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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC
20549
___________________________________
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Capital City Bank Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida
0-13358
59-2273542
(State of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)
217 North Monroe Street
,
Tallahassee
,
Florida
32301
(Address of principal executive offices)
(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, $0.01 par value
CCBG
The
Nasdaq Stock Market
LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if
the registrant is a well-known
seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes
☐
No
☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of
the Exchange Act. Yes
☐
No
☒
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
☒
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
☒
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 definition 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 provided pursuant to Section 13(a)
of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a
report on and attestation to its management’s assessment of the effectiveness of its internal control
over
financial reporting under Section 404(b) of the Sarbanes-Oxley
Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit
report.
☒
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements
of the registrant included in the filing reflect
the correction of an error to previously issued financial statements
.
☒
Indicate by check mark whether any of those error corrections
are restatements that required a recovery analysis of
incentive-based compensation received by any of
the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
The aggregate market value of the registrant’s common stock, $0.01 par value
per share, held by non-affiliates of the registrant on June
30, 2023, the last business day
of the registrant’s most recently completed second fiscal quarter, was approximately $
400,209,385
(based on the closing sales price of the registrant’s common stock
on that date). Shares of the registrant’s common stock held by each officer and director
and each person known to the registrant to own 10% or more of
the
outstanding voting power of the registrant have been excluded
in that such persons may be deemed to be affiliates. This
determination of affiliate status is not a
determination for other purposes.
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at February 29, 2024
Common Stock, $0.01 par value per share
16,943,238
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the Annual Meeting of Shareowners to be held on April 23, 2024, are incorporated by reference in Part III.
2
CAPITAL CITY BANK
GROUP,
INC.
ANNUAL REPORT FOR 2023 ON FORM 10-K
TABLE OF CONTENTS
PART
I
PAGE
Item 1.
Business
6
Item 1A.
Risk Factors
22
Item 1B.
Unresolved Staff Comments
36
Item 1C.
Cybersecurity
36
Item 2.
Properties
36
Item 3.
Legal Proceedings
36
Item 4.
Mine Safety Disclosure
36
PART
II
Item 5.
Market for the Registrant’s Common Equity, Related Shareowner Matters, and Issuer Purchases of
Equity Securities
38
Item 6.
Selected Financial Data
41
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
43
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
68
Item 8.
Financial Statements and Supplementary Data
69
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
139
Item 9A.
Controls and Procedures
139
Item 9B.
Other Information
143
PART
III
Item 10.
Directors, Executive Officers, and Corporate Governance
144
Item 11.
Executive Compensation
144
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters
144
Item 13.
Certain Relationships and Related Transactions, and Director Independence
144
Item 14.
Principal Accountant Fees and Services
144
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
145
Item 16.
Form 10-K Summary
146
Signatures
147
3
EXPLANATORY
NOTE
The Consolidated Statements of Cash Flows of Capital City Bank
Group, Inc. (the “Company”)
for the years ended December
31, 2021 and December 31, 2022 and for the each of the three month periods
ended March 31, 2022 and 2023, six month periods
ended June 30, 2022 and 2023 and nine month periods ended September 30,
2022 and 2023 (collectively,
the “Impacted
Statements of Cash Flows”) included in this Annual Report on Form 10-K
for the year ended December 31, 2023 (this “Form 10-
K”) have been restated.
For additional information, see “Part II – Item 8. Financial Statements and Supplementary
– Note 1 –
Restatement of Previously Issued Consolidated Financial Statements” in this Form
10-K. The Company has not filed and does not
intend to file amendments to the Company’s
previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
containing any of the Impacted Statements of Cash Flow.
Investors and others should rely on the financial information and other
disclosures regarding the affected period contained in this Form
10-K and in future filings with the Securities and Exchange
Commission (as applicable).
4
INTRODUCTORY NOTE
This Annual Report on Form 10-K 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.
In addition to those risks discussed in this Annual Report under Item 1A Risk Factors, factors
that could cause our actual results
to differ materially from those in the forward-looking
statements, include, without limitation:
●
our ability to successfully manage credit risk, interest rate risk, liquidity risk,
and other risks inherent to our industry;
●
legislative or regulatory changes;
●
adverse developments in the financial services industry generally,
such as bank failures and any related impact on depositor
behavior;
●
the effects of changes in the level of checking or savings account
deposits and the competition for deposits on our funding
costs, net interest margin and ability to replace maturing deposits and
advances, as necessary;
●
inflation, interest rate, market and monetary fluctuations;
●
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 effects of actions taken by governmental agencies to stabilize the
recent volatility in the financial system and the
effectiveness of such actions;
●
changes in monetary and fiscal policies of the U.S. Government;
●
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 our liquidity position;
●
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 loan segments, 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;
●
the effect of corporate restructuring, acquisitions or dispositions,
including the actual restructuring and other related
charges and the failure to achieve the expected gains, revenue growth
or expense savings from such corporate
restructuring, acquisitions or dispositions;
●
the effects of natural disasters, harsh weather conditions
(including hurricanes), widespread health emergencies (including
pandemics, such as the COVID-19 pandemic), military conflict, terrorism, civil
unrest or other geopolitical events;
●
our ability to comply with the extensive laws and regulations to which
we are subject, including the laws for each
jurisdiction where we operate;
●
the impact of the restatement of the Impacted Statements of Cash Flows;
●
any inability to implement and maintain effective internal
control over financial reporting and/or disclosure control or
inability to remediate our existing material weaknesses in our internal
controls deemed ineffective;
●
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;
●
The cost and effects of cybersecurity incidents or other failures, interruptions,
or security breaches of our systems or those
of our customers or third-party providers;
●
the outcomes of litigation or regulatory proceedings;
●
negative publicity and the impact on our reputation;
●
changes in consumer spending and saving habits;
●
growth and profitability of our noninterest income;
5
●
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 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.
6
PART
I
Item 1.
Business
About Us
General
Capital City Bank Group, Inc. (“CCBG”) is a financial holding company
headquartered in Tallahassee,
Florida. CCBG was
incorporated under Florida law on December 13, 1982, to acquire five national banks
and one state bank that all subsequently
became part of CCBG’s bank subsidiary,
Capital City Bank (“CCB” or the “Bank”). The Bank commenced operations
in 1895. In
this report, the terms “Company,”
“we,” “us,” or “our” mean CCBG and all subsidiaries included in our consolidated financial
statements.
CCBG is one of the largest publicly traded financial holding
companies headquartered in Florida and has approximately $4.3
billion in assets. 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 the
sale of life insurance, risk management and asset protection services. The
Bank has 63 banking offices and 103 ATMs/ITMs
in
Florida, Georgia, and Alabama.
Through Capital City Home Loans, LLC (“CCHL”), we have 29 additional offices
in the
Southeast for our mortgage banking business.
The majority of the revenue (excluding CCHL), approximately 85%, is derived
from our Florida market areas while approximately 14% and 1% of the
revenue is derived from our Georgia and other market
areas, respectively.
Approximately 48% of the revenue from CCHL is derived from our Georgia
market areas while
approximately 38% and 14% is derived from our Florida and other
market areas, respectively.
Below is a summary of our financial condition and results of operations for the past three
fiscal years, which we believe is a
sufficient period for understanding our general business development.
Our financial condition and results of operations are more
fully discussed in our Management’s
Discussion and Analysis on page 43 and our consolidated financial statements on
page 73.
Dollars in millions
Year
Ended
December 31,
Assets
Deposits
Shareowners’
Equity
Revenue
(1)
Net Income
2023
$4,304.5
$3,701.8
$440.6
$252.7
$52.3
2022
$4,519.2
$3,939.3
$387.3
$207.1
$33.4
2021
$4,263.8
$3,712.9
$383.2
$213.9
$33.4
(1)
Revenue represents interest income plus noninterest income
Dividends and management fees received from the Bank are CCBG’s
primary source of income. Dividend payments by the Bank
to CCBG depend on the capitalization, earnings and projected growth of
the Bank, and are limited by various regulatory
restrictions, including compliance with a minimum Common Equity
Tier 1 Capital conservation buffer.
See the section entitled
“Regulatory Considerations” in this Item 1 and Note 17 in the Notes to Consolidated
Financial Statements for a discussion of the
restrictions.
Item 6 contains other financial and statistical information about us.
Subsidiaries of CCBG
CCBG’s principal asset is the capital
stock of CCB, our wholly owned banking subsidiary,
which accounted for nearly 100% of
consolidated assets and net income attributable to CCBG at December 31,
2023.
CCBG also maintains an insurance subsidiary,
Capital City Strategic Wealth,
LLC.
CCB has two primary subsidiaries, which are wholly owned, Capital City Trust
Company
and Capital City Investments.
CCB also maintains
a 51% membership interest in a consolidated subsidiary,
CCHL, which we
acquired on March 1, 2020.
The nature of these subsidiaries is provided below.
Operating Segment
We have one
reportable segment with two principal services: Banking Services and Wealth
Management Services.
Banking
Services are operated at CCB, and Wealth
Management Services are operated under three separate subsidiaries (Capital City
Trust Company,
Capital City Investments, and Capital City Strategic Wealth,
LLC).
Revenues from these principal services for
the year ended 2023
totaled approximately 93.5% and 6.5% of our total revenue, respectively.
In 2022
and 2021, Banking
Services (CCB) revenue was approximately 90.3% and 93.2% of our total revenue
for each respective year.
7
Capital City Bank
CCB is a Florida-chartered full-service bank engaged in the commercial and
retail banking business. Significant services offered
by CCB include:
●
Business Banking
– We provide banking
services to corporations and other business clients. Credit products are available
for a wide variety of general business purposes, including financing for
commercial business properties, equipment,
inventories and accounts receivable, as well as commercial leasing and
letters of credit. We also provide
treasury
management services, and, through a marketing alliance with Elavon, Inc., merchant
credit card transaction processing
services.
●
Commercial Real Estate Lending
– We provide
a wide range of products to meet the financing needs of commercial
developers and investors, residential builders and developers, and community
development. Credit products are available
to purchase land and build structures for business use and for investors
who are developing residential or commercial
property.
●
Residential Real Estate Lending
– We provide products
through our strategic alliance with CCHL and its existing
network of locations to help meet the home financing needs of consumers,
including conventional permanent and
construction/ permanent (fixed, adjustable, or variable rate) financing
arrangements, and FHA/VA/Government
National
Mortgage Association (“GNMA”) loan products.
We offer
both fixed and adjustable-rate residential mortgage (ARM)
loans.
We offer
these products through our existing network of CCHL locations.
We do not originate
subprime
residential real estate loans.
●
Retail Credit
– We provide
a full-range of loan products to meet the needs of consumers, including personal
loans,
automobile loans, boat/RV
loans, home equity loans, and through a marketing alliance with ELAN, we offer
credit card
programs.
●
Institutional Banking –
We provide banking
services to meet the needs of state and local governments, public schools
and colleges, charities, membership and not-for-profit
associations including customized checking and savings accounts,
cash management systems, tax-exempt loans, lines of credit, and term
loans.
●
Retail Banking
– We provide a full-range
of consumer banking services, including checking accounts, savings programs,
interactive/automated teller machines (ATMs/ITMs),
debit/credit cards, night deposit services, safe deposit facilities,
online banking, and mobile banking.
Capital City Trust Company
Capital City Trust Company,
or the Trust Company,
provides asset management for individuals through agency,
personal trust,
IRA, and personal investment management accounts. Associations, endowments,
and other nonprofit entities hire the Trust
Company to manage their investment portfolios. Additionally,
a staff of well-trained professionals serves individuals requiring
the
services of a trustee, personal representative, or a guardian.
The market value of trust assets under discretionary management
exceeded $1.121 billion at December 31, 2023, with total assets under administration
exceeding $1.136 billion.
Capital City Investments
We offer
our customers access to retail investment products through LPL Financial pursuant to
which retail investment products
would be offered through LPL. LPL offers a full line
of retail securities products, including U.S. Government bonds, tax-free
municipal bonds, stocks, mutual funds, unit investment trusts, annuities, life insurance
and long-term health care. Non-deposit
investment and insurance products are: (i) not FDIC insured; (ii) not deposits,
obligations, or guarantees by any bank; and (iii)
subject to investment risk, including the possible loss of principal amount
invested.
Capital City Strategic Wealth,
LLC.
We provide
a multi-disciplinary strategic planning approach that requires examining all facets of our
clients’ financial lives
through our business, estate, financial, insurance and business planning,
tax planning, and asset protection advisory services.
Insurance sales within this division include life, health, disability,
long-term care, and annuity solutions.
8
Lending Activities
One of our core goals is to support the communities in which we operate. We
seek loans from within our primary market area,
which is defined as the counties in which our banking offices are located.
We will also originate
loans within our secondary
market area, defined as counties adjacent to those in which we have banking offices.
There may also be occasions when we will
have opportunities to make loans that are out of both the primary and secondary
market areas, including participation loans.
These loans are only approved if the underwriting is consistent with our criteria and generally
the project or applicant’s primary
business is in or near our primary or secondary market areas. Approval of all loans is subject to
our policies and standards
described in more detail below.
We have adopted
comprehensive lending policies, underwriting standards and loan review procedures.
Management and our
Board of Directors reviews and approves these policies and procedures on a regular
basis (at least annually).
Management has also implemented reporting systems designed to
monitor loan originations, loan quality,
concentrations of
credit, loan delinquencies, nonperforming loans, and potential problem
loans. Our 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, we establish total borrower exposure limits and monitor concentration
risk. 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 portfolio are monitored and reported to our
Board on a quarterly basis, and we have strategic plans in place to supplement
Board approved credit policies governing exposure
limits and underwriting standards. We
recognize that exceptions to the below-listed policy guidelines may
occasionally occur and
have established procedures for approving exceptions to these policy guidelines.
Residential Real Estate Loans
We originate
1-4 family, owner-occupied
residential real estate loans at CCHL for sale in the secondary market.
Historically, a
vast majority of residential loan originations are fixed-rate loans which
are sold in the secondary market on a non-recourse basis.
We will frequently
sell loans and retain the servicing rights.
Note 4 – Mortgage Banking Activities in the Notes to Our
Consolidated Financial Statements provides additional information on our
servicing portfolio.
CCB also maintains a portfolio of residential loans held for investment and
will periodically purchase newly originated 1-4
family secured adjustable-rate loans from CCHL for that portfolio.
Residential loans held for investment are generally
underwritten in accordance with secondary market guidelines in effect
at the time of origination, including loan-to-value, or LTV,
and documentation requirements.
Residential real estate loans also include home equity lines of credit, or HELOCs, and
home equity loans. Our home equity
portfolio includes revolving open-ended equity loans with interest-only
or minimal monthly principal payments and closed-end
amortizing loans. Open-ended equity loans typically have an interest only
10-year draw period followed by a five-year repayment
period of 0.75% of principal balance monthly and balloon payment at maturity.
As of December 31, 2023, approximately 53% of
our residential home equity loan portfolio consisted of first mortgages.
Interest rates may be fixed or adjustable.
Adjustable-rate
loans are tied to the Prime Rate with a typical margin of 1.0% or more.
Commercial Loans
Our policy sets forth guidelines for debt service coverage ratios, LTV
ratios and documentation standards. Commercial loans are
primarily made based on identified cash flows of the borrower with consideration
given to underlying collateral and personal or
other guarantees. We
have established 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 our commercial loans are secured by the
assets being financed or other business assets such as accounts receivable or inventory.
Many of the loans in the commercial
portfolio have variable interest rates tied to the Prime Rate or U.S. Treasury
indices.
9
Commercial Real Estate Loans
We have adopted
guidelines for debt service coverage ratios, LTV
ratios and documentation standards for commercial real estate
loans. These loans are primarily made based on identified cash flows of the
borrower with consideration given to underlying real
estate collateral and personal guarantees. Our policy establishes a maximum
LTV specific to
property type and minimum 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. Commercial real estate loans may be fixed
or variable-rate loans with interest rates tied to the Prime Rate
or U.S. Treasury indices. We
require appraisals for loans in excess of $500,000 that are secured by real property
unless we deem
the real property used as security to be a complex property type, in which case we require
appraisals for loans in excess of
$250,000. For loans secured by real property that fall beneath the applicable
thresholds above, we will generally use a third-party
evaluation to assess the value of the real property used as security.
Consumer Loans
Our consumer loan portfolio includes personal installment loans, direct
and indirect automobile financing, and overdraft lines of
credit. The majority of the consumer loan portfolio consists of indirect
and direct automobile loans. The majority of our consumer
loans are short-term and have fixed rates of interest that are priced based on
current market interest rates and the financial
strength of the borrower. Our policy
establishes maximum debt-to-income ratios, minimum credit scores, and includes
guidelines
for verification of applicants’ income and receipt of credit reports.
Expansion of Business
See Item 7.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations under the section captioned
“Business Overview” for discussion related to the expansion of our
Business.
Competition
There is significant competition among commercial banks in our market
areas. We compete
against a wide range of banking and
nonbanking institutions including banks, savings and loan associations, credit
unions, money market funds, mutual fund advisory
companies, mortgage banking companies, investment banking companies,
insurance agencies and companies, securities firms,
brokerage firms, finance companies and other types of financial institutions.
Some of our competitors are larger financial
institutions with greater resources and, as such, may have higher lending
limits and may offer other services that are not provided
by us. However, we believe that the larger
financial institutions are less familiar with the markets in which we operate and
typically target a different client base. We
also believe clients who bank at community banks tend to prefer the relationship
style
service of community banks compared to larger banks.
As a result, we expect to be able to effectively compete in our markets
with larger financial institutions through providing
superior client service and leveraging our knowledge and experience
in providing banking products and services in our market
areas. See Item 1A. Risk Factors under the section captioned “Our future success is dependent
on our ability to compete
effectively in the highly competitive banking industry” for further discussion
related to the competitive environment in which we
operate.
Our primary market area consists of 21 counties in Florida, six counties in
Georgia, and one county in Alabama. Most of Florida’s
major banking concerns have a presence in Leon County,
where our main office is located.
Our Leon County deposits totaled
$1.272 billion, or 34.4% of our consolidated deposits at December 31, 2023.
10
The table below depicts our market share percentage within each county,
based on commercial bank deposits within the county.
Market Share as of June 30,
(1)
County
2023
2022
2021
Florida
Alachua
5.1%
4.9%
4.6%
Bay
0.3%
0.3%
0.2%
Bradford
37.1%
34.9%
32.4%
Citrus
4.4%
4.7%
4.1%
Clay
2.4%
2.3%
2.8%
Dixie
17.5%
19.8%
18.9%
Gadsden
81.9%
82.1%
81.1%
Gilchrist
42.2%
41.2%
39.6%
Gulf
12.4%
14.8%
14.6%
Hernando
4.9%
5.0%
3.9%
Jefferson
28.3%
24.8%
24.4%
Leon
16.9%
15.4%
11.9%
Levy
26.4%
25.4%
26.4%
Madison
13.5%
14.0%
14.5%
Putnam
34.4%
26.4%
23.2%
St. Johns
0.8%
0.7%
0.7%
Suwannee
6.6%
7.0%
6.8%
Taylor
75.0%
73.8%
73.2%
Wakulla
8.4%
10.0%
10.5%
Walton
0.3%
-
-
Washington
9.2%
11.2%
11.2%
Georgia
Bibb
2.9%
3.2%
3.3%
Cobb
0.1%
0.0%
0.0%
Gwinnett
(2)
0.0%
-
-
Grady
13.8%
16.3%
14.8%
Laurens
6.7%
7.8%
7.9%
Troup
5.6%
6.4%
6.1%
Alabama
Chambers
8.6%
9.3%
9.3%
(1)
Obtained from the FDIC Summary of Deposits Report for the year indicated.
(2)
Bank office opened in the second quarter of 2023.
Seasonality
We believe our
commercial banking operations are not generally seasonal in nature; however,
public deposits tend to increase
with tax collections in the fourth and first quarters of each year and decline
as a result of governmental spending thereafter.
Human Capital Matters
Our culture distinguishes us from our competitors and is the driving force
behind our continued success. Our leadership is
committed to a culture that values people alongside results.
Our brand promise (“More than your bank. Your
banker.”)
and purpose (“We
empower our clients’ financial wellness and help
them build secure futures”), together with our core values statement (“Do
the Right Thing, Build Relationships & Loyalty,
Embrace Individuality & Value
Others, Promote Career Growth, Be Committed to Community,
and Represent the Star (our bank)
Proudly”), are the foundation on which our culture is built.
11
The bank has grown significantly since its beginnings in 1895. Our commitment
to fostering a culture that values our associates
across our entire footprint remains unwavering. We
have a Chief Culture Officer and a Chief Diversity Officer
who make it a
priority to ensure our culture is maintained and associates exemplify our values.
Diversity and Inclusion
. Integral to our culture and values is a commitment to an equitable, diverse, and inclusive work
environment whereby respect, acceptance and belonging are practiced
and experienced by all.
Our associates are our most valuable assets, and our differences make
us stronger. The individual perspectives,
life experiences,
capabilities and talents, which our associates invest in their work, represent a
significant part of our culture, reputation and
collective achievements.
The Chief Diversity Officer and the Diversity,
Equity, and Inclusion (DE&I) Council,
which comprises diverse associates from
various levels and offices throughout our organization,
connect the company’s diversity and inclusion
initiatives with our broader
business strategies. A diverse team produces more creative solutions, offers
better client service and is vital to attracting and
retaining talent—key factors that contribute to our success. We
continue to build an inclusive culture through a variety of DE&I
initiatives for internal promotions and hiring practices.
At February 8, 2024, we had approximately 811
associates, which included approximately 784 full-time associates and
approximately 27 part-time associates. At February 8, 2024, approximately
70% of our workforce was female, 30% was male,
and approximately 22% was ethnic minorities. None of our associates are represented
by a labor union or covered by a collective
bargaining agreement.
Our commitment to people and being an employer with integrity and heart has
earned us numerous accolades including:
one of
the “Best Companies to Work
for in Florida” by Florida Trend for 12 consecutive
years, a “Best Bank to Work
For” by American
Bankers Association for 11 consecutive years
and being named by Forbes in 2023 as one of “America’s
Best-in-State Banks, a
selection made from direct consumer feedback and online reviews.
The average tenure of our associates is approximately 9.6 years, and the
average tenure of our management team is 28 years.
Tenure statistics support
these accolades and further demonstrate that associates enjoy working
for CCB.
Compensation and Benefits Program
. To attract and retain experienced
associates we offer a competitive compensation and
benefits program, foster a culture where everyone feels included and empowered
to do to their best work, and give associates the
opportunity to give back to their communities and make a social impact.
Our compensation program is designed to attract and reward talented individuals
who possess the skills necessary to support our
business objectives, assist in the achievement of our strategic goals and
create long-term value for our shareowners. We
provide
our associates with compensation packages that include base salary and
annual incentive bonuses, and certain associates can
receive equity awards tied to the Company’s
performance.
Experience has taught us that a compensation program with both
short-
and long-term awards provides fair and competitive
compensation and aligns associate and shareowner interests by incentivizing
business and individual performance. This dual
approach also encourages long-term company performance and integrates compensation
with our business plans.
In addition to cash and equity compensation, we offer associates benefits
including life and health (medical, dental & vision)
insurance, paid time off, an associate stock purchase plan, and a
401(k) plan. Associates hired prior to 2020 are eligible to
participate in a pension plan.
A core value is providing associates the ability to “grow a career.”
To that end, we support and encourages
associates to develop a
life-long habit of continuous learning that focuses on personal and professional
development through higher education. We
offer
an educational Tuition Assistance Plan to help eligible
associates continue or begin post-high school education, develop skills,
increase knowledge and aid in career development.
We have invested
in tools and capabilities that allow our team members to work remotely as appropriate.
Health and Safety
. Our business success is fundamentally connected to our associates’ well-being.
We make available to our
associates a voluntary wellness program,
StarFit that provides associates with resources and good-health opportunities through
exercise, diet and preventive care.
In response to emerging workplace practices, we made changes to our
flex–work program to assist our associates in maintaining a
work/life balance consistent with their professional and personal goals.
12
We continue
to follow local and federal guidance, including guidance prescribed by the Centers for
Disease Control and
Prevention (“CDC”), regarding COVID-19 precautions and health measures.
Social Matters
Community Involvement
. We aim to give back
to the communities where we live and work and believe that this commitment
helps in our efforts to attract and retain associates. Our commitment
to help our community starts with our associates. Community
involvement is a hallmark for our organization, and it comes naturally
to our associates. We
encourage our associates to volunteer
their hours with service organizations and philanthropic groups in
the communities we serve.
We recorded
10,526 community service hours in 2023, and 9,508, and 8,697 hours in
2022 and 2021, respectively. Furthermore,
the CCBG Foundation donated $0.3 million in 2023 to various non-profit organizations
in the communities we serve and $0.3
million and $0.2 million in 2022, and 2021, respectively.
Since 2015, we have annually supported the United Way
of the Big Bend in analyzing financial information for its annual grant
review process. Many of these grants are provided to low-moderate income
communities in the Big Bend area.
Access, affordability,
and financial inclusion.
Our community commitment to further financial literacy in the markets we service
remains an ongoing focus. In 2023, the CCBG Foundation made grants totaling
$143,000 to Community Reinvestment Act of
1977 (“CRA”) eligible organizations in our market
area. We are committed
to providing educational outreach regarding home
ownership and financial access for minorities. We
are a long-time supporter of Habitat for Humanity,
with our associates
providing volunteer hours on home builds.
During 2020 to 2023, we partnered with Habitat for Humanity and Warrick
Dunn
Charities to build and furnish four homes.
During tax season, we provide locations for community residents to access Volunteer
Income Tax Assistance (VITA)
services.
VITA is a nationwide
IRS program that offers free tax preparation assistance to people who generally
make $60,000 or less,
persons with disabilities, the elderly,
and limited English-speaking taxpayers who need assistance in preparing their
own tax
returns.
Environmental Matters
We recognize
the value of environmental stewardship and seek opportunities to reduce our carbon
footprint and incorporate
energy efficiency products into business operations.
We have implemented
company-wide recycling programs and have
converted exterior lighting to LED at 64 offices. Further reducing
our environmental impact, our office model design is reduced
from an average 5,500 square feet to 3,300 square feet. As we renovate or build
new facilities, we employ energy efficient
equipment such as HVAC
systems and lighting controls in offices.
In 2022, we made a commitment for a $7 million investment in SOLCAP 2022-1,
LLC and, in 2023, we made a commitment for
a $7 million investment in SOLCAP 2023-1, LLC. Each of these funds were formed
to make solar tax equity investments in
renewable solar energy projects that will provide us with
tax credits and other tax benefits. These projects will produce
approximately 20,186,357 kw hours of clean power each year.
The clean power produced is equivalent to removing
approximately 14,306 metric tons of greenhouse gas emissions. We
plan to continue to review these kinds of investment
opportunities as they arise.
We work to ensure
lending activities do not encourage business activities that could cause irreparable
damage to our reputation or
the environment. In general, we evaluate each credit or transaction
on its individual merits, with larger deals receiving more
attention and deeper analysis, including a review of environmental matters
related to certain real estate loans, which is overseen
by our Credit Risk Oversight Committee.
To prepare for any climate-related
occurrences, we have a business continuity plan that addresses how to maintain
business
operations in the event of a disastrous event. We
also offer disaster assistance to our associates, which includes
accommodation/shelter reimbursement in case of evacuations or sustained
power outages.
Regulatory Considerations
We must comply
with state and federal banking laws and regulations
that control virtually all aspects of our operations.
These
laws and regulations generally aim to protect
our depositors, not necessarily our shareowners or our creditors.
Any changes in
applicable laws or regulations may materially affect
our business and prospects. Proposed
legislative or regulatory changes may
also affect our operations. The following description summarizes some of the laws and
regulations to which we are
subject.
References to applicable statutes and regulations
are brief summaries, do not purport to be complete, and
are qualified in their
entirety by reference
to such statutes and regulations.
13
Capital City Bank Group, Inc.
We are registered
with the Board of Governors of the Federal Reserve as a bank holding company under
the Bank Holding
Company Act of 1956 (“BHC Act”) and have also elected to be a financial
holding company. As a result,
we are subject to
supervisory regulation and examination by the Federal Reserve. The BHC Act, the Dodd
-Frank Wall Street Reform
and
Consumer Protection Act (the “Dodd-Frank Act”), the Gramm-Leach-Bliley Financial
Modernization Act (the “GLBA”), and
other federal laws subject financial holding companies to restrictions on the types of
activities in which they may engage, and to a
range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.
Permitted Activities
The GLBA reformed the U.S. banking system by: (i) allowing bank holding companies
(“BHCs”) that qualify as “financial
holding companies,” such as CCBG, to engage in a broad range of financial
and related activities; (ii) allowing insurers and other
financial service companies to acquire banks; (iii) removing restrictions that applied
to bank holding company ownership of
securities firms and mutual fund advisory companies; and (iv) establishing the
overall regulatory scheme applicable to bank
holding companies that also engage in insurance and securities operations.
The general effect of the law was to establish a
comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other
financial service providers. Activities that are financial in nature are broadly
defined to include not only banking, insurance, and
securities activities, but also merchant banking and additional activities that the Federal
Reserve, in consultation with the
Secretary of the Treasury,
determines to be financial in nature, incidental to such financial activities, or complementary
activities
that do not pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally.
In contrast to financial holding companies, bank holding companies are
limited to managing or controlling banks, furnishing
services to or performing services for its subsidiaries, and engaging
in other activities that the Federal Reserve determines by
regulation or order to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In
determining whether a particular activity is permissible, the Federal Reserve must
consider whether the performance of such an
activity reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Possible benefits
include greater convenience, increased competition, and gains in efficiency.
Possible adverse effects include undue concentration
of resources, decreased or unfair competition, conflicts of interest, and unsound
banking practices. Despite prior approval, the
Federal Reserve may order a bank holding company or its subsidiaries to terminate
any activity or to terminate ownership or
control of any subsidiary when the Federal Reserve has reasonable cause
to believe that a serious risk to the financial safety,
soundness or stability of any bank subsidiary of that bank holding company
may result from such an activity.
Changes in Control
Subject to certain exceptions, the BHC Act and the Change in Bank Control Act
(“CBCA”), together with the applicable
regulations, require Federal Reserve approval (or,
depending on the circumstances, no notice of disapproval) prior to any
acquisition of “control” of a bank or bank holding company.
Under the BHC Act, a company (a broadly defined term that includes
partnerships among other things) that acquires the power,
directly or indirectly, to direct
the management or policies of an insured
depository institution or to vote 25% or more of any class of voting securities of
any insured depository institution is deemed to
control the institution and to be a bank holding company.
A company that acquires less than 5% of any class of voting security
(and that does not exhibit the other control factors) is presumed not to have control.
For ownership levels between the 5% and
25% thresholds, the Federal Reserve has developed an extensive body of
law on the circumstances in which control may or may
not exist.
Further, on January 30, 2020, the Federal Reserve finalized
a rule that simplifies and increases the transparency of its
rules for determining when one company controls another company for
purposes of the BHC Act.
The rule became effective
September 30, 2020. It has and will likely continue to have a meaningful impact on
control determinations related to investments
in banks and bank holding companies and investments by bank holding
companies in nonbank companies.
Under the CBCA, if an individual or a company that acquires 10% or more of any
class of voting securities of an insured
depository institution or its holding company and either that institution or
company has registered securities under Section 12 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or no
other person will own a greater percentage of that
class of voting securities immediately after the acquisition, then that investor is presumed
to have control and may be required to
file a change in bank control notice with the institution’s
or the holding company’s primary
federal regulator. Our common
stock
is registered under Section 12 of the Exchange Act so we are subject to these rules.
14
As a financial holding company,
we are required to obtain prior approval from the Federal Reserve before (i) acquiring
all or
substantially all of the assets of a bank or bank holding company,
(ii) acquiring direct or indirect ownership or control of more
than 5% of the outstanding voting stock of any bank or bank holding company
(unless we own a majority of such bank’s voting
shares), or (iii) acquiring, merging or consolidating with
any other bank or bank holding company.
In determining whether to
approve a proposed bank acquisition, federal bank regulators will consider,
among other factors, the effect of the acquisition on
competition, the public benefits expected to be received from the acquisition,
the projected capital ratios and levels on a post-
acquisition basis, and the companies’ records of addressing the credit needs of
the communities they serve, including the needs of
low and moderate income neighborhoods, consistent with the safe and sound
operation of the bank, under the CRA.
Under Florida law,
a person or entity proposing to directly or indirectly acquire control of a Florida bank must
also obtain
permission from the Florida Office of Financial Regulation. The
Florida Statutes define “control” as either (i) indirectly or
directly owning, controlling or having power to vote 25% or more of the voting
securities of a bank; (ii) controlling the election of
a majority of directors of a bank; (iii) owning, controlling, or having power to vote 10%
or more of the voting securities as well as
directly or indirectly exercising a controlling influence over management
or policies of a bank; or (iv) as determined by the
Florida Office of Financial Regulation. These requirements
will affect us because the Bank is chartered under Florida law and
changes in control of CCBG are indirect changes in control of CCB.
Prohibitions Against Tying Arrangements
Banks are subject to the prohibitions on certain tying arrangements.
We are prohibited,
subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying
the consideration for such extension of credit or service, on
the condition that the customer obtain some additional service from the institution
or its affiliates or not obtain services of a
competitor of the institution.
Capital; Dividends; Source of Strength
The Federal Reserve imposes certain capital requirements on financial
holding companies under the BHC Act, including a
minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted
assets. These requirements are described
below under “Capital Regulations.” Subject to these capital requirements
and certain other restrictions, we are generally able to
borrow money to make a capital contribution to CCB, and such loans may
be repaid from dividends paid from CCB to us. We
are
also able to raise capital for contributions to CCB by issuing securities without having
to receive regulatory approval, subject to
compliance with federal and state securities laws.
It is the Federal Reserve’s policy
that bank holding companies should generally pay dividends on common
stock only out of
income available over the past year,
and only if prospective earnings retention is consistent with the organization’s
expected
future needs and financial condition. It is also the Federal Reserve’s
policy that bank holding companies should not maintain
dividend levels that undermine their ability to be a source of strength to their banking
subsidiaries. Additionally,
the Federal
Reserve has indicated that bank holding companies should carefully review
their dividend policies and has discouraged payment
ratios that are at maximum allowable levels unless both asset quality and capital are
very strong. The Federal Reserve possesses
enforcement powers over bank holding companies and their non-bank subsidiaries
to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Bank holding companies are expected to consult with the Federal Reserve before
redeeming any equity or other capital instrument
included in Tier 1 or Tier
2 capital prior to stated maturity,
if such redemption could have a material effect on the level or
composition of the organization’s
capital base. In addition, a bank holding company may not repurchase shares equal
to 10% or
more of its net worth if it would not be well-capitalized (as defined by the Federal Reserve)
after giving effect to such repurchase.
Bank holding companies experiencing financial weaknesses, or that
are at significant risk of developing financial weaknesses,
must consult with the Federal Reserve before redeeming or repurchasing common
stock or other regulatory capital instruments.
In accordance with Federal Reserve policy,
which has been codified by the Dodd-Frank Act, we are expected to act as a source of
financial strength to CCB and to commit resources to support CCB in circumstances in
which we might not otherwise do so. In
furtherance of this policy,
the Federal Reserve may require a financial holding company to terminate any activity or
relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve’s determination
that such
activity or control constitutes a serious risk to the financial soundness or stability of
any subsidiary depository institution of the
financial holding company.
Further, federal bank regulatory authorities have
additional discretion to require a financial holding
company to divest itself of any bank or nonbank subsidiary if the agency determines
that divestiture may aid the depository
institution’s financial condition.
Safe and Sound Banking Practices
15
Bank holding companies and their nonbanking subsidiaries are prohibited
from engaging in activities that represent unsafe and
unsound banking practices or that constitute a violation of law or regulations.
Under certain conditions the Federal Reserve may
conclude that some actions of a bank holding company,
such as a payment of a cash dividend, would constitute an unsafe and
unsound banking practice. The Federal Reserve also has the authority
to regulate the debt of bank holding companies, including
the authority to impose interest rate ceilings and reserve requirements on such debt.
The Federal Reserve may also require a bank
holding company to file written notice and obtain its approval prior to purchasing
or redeeming its equity securities, unless certain
conditions are met.
Capital City Bank
Capital City Bank is a state-chartered commercial banking institution that is chartered
by and headquartered in the State of Florida
and is subject to supervision and regulation by the Florida Office of
Financial Regulation. The Florida Office of Financial
Regulation supervises and regulates all areas of our operations including,
without limitation, the making of loans, the issuance of
securities, the conduct of our corporate affairs, the satisfaction
of capital adequacy requirements, the payment of dividends, and
the establishment or closing of banking centers. We
are also a member bank of the Federal Reserve System, which makes our
operations subject to broad federal regulation and oversight by the Federal
Reserve. In addition, our deposit accounts are insured
by the FDIC up to the maximum extent permitted by law,
and the FDIC has certain supervisory enforcement powers over us.
As a Florida state-chartered bank, we are empowered by statute, subject to
the limitations contained in those statutes, to take and
pay interest on savings and time deposits, to accept demand deposits, to
make loans on residential and other real estate, to make
consumer and commercial loans, to invest (with certain limitations) in equity securities
and in debt obligations of banks and
corporations and to provide various other banking services for the benefit
of our clients. Various
consumer laws and regulations
also affect our operations, including state usury laws, laws relating to
fiduciaries, consumer credit and equal credit opportunity
laws, and fair credit reporting. In addition, the Federal Deposit Insurance Corporation
Improvement Act of 1991, or FDICIA,
prohibits insured state-chartered institutions from conducting activities as principal
that are not permitted for national banks. A
bank, however, may engage in certain otherwise
prohibited activity if it meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the Deposit Insurance
Fund (“DIF”).
Safety and Soundness Standards / Risk Management
The federal banking agencies have adopted guidelines establishing
operational and managerial standards to promote the safety
and soundness of federally insured depository institutions. The guidelines
set forth standards for internal controls, information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved
in each area, and each institution is responsible
for establishing its own procedures to achieve those goals. If an institution fails to
comply with any of the standards set forth in
the guidelines, the financial institution’s
primary federal regulator may require the institution to submit a plan for
achieving and
maintaining compliance. If a financial institution fails to submit an acceptable
compliance plan or fails in any material respect to
implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order
directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator
may
restrict the financial institution’s
rate of growth, require the financial institution to increase its capital, restrict the
rates the
institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances.
Noncompliance with the standards established by the safety and soundness guidelines
may also constitute grounds for other
enforcement action by the federal bank regulatory agencies, including
cease and desist orders and civil money penalty
assessments.
The bank regulatory agencies have increasingly emphasized the importance
of sound risk management processes and strong
internal controls when evaluating the activities of the financial institutions they
supervise. Properly managing risks has been
identified as critical to the conduct of safe and sound banking activities and has
become even more important as new
technologies, product innovation and the size and speed of financial transactions have
changed the nature of banking markets. The
agencies have identified a spectrum of risks facing a banking institution including,
but not limited to, credit, market, liquidity,
operational, legal and reputational risk. In particular,
recent regulatory pronouncements have focused on operational risk, which
arises from the potential that inadequate information systems, operational problems,
breaches in internal controls, fraud or
unforeseen catastrophes will result in unexpected losses. New products and services,
third party risk management and
cybersecurity are critical sources of operational risk that financial institutions are expected
to address in the current environment.
The Bank is expected to have active board and senior management oversight; adequate
policies, procedures and limits; adequate
risk measurement, monitoring and management information systems; and
comprehensive internal controls.
Reserves
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The Federal Reserve requires all depository institutions to maintain reserves
against transaction accounts (noninterest bearing and
NOW checking accounts). The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be
used to satisfy liquidity requirements. An institution may borrow from
the Federal Reserve Bank “discount window” as a
secondary source of funds, provided that the institution meets the Federal Reserve
Bank’s credit standards.
Dividends
CCB is subject to legal limitations on the frequency and amount of dividends
that can be paid to CCBG. The Federal Reserve may
restrict the ability of CCB to pay dividends if such payments would constitute an
unsafe or unsound banking practice.
Additionally, financial
institutions are now required to maintain a capital conservation buffer
of at least 2.5% of risk-weighted
assets in order to avoid restrictions on capital distributions and other payments.
If a financial institution’s capital conservation
buffer falls below the minimum requirement, its maximum payout
amount for capital distributions and discretionary payments
declines to a set percentage of eligible retained income based on the size of the
buffer. See “Capital Regulations” below
for
additional details on this capital requirement.
In addition, Florida law and Federal regulation place restrictions on the declaration
of dividends from state-chartered banks to
their holding companies. Under the Florida Financial Institutions Code,
the board of directors of a state-chartered bank, after it
charges off bad debts, depreciation and other
worthless assets, if any, and makes provisions
for reasonably anticipated future
losses on loans and other assets, may quarterly,
semi-annually or annually declare a dividend of up to the aggregate net profits of
that period combined with the bank’s
retained net profits for the preceding two years. In addition, with the approval of the Florida
Office of Financial Regulation and Federal Reserve,
the bank’s board of directors may declare a
dividend from retained net
profits which accrued prior to the preceding two years. Before declaring such dividends,
20% of the net profits for the preceding
period as is covered by the dividend must be transferred to the surplus fund of the
bank until this fund becomes equal to the
amount of the bank’s common stock
then issued and outstanding. However, a Florida
state-chartered bank may not declare any
dividend if (i) its net income (loss) from the current year combined with the retained net
income (loss) for the preceding two years
aggregates a loss or (ii) the payment of such dividend would cause the capital account
of the bank to fall below the minimum
amount required by law, regulation,
order or any written agreement with the Florida Office of Financial
Regulation or a federal
regulatory agency.
Under Federal Reserve regulations, a state member bank may,
without the prior approval of the Federal
Reserve, pay a dividend in an amount that, when taken together with all dividends
declared during the calendar year, does not
exceed the sum of the bank’s net income
during the current calendar year and the retained net income of the prior
two calendar
years. The Federal Reserve may approve greater amounts.
Insurance of Accounts and Other Assessments
Deposits at U.S. domiciled banks are insured by the FDIC, subject to limits and conditions of
applicable laws and regulations.
Our deposit accounts are insured by the DIF generally up to a maximum of
$250,000 per separately insured depositor.
In order to
fund the DIF,
all insured depository institutions are required to pay quarterly assessments to
the FDIC that are based on an
institutions assignment to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other
factors. The FDIC has the discretion to adjust an institution’s
risk rating and may terminate its insurance of deposits upon a
finding that the institution engaged or is engaging in unsafe and unsound practices,
is in an unsafe or unsound condition to
continue operations, or violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or written
agreement entered into with the FDIC. The FDIC may also prohibit any FDIC-insured
institution from engaging in any activity it
determines to pose a serious risk to the DIF.
In October 2022, the FDIC finalized a rule to increase the initial base deposit insurance
assessment rate schedules uniformly by 2
basis points beginning with the first quarterly assessment period of 2023. The increased
assessment is intended to improve the
likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35%
by the statutory deadline of September 30,
2028 prescribed under the FDIC’s amended
restoration plan. In November 2023, the FDIC adopted a final rule with respect to a
special assessment to recover the costs associated with protecting uninsured
depositors following the closures of Silicon Valley
Bank and Signature Bank. The final rule does not apply to any banking organization
with less than $5 billion in total consolidated
assets and therefore the special assessment is not expected to impact the Company.
Transactions with Affiliates and
Insiders
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation
W, the authority
of CCB to engage in transactions
with related parties or “affiliates” or to make loans to insiders is limited. Loan
transactions with an affiliate generally must be
collateralized and certain transactions between CCB and its affiliates,
including the sale of assets, the payment of money or the
provision of services, must be on terms and conditions that are substantially the same,
or at least as favorable to CCB, as those
prevailing for comparable nonaffiliated transactions. In
addition, CCB generally may not purchase securities issued or
underwritten by affiliates.
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Loans to executive officers and directors of an insured depository institution
or any of its affiliates or to any person who directly
or indirectly, or acting
through or in concert with one or more persons, owns, controls or has the power
to vote more than 10% of
any class of voting securities of a bank, which we refer to as “10% Shareowners,”
or to any political or campaign committee the
funds or services of which will benefit those executive officers, directors,
or 10% Shareowners or which is controlled by those
executive officers, directors or 10% Shareowners, are subject to Sections
22(g) and 22(h) of the Federal Reserve Act and the
corresponding regulations (Regulation O) and Section 13(k) of the
Exchange Act relating to the prohibition on personal loans to
executives (which exempts financial institutions in compliance with the insider
lending restrictions of Section 22(h) of the Federal
Reserve Act). Among other things, these loans must be made on terms substantially
the same as those prevailing on transactions
made to unaffiliated individuals and certain extensions of
credit to those persons must first be approved in advance by a
disinterested majority of the entire board of directors. Section 22(h) of the Federal
Reserve Act prohibits loans to any of those
individuals where the aggregate amount exceeds an amount equal to
15% of an institution’s unimpaired
capital and surplus plus
an additional 10% of unimpaired capital and surplus in the case of loans that are fully
secured by readily marketable collateral, or
when the aggregate amount on all of the extensions of credit outstanding
to all of these persons would exceed our unimpaired
capital and unimpaired surplus. Section 22(g) identifies limited circumstances
in which we are permitted to extend credit to
executive officers.
Community Reinvestment Act
The CRA and its corresponding regulations are intended to encourage banks to
help meet the credit needs of the communities
they serve, including low- and moderate-income (“LMI”) neighborhoods,
consistent with safe and sound banking practices. These
regulations provide for regulatory assessment of a bank’s
record in meeting the credit needs of its market area. Federal banking
agencies are required to publicly disclose each bank’s
rating under the CRA. The Federal Reserve considers a bank’s
CRA rating
when the bank submits an application to establish bank branches, merge
with another bank, or acquire the assets and assume the
liabilities of another bank. In the case of a financial holding company,
the CRA performance record of all banks involved in a
merger or acquisition are reviewed in connection with
the application to acquire ownership or control of shares or assets of a bank
or to merge with another bank or bank holding company.
An unsatisfactory record can substantially delay or block the
transaction. We
received a satisfactory rating on our most recent CRA assessment.
In October 2023, the Federal Reserve, along with the FDIC and OCC, issued a joint final
rule that made significant amendments
to the regulations implementing the CRA to “strengthen and modernize”
those regulations, including by creating rigorous data-
driven performance tests and growing the geographic areas in which
a bank’s CRA performance may be
evaluated. The final rules
are intended to achieve the following key goals, among others: strengthen
the achievement of the core purpose of the CRA;
encourage banks to expand access to credit, investment, and banking services
in LMI communities; adapt to changes in the
banking industry, including
internet and mobile banking; provide greater clarity and consistency in the application
of the CR
A
regulations; and tailor CRA evaluations and data collection to bank size and
type. Although the effective date of the final rule is
April 1, 2024, the compliance date for the majority of the rule’s
provisions is January 1, 2026. The remaining requirements,
including the data reporting requirements, will be applicable on January 1, 2027.
We are planning for
compliance with the final
rules and continue to evaluate the impact of the final rules to our financial condition,
results of operations, and liquidity,
which
cannot be predicted at this time.
Capital Regulations
The federal banking regulators have adopted rules implementing
risk-based, capital adequacy guidelines for financial holding
companies and their subsidiary banks based on the Basel III standards. Under these
guidelines, assets and off-balance sheet items
are assigned to specific risk categories each with designated risk weightings.
These risk-based capital guidelines were designed to
make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposure, to minimize disincentives
for holding liquid assets, and to achieve greater consistency in
evaluating the capital adequacy of major banks throughout the world.
The resulting capital ratios represent capital as a percentage
of total risk-weighted assets and off-balance sheet items.
In computing total risk-weighted assets, bank and bank holding company
assets are given risk-weights of 0%, 20%, 50%, 100%
and 150%. In addition, certain off-balance sheet items are given similar
credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply.
Most loans will be assigned to the 100% risk category,
except
for performing first mortgage loans fully secured by 1-to-4 family and
certain multi-family residential property,
which carry a
50% risk rating. Most investment securities (including, primarily,
general obligation claims on states or other political
subdivisions of the United States) will be assigned to the 20% category,
except for municipal or state revenue bonds, which have
a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In covering off
-balance sheet items, direct credit substitutes, including general
guarantees and standby letters of credit backing financial obligations, are
given a 100% conversion factor. Transaction
-related
contingencies such as bid bonds, standby letters of credit backing nonfinancial
obligations, and undrawn commitments (including
commercial credit lines with an initial maturity of more than one year) have a
50% conversion factor. Short-term
commercial
letters of credit are converted at 20% and certain short-term unconditionally
cancelable commitments have a 0% factor.
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The rules implement strict eligibility criteria for regulatory capital instruments
and improve the methodology for calculating risk-
weighted assets to enhance risk sensitivity.
Consistent with the international Basel III framework, the rules include
a minimum
ratio of Common Equity Tier 1 Capital to Risk-Weighted
Assets of 4.5%. The rules provide for a Common Equity Tier
1 Capital
conservation buffer of 2.5% of risk-weighted assets. This buffer
is added to each of the three risk-based capital ratios to determine
whether an institution has established the buffer.
The rules provide for a minimum ratio of Tier 1 Capital to Risk-Weighted
Assets
of 6% and include a minimum leverage ratio of 4% for all banking organizations.
If a financial institution’s capital conservation
buffer falls below 2.5% (e.g., if the institution’s
Common Equity Tier 1 Capital to Risk-Weighted
Assets is less than 7.0%), then
capital distributions and discretionary payments will be limited or prohibited
based on the size of the institution’s buffer.
The
types of payments subject to this limitation include dividends, share buybacks,
discretionary payments on Tier 1 instruments,
and
discretionary bonus payments.
The capital regulations may also impact the treatment of accumulated
other comprehensive income (“AOCI”) for regulatory
capital purposes. AOCI generally flows through to regulatory capital; however,
community banks and their holding companies
were allowed a one-time irrevocable opt-out election to continue
to treat AOCI the same as under the old regulations for
regulatory capital purposes. This election was required to be made on the first call
report or bank holding company annual report
(on form FR Y-9C)
filed after January 1, 2015. We
made the opt-out election. Additionally,
the rules also permitted community
banks with less than $15 billion in total assets to continue to count certain non
-qualifying capital instruments issued prior to May
19, 2010, as Tier 1 capital, including trust preferred
securities and cumulative perpetual preferred stock (subject to a limit of 25%
of Tier 1 capital). However,
non-qualifying capital instruments issued on or after May 19, 2010, would not
qualify for Tier 1
capital treatment.
Commercial Real Estate Concentration Guidelines
The federal banking regulators have implemented guidelines to address increased
concentrations in commercial real estate loans.
These guidelines describe the criteria regulatory agencies will use as indicators to
identify institutions potentially exposed to
commercial real estate concentration risk. An institution that has (i) experienced
rapid growth in commercial real estate lending,
(ii) notable exposure to a specific type of
commercial real estate, (iii) total reported loans for construction, land development,
and
other land representing 100% or more of total risk-based capital, or (iv)
total commercial real estate (including construction) loans
representing 300% or more of total risk-based capital and the outstanding
balance of the institutions commercial real estate
portfolio has increased by 50% or more in the prior 36 months, may be identified for
further supervisory analysis of a potential
concentration risk.
At December 31, 2023, CCB’s ratio of
construction, land development and other land loans to total risk-based
capital was 77%,
its ratio of total commercial real estate loans to total risk-based capital was 235%
and, therefore, CCB was under the 100% and
300% thresholds, respectively,
set forth in clauses (iii) and (iv) above.
As a result, we are not deemed to have a concentration in
commercial real estate lending under applicable regulatory guidelines.
Prompt Corrective Action
The federal banking agencies are required to take “prompt corrective
action” with respect to financial institutions that do not meet
minimum capital requirements. The law establishes five categories for
this purpose: “well-capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”
To be considered “well-capitalized,”
an
insured depository institution must maintain minimum capital ratios and
must not be subject to any order or written directive to
meet and maintain a specific capital level for any capital measure. An institution
that fails to remain well-capitalized becomes
subject to a series of restrictions that increase in severity as its capital condition weakens. Such
restrictions may include a
prohibition on capital distributions, restrictions on asset growth or restrictions
on the ability to receive regulatory approval of
applications. The regulations apply only to banks and not to BHCs. However,
the Federal Reserve is authorized to take
appropriate action at the holding company level based on the undercapitalized
status of the holding company’s subsidiary
banking
institutions. In certain instances relating to an undercapitalized banking
institution, the BHC would be required to guarantee the
performance of the undercapitalized subsidiary’s
capital restoration plan and could be liable for civil money damages for failure
to fulfill those guarantee commitments.
In addition, failure to meet capital requirements may cause an institution to
be directed to raise additional capital. Federal law
further mandates that the agencies adopt safety and soundness standards generally
relating to operations and management, asset
quality and executive compensation, and authorizes administrative action
against an institution that fails to meet such standards.
Failure to meet capital guidelines may subject a banking organization
to a variety of other enforcement remedies, including
additional substantial restrictions on its operations and activities, termination of
deposit insurance by the FDIC and, under certain
conditions, the appointment of a conservator or receiver.
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At December 31, 2023, we exceeded the requirements contained in the applicable
regulations, policies and directives pertaining to
capital adequacy to be classified as “well capitalized” and are unaware
of any material violation or alleged violation of these
regulations, policies or directives (see table below). Rapid growth, poor loan
portfolio performance, or poor earnings
performance, or a combination of these factors, could change our capital position
in a relatively short period of time, making
additional capital infusions necessary.
Our capital ratios can be found in Note 17 to the Notes to our Consolidated Financial
Statements.
Interstate Banking and Branching
The Dodd-Frank Act relaxed interstate branching restrictions by modifying
the federal statute governing de novo interstate
branching by state member banks. Consequently,
a state member bank may open its initial branch in a state outside of the bank’s
home state by way of an interstate bank branch, so long as a bank chartered under the
laws of that state would be permitted to
open a branch at that location.
Anti-money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism
Act of
2001 (the “USA Patriot Act”), provides the federal government with additional
powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers,
increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy
Act (the “BSA”), the USA Patriot Act puts in place
measures intended to encourage information sharing among bank regulatory
and law enforcement agencies. In addition, certain
provisions of the USA Patriot Act impose affirmative obligations
on a broad range of financial institutions.
The USA Patriot Act, BSA, and the related federal regulations require banks
to establish anti-money laundering programs that
include policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing and to verify the
identity of their customers and of beneficial owners of their legal entity customers.
The Anti-Money Laundering Act (“AMLA”), which amends the BSA, was enacted in
early 2021. The AMLA is intended to be a
comprehensive reform and modernization of U.S. bank
secrecy and anti-money laundering laws. In particular,
it codifies a risk-
based approach to anti-money laundering compliance for financial institutions,
requires the U.S. Department of the Treasury to
promulgate priorities for anti-money laundering and countering the
financing of terrorism policy,
requires the development of
standards for testing technology and internal processes for BSA compliance,
expands enforcement-
and investigation-related
authority (including increasing available sanctions for certain BSA violations),
and expands BSA whistleblower incentives and
protections.
Many AMLA provisions require additional rulemakings, reports, and
other measures, and the impact of the AMLA will depend
on, among other things, rulemaking and implementation guidance.
In June 2021, the Financial Crimes Enforcement Network, a
bureau of the U.S. Department of the Treasury,
issued the priorities for anti-money laundering and countering the financing of
terrorism policy required under the AMLA. The priorities include corruption,
cybercrime, terrorist financing, fraud, transnational
crime, drug trafficking, human trafficking
and proliferation financing.
There is also increased scrutiny of compliance with the sanctions programs
and rules administered and enforced by the Office of
Foreign Assets Control of the U.S. Department of Treasury,
or “OFAC.” OFAC
administers and enforces economic and trade
sanctions against targeted foreign countries and regimes, terrorists, international
narcotics traffickers, those engaged in activities
related to the proliferation of weapons of mass destruction, and other threats to
the national security, foreign
policy or economy of
the United States, based on U.S. foreign policy and national security goals.
OFAC issues regulations
that restrict transactions by
U.S. persons or entities (including banks), located in the U.S. or abroad,
with certain foreign countries, their nationals or
“specially designated nationals.” OFAC
regularly publishes listings of foreign countries and designated
nationals that are
prohibited from conducting business with any U.S. entity or individual. While OFAC
is responsible for promulgating, developing
and administering these controls and sanctions, all of the bank regulatory
agencies are responsible for ensuring that financial
institutions comply with these regulations.
Privacy
A variety of federal and state privacy laws govern the collection, safeguarding, sharing
and use of customer information, and
require that financial institutions have policies regarding information privacy
and security. The GLBA and related
regulations
require banks and their affiliated companies to adopt and disclose
privacy policies, including policies regarding the sharing of
personal information with third parties. Some state laws also protect the privacy of
information of state residents and require
adequate security of such data, and certain state laws may require us to notify
affected individuals of security breaches of
computer databases that contain their personal information. These laws may
also require us to notify law enforcement, regulators
or consumer reporting agencies in the event of a data breach, as well as businesses and
governmental agencies that own data.
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Cybersecurity
The federal banking regulators regularly issue new guidance and standards,
and update existing guidance and standards, regarding
cybersecurity intended to enhance cyber risk management among financial
institutions. Financial institutions are expected to
comply with such guidance and standards and to accordingly develop appropriate
security controls and risk management
processes. If we fail to observe such regulatory guidance or standards, we
could be subject to various regulatory sanctions,
including financial penalties. In 2023, the SEC issued a final rule that requires
disclosure of material cybersecurity incidents, as
well as cybersecurity risk management, strategy and governance. Under
this rule, banking organizations that are SEC registrants
must generally disclose information about a material cybersecurity incident
within four business days of determining it is material
with periodic updates as to the status of the incident in subsequent filings,
as necessary.
Under a final rule adopted by federal banking agencies in 2021, banking organizations
are required to notify their primary
banking regulator within 36 hours of determining that a “computer-security
incident” has materially disrupted or degraded, or is
reasonably likely to materially disrupt or degrade, the banking organization’s
ability to carry out banking operations or deliver
banking products and services to a material portion of its customer base,
its businesses and operations that would result in
material loss, or its operations that would impact the stability of the United States.
State regulators have also been increasingly active in implementing privacy
and cybersecurity standards and regulations.
Recently, several states have
adopted regulations requiring certain financial institutions to implement
cybersecurity programs and
many states have also recently implemented or modified their data breach
notification, information security and data privacy
requirements. We
expect this trend of state-level activity in those areas to continue and are continually
monitoring developments
in the states in which our customers are located.
Risks and exposures related to cybersecurity attacks, including litigation
and enforcement risks, are expected to be elevated for
the foreseeable future due to the rapidly evolving nature and sophistication of
these threats, as well as due to the expanding use of
internet banking, mobile banking, and other technology-based products
and services by us and our customers.
See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity
and Item 1C. Cybersecurity for a further
discussion of risk management strategies and governance processes related to
cybersecurity.
Overdraft Fee Regulation
The Electronic Fund Transfer Act prohibits
financial institutions from charging consumers fees for paying overdrafts
on
automated teller machines, or ATM,
and one-time debit card transactions, unless a consumer consents, or opts
in, to the overdraft
service for those type of transactions.
If a consumer does not opt in, any ATM
transaction or debit that overdraws the consumer’s
account will be denied.
Overdrafts on the payment of checks and regular electronic bill payments are not covered
by this rule.
Before opting in, the consumer must be provided a notice that explains the financial
institution’s overdraft services,
including the
fees associated with the service, and the consumer’s choices.
Financial institutions must provide consumers who do not opt in
with the same account terms, conditions and features (including pricing)
that they provide to consumers who do opt in.
Consumer Laws and Regulations
CCB is also subject to other federal and state consumer laws and regulations that
are designed to protect consumers in
transactions with banks. While the list set forth below is not exhaustive,
these laws and regulations include the Truth in Lending
Act, the Truth in Savings Act, the Electronic Fund
Transfer Act, the Expedited Funds Availability
Act, the Check Clearing for the
21st Century Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the
Equal Credit Opportunity Act, the
Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and
Accurate Credit Transactions Act, the Mortgage Disclosure
Improvement Act, and the Real Estate Settlement Procedures Act, among
others. These laws and regulations mandate certain
disclosures and regulate the manner in which financial institutions must deal
with clients when taking deposits or making loans to
clients. CCB must comply with these consumer protection laws and regulations as part
of its ongoing client relations.
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In addition, the Consumer Financial Protection Bureau (“CFPB”) issues regulations
and standards under these federal consumer
protection laws that affect our consumer businesses. These
include regulations setting “ability to repay” standards for residential
mortgage loans and mortgage loan servicing and originator compensation
standards, which generally require creditors to make a
reasonable, good faith determination of a consumer’s ability
to repay any consumer credit transaction secured by a dwelling
(excluding an open-end credit plan, timeshare plan, reverse mortgage,
or temporary loan) and establishes certain protections from
liability under this requirement for loans that meet the requirements of the “qualified
mortgage” safe harbor. Also, the more
recent
TILA-RESPA
Integrated Disclosure, or TRID, rules for mortgage closings have
impacted our loan applications. These rules,
including the required loan forms, generally increased the time it takes to approve
mortgage loans.
Future Legislative Developments
Various
bills are from time to time introduced in the U.S. Congress and the Florida legislature.
This legislation may change
banking and tax statutes and the environment in which our banking subsidiary
and we operate in substantial and unpredictable
ways. We cannot
determine the ultimate effect that potential legislation, if enacted, or
implementing regulations with respect
thereto, would have upon our financial condition or results of operations or
that of our banking subsidiary.
Legislative and Regulatory Responses to the COVID-19 Pandemic
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which came
into law in 2020, was a $2.2 trillion
economic stimulus bill that was intended to provide relief in response to the
COVID-19 pandemic. The CARES Act, among other
things, amended the SBA’s
loan program, in which the Bank participates, to create a guaranteed,
unsecured loan program (the
“PPP”) to fund operational costs of eligible businesses, organizations
and self-employed persons during COVID-19. The PPP
authorized financial institutions to make federally guaranteed loans to
qualifying small businesses and non-profit organizations.
These loans carry an interest rate of 1% per annum and a maturity of two years for loans
originated prior to June 5, 2020 and five
years for loans originated on or after June 5, 2020. The PPP provides that
such loans may be forgiven if the borrowers meet
certain requirements with respect to maintaining employee headcount
and payroll and the use of the loan proceeds after the loan is
originated. Although the PPP ended in accordance with its terms on May 31,
2021, outstanding PPP loans continue to go through
the process of either obtaining forgiveness from the SBA or pursuing
claims under the SBA guaranty.
There have also been a number of regulatory actions intended to help mitigate the adverse economic
impact of the COVID-19
pandemic on borrowers, including several mandates from the bank regulatory
agencies, requiring financial institutions to work
constructively with borrowers affected by the COVID-19
pandemic.
While these programs have generally expired, governmental
authorities may take additional actions in the future to limit the adverse impacts of
COVID-19 that may affect the Bank and its
clients.
Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general
economic conditions, but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the “discount window,”
open market operations, changes in the Fed Funds target
interest rate, changes in interest rates payable on reserve accounts, the
imposition of changes in reserve requirements against member banks’ deposits
and assets of foreign banking centers and the
imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the
instruments of monetary policy available to the Federal Reserve. These monetary
policies are used in varying combinations to
influence overall growth and distributions of bank loans, investments and deposits,
which may affect interest rates charged on
loans or paid on deposits. The monetary policies of the Federal Reserve have
had a significant effect on the operating results of
commercial banks and are expected to continue to do so in the future. The
Federal Reserve’s policies are primarily
influenced by
its dual mandate of price stability and full employment, and, to a lesser degree by
short-term and long-term changes in the
international trade balance and in the fiscal policies of the U.S. Government. Future
changes in monetary policy and the effect of
such changes on our business and earnings in the future cannot be predicted.
Website Access to Company’s
Reports
Our Internet website is www.ccbg.com.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on
Form 8-K, including any amendments to those reports filed or furnished pursuant
to section 13(a) or 15(d), and reports filed
pursuant to Section 16, 13(d), and 13(g) of the Exchange Act are available
free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission.
The
information on our website is not incorporated by reference into this report.
22
Item 1A.
Risk Factors
An investment in our common stock contains a high degree
of risk. You should
consider carefully the following risk factors before
deciding whether to invest in our common stock. Our business, including our operating
results and financial condition, could be
harmed by any of these risks. Additional risks and uncertainties not currently
known to us or that we currently deem to be
immaterial also may materially and adversely affect our business. The trading
price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. In assessing these risks, you
should also refer to the other
information contained in our filings with the SEC, including our financial
statements and related notes.
Market Risks
We may incur losses if we are
unable to successfully manage interest rate risk.
Our profitability depends to a large extent on Capital City Bank’s
net interest income, which is the difference between income on
interest-earning assets, such as loans and investment securities, and
expense on interest-bearing liabilities such as deposits and
borrowings. We
are unable to predict changes in market interest rates, which are affected
by many factors beyond our control,
including inflation, recession, unemployment, federal funds target
rate, money supply, domestic and
international events and
changes in the United States and other financial markets. Our net interest income
may be reduced if: (i) more interest-earning
assets than interest-bearing liabilities reprice or mature during a time when
interest rates are declining or (ii) more interest-bearing
liabilities than interest-earning assets reprice or mature during a time when
interest rates are rising.
Changes in the difference between short-term
and long-term interest rates may also harm our business. We
generally use short-
term deposits to fund longer-term assets. When interest rates change,
assets and liabilities with shorter terms reprice more quickly
than those with longer terms, which could have a material adverse effect
on our net interest margin. During 2022 and 2023, the
Federal Reserve raised the federal funds rate 11
times for a cumulative increase of 5.25% and there is no guarantee that it will
reduce the federal funds rate in the near-term.
Prior to 2022, the Federal Reserve had not raised the federal funds rate since
December 2018. The increase in the federal funds rate could have an
adverse effect on our net interest income and profitability.
If
market interest rates start rising again, interest rate adjustment caps may also limit
increases in the interest rates on adjustable-rate
loans, which could further reduce our net interest income. Further,
increased price competition for deposits resulting from the
return to a historically normal interest rate environment could adversely
affect our net interest margin.
Although we continuously monitor interest rates and have a number
of tools to manage our interest rate risk exposure, changes in
market assumptions regarding future interest rates could significantly impact our
interest rate risk strategy, our financial
position
and results of operations. If we do not properly monitor our interest rate risk management
strategies, these activities may not
effectively mitigate our interest rate sensitivity or have the desired
impact on our results of operations or financial condition.
Interest rates and economic conditions affect consumer
demand for housing and can create volatility in the mortgage industry.
These risks can have a material impact on the volume of mortgage originations
and refinancings, adversely affecting mortgage
banking revenues and the profitability of our mortgage banking business.
See Item 7.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations under the section captioned
“Net Interest Income” and “Market Risk and Interest Rate Sensitivity” elsewhere
in this report for further discussion related to
interest rate sensitivity and our management of interest rate risk.
The fair value of our investments could decline which would cause a reduction
in shareowners’ equity.
A portion of our investment securities portfolio (35.1%) at December
31, 2023 has been designated as available-for-sale pursuant
to U.S. generally accepted accounting principles relating to accounting for
investments. Such principles require that unrealized
gains and losses in the estimated value of the available-for-sale
portfolio be “marked to market” and reflected as a separate item in
shareowners’ equity (net of tax) as accumulated other comprehensive
income/losses. Shareowners’ equity will continue to reflect
the unrealized gains and losses (net of tax) of these investments. The fair value
of our investment portfolio may decline, causing a
corresponding decline in shareowners’ equity.
Management believes that several factors will affect the
fair values of our investment portfolio. These include, but are not limited
to, changes in interest rates or expectations of changes in interest rates, the degree
of volatility in the securities markets, inflation
rates or expectations of inflation and the slope of the interest rate yield curve
(the yield curve refers to the differences between
short-term and long-term interest rates; a positively sloped yield curve means short
-term rates are lower than long-term rates).
These and other factors may impact specific categories of the portfolio differently,
and we cannot predict the effect these factors
may have on any specific category.
23
Inflationary pressures and rising prices may
affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and continued rising in 2022 at levels not
seen for over 40 years. Inflationary pressures
eased but remained elevated throughout 2023. Small to medium-sized
businesses may be impacted more during periods of high
inflation as they are not able to leverage economies of scale to mitigate cost pressures compared
to larger businesses.
Consequently, the
ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration
may
occur quickly,
which would adversely impact our results of operations and financial condition. Furthermore,
a prolonged period
of inflation could cause wages and other costs to further increase which could
adversely affect our results of operations and
financial condition. Sustained higher interest rates by the Federal Reserve may
be needed to tame persistent inflationary price
pressures, which could push down asset prices and weaken economic
activity. A deterioration in economic
conditions in the
United States and our markets could result in an increase in loan delinquencies
and non-performing assets, decreases in loan
collateral values and a decrease in demand for our products and services, all of
which, in turn, would adversely affect our
business, financial condition and results of operations.
The impact of interest rates on our mortgage banking business can
have a significant impact on revenues.
Changes in interest rates can impact our mortgage-related revenues and net revenues
associated with our mortgage activities.
A
decline in mortgage rates generally increases the demand for mortgage loans
as borrowers refinance, but also generally leads to
accelerated payoffs. Conversely,
in a constant or increasing rate environment, we would expect fewer loans to be refinanced
and a
decline in payoffs. Although we use models to assess the impact
of interest rates on mortgage-related revenues, the estimates of
revenues produced by these models are dependent on estimates and assumptions
of future loan demand, prepayment speeds and
other factors which may differ from actual subsequent
experience.
Our profitability depends significantly on economic
conditions in the States of Florida and Georgia.
Our profitability and the success of our business depends substantially on the general
economic conditions of the States of Florida
and, to a lesser extent, Georgia, as well as the specific local markets in
which we operate. Unlike larger national or other regional
banks that are more geographically diversified, we provide banking
and financial services primarily to customers across northern
Florida and Georgia. The local economic conditions in
these areas have a significant impact on the demand for our products and
services as well as the ability of our customers to repay loans, the value of the
collateral securing loans and the stability of our
deposit funding sources. As a result, a significant decline in general economic
conditions in Florida or Georgia, whether caused
by recession, inflation, unemployment, in-flows and out-flows of residents,
shifts in political landscape, changes in securities
markets, acts of terrorism, pandemics, natural disasters, climate change,
outbreak of hostilities or other occurrences or other
factors could have a material adverse effect on our business, financial
condition and results of operations.
Shares of our common stock are not an insured
deposit and may lose value.
The shares of our common stock are not a bank deposit and will not be insured or
guaranteed by the FDIC or any other
government agency.
Your
investment will be subject to investment risk, and you must be capable of affording the
loss of your
entire investment.
Limited trading activity for shares of our common stock may
contribute to price volatility.
While our common stock is listed and traded on the Nasdaq Global Select Market, there
has historically been limited trading
activity in our common stock.
The average daily trading volume of our common stock over the 12-month
period ending
December 31, 2023 was approximately 33,775 shares. Due to the limited
trading activity of our common stock, relativity small
trades may have a significant impact on the price of our common stock.
Similarly, significant sales of our common
stock, or the
expectation of these sales, could cause our stock prices to fall.
Securities analysts may not initiate coverage or continue to cover our common
stock, and this may have a negative impact
on its market price.
The trading market for our common stock will depend in part on the research
and reports that securities analysts publish about us
and our business. We do
not have any control over securities analysts, and they may not initiate coverage
or continue to cover our
common stock. If securities analysts do not cover our common stock, the lack
of research coverage may adversely affect its
market price. If we are covered by securities analysts, and our common stock is the subject of
an unfavorable report, our stock
price would likely decline. If one or more of these analysts ceases to cover our Company
or fails to publish regular reports on us,
we could lose visibility in the financial markets, which may cause our
stock price or trading volume to decline.
24
Credit Risks
Our loan portfolio includes loans with a higher risk of loss which could lead to higher loan losses and nonperforming
assets.
We originate
commercial real estate loans, commercial loans, construction loans, vacant land
loans, consumer loans, and
residential mortgage loans primarily within our market area. Commercial
real estate, commercial, construction, vacant land, and
consumer loans may expose a lender to greater credit risk than traditional
fixed-rate fully amortizing loans secured by single-
family residential real estate because the collateral securing these loans may
not be sold as easily as single-family residential real
estate. In addition, these loan types tend to involve larger loan balances
to a single borrower or groups of related borrowers and
are more susceptible to a risk of loss during a downturn in the business cycle. These
loans also have historically had greater credit
risk than other loans for the following reasons:
●
Commercial Real Estate Loans
. Repayment is dependent on income being generated in amounts sufficient
to cover
operating expenses and debt service. These loans also involve greater risk because
they are generally not fully amortizing
over the loan period, but rather have a balloon payment due at maturity.
A borrower’s ability to make a balloon payment
typically will depend on the borrower’s ability to either refinance
the loan or timely sell the underlying property.
At
December 31, 2023, commercial mortgage loans comprised approximately
30.2% of our total loan portfolio.
●
Commercial Loans
. Repayment is generally dependent upon the successful operation of the borrower’s
business. In
addition, the collateral securing the loans may depreciate over time, be
difficult to appraise, be illiquid, or fluctuate in
value based on the success of the business. At December 31, 2023, commercial
loans comprised approximately 8.2% of
our total loan portfolio.
●
Construction Loans
. The risk of loss is largely dependent on our initial estimate of whether
the property’s value at
completion equals or exceeds the cost of property construction and the availability
of take-out financing. During the
construction phase, a number of factors can result in delays or cost overruns. If
our estimate is inaccurate or if actual
construction costs exceed estimates, the value of the property securing our
loan may be insufficient to ensure full
repayment when completed through a permanent loan, sale of the property,
or by seizure of collateral.
At December 31,
2023, construction loans comprised approximately 7.2% of our total loan
portfolio.
●
Vacant
Land Loans
. Because vacant or unimproved land is generally held by the borrower
for investment purposes or
future use, payments on loans secured by vacant or unimproved land will typically
rank lower in priority to the borrower
than a loan the borrower may have on their primary residence or business. These loans
are susceptible to adverse
conditions in the real estate market and local economy.
At December 31, 2023, vacant land loans comprised
approximately 3.5% of our total loan portfolio.
●
HELOCs
. Our open-ended home equity loans have an interest-only draw period
followed by a five-year repayment
period of 0.75% of the principal balance monthly and a balloon payment
at maturity. Upon the commencement
of the
repayment period, the monthly payment can increase significantly,
thus, there is a heightened risk that the borrower will
be unable to pay the increased payment. Further,
these loans also involve greater risk because they are generally not fully
amortizing over the loan period, but rather have a balloon payment due
at maturity.
A borrower’s ability to make a
balloon payment may depend on the borrower’s ability
to either refinance the loan or timely sell the underlying property.
At December 31, 2023, HELOCs comprised approximately 7.7% of
our total loan portfolio.
●
Consumer Loans
. Consumer loans (such as automobile loans and personal lines of
credit) are collateralized, if at all,
with assets that may not provide an adequate source of payment of the loan due
to depreciation, damage, or loss. At
December 31, 2023, consumer loans comprised approximately 9.9%
of our total loan portfolio, with indirect auto loans
making up a majority of this portfolio at approximately 91.2% of the total
balance.
The increased risks associated with these types of loans result in a correspondingly
higher probability of default on such loans (as
compared to fixed-rate fully amortizing single-family real estate loans). Loan
defaults would likely increase our loan losses and
nonperforming assets and could adversely affect our allowance
for credit losses and our results of operations.
25
Our loan portfolio is heavily concentrated in mortgage loans secured
by properties in Florida and Georgia which causes
our risk of loss to be higher than if we had a more geographically diversified
portfolio.
Our interest-earning assets are heavily concentrated in mortgage loans secured
by real estate, particularly real estate located in
Florida and Georgia.
At December 31, 2023, approximately 81.8% of our loans included real estate as a primary,
secondary, or
tertiary component of collateral. The real estate collateral in each case provides
an alternate source of repayment in the event of
default by the borrower; however, the value
of the collateral may decline during the time the credit is extended. If we are required
to liquidate the collateral securing a loan during a period of reduced real estate values
to satisfy the debt, our earnings and capital
could be adversely affected.
Additionally, at December
31, 2023, a significant number of our loans secured by real estate are secured by commercial and
residential properties located in Florida and Georgia. The
concentration of our loans in these areas subjects us to risk that a
downturn in the economy or recession in these areas could result in a decrease in
loan originations and increases in delinquencies
and foreclosures, which would more greatly affect us than
if our lending were more geographically diversified. In addition, since
a large portion of our portfolio is secured by properties located
in Florida and Georgia, the occurrence of a natural disaster,
such
as a hurricane, or a man-made disaster could result in a decline in loan originations,
a decline in the value or destruction of
mortgaged properties and an increase in the risk of delinquencies, foreclosures
or loss on loans originated by us. We
may suffer
further losses due to the decline in the value of the properties underlying our
mortgage loans, which would have an adverse
impact on our results of operations and financial condition.
Our concentration in loans secured by real estate
may increase our credit losses, which would negatively
affect our
financial results.
Due to the lack of diversified industry within some of the markets served by CCB and the relatively
close proximity of our
geographic markets, we have both geographic concentrations as well as concentrations
in the types of loans funded. Specifically,
due to the nature of our markets, a significant portion of the portfolio has historically
been secured with real estate. At December
31, 2023, approximately 30.2% and 44.4% of our $2.7 billion
loan portfolio was secured by commercial real estate and residential
real estate, respectively.
As of this same date, approximately 7.2% was secured by property under construction.
In the event we are required to foreclose on a property securing one of our mortgage
loans or otherwise pursue our remedies in
order to protect our investment, we may be unable to recover funds in an amount
equal to our projected return on our investment
or in an amount sufficient to prevent a loss to us due to prevailing economic
conditions, real estate values and other factors
associated with the ownership of real property.
As a result, the market value of the real estate or other collateral underlying our
loans may not, at any given time, be sufficient to satisfy the outstanding
principal amount of the loans, and consequently,
we
would sustain loan losses.
An inadequate allowance for credit losses would reduce our
earnings.
We are exposed
to the risk that our clients may be unable to repay their loans according to their terms and
that any collateral
securing the payment of their loans may not be sufficient
to assure full repayment. This could result in credit losses that are
inherent in the lending business. We
evaluate the collectability of our loan portfolio and provide an allowance
for credit losses
that we believe is adequate based upon such factors as:
●
the risk characteristics of various classifications of loans;
●
previous loan loss experience;
●
specific loans that have loss potential;
●
delinquency trends;
●
estimated fair market value of the collateral;
●
current and future economic conditions; and
●
geographic and industry loan concentrations.
At December 31, 2023, our allowance for credit losses for loans held for investment
was $29.9 million, which represented
approximately 1.10% of our total loans held for investment.
We had $6.2
million in nonaccruing loans at December 31, 2023.
The allowance is based on management’s
reasonable estimate and may not prove sufficient to cover future loan
losses.
Although
management uses the best information available to make determinations
with respect to the allowance for credit losses, future
adjustments may be necessary if economic conditions differ substantially
from the assumptions used or adverse developments
arise with respect to our nonperforming or performing loans.
In addition, regulatory agencies, as an integral part of their
examination process, periodically review our estimated losses on loans.
Our regulators may require us to recognize additional
losses based on their judgments about information available to them at the time of
their examination.
Accordingly, the allowance
for credit losses may not be adequate to cover all future loan losses and significant increases
to the allowance may be required in
the future if, for example, economic conditions worsen.
A material increase in our allowance for credit losses would adversely
impact our net income and capital in future periods, while having the effect
of overstating our current period earnings.
26
We may incur significant costs associated
with the ownership of real property
as a result of foreclosures, which could
reduce our net income.
Since we originate loans secured by real estate, we may have to foreclose on the
collateral property to protect our investment and
may thereafter own and operate such property,
in which case we would be exposed to the risks inherent in the ownership of real
estate.
The amount that we, as a mortgagee, may realize after a foreclosure is dependent
upon factors outside of our control, including,
but not limited to:
●
general or local economic conditions;
●
environmental cleanup liability;
●
neighborhood values;
●
interest rates;
●
real estate tax rates;
●
operating expenses of the mortgaged properties;
●
supply of and demand for rental units or properties;
●
ability to obtain and maintain adequate occupancy of the properties;
●
zoning laws;
●
governmental rules, regulations and fiscal policies; and
●
acts of God.
Certain expenditures associated with the ownership of real estate, including
real estate taxes, insurance and maintenance costs,
may adversely affect the income from the real estate. Furthermore,
we may need to advance funds to continue to operate or to
protect these assets. As a result, the cost of operating real property
assets may exceed the rental income earned from such
properties or we may be required to dispose of the real property at a loss.
Reliance on inaccurate or misleading financial statements, credit
reports, or other financial information could have a
material adverse impact on our business, financial condition,
and results of operations.
In deciding whether to extend credit or enter into other transactions, we
rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit
reports, and other financial information. We
also rely on
representations of those customers, counterparties, or other third parties, such
as independent auditors, as to the accuracy and
completeness of that information. Reliance on inaccurate or misleading
financial statements, credit reports, or other financial
information could have a material adverse impact on our business, financial condition,
and results of operations.
Liquidity and Capital Risks
Liquidity risk could impair our ability to fund operations and jeopardize our financial
condition.
Effective liquidity management is essential for the operation of
our business. We require
sufficient liquidity to meet client loan
requests, client deposit maturities and withdrawals, payments on our debt obligations
as they come due and other cash
commitments under both normal operating conditions and other unpredictable
circumstances causing industry or general financial
market stress. If we are unable to raise funds through deposits, borrowings,
earnings and other sources, it could have a substantial
negative effect on our liquidity.
In particular, a majority of our liabilities during 2023
were checking accounts and other liquid
deposits, which are generally payable on demand or upon short notice.
By comparison, a substantial majority of our assets were
loans, which cannot generally be called or sold in the same time frame. Although
we have historically been able to replace
maturing deposits and advances as necessary,
we might not be able to replace such funds in the future, especially if a large
number of our depositors seek to withdraw their accounts at the same time, regardless
of the reason. Our access to funding
sources in amounts adequate to finance our activities on terms that are acceptable
to us could be impaired by factors that affect us
specifically or the financial services industry or economy in general.
Factors that could negatively impact our access to liquidity
sources include a decrease in the level of our business activity as a result of a downturn
in the markets in which our loans are
concentrated, adverse regulatory action against us, or our inability to attract and
retain deposits. Our access to deposits may be
negatively impacted by,
among other factors, periods of low interest rates or high interest rates.
Periods of high interest rates
could promote increased competition for deposits, including from new
financial technology competitors, or provide customers
with alternative investment options.
Our ability to borrow could also be impaired by factors that are not specific to us, such
as a
disruption in the financial markets or negative views and expectations about
the prospects for the financial services industry.
If we
are unable to maintain adequate liquidity,
it could materially and adversely affect our business, results of operations
or financial
condition.
27
A
significant
decrease
in
our
public
fund
deposit
balances
as
a
result
of
increased
competition
in
the
current
higher
interest-rate environment and seasonal nature
of these deposits could materially and adversely affect our liquidity.
The Company has many long-standing relationships with municipal entities
throughout its markets and the deposits held by these
customers have provided a relatively attractive and stable (although seasonal)
funding source for the Company over an extended
period of time. Public fund deposits from local government entities such as universities,
counties, school districts, and other
municipalities generally have higher average balances and historically been
more volatile than nonpublic deposits because they
are heavily impacted by the seasonality of tax collection, changes in competitive
and market forces, and fiscal spending patterns,
as well as the longer-term financial position of local government entities, which
can change from year to year. Such public
fund
deposits are often subject to competitive bidding and in many cases must be secured
by pledging a portion of our investment
securities.
The Company’s inability to
retain public fund deposit balances due to increased competition in the current higher
interest-rate environment and seasonal nature of these deposits could materially
and adversely affect our liquidity or result in the
use of higher-cost funding sources, which, in turn, could
materially and adversely affect our business, results of operations or
financial condition.
Unrealized losses in our securities portfolio could materially
and adversely affect our liquidity.
As market interest rates have increased, we have experienced significant unrealized
losses on our available-for-sale securities
portfolio. Unrealized losses related to available-for-sale securities are reflected
in accumulated other comprehensive income in
our consolidated statements of financial condition and reduce the level of our book
capital and tangible common equity.
However,
such unrealized losses do not affect our regulatory capital ratios. We
actively monitor our available-for-sale securities portfolio
and we do not currently anticipate the need to realize material losses from the sale of securities for
liquidity purposes.
Furthermore, we believe it is unlikely that we would be required to sell any such securities
before recovery of their amortized cost
bases, which may be at maturity.
Nonetheless, our access to liquidity sources could be affected by unrealized
losses if securities
must be sold at a loss, tangible capital ratios decline from an increase in unrealized
losses or realized credit losses, the Federal
Home Loan Bank of Atlanta (“FHLB”) or other funding sources reduce
capacity, or bank regulators impose
restrictions on us that
impact the level of interest rates we may pay on deposits or our ability to access federal
funds lines or brokered deposits.
Additionally, significant
unrealized losses could negatively impact market and customer perceptions
of the Company, which
could lead to a loss of depositor confidence and an increase in deposit withdrawals,
particularly among those with uninsured
deposits.
We may need to raise additional capital
in the future, and such capital may not be available on acceptable terms or at all.
We
may
need
to
raise
additional
capital
in
the
future
to
provide
us
with
sufficient
capital
resources
and
liquidity
to
meet
our
commitments and business
needs, particularly if our
asset quality or earnings
were to deteriorate significantly.
Our ability to raise
additional capital,
if needed, will
depend on, among
other things, conditions
in the capital
markets at that
time, which are
outside
of our
control, and
our financial
condition. Economic
conditions and
the loss of
confidence in
financial institutions
may increase
our
cost
of
funding
and
limit
access
to
certain
customary
sources
of
capital,
including
inter-bank
borrowings,
repurchase
agreements and borrowings from the discount window of the Federal Reserve.
Further, as a result of our failure to timely file our
Quarterly Report on Form 10-Q for the three-month period ended September
30, 2023, we are currently ineligible to file new short form registration statements on
Form S-3 and, absent a waiver of the Form
S-3 eligibility requirements, we are not currently permitted to use our existing
registration statement on Form S-3D. If we seek to
access the capital markets through a registered offering during the
period of time that we are unable to use Form S-3, we may be
required to publicly disclose the proposed offering and the material
terms thereof before the offering commences and we will be
required to use a registration statement on Form S-1 to register securities with
the SEC, which would hinder our ability to act
quickly in raising capital to take advantage of market conditions in our capital
raising activities and would increase our cost of
raising capital.
As a result, we may be unable to raise capital on terms favorable to us, in a timely manner
or at all, which could materially and
adversely affect our liquidity,
business, results of operations, or financial condition. Moreover,
if we need to raise capital in the
future, we may have to do so when many other financial institutions are also seeking
to raise capital and would have to compete
with those institutions for investors.
We may be unable to pay dividends in the future.
In 2023, our Board of Directors declared four quarterly cash dividends.
Declarations of any future dividends will be contingent on
our ability to earn sufficient profits and to remain well capitalized, including
our ability to hold and generate sufficient capital to
comply with the Common Equity Tier 1 (“CET1”)
Capital conservation buffer requirement. In addition,
due to our contractual
obligations with the holders of our trust preferred securities, if we defer the payment of accrued
interest owed to the holders of our
trust preferred securities, we may not make dividend payments to our
shareowners.
28
Further, under applicable statutes and regulations,
CCB’s board of directors,
after charging-off bad debts, depreciation and other
worthless assets, if any,
and making provisions for reasonably anticipated future losses on loans and other assets, may
quarterly,
semi-annually, or
annually declare and pay dividends to CCBG of up to the aggregate net income
of that period combined with
the CCB’s retained net income for
the preceding two years and, with the approval of the Florida Office of Financial
Regulation
and Federal Reserve, declare a dividend from retained net income which accrued
prior to the preceding two years.
Additional
state laws generally applicable to Florida corporations may also limit our ability
to declare and pay dividends. Thus, our ability to
fund future dividends may be restricted by state and federal laws and regulations.
Regulatory and Compliance Risks
We are subject to
extensive regulation, which could restrict our activities
and impose financial requirements or limitations
on the conduct of our business.
We are subject to
extensive regulation, supervision and examination by our regulators, including
the Florida Office of Financial
Regulation, the Federal Reserve, and the FDIC. Our compliance with
these industry regulations is costly and restricts certain of
our activities, including payment of dividends, mergers
and acquisitions, investments, lending and interest rates charged on
loans,
interest rates paid on deposits, access to capital and brokered deposits and locations
of banking offices. If we are unable to meet
these regulatory requirements, our financial condition, liquidity and results of
operations would be materially and adversely
affected.
Our activities are also regulated under consumer protection laws applicable to
our lending, deposit, and other activities. Many of
these regulations are intended primarily for the protection of our
depositors, the DIF,
and the banking system as a whole, and not
for the benefit of our shareowners. In addition to the regulations of the bank regulatory
agencies, as a member of the FHLB of
Atlanta, we must also comply with applicable regulations of the Federal
Housing Finance Agency and the Federal Home Loan
Bank.
Our failure to comply with these laws and regulations could subject us to the loss of
FDIC insurance, reputational damage, the
revocation of our banking charter,
enforcement actions, sanctions, or other legal actions by regulatory agencies, restrictions
on our
business activities, fines, and other penalties, any of which could adversely
affect our results of operations, capital base, and the
price of our securities. Further, any new laws, rules,
regulations, policies, and supervisory guidance or changes in existing
laws,
rules, regulations, policies, and supervisory guidance (including changes
in interpretation and implementation) could make
compliance more difficult or expensive or otherwise adversely
affect our business and financial condition.
Government authorities, including the bank regulatory agencies, are pursuing
aggressive enforcement actions with respect to
compliance and other legal matters involving financial activities, which heightens
the risks associated with actual and perceived
compliance failures. Directives issued to enforce such actions may be
confidential and thus, in some instances, we are not
permitted to publicly disclose these actions. Any of the foregoing could have
a material adverse effect on our business, financial
condition, and results of operations.
In addition, we anticipate increased regulatory scrutiny,
in the course of routine examinations and otherwise, and new regulations
in response to recent negative developments in the banking industry,
which may increase our cost of doing business and reduce
our profitability.
Among other things, there may be increased focus by both regulators and investors on deposit
composition, the
level of uninsured deposits, brokered deposits, unrealized losses in securities portfolios,
liquidity, commercial real estate loan
composition and concentrations, and capital as well as general oversight
and control of the foregoing. We
could face increased
scrutiny or be viewed as higher risk by regulators and the investor community,
which could have a material adverse effect on our
business, financial condition, and results of operations.
Please refer to the Section entitled “Business – Regulatory Considerations”
on page 10.
U.S. federal banking agencies may require us to increase
our regulatory capital, long-term debt or liquidity
requirements,
which could result in the need to issue additional qualifying securities or to
take other actions, such as to sell company
assets.
We are subject to
U.S. regulatory capital and liquidity rules. These rules, among other things, establish minimum
requirements to
qualify as a well-capitalized institution. If CCB fails to maintain its status as well capitalized
under the applicable regulatory
capital rules, the Federal Reserve will require us to agree to bring the bank back to
well-capitalized status. For the duration of
such an agreement, the Federal Reserve may impose restrictions on our
activities. If we were to fail to enter into or comply with
such an agreement or fail to comply with the terms of such agreement, the Federal
Reserve may impose more severe restrictions
on our activities, including requiring us to cease and desist activities permitted
under the Bank Holding Company Act of 1956.
Additionally, if our
CET1 to Risk Weighted Assets ratio
does not exceed the minimum required plus the additional CET1
conservation buffer,
we may be restricted in our ability to pay dividends or make other distributions of capital to our shareowners.
29
Capital and liquidity requirements are frequently introduced and amended.
It is possible that regulators may increase regulatory
capital requirements, change how regulatory capital is calculated or increase liquidity
requirements. Requirements to maintain
higher levels of capital may lower our return on equity.
Further changes to and compliance with the regulatory capital and liquidity requirements
may impact our operations by requiring
us to liquidate assets, increase borrowings, issue additional equity or other securities,
cease or alter certain operations, sell
company assets or hold highly liquid assets, which may adversely affect
our results of operations. We
may be prohibited from
taking capital actions such as paying or increasing dividends or repurchasing
securities.
Changes in accounting standards or assumptions in applying accounting policies
could adversely affect us.
Our accounting policies and methods are fundamental to how we record and report
our financial condition and results of
operations. Some of these policies require use of estimates and assumptions that
may affect the reported value of our assets or
liabilities and results of operations and are critical because they require management
to make difficult, subjective and complex
judgments about matters that are inherently uncertain. If those assumptions, estimates or
judgments were incorrectly made, we
could be required to correct and restate prior-period financial statements. Accounting
standard-setters and those who interpret the
accounting standards, the SEC, banking regulators and our independent registered
public accounting firm may also amend or even
reverse their previous interpretations or positions on how various standards
should be applied. These changes may be difficult to
predict and could impact how we prepare and report our financial statements. In
some cases, we could be required to apply a new
or revised standard retrospectively,
resulting in us revising prior-period financial statements.
Florida financial institutions, such as CCB, face a higher risk of noncompliance
and enforcement actions with the Bank
Secrecy Act and other anti-money laundering statutes and regulations.
Since September 11, 2001, banking regulators
have intensified their focus on anti-money laundering and BSA compliance
requirements, particularly the anti-money laundering provisions of
the USA PATRIOT
Act. There is also increased scrutiny of
compliance with the rules enforced by the Office of Foreign Assets
Control, or OFAC.
Since 2004, federal banking regulators and
examiners have been extremely aggressive in their supervision and examination
of financial institutions located in the State of
Florida with respect to the institution’s
BSA/anti-money laundering compliance. Consequently,
numerous formal enforcement
actions have been instituted against financial institutions. If CCB’s
policies, procedures and systems are deemed deficient or
the
policies, procedures and systems of the financial institutions that it has already
acquired or may acquire in the future are deficient,
CCB would be subject to liability,
including fines and regulatory actions such as restrictions on its ability to pay
dividends and the
necessity to obtain regulatory approvals to proceed with certain aspects of its business plan,
including its acquisition plans.
We are subject to
government regulation and oversight relating to
data and privacy protection.
Our business requires the collection and retention of large
volumes of customer data, including personally identifiable
information
in various information systems that we maintain and in those maintained
by third parties with whom we contract. We
also
maintain important internal company data such as personally identifiable information
about our associates and information
relating to our operations. The integrity and protection of that customer and company
data is important to us.
We are subject to
complex and evolving laws and regulations relating to the privacy of the information
of our customers,
associates and others, and any failure to comply with these laws and regulations,
or any misuse or mismanagement of such
information, could expose us to liability and reputational damage, which could
adversely affect our financial condition and results
of operations. As new privacy-related laws and regulations are implemented,
the time and resources needed for us to comply with
such laws and regulations, as well as our potential liability for non-compliance
and reporting obligations in the case of data
breaches, may significantly increase. It is possible that these laws may be interpreted
and applied by various jurisdictions in a
manner inconsistent with our current or future practices, or that is inconsistent
with one another.
Fee revenues from overdraft protection
programs constitute a significant portion of our noninterest income
and may be
subject to increased supervisory scrutiny.
Revenues derived from transaction fees associated with overdraft protection
programs offered to consumers represent a
significant portion of our noninterest income. In 2023, the Company
collected approximately $9.6 million in net consumer
overdraft transaction fees.
30
In 2022, certain members of Congress and the leadership of the CFPB have expressed
a heightened interest in bank consumer
overdraft protection programs. In 2022, the CFPB piloted a supervision
effort to collect key metrics from some supervised
institutions regarding the consumer impact of their overdraft and
non-sufficient fund practices, with the intent of using this
information to identify institutions for further examination and review.
The CFPB has indicated that it intends to pursue
enforcement actions against banking organizations,
and their executives, that oversee overdraft practices that are deemed to be
unlawful, and indeed took action against a large bank for charging
“surprise” overdraft fees known as authorized positive fee. In
October of 2022, the CFPB issued guidance to help banks avoid charging
illegal surprise overdraft fees. In addition, the
Comptroller of the Currency has identified potential options for reform of
national bank overdraft protection practices, including
providing a grace period before the imposition of a fee, refraining
from charging multiple fees in a single day and eliminating fees
altogether.
In response to this increased congressional and regulatory scrutiny,
and in anticipation of enhanced supervision and enforcement
of overdraft protection practices in the future, certain banking organizations
have begun to modify their overdraft protection
programs, including by discontinuing the imposition of overdraft transaction
fees and amending their payment priority policies
and procedures. These competitive pressures from our peers, as well as any adoption
by our regulators of new rules or supervisory
guidance or more aggressive examination and enforcement policies in respect
of banks’ overdraft protection practices, could
cause us to modify our program and practices in ways that may have a negative impact
on our revenue and earnings, which, in
turn, could have an adverse effect on our financial condition and
results of operations.
Operational Risks
Many types of operational risks can affect our earnings negatively.
We regularly
assess and monitor operational risk in our businesses. Despite our efforts to
assess and monitor operational risk, our
risk management framework may not be effective in all cases.
Factors that can impact operations and expose us to risks varying
in
size, scale and scope include:
●
failures of technological systems or breaches of security measures, including, but not
limited to, those resulting from
computer viruses or cyber-attacks;
●
unsuccessful or difficult implementation of computer
systems upgrades;
●
human errors or omissions, including failures to comply with applicable
laws or corporate policies and procedures;
●
theft, fraud or misappropriation of assets, whether arising from the intentional
actions of internal personnel or external
third parties;
●
breakdowns in processes, breakdowns in internal controls or failures of
the systems and facilities that support our
operations;
●
deficiencies in services or service delivery;
●
negative developments in relationships with key counterparties, third-party
vendors, or associates in our day-to-day
operations; and
●
external events that are wholly or partially beyond our control, such as pandemics,
geopolitical events, political unrest,
natural disasters or acts of terrorism.
While we have in place many controls and business continuity plans designed
to address these factors and others, these plans may
not operate successfully to mitigate these risks effectively.
If our controls and business continuity plans do not mitigate the
associated risks successfully,
such factors may have a negative impact on our business, financial condition or results
of
operations. In addition, an important aspect of managing our operational
risk is creating a risk culture in which all associates fully
understand that there is risk in every aspect of our business and the importance of
managing risk as it relates to their job functions.
We continue
to enhance our risk management program to support our risk culture.
Nonetheless, if we fail to provide the
appropriate environment that sensitizes all of our associates to managing
risk, our business could be impacted adversely.
31
We are subject to
certain operational risks, including, but not limited to
risk arising from failure or circumvention
of our
controls and procedures.
Our internal controls, including fraud detection and controls, disclosure controls
and procedures, and corporate governance
procedures are based in part on certain assumptions and can provide only reasonable,
not absolute, assurances that the objectives
of the controls and procedures are met. Notwithstanding the proliferation of
technology and technology-based risk and control
systems, we rely on the ability of our associates and systems to process a high number
of transactions, and we are subject to the
risk that our associates may make mistakes or engage in violations of applicable
policies, laws, rules, or procedures that in the
past have not, and in the future may not, always be prevented by our technological
processes or by our controls and other
procedures intended to prevent and detect such errors or violations. Any
failure or circumvention of our controls and procedures,
failure to comply with regulations related to controls and procedures, failure to comply
with our corporate governance procedures,
fraud by associates or persons outside our Company,
the execution of unauthorized transactions by associates, or errors relating to
transaction processing and technology could have a material adverse effect
on our reputation, business, financial condition and
results of operations, including subjecting us to litigation, customer attrition,
regulatory fines, penalties, or other sanctions.
Insurance coverage may not be available for losses relating to such event,
or where available, such losses may exceed insurance
limits.
We are subject to
credit and/or settlement risk arising from
the soundness of other financial institutions and
counterparties which may have a material adverse effect on our business, financial condition,
and results of operations.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other
relationships. We
have
exposure to many different industries and counterparties,
and routinely execute transactions with counterparties in the financial
services industry, including
commercial banks, brokers and dealers, investment banks, other institutional clients,
and certain
vendors. Many of these transactions expose us to credit or settlement risk in the
event of a default or other failure to adhere to
contractual obligations by a counterparty or client. In addition, our credit or
settlement risk may be exacerbated when any
collateral held by us cannot be realized upon or is liquidated at prices not sufficient
to recover the full amount of the credit or
derivative exposure due to us. Increased interconnectivity amongst
financial institutions also increases the risk of cyber-attacks
and information system failures for financial institutions. Any such losses could
have a material adverse effect on our business,
financial condition, and results of operations.
The Company recently
identified a material
weakness in its
internal control over
financial reporting.
If we are
not able to
remediate this
material weakness,
or if we
experience additional
material weaknesses
or other deficiencies
in our internal
control
over
financial
reporting
in
the
future
or
otherwise
fail
to
maintain
an
effective
system
of
internal
control
over
financial
reporting,
we
may
not
be
able
to
accurately
report
our
financial
results,
prevent
fraud,
or
file
our
periodic
reports in
a timely
manner,
which may
cause investors
to lose
confidence in
our reported
financial information
and may
lead to a decline in our stock price.
As a public
company,
we are required
to maintain internal
control over financial
reporting and to
report any material
weaknesses
in such internal control.
Section 404 of the Sarbanes
-Oxley Act requires that
we furnish a report
by management on, among
other
things,
the
effectiveness
of
our
internal
control
over
financial
reporting.
This
assessment
requires
disclosure
of
any
material
weaknesses
identified
by
our
management
in
our
internal
control
over
financial
reporting.
Our
independent
registered
public
accounting firm
also needs
to attest to
the effectiveness
of our
internal control
over financial
reporting. Effective
internal control
over financial reporting is necessary for us to provide reliable financial
reports and, together with adequate disclosure controls and
procedures, is designed
to prevent fraud.
Any failure to
maintain or implement
required new or
improved controls,
or difficulties
encountered in implementation could cause us to fail to meet our reporting obligations.
In the fourth
quarter of 2023, management
identified a material weakness
in its internal control
over financial reporting
related to
certain
inter-company
transactions.
As
discussed
in
Item
9A.
Controls
and
Procedures,
the
Company's
management
has
re-
evaluated its assessment of
the effectiveness of
internal control over financial
reporting and its disclosure controls
and procedures
and concluded that they were
not effective as of December
31, 2023. Management has implemented
controls in accordance with a
remediation plan to
address the material
weakness. For additional
information related to
the material weakness
in internal control
over financial reporting and the related remedial measures, see Item 9A.
Controls and Procedures.
There can
be no
assurance as
to when
the material
weakness will
be remediated
or that
additional material
weaknesses will
not
arise in
the future.
If the
Company is
unable to
maintain effective
internal control
over financial
reporting, its
ability to
record,
process and
report financial
information timely
and accurately
could be
adversely affected,
which could
subject the
Company to
litigation,
investigations,
or
breach
of
contract
claims,
require
management
resources,
increase
costs,
negatively
affect
investor
confidence, and adversely impact its stock price.
We face risks related
to the restatement of our Impacted Statements of Cash Flows.
32
As discussed in the Explanatory Note,
we determined to restate the Impacted
Statements of Cash Flows. These restatements
are in
addition to
the restatements
contained in
our Form
10-K/A for
2022 and
our Form
10-Q/A filings
for March
31, 2023
and June
30, 2023, each
of which were
filed with the
SEC on December
22, 2023. As
a result, we
have become subject
to some additional
risks
and
uncertainties,
which
could
affect
investor
confidence
in
the
accuracy
of
our
financial
disclosures
and
may
cause
reputational harm to our business. We
may face potential for litigation or other disputes, which may
include, among others, claims
invoking the
federal and
state securities
laws. In
addition, the
processes undertaken
to effect
the restatements
may not have
been
adequate to
identify and
correct all
errors in
our historical
financial statements.
If one
or more
of the
foregoing risks
persist, our
business, operations and financial condition could be materially and
adversely affected.
Cybersecurity
incidents,
including
security
breaches
and
failures
of
our
information
systems
could
significantly
disrupt
our
business,
result
in
the
unintended
disclosure
or
misuse
of
confidential
or
proprietary
information,
damage
our
reputation, increase our costs, and cause losses.
In the ordinary course of business, we rely on electronic communications
and information systems to conduct our operations and
to store sensitive data
, including our proprietary business information and that of our clients, and personally
identifiable
information of our clients and associates. The secure processing, maintenance,
and transmission of this information is critical to
our operations.
Our systems, or those of our clients, could be vulnerable to cybersecurity-related incidents, which
include
breaches of information systems, attempts to access information, including
customer and company information, malicious code,
computer viruses and denial of service attacks that could result in unauthorized
access, theft, misuse, loss, release, or destruction
of data (including confidential customer information), account takeovers, unavailability
of service, or other events. These types of
threats may derive from human error, fraud, or
malice on the part of external or internal parties or may result from accidental
technological failure. Any failure, interruption, or breach in security of these
systems could result in significant disruption to our
operations.
Financial institutions and companies engaged in data processing have
increasingly reported breaches in the security of their
websites or other systems, some of which have involved sophisticated and
targeted attacks intended to obtain unauthorized access
to confidential information, destroy data, disrupt or degrade service, sabotage
systems, or cause other damage. Our technologies,
systems, networks, and software have been and continue to be subject to cybersecurity
threats and attacks, which range from
uncoordinated individual attempts to sophisticated and targeted
measures directed at us. Our customers, associates, and third
parties that we do business with have been, and will likely continue to be,
targeted in cybersecurity-related incidents by parties
using fraudulent e-mails, artificial intelligence, and other communications
in attempts to misappropriate passwords, bank account
information, or other personal information or to introduce viruses or other
malware programs to our information systems, the
information systems of our third-party service providers and our customers’
personal devices, which are beyond our security
control systems. Though we endeavor to mitigate these threats through product
improvements, use of encryption and
authentication technology and customer and employee education, such cyber-attacks
against us, our third-party service providers
and our customers remain a serious issue and have been successful in the past.
We may be required
to spend significant capital and other resources to protect against the threat of
cybersecurity-related incidents
or to alleviate problems caused by such incidents. Any failures related to upgrades
and maintenance of our technology and
information systems could increase our information and system security
risk. Our increased use of cloud and other technologies,
such as remote work technologies, also increases our risk of being subject to a cyber-related
incident. The risk of a cybersecurity-
related incident has increased as the number,
intensity, and sophistication of
attempted attacks and intrusions from around the
world have increased. A cybersecurity-related incident or other significant
disruption of our information systems or those of our
customers or third-party vendors could (i) disrupt the proper functioning
of our networks and systems and therefore our
operations and those of our customers; (ii) result in the unauthorized access to,
and destruction, loss, theft, misappropriation, or
release of confidential, sensitive, or otherwise valuable information
of ours or our customers; (iii) result in a violation of
applicable privacy,
data protection, and other laws, subjecting us to additional regulatory scrutiny and
exposing us to civil
litigation, enforcement actions, governmental fines, and possible financial
liability; (iv) require significant management attention
and resources to remedy the damages that result; or (v) harm our reputation or
cause a decrease in the number of customers that
choose to do business with us, damaging our ability to generate deposits. The occurrence
of any of the foregoing could have a
material adverse effect on our business, financial condition,
and results of operations. Furthermore, in the event of a cyber-related
incident, we may be delayed in identifying or responding to the incident,
which could increase the negative impact of the incident
on our business, financial condition, and results of operations. While we maintain
“cyber” insurance coverage, which would apply
in the event of certain cyber-related incidents, the amount of coverage
may not be adequate depending on the magnitude of the
incident. Furthermore, because cyber-related incidents are inherently difficult
to predict and can take many forms, some incidents
may not be covered under our cyber insurance coverage.
33
Increased fraudulent activity may cause losses to us or our clients, damage
to our brand, and increases in our costs, in
turn, materially and adversely affecting our business, financial condition,
and results of operations.
Additionally, fraud
losses have risen in recent years due in large part to growing and evolving schemes.
Fraudulent activity has
taken many forms, ranging from wire fraud, debit card fraud, credit card fraud,
check fraud, mechanical devices attached to
ATMs,
social engineering, and phishing attacks to obtain personal information, business
email compromise, or impersonation of
clients through the use of falsified or stolen credentials. Many financial
institutions have suffered significant losses in recent years
due to the theft of cardholder data that has been illegally exploited for personal gain.
The potential for debit and credit card fraud,
as well as check fraud, against us or our clients and our third-party
service providers is a serious issue. Debit and credit card fraud
and check fraud are pervasive, and the risks of cybercrime are complex
and continue to evolve. While we have policies and
procedures, as well as fraud detection tools, designed to prevent fraud losses, such
policies, procedures, and tools may be
insufficient to accurately detect and prevent fraud. A significant increase
in fraudulent activities could lead us to take additional
steps to reduce fraud risk, which could increase our costs. Fraud losses
could cause losses to us or our clients, damage to our
brand, and an increase in our costs, in turn, materially and adversely affecting
our business, financial condition, and results of
operations.
We may not be able to attract and
retain skilled people, which may have a negative impact
on our business and
operations.
Our success depends, in large part, on our ability to attract and retain
key people. Competition for the best people in many
activities engaged in by us is intense, including with respect to compensation
and emerging workplace practices and
accommodations, and, as a result, we may not be able to sufficiently
hire or to retain key people. We
do not currently have
employment agreements or non-competition agreements with any of our senior officers.
The unexpected loss of service of key
personnel could have a material adverse impact on our business, financial
condition, and results of operations because of their
customer relationships, skills, knowledge of our market, years of industry
experience, and the difficulty of promptly finding
qualified replacement personnel. In addition, the scope and content of U.S. banking
regulators’ policies on incentive
compensation, as well as changes to these policies, could adversely affect
our ability to hire, retain, and motivate our key
associates.
Issues we encounter with respect to external vendors upon which we rely
could have a material adverse effect on our
business and, in turn, our financial condition and results of operations.
We rely on
certain external vendors to provide products and services necessary to maintain our day-to-day
operations. These
third-party vendors are sources of operational and informational security
risk to us, including risks associated with operational
errors, information system failures, interruptions or breaches, and
unauthorized disclosures of sensitive or confidential client or
customer information. If we encounter any of these issues in connection
with our external vendors, or if we have difficulty
communicating with these vendors, we could be exposed to disruption
of operations, loss of service, or connectivity to customers,
reputational damage, and litigation risk that could have a material adverse effect
on our business and, in turn, our financial
condition and results of operations.
In addition, our operations are exposed to risk that these vendors will not perform in
accordance with the contracted arrangements
under service level agreements. Although we have selected these external vendors
carefully, we do not control their actions.
The
failure of an external vendor to perform in accordance with the contracted
arrangements under service level agreements could be
disruptive to our operations, which could have a material adverse effect
on our business and, in turn, our financial condition and
results of operations. Replacing these external vendors could also entail
significant delay and expense.
Pandemics, severe weather,
natural disasters, global climate change, acts of terrorism and global
conflicts may have a
negative impact on our business and operations.
Pandemics (such as the COVID-19 pandemic), severe weather,
natural disasters, global climate change, acts of terrorism, global
conflicts, or other similar events have in the past, and may in the future have, a negative
impact on our business and operations.
These events impact us negatively to the extent that they result in reduced capital
markets activity, lower asset price
levels, or
disruptions in general economic activity in the United States or abroad, or
in financial market settlement functions. In addition,
such events could affect the stability of our deposit base, impair the
ability of borrowers to repay outstanding loans, impair the
value of collateral securing loans, cause significant property damage, result
in loss of revenue, cause us to incur additional
expenses, and impact economic growth negatively.
If any of these risks materialized, they could have an adverse effect on our
business and operations and may have other adverse effects on
us in ways that we are unable to predict.
34
Litigation may adversely affect our results.
We are subject to
litigation in the ordinary course of business. Claims and legal actions, including
claims pertaining to our
performance of our fiduciary responsibilities as well as supervisory actions
by our regulators, could involve large monetary
claims and significant defense costs. The outcome of litigation and regulatory
matters as well as the timing of ultimate resolution
are inherently difficult to predict.
Actual legal and other costs of resolving claims may be greater than our
legal reserves. The ultimate resolution of a pending legal
proceeding, depending on the remedy sought and granted, could
materially adversely affect our results of operations and financial
condition.
In addition, governmental authorities have, at times, sought criminal penalties
against companies in the financial services sector
for violations, and, at times, have required an admission of wrongdoing from
financial institutions in connection with resolving
such matters. Criminal convictions or admissions of wrongdoing in a settlement with
the government can lead to greater exposure
in civil litigation and reputational harm.
Substantial legal liability or significant regulatory action against us could have material
adverse financial effects or cause
significant reputational harm, which adversely impact our business prospects. Further,
we may be exposed to substantial
uninsured liabilities, which could adversely affect
our results of operations and financial condition.
Strategic Risks
Our future success is dependent on our ability to compete effectively
in the highly competitive banking industry.
We face vigorous
competition for deposits, loans and other financial services in our market area
from other banks and financial
institutions, including savings and loan associations, savings banks,
finance companies and credit unions. A number of our
competitors are significantly larger than we are and have greater access to
capital and other resources. Many of our competitors
also have higher lending limits, more expansive branch networks, and offer
a wider array of financial products and services. To
a
lesser extent, we also compete with other providers of financial services, such as money
market mutual funds, brokerage firms,
consumer finance companies, insurance companies and governmental
organizations, which may offer financial products and
services on more favorable terms than we are able to. Many of our non-bank
competitors are not subject to the same extensive
regulations that govern our activities. As a result, these non-bank competitors have advantages over
us in providing certain
services. The effect of this competition may reduce or limit our
margins or our market share and may adversely affect our
results
of operations and financial condition.
Our inability to adapt our business strategies, products, and services could
harm our business.
We rely on
a diversified mix of financial products and services through multiple distribution channels.
Our success depends on
our and our third-party providers’ of products and services abilities to adapt our
business strategies, products, and services and
their respective features in a timely manner,
including available payment processing services and technology to rapidly
evolving
industry standards and consumer preferences.
The widespread adoption and rapid evolution of emerging
technologies, including artificial intelligence, analytic capabilities, self-
service digital trading platforms and automated trading markets, internet
services, and digital assets, such as central bank digital
currencies, cryptocurrencies (including stablecoins), tokens, and other cryptoassets
that utilize distributed ledger technology
(DLT),
as well as DLT in
payment, clearing, and settlement processes creates additional risks, could
negatively impact our ability
to compete, and require substantial expenditures to the extent we were to modify
or adapt our existing products and services. As
such new technologies evolve and mature, our businesses and results of operations
could be adversely impacted, including as a
result of the introduction of new competitors to the payment ecosystem and increased
volatility in deposits and significant long-
term reduction in deposits. In addition, cloud technologies are also critical
to the operation of our systems, and our reliance on
cloud technologies is growing. Failure to successfully keep pace with technological
change affecting the financial services
industry could have a material adverse effect on our business,
financial condition, and results of operations.
35
Also, we may not be timely or successful in developing or introducing new products and
services, integrating new products or
services into our existing offerings, responding, managing,
or adapting to changes in consumer behavior, preferences,
spending,
investing and saving habits, achieving market acceptance of our
products and services, or reducing costs in response to pressures
to deliver products and services at lower prices. There are substantial risks and uncertainties
associated with these efforts,
particularly in instances where the markets are not fully developed.
In developing and marketing new products and services, we
invest significant time and resources. Initial timetables for the introduction
and development of new products or services may not
be achieved, and price and profitability targets may not prove feasible.
External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact
the successful implementation of new products or
services. The Company’s, or
its third-party providers’, inability or resistance to timely innovate or adapt its operations, products,
and services to evolving industry standards and consumer preferences could result
in service disruptions and harm our business
and adversely affect our results of operations and reputation.
Furthermore, any new products, services, or technology could have
a significant impact on the effectiveness of our system of
internal controls. Failure to successfully manage these risks in the development
and implementation of new products or services
could have a material adverse effect on our business, financial condition,
and results of operations.
Our directors, executive officers, and principal shareowners,
if acting together,
have substantial control over all matters
requiring shareowner approval,
including changes of control. Because Mr.
William G. Smith, Jr.
is a principal
shareowner and our Chairman, President, and Chief Executive
Officer and Chairman of CCB, he has substantial control
over all matters on a day-to-day basis.
Our directors, executive officers, and principal shareowners beneficially
owned approximately 19.2% of the outstanding shares of
our common stock at December 31, 2023.
William G. Smith, Jr.,
our Chairman, President and Chief Executive Officer
beneficially owned 17.2% of our shares as of that date.
Accordingly, these directors, executive
officers, and principal
shareowners, if acting together, may be
able to influence or control matters requiring approval by our shareowners, including
the
election of directors and the approval of mergers, acquisitions or
other extraordinary transactions. Moreover,
because William G.
Smith, Jr. is the Chairman, President,
and Chief Executive Officer of CCBG and Chairman of CCB, he has substantial
control
over all matters on a day-to-day basis, including the nomination and election
of directors.
These directors, executive officers, and principal shareowners may
also have interests that differ from yours and may vote in a
way with which you disagree, and which may be adverse to your interests. The concentration
of ownership may have the effect of
delaying, preventing or deterring a change of control of our Company,
could deprive our shareowners of an opportunity to receive
a premium for their common stock as part of a sale of our Company and might ultimately
affect the market price of our common
stock. You
may also have difficulty changing management, the composition of
the Board of Directors, or the general direction of
our Company.
Our Articles of Incorporation, Bylaws, and certain laws and regulations
may prevent or delay transactions you might
favor,
including a sale or merger of CCBG.
CCBG is registered with the Federal Reserve as a financial holding
company under the Bank Holding Company Act, or BHC Act.
As a result, we are subject to supervisory regulation and examination by the
Federal Reserve. The GLBA, the BHC Act, and other
federal laws subject financial holding companies to restrictions on
the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.
Provisions of our Articles of Incorporation, Bylaws, certain laws and regulations
and various other factors may make it more
difficult and expensive for companies or persons to acquire control
of us without the consent of our Board of Directors. It is
possible, however, that you would want a
takeover attempt to succeed because, for example, a potential buyer could offer
a
premium over the then prevailing price of our common stock.
For example, our Articles of Incorporation permit our Board of Directors
to issue preferred stock without shareowner action. The
ability to issue preferred stock could discourage a company from attempting
to obtain control of us by means of a tender offer,
merger, proxy contest or
otherwise. We are also subject to
certain provisions of the Florida Business Corporation Act and our
Articles of Incorporation that relate to business combinations with interested
shareowners. Other provisions in our Articles of
Incorporation or Bylaws that may discourage takeover attempts or make them
more difficult include:
●
Supermajority voting requirements to remove a director from office;
●
Provisions regarding the timing and content of shareowner proposals
and nominations;
●
Supermajority voting requirements to amend Articles of Incorporation
unless approval is received by a majority of
“disinterested directors”;
●
Absence of cumulative voting; and
●
Inability for shareowners to take action by written consent.
36
Reputational Risks
Damage to our reputation could harm our businesses, including our
competitive position and business prospects.
Reputation risk, or the risk to our earnings, liquidity,
and capital from negative public opinion, is inherent in our business.
Negative public opinion could adversely affect our ability to attract
and retain customers, clients, investors and associates and
expose us to adverse legal and regulatory consequences. Negative public
opinion could result from our actual or alleged conduct
and can arise from various sources, including (a) officer,
director or associate fraud, misconduct, and unethical behavior; (b)
security breaches; (c) litigation or regulatory outcomes; (d) compensation
practices; (e) lending practices; (f) branching strategy;
(g) the suitability or reasonableness of recommending particular trading or
investment strategies, including the reliability of our
research and models; (h) prohibiting clients from engaging in certain transactions;
(h) associate sales practices; (i) failure to
deliver products and services; (j) subpar standards of service and quality expected
by our customers, clients, and the community;
(k) compliance failures; (l) mergers and acquisitions; (m) the inability
to manage technology change or maintain effective data
management; (n) cyber incidents; (o) internal and external fraud (including
check fraud and debit card and credit card fraud); (p)
inadequacy of responsiveness to internal controls; (q) unintended
disclosure of personal, proprietary or confidential information;
(r) failure (or perceived failure) to identify and manage actual and potential conflicts
of interest; (s) breach of fiduciary
obligations; (t) the handling of health emergencies or pandemics, (u)
the activities of our clients, customers, counterparties, and
third parties, including vendors; (v) our environmental, social, and
governance practices and disclosures, including practices and
disclosures related to climate change; (w) our response (or lack of response)
to social and sustainability concerns; and (x) actions
by the financial services industry generally or by certain members or individuals
in the industry. In addition, adverse publicity
or
negative information posted on social media by associates, the media or otherwise,
whether or not factually correct, may
adversely impact our reputation. Harm to our reputation may adversely
and materially affect our competitive position, business
prospects, and financial results.
Item 1B.
Unresolved Staff Comments
None.
Item 1C.
Cybersecurity
Risk Management and Strategy
Our enterprise risk management program is designed to identify,
assess, and mitigate risks across various aspects of our
Company, including
financial, operational, market, regulatory,
technology, legal, and reputational.
Cybersecurity risk is a critical
component of our technology risk management program, specifically our
information security program given the increasing
reliance on technology and potential of cyber risk threats.
Our Chief Information Security Officer (“CISO”) is primarily
responsible for coordinating the various aspects of the information security
program with cross-functional support teams.
The
Chief Operating Officer (“COO”), management risk committees,
and the Board of Directors provide oversight of the program and
its activities.
Our objective for managing cybersecurity risk is to avoid or minimize the impacts
of external threat events or other efforts to
penetrate, disrupt or misuse systems or information.
Our cybersecurity risk management infrastructure is designed around
regulatory guidance, other industry standards and the National Institute of
Standards and Technology
(“NIST”) Cybersecurity
Framework, although this does not imply that we meet all technical standards,
specification, or requirements under the NIST.
Our
CISO and Information Security Officer (“ISO”) along
with key members of their respective teams, regularly collaborate with peer
banks, industry groups, and policymakers to discuss cybersecurity trends and
issues and identify best practices.
Our information
security program and cyber risk management policies and procedures are periodically
reviewed by the CISO and ISO with the
goal of addressing changing threats and conditions.
The parts of our information security program relating to cybersecurity are built
on a multi-layered and integrated defense model
and include the following processes:
◾
Risk-based controls for information systems and information
on our networks:
We maintain risk
management
processes designed to identify,
assess, and manage cybersecurity risks associated with external service
providers and the
services we provide to our clients. We
leverage people, processes, and technology as part of our efforts
to manage and
maintain cybersecurity controls. We
also employ a variety of preventative and detective tools designed
to monitor, block,
and provide alerts regarding suspicious activity,
as well as to report on suspected advanced persistent threats. We
seek to
maintain a risk management infrastructure that implements physical, administrative
and technical controls that are
designed, based on risk, to protect our information systems and the information
stored on our networks, including personal
information, intellectual property and proprietary information of our
Company and our clients.
37
◾
Incident response program:
We have an
incident response program and dedicated teams to respond to cybersecurity,
physical and administrative incidents. When a cybersecurity incident occurs,
we have cross-functional teams that are
responsible for leading the initial assessment of priority and severity and
communicating material cybersecurity incidents
to the appropriate members of management and the Board of Directors.
◾
Training and testing:
We have
established processes and systems designed to mitigate cybersecurity risk, including
regular and on-going education and training for associates, preparedness simulations
and tabletop exercises, and recovery
and resilience tests. We
also actively monitor our email gateways for malicious phishing
email campaigns and monitor
remote connections.
◾
Internal and external risk assessments:
We engage
in regular assessments of our infrastructure, software systems, and
network architecture using internal experts and third-party specialists.
Our internal auditor and other independent external
partners will periodically review our processes, systems, and controls, including
with respect to our information security
program, to assess their design and operating effectiveness and
make recommendations to strengthen our risk management
processes.
Notwithstanding our defensive measures and processes, the threat posed
by cyber-attacks is severe.
Our internal systems,
processes, and controls are designed to mitigate loss from cyber-attacks
and, while we have experienced cybersecurity incidents
in the past, to date, risks from cybersecurity threats have not materially affected
our Company.
For further discussion of risks
from cybersecurity threats, see Item 1A. Risk Factors under the section captioned
“Cybersecurity incidents, including security
breaches and failures of our information systems could significantly disrupt our
business, result in the unintended disclosure or
misuse of confidential or proprietary information, damage our reputation,
increase our costs, and cause losses.”
Governance
Our CISO is responsible for managing our Corporate Security Department
and overseeing our information security program,
including cybersecurity risks.
The CISO reports the day-to-day status of the program to the COO who in turn
reports to our Bank
President.
On a quarterly basis, and as needed, the CISO reports the status of the program, notable
threats or incidents, and other
developments related to information security and cybersecurity risks to our Operations
Risk Oversight Committee (“OROC”) and
to our Enterprise Risk Oversight Committee (“ROC”). The CISO also provides
reports to our Board of Directors at least annually
on the status of the information security program and risks, notable threats and
incidents, and other developments related to
cybersecurity. In
addition, the CISO provides more frequent reports to the Audit Committee on the
aforementioned activities,
including remediation efforts and the status of incident
response, as needed.
Item 2.
Properties
We are headquartered
in Tallahassee, Florida.
Our executive office is in the Capital City Bank building located
on the corner of
Tennessee and Monroe
Streets in downtown Tallahassee.
The building is owned by CCB, but is located on land leased under a
long-term agreement.
At December 31, 2023, Capital City Bank had 63 banking offices.
Of these locations, we lease the land, buildings, or both at 13
locations and own the land and buildings at the remaining 50. CCHL had
30 loan production offices, 29 of which were leased.
Capital City Strategic Wealth,
LLC. maintained five offices, all of which were leased.
Item 3.
Legal Proceedings
We are 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 our
consolidated results of operations, financial position, or cash flows.
Item 4
.
Mine Safety Disclosure
Not applicable.
38
PART
II
Item 5.
Market for the Registrant’s
Common Equity, Related Shareowner Matters,
and Issuer Purchases of Equity
Securities
Common Stock Market Prices and Dividends
Our common stock trades on the Nasdaq Global Select Market under
the symbol “CCBG.”
We had a
total of 1,080 shareowners
of record at January 31, 2024.
The following table presents the range of high and low closing sales prices reported
on the Nasdaq Global Select Market and cash
dividends declared for each quarter during the past two years.
2023
2022
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Common stock price:
High
$
32.56
$
33.44
$
34.16
$
36.86
$
36.23
$
33.93
$
28.55
$
28.88
Low
26.12
28.64
28.03
28.18
31.14
27.41
24.43
25.96
Close
29.43
29.83
30.64
29.31
32.50
31.11
27.89
26.36
Cash dividends per share
0.20
0.20
0.18
0.18
0.17
0.17
0.16
0.16
Florida law and Federal regulations impose restrictions on our ability to
pay dividends and limitations on the amount of dividends
that the Bank can pay annually to us.
See Item 1. “Capital; Dividends; Sources of Strength” and “Dividends” in the Business
section on page 11 and 13, Item 1A. “Market
Risks” in the Risk Factors section on page 19, Item 7. “Liquidity and Capital
Resources – Dividends” – in Management’s
Discussion and Analysis of Financial Condition and Operating Results on page
56
and Note 17 in the Notes to Consolidated Financial Statements.
39
Performance Graph
This performance graph compares the cumulative total shareowner
return on our common stock with the cumulative total
shareowner return of the Nasdaq Composite Index and the S&P U.S. Small Cap Banks Index
for the past five years.
The graph
assumes that $100 was invested on December 31, 2018 in our common stock and each of
the above indices, and that all dividends
were reinvested.
The shareowner return shown below represents past performance and should not
be considered indicative of
future performance.
Period Ending
Index
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
Capital City Bank Group, Inc.
$
100.00
$
133.95
$
110.72
$
121.82
$
153.27
$
142.32
Nasdaq Composite
100.00
136.69
198.10
242.03
163.28
236.17
SNL $1B-$5B Bank Index
100.00
125.46
113.94
158.62
139.85
140.55
40
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information about all purchases made during
the fourth quarter of 2023 by, or on behalf
of, us and
any affiliated purchaser (as defined in Rule 10b-18(a)(3)
under the Exchange Act) of shares or other units of any class of our
equity securities that is registered pursuant to Section 12 of the Exchange
Act.
Total
number of
Maximum Number of
Total
number
Average
shares purchased as
shares that may yet be
of shares
price paid
part of our share
purchased under our share
Period
purchased
per share
repurchase program
(1)
repurchase program
October 1, 2023 to
October 31, 2023
4,000
$28.05
4,000
466,901
November 1, 2023 to
November 30, 2023
16,391
$29.07
16,391
450,510
December 1, 2023 to
December 31, 2023
-
-
-
450,510
Total
20,391
$30.24
20,391
450,510
(1)
This balance represents the number of shares that were repurchased during
the fourth quarter of 2023 through the Capital City
Bank Group, Inc. Share Repurchase Program (the “Program”), which
was approved on January 31, 2019 for a five year
period, under which we were authorized to repurchase up to 750,000 shares of
our common stock.
The Program is flexible
and shares are acquired from the public markets and other sources using
free cash flow.
No shares are repurchased outside of
the Program.
41
Item 6.
Selected Financial Data
(Dollars in Thousands, Except Per Share Data)
2023
2022
2021
Interest Income
$
181,068
$
131,910
$
106,351
Net Interest Income
158,988
125,022
102,861
Provision for Credit Losses
9,714
7,494
(1,553)
Noninterest Income
71,610
75,181
107,545
Noninterest Expense
(1)
157,023
151,634
162,508
Pre-Tax Loss (Income) Attributable to Noncontrolling Interests
(2)
1,437
135
(6,220)
Net Income Attributable to Common Shareowners
52,258
33,412
33,396
Per Common Share:
Basic Net Income
$
3.08
$
1.97
$
1.98
Diluted Net Income
3.07
1.97
1.98
Cash Dividends Declared
0.76
0.66
0.62
Diluted Book Value
25.92
22.73
22.63
Diluted Tangible Book Value
(3)
20.45
17.27
17.12
Performance Ratios:
Return on Average Assets
1.22
%
0.77
%
0.84
%
Return on Average Equity
12.40
8.81
9.92
Net Interest Margin (FTE)
4.05
3.14
2.83
Noninterest Income as % of Operating Revenues
31.05
37.55
51.11
Efficiency Ratio
67.99
75.62
77.11
Asset Quality:
Allowance for Credit Losses ("ACL")
$
29,941
$
25,068
$
21,606
ACL to Loans Held for Investment ("HFI")
1.10
%
0.98
%
1.12
%
Nonperforming Assets ("NPAs")
6,243
2,728
4,339
NPAs to Total
Assets
0.15
0.06
0.10
NPAs to Loans HFI plus OREO
0.23
0.11
0.22
ACL to Non-Performing Loans
479.70
1091.33
499.93
Net Charge-Offs to Average Loans HFI
0.18
0.18
-0.03
Capital Ratios:
Tier 1 Capital
15.37
%
14.27
%
16.14
%
Total Capital
16.57
15.30
17.15
Common Equity Tier 1 Capital
13.52
12.38
13.86
Tangible Common Equity
(3)
8.26
6.65
6.95
Leverage
10.30
8.91
8.95
Equity to Assets
10.24
8.57
8.99
Dividend Pay-Out
24.76
33.50
31.31
Averages for the Year:
Loans Held for Investment
$
2,656,394
$
2,189,440
$
2,000,563
Earning Assets
3,933,800
3,989,248
3,652,486
Total Assets
4,278,686
4,332,302
3,984,064
Deposits
3,669,612
3,763,336
3,406,886
Shareowners’ Equity
421,482
379,290
336,821
Year
-End Balances:
Loans Held for Investment
$
2,733,918
$
2,547,685
$
1,931,465
Earning Assets
3,957,452
4,177,177
3,949,111
Total Assets
4,304,477
4,519,223
4,263,849
Deposits
3,701,822
3,939,317
3,712,862
Shareowners’ Equity
440,625
387,281
383,166
Other Data:
Basic Average Shares Outstanding
16,987,167
16,950,810
16,862,932
Diluted Average Shares Outstanding
17,022,922
16,984,740
16,892,947
Shareowners of Record
(4)
1,080
1,124
1,157
Banking Locations
(4)
63
59
57
Full-Time Equivalent Associates
(4)(5)
970
992
954
(1)
For 2023, 2022 and 2021, includes pension settlement
gain of $0.3 million, charge of $2.3 million and $3.1 million, respectively.
(2)
Acquired 51% membership interest in Brand Mortgage Group, LLC, re-named as Capital City Home Loans,
LLC, on March 1, 2020 - fully consolidated.
(3)
Diluted tangible book value and tangible common equity
ratio are non-GAAP financial measures. For additional information, including a reconciliation
to GAAP, refer
to page 42.
(4)
As of January 31st of the following year.
(5)
Reflects 970 full-time equivalent associates that
includes 178 full-time equivalent associates at CCHL.
42
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 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 selected year-to-date
financial data is provided below.
Non-GAAP Reconciliation - Selected Financial Data
(Dollars in Thousands, except per share data)
2023
2022
2021
Shareowners' Equity (GAAP)
$
440,625
$
387,281
$
383,166
Less: Goodwill and Other Intangibles (GAAP)
92,933
93,093
93,253
Tangible Shareowners' Equity (non-GAAP)
A
347,692
294,188
289,913
Total Assets (GAAP)
4,304,477
4,519,223
4,263,849
Less: Goodwill and Other Intangibles (GAAP)
92,933
93,093
93,253
Tangible Assets (non-GAAP)
B
$
4,211,544
$
4,426,130
$
4,170,596
Tangible Common Equity Ratio (non-GAAP)
A/B
8.26%
6.65%
6.95%
Actual Diluted Shares Outstanding (GAAP)
C
17,000,758
17,039,401
16,935,389
Tangible Book Value
per Diluted Share (non-GAAP)
A/C
20.45
17.27
17.12
43
Item 7.
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 included in the Annual Report on Form 10-K.
The MD&A is divided into subsections entitled
“Business Overview,” “Executive
Overview,” “Results of Operations,”
“Financial Condition,” “Liquidity and Capital Resources,”
“Off-Balance Sheet Arrangements,” and “Accounting Policies.”
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
2023 compares with prior years.
Throughout this section, Capital City Bank Group, Inc., and its subsidiaries,
collectively, are
referred to as “CCBG,” “Company,”
“we,” “us,” or “our.”
CAUTION CONCERNING FORWARD
-LOOKING STATEMENTS
This Annual Report on Form 10-K, 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
this Annual Report for a discussion of factors that could cause our actual results to differ
materially from those in the forward-
looking statements.
However, other factors besides those listed in
Item 1A Risk Factors
or discussed in this 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
Our Business
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 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 the sale of life insurance, risk management, and
asset protection services. The Bank has 63 banking
offices and 103 ATMs/ITMs
in Florida, Georgia and Alabama.
Through Capital City Home Loans, LLC (“CCHL”), we have 29
additional offices in the Southeast for our mortgage banking business.
Please see the section captioned “About Us” beginning on
page 4 for more detailed information about our business.
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.
Strategic Review
Operating Philosophy
.
Our philosophy is to build long-term client relationships based on quality
service, high ethical standards,
and safe and sound banking practices.
We maintain a locally
oriented, community-based focus, which is augmented by
experienced, centralized support in select specialized areas.
Our local market orientation is reflected in our network of banking
office locations, experienced community executives with
a dedicated President for each market, and community boards which
support our focus on responding to local banking needs.
We strive to offer
a broad array of sophisticated products and to provide
quality service by empowering associates to make decisions in their local
markets.
44
Strategic Initiatives
.
In 2021, we initiated a new five-year strategic plan “2025 In Focus” that guide
s
us in the areas of client
experience, channel optimization, market expansion, and culture.
As part of 2025 In Focus, we aim to take our brand of
relationship banking to the next level, further deepen relationships within
our communities, expand into new higher growth
markets, diversify our revenue sources, invest in new technology that
will support the expansion of client relationships, scale
within our lines of business, and drive higher profitability.
We have implemented
initiatives in support of the strategic plan,
including the implementation of an integrated marketing software aimed at deepening
client relationships, continued our
comprehensive review of our banking office network, continued
expansion into new markets and further diversification of
revenues by expanding our residential mortgage banking and wealth businesses
.
Markets
.
We maintain a blend
of large and small markets in Florida and Georgia,
all in close proximity to major interstate
thoroughfares such as Interstates 10 and 75.
Our larger markets include Tallahassee
(Leon County, Florida),
Gainesville
(Alachua County, Florida),
Macon (Bibb County,
Georgia), and Suncoast (Hernando/Pasco/Citrus Counties, Florida).
The larger
employers in these markets are state and local governments, healthcare
providers, educational institutions, and small businesses,
providing stability and good growth dynamics that have historically grown
in excess of the national average.
We serve an
additional fourteen smaller, less competitive,
rural markets located on the outskirts of, and centered between, our larger markets
where we are positioned as a market leader.
In 7 of 11 markets in Florida and two of four Georgia
markets (excluding Northern
Arc of Atlanta markets entered into in 2022 and 2023),
we frequently rank within the top four banks in terms of deposit market
share.
Furthermore, in the counties in which we operate, we maintain an 7.7% deposit
market share in the Florida counties and
5.5% in the Georgia counties (excluding Northern Arc of Atlanta).
Our markets provide for a strong core deposit funding base, a
key differentiator and driver of our profitability and franchise
value.
Recent Acquisition/Expansion Activity
.
We have continued
our expansion into the Northern Arc of Atlanta, Georgia by opening
full-service offices in Marietta (Cobb County) in the fourth
quarter of 2022 and Duluth (Gwinnett County) in the second quarter
of 2023.
Additionally, we expanded
our presence in the Florida Panhandle by opening a full-service office
in Watersound,
Florida in the first quarter of 2023 and Panama City,
Florida (Lynn Haven) in the first quarter of
2024 and we plan to open
another full-service office in Panama City,
Florida (West Bay)
in the second half of 2024.
To expand our presence
and
commitment to our Gainesville market, we opened a third full-service banking
office in the area in early 2023.
During 2022 and
2023,
we hired leadership and banking teams in the Northern Arc and Walton
County office markets, including commercial
bankers, retail delivery support, private banking, wealth advisors, and
treasury professionals.
Further, CCHL loan originators will
reside in the Northern Arc and Walton
County offices.
On March 1, 2020, CCB acquired a 51% membership interest in Brand Mortgage
Group, LLC (“Brand”) which is now operated
as CCHL, a consolidated entity in the Company’s
financial statements. The terms of the transaction included a buyout call/put
option for CCB to purchase the remaining 49% of the membership interests in CCHL (“the
49% Interest”) that are held by
BMGBMG, LLC (“BMG”). The option requires 12 months advance notice
to the other party, and under the
terms of the option,
January 1, 2025 is the earliest date the transfer of the 49% Interest may be completed.
On December 20, 2023, BMG notified
CCB that BMG will exercise its put option and the transfer of the 49% Interest will become
effective on January 1, 2025.
EXECUTIVE OVERVIEW
For 2023, net income attributable to common shareowners totaled $52.3 million,
or $3.07 per diluted share, compared to net
income of $33.4 million, or $1.97 per diluted share, for 2022, and $33.4
million, or $1.98 per diluted share, for 2021.
The increase in net income attributable to common shareowners for 202
3
reflected higher net interest income of $34.0 million that
was partially offset by higher noninterest expense of $5.4 million,
higher income taxes of $5.2 million, lower noninterest income
of $3.6 million, and a $2.2 million increase in the provision for credit losses.
Net income attributable to common shareowners
included a $1.3 million increase in the deduction to record the 49% non-controlling
interest in the earnings of CCHL.
The increase in net income attributable to common shareowners for 202
2
was attributable to higher net interest income of $22.2
million, lower noninterest expense of $10.9 million, and lower income
taxes of $1.9 million, partially offset by a $9.0 million
increase in the provision for credit losses and lower noninterest income of $32.4
million.
Net income attributable to common
shareowners included a $6.4 million increase in the deduction to record the
49% non-controlling interest in the earnings of CCHL.
Below are
Summary Highlights
of our 2023 financial performance:
◾
Tax-equivalent
net interest income totaled $159.4 million for 2023 compared
to $125.3 million for 2022 driven by strong
loan growth and higher interest
rates, partially offset by higher deposit cost which was well controlled
at 48 basis points for
the year – net interest margin
was 4.05% for 2023 compared to 3.14% for 2022
◾
Credit quality metrics remained
strong throughout
the year – allowance coverage ratio increased from
0.98% to 1.10% -
net loan charge-offs were 18
basis points of average loans for both periods
◾
Noninterest income decreased
$3.6 million, or 4.8%, driven by lower wealth management fees reflective
of lower insurance
commissions (large policy sales in 2022) and
mortgage banking revenues (lower residential
loan originations attributable
to the higher interest rate environment)
◾
Noninterest expense increased
$5.4 million, or 3.6%, primarily due to higher compensation and occupancy expense
reflective of the addition of staffing and banking
offices in our new markets
45
◾
Loan balances grew $467.0 million, or 21.3% (average),
and $186.2 million, or 7.3% (end of period)
◾
Deposit balances (including repurchase
agreements) declined by $81.9 million, or 2.2% (average),
and decreased $217.1
million, or 5.5% (end of period)
◾
Tangible
book value per share increased $3.18,
or 18.4%, driven by strong earnings and favorable investment
security and
pension plan accumulated other comprehensive
loss adjustments
For more detailed information, refer to the following additional sections of the
MD&A “Results of Operations” and “Financial
Condition”.
46
RESULTS
OF OPERATIONS
A condensed earnings summary for the last three fiscal years is presented
in Table 1 below:
Table 1
CONDENSED SUMMARY OF EARNINGS
(Dollars in Thousands, Except Per Share
Data)
2023
2022
2021
Interest Income
$
181,068
$
131,910
$
106,351
Taxable Equivalent
Adjustments
367
325
349
Total Interest Income
(FTE)
181,435
132,235
106,700
Interest Expense
22,080
6,888
3,490
Net Interest Income (FTE)
159,355
125,347
103,210
Provision for Credit Losses
9,714
7,494
(1,553)
Taxable Equivalent
Adjustments
367
325
349
Net Interest Income After Provision for Credit Losses
149,274
117,528
104,414
Noninterest Income
71,610
75,181
107,545
Noninterest Expense
157,023
151,634
162,508
Income Before Income Taxes
63,861
41,075
49,451
Income Tax Expense
13,040
7,798
9,835
Pre-Tax Income
Attributable to Noncontrolling Interests
1,437
135
(6,220)
Net Income Attributable to Common Shareowners
$
52,258
$
33,412
$
33,396
Basic Net Income Per Share
$
3.08
$
1.97
$
1.98
Diluted Net Income Per Share
$
3.07
$
1.97
$
1.98
Net Interest Income and Margin
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.
We provide
an analysis of our net interest income, including
average yields and rates in Tables
2 and 3 below.
We provide this information
on a “taxable equivalent” basis to reflect the tax-
exempt status of income earned on certain loans and investments.
For 2023, our taxable equivalent net interest income totaled $159.4
million compared to $125.3 million in 2022 and $103.2
million in 2021.
The $34.1 million, or 27.2%, increase in 2023 reflected loan growth and higher
interest rates across a majority of
our earning assets, partially offset by higher deposit interest expense.
The $22.1 million, or 21.4%, increase in 2022 was
primarily due to strong loan growth, higher interest rates, and growth in the
investment portfolio.
For 2023, our taxable equivalent interest income totaled $181.4
million compared to $132.2 million in 2022 and $106.7 million in
2021.
The $49.2 million, or 37.2%, increase in 2023
and the $25.5 million, or 23.9%, increase in 2022 reflected an overall
improved earning asset mix and higher interest rates on earning assets.
For 2023, interest expense totaled $22.1 million compared to $6.9 million in 2022
and $3.5 million in 2021.
The $15.2 million, or
220.3%, increase in 2023 was primarily attributable to a $9.6 million increase
in NOW account interest expense and $3.5 million
increase in money market account expense.
The increase in NOW account expense reflected an increase in expense for our
commercial accounts that have a managed rate that was increased during
the year reflective of higher interest rates.
The shift in
balances from noninterest bearing to the NOW product also contributed
to the increase.
The increase in the expense for money
market accounts reflected adjustment to our board and managed rates for this product
also reflective of higher interest rates.
For
2022, the $3.4 million, or 97.4%, increase was primarily attributable
to higher NOW account expense related to our negotiated
rate commercial accounts that were tied to an index until mid-2022
and then migrated to a managed rate product.
To a lesser
extent, higher interest expense for our variable rate short-term borrowings
(warehouse line of credit for mortgage banking) and
subordinated notes contributed to the increase in 2022.
Our cost of interest bearing deposits was 81 basis points in 2023, 17 basis points
in 2022, and 4 basis points in 2021.
Our total
cost of deposits (including noninterest bearing accounts) was 48 basis points
in 2023, 9 basis points in 2022, and 2 basis points in
2021.
Our total cost of funds (interest expense/average earning assets) was 56 basis points in 2023,
17 basis points in 2022, and
10 basis points in 2021.
47
Our interest rate spread (defined as the taxable-equivalent yield on
average earning assets less the average rate paid on interest
bearing liabilities) was 3.63% in 2023, 3.00% in 2022, and 2.75% in 2021.
Our net interest margin (defined as taxable-equivalent
interest income less interest expense divided by average earning assets) was 4.05%
in 2023, 3.14% in 2022, and 2.83% in 2021.
The increase in the interest rate spread and net interest margin
in 2023 and 2022 reflected an improved earning asset mix, higher
yields across a majority of our earning assets due to the rapid increase in interest rates,
and good control of our deposit cost.
During 2023, the Federal Open Market Committee (“FOMC”) raised interest
rates 100 basis points, putting the federal funds
target rate at a range of 5.25%-5.50%, compared to a range of
4.25%-4.50% at the end of 2022.
Our asset sensitive position, with
strong core deposit funding and ample liquidity provided
benefits as interest rates increased.
48
Table 2
AVERAGE
BALANCES AND INTEREST RATES
2023
2022
2021
(Taxable Equivalent Basis - Dollars
in Thousands)
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
ASSETS
Loans Held for Sale
(1)(2)
$
55,510
$
3,232
5.82
%
$
48,502
$
2,175
4.49
%
$
78,328
$
2,555
3.24
%
Loans Held for Investment
(1)(2)
2,656,394
149,366
5.62
2,189,440
104,578
4.78
2,000,563
94,332
4.76
Investment Securities
Taxable Investment Securities
1,016,550
18,652
1.83
1,098,876
15,917
1.45
778,953
8,724
1.12
Tax-Exempt Investment Securities
(2)
2,199
59
2.68
2,668
54
2.03
3,772
91
2.39
Total Investment Securities
1,018,749
18,711
1.83
1,101,544
15,971
1.45
782,725
8,815
1.12
Fed Funds Sold & Int Bearing Dep
203,147
10,126
4.98
649,762
9,511
1.46
790,870
998
0.13
Total Earning Assets
3,933,800
181,435
4.61
%
3,989,248
132,235
3.32
%
3,652,486
106,700
2.92
%
Cash & Due From Banks
75,786
76,929
72,409
Allowance for Credit Losses
(28,190)
(21,688)
(22,960)
Other Assets
297,290
287,813
282,129
TOTAL ASSETS
$
4,278,686
$
4,332,302
$
3,984,064
LIABILITIES
Noninterest Bearing Deposits
$
1,507,657
$
1,691,132
$
1,523,717
NOW Accounts
1,172,861
12,375
1.06
%
1,065,838
2,799
0.26
%
965,320
294
0.03
%
Money Market Accounts
299,581
3,670
1.22
283,407
203
0.07
278,606
134
0.05
Savings Accounts
592,033
598
0.10
628,313
309
0.05
537,023
263
0.05
Time Deposits
97,480
939
0.96
94,646
133
0.14
102,220
148
0.14
Total Interest Bearing Deposits
2,161,955
17,582
0.81
%
2,072,204
3,444
0.17
%
1,883,169
839
0.04
%
Total Deposits
3,669,612
17,582
0.48
3,763,336
3,444
0.09
3,406,886
839
0.02
Repurchase Agreements
19,917
513
2.57
8,095
14
0.17
5,762
2
0.03
Short-Term Borrowings
24,146
1,538
6.37
32,388
1,747
5.40
47,749
1,360
2.54
Subordinated Notes Payable
52,887
2,427
4.53
52,887
1,652
3.08
52,887
1,228
2.29
Other Long-Term Borrowings
408
20
4.77
665
31
4.62
1,887
63
3.33
Total Interest Bearing Liabilities
2,259,313
22,080
0.98
%
2,166,239
6,888
0.32
%
1,991,454
3,490
0.18
%
Other Liabilities
81,842
85,684
111,567
TOTAL LIABILITIES
3,848,812
3,943,055
3,626,738
Temporary Equity
8,392
9,957
20,505
TOTAL SHAREOWNERS’
EQUITY
421,482
379,290
336,821
TOTAL LIABILITIES,
TEMPORARY EQUITY AND
SHAREOWNERS’ EQUITY
$
4,278,686
$
4,332,302
$
3,984,064
Interest Rate Spread
3.63
%
3.00
%
2.75
%
Net Interest Income
$
159,355
$
125,347
$
103,210
Net Interest Margin
(3)
4.05
%
3.14
%
2.83
%
(1)
Average balances include net loan fees, discounts and premiums, and nonaccrual loans.
Interest income includes loan fees of $0.05 million for 2023,
$0.5 million for 2022, and $6.6 million for 2021.
(2)
Interest income includes the effects of taxable equivalent adjustments using
a 21% tax rate.
(3)
Taxable equivalent net interest income divided by average earning assets.
49
Table 3
RATE/VOLUME
ANALYSIS
(1)
2023 vs. 2022
2022 vs. 2021
(Taxable Equivalent Basis -
Dollars in Thousands)
Increase (Decrease) Due to Change In
Increase (Decrease) Due to Change In
Total
Volume
Rate
Total
Calendar
Volume
Rate
Earnings Assets:
Loans Held for Sale
(2)
$
1,057
$
315
$
742
$
(380)
$
-
$
(967)
$
587
Loans Held for Investment
(2)
44,788
22,304
22,484
10,247
-
8,982
1,265
Taxable Investment Securities
2,735
(1,192)
3,927
7,193
-
3,583
3,610
Tax-Exempt Investment Securities
(2)
5
(10)
15
(37)
-
(27)
(10)
Funds Sold
615
(6,537)
7,152
8,513
-
(178)
8,691
Total
$
49,200
$
14,880
$
34,320
25,536
$
-
$
11,393
$
14,143
Interest Bearing Liabilities:
NOW Accounts
$
9,576
$
281
$
9,295
2,505
$
-
$
31
$
2,474
Money Market Accounts
3,467
12
3,455
69
-
2
67
Savings Accounts
289
(18)
307
46
-
45
1
Time Deposits
806
4
802
(15)
-
(11)
(4)
Short-Term Borrowings
290
156
134
401
-
(331)
732
Subordinated Notes Payable
775
-
775
424
-
-
424
Other Long-Term Borrowings
(11)
(12)
1
(32)
-
(41)
9
Total
$
15,192
$
423
$
14,769
3,398
$
-
$
(305)
$
3,703
Changes in Net Interest Income
$
34,008
$
14,457
$
19,551
$
22,138
$
-
$
11,698
$
10,440
(1)
This table shows the change in taxable equivalent net interest income for comparative periods based on either changes in average
volume or changes in average rates for interest earning assets and interest bearing liabilities. Changes which are not solely
due to volume changes or solely due to rate changes have been attributed to rate changes.
(2)
Interest income includes the effects of taxable equivalent adjustments using a 21% tax rate to adjust on tax-exempt loans and securities
and securities to a taxable equivalent basis.
Provision for Credit Losses
For 2023, we recorded a provision for credit loss expense of $9.7 million ($9.5
million expense for loans held for investment
(“HFI”) and $0.2 million expense for unfunded loan commitments) compared
to a provision expense of $7.5 million for 2022
($7.4 million benefit for loans HFI and $0.1 million expense for unfunded
loan commitments), and a provision benefit of $1.6
million for 2021
($2.8 million benefit for loans HFI and $1.2 million expense for unfunded loan commitments
).
The higher loan
loss provision in 2023 was driven by loan growth.
The higher level of provision in 2022 was primarily attributable to strong loan
growth and weaker projected economic conditions, primarily a higher
rate of unemployment.
The credit loss provision in 2021
was favorably impacted by strong loan recoveries.
We discuss the various
factors that have impacted our provision expense in
more detail under the heading Allowance for Credit Losses.
Noninterest Income
For 2023, noninterest income totaled $71.6 million, a $3.6 million decrease
from 2022 and reflected decreases in wealth
management fees of $1.7 million, mortgage banking revenues of $1.5
million, deposit fees of $0.8 million, and bank card fees of
$0.5 million, partially offset by a $0.9 million increase in other
income.
The decrease in wealth management fees reflected lower
insurance commissions of $2.7 million due to the sale of large policies
in 2022 and was partially offset by higher trust fees of $0.5
million and retail brokerage fees of $0.5 million.
The decrease in mortgage banking revenues was primarily driven by lower
production volume in 2023, reflective of the rapid increase in interest rates and
lower market driven gain on sale margins.
Steady
best efforts adjustable-rate production by CCHL during
2023 contributed to the Bank’s loan growth
and earnings.
The decline in
deposit fees reflected lower commercial account analysis fees and account
service charge fees, and the reduction in bank card fees
was generally due to lower card volume reflective of slower consumer spending.
The increase in other income was primarily due
to a $1.4 million gain from the sale of mortgage servicing rights that was partially offset
by lower loan servicing income.
50
For 2022, noninterest income totaled $75.2 million, a $32.4 million decrease
from 2021 due to lower mortgage banking revenues
of $40.5 million, partially offset by higher wealth management
fees of $4.4 million, deposit fees of $3.2 million, other income of
$0.4 million, and bank card fees of $0.1 million.
Lower mortgage banking revenues at CCHL in 2022 generally reflected
a
reduction in refinancing activity and, to a lesser degree, lower purchase mortgage
originations primarily driven by higher interest
rates.
In addition, gain on sale margins were pressured due to a lower level of
governmental loan originations and mandatory
delivery loan sales (both of which provide a higher gain on sale percentage).
Strong best efforts adjustable-rate production by
CCHL during 2022 contributed to the Bank’s
loan growth and earnings.
Noninterest income as a percent of total operating revenues (net interest income plus
noninterest income) was 31.05% in 2023,
37.55% in 2022, and 51.11% in 2021.
The variance in both 2023 and 2022 reflected strong growth in net interest income and
lower mortgage banking revenues.
The table below reflects the major components of noninterest income.
Table 4
NONINTEREST INCOME
(Dollars in Thousands)
2023
2022
2021
Deposit Fees
$
21,325
$
22,121
$
18,882
Bank Card Fees
14,918
15,401
15,274
Wealth Management
Fees
16,337
18,059
13,693
Mortgage Banking Revenues
10,400
11,909
52,425
Other
8,630
7,691
7,271
Total Noninterest
Income
$
71,610
$
75,181
$
107,545
Significant components of noninterest income are discussed in more
detail below.
Deposit Fees
.
For 2023, deposit fees (service charge fees, insufficient
fund/overdraft fees, and business account analysis fees)
totaled $21.3 million compared to $22.1 million in 2022
and $18.9 million in 2021.
The $0.8 million, or 3.6%, decrease in 2023
was attributable to lower commercial account analysis fees of $0.5 million
and account service charge fees of $0.3
million.
The
reduction in commercial account analysis fees reflected a higher earnings
credit rate for commercial deposit accounts.
The
decrease in account service charge fees was attributable
to higher debit card utilization which allows the client to forego the
service charge fee if a certain number of debit card transactions
is achieved.
The $3.2 million, or 17.2%, increase in 2022
reflected higher account service charge fees and overdraft
fees.
The conversion,
in the third quarter of 2021, of our remaining
free checking accounts to a monthly maintenance fee account type
drove the increase in account service charge fees.
The increase
in overdraft fees was driven by higher utilization of our overdraft service
which is closely correlated (inversely) with the
consumer savings rate which has declined noticeably since it substantially increased
in 2021 due to the high level of governmental
stimulus related to the COVID-19 pandemic.
Bank Card Fees
.
Bank card fees totaled $14.9 million in 2023 compared to $15.4 million in 2022
and $15.3 million in 2021.
The
decrease in 2023 was generally due to lower card volume reflective of overall
slower consumer spending.
The slight increase in
2022 reflected incremental revenues from growth in new checking accounts that
was partially offset by lower transaction volume
which reflected a slowdown in consumer spending.
Wealth
Management Fees
.
Wealth management fees
including both trust fees (i.e., managed accounts and trusts/estates) and
retail brokerage fees (i.e., investment, insurance products, and retirement
accounts) totaled $16.3 million in 2023
compared to
$18.1 million in 2022 and $13.7 million in 2021.
The decrease in 2023 reflected lower insurance revenues of $2.7 million that
was partially offset by a $0.5 million decrease in trust fees and $0.5
million decrease in retail brokerage fees.
The sale of large
policies in 2022 drove the decline in insurance revenues.
The increase in 2022 was primarily due to higher insurance revenues of
$3.7 million and retail brokerage fees of $0.6 million.
The higher level of insurance revenues reflected the acquisition of CCSW
in 2021.
At December 31, 2023, total assets under management (“AUM”) were approximately
$2.588 billion compared to $2.273
billion at December 31, 2022 and $2.324 billion at December 31, 2021.
The increase in AUM in 2023 was primarily attributable
to growth in assets at Capital City Investments, our retail brokerage subsidiary,
reflecting increases
in investments
in fixed
income and annuity products,
and higher account values/returns reflective of the improved market returns
in 2023.
The decrease
in AUM in 2022 generally reflected lower account values/returns
reflective of volatile market conditions during the year partially
offset by new account growth.
51
Mortgage Banking Revenues
.
Mortgage banking revenues totaled $10.4 million in 2023 compared
to $11.9 million in 2022 and
$52.4 million in 2021.
The decrease in 2023 was primarily driven by lower production volume
reflective of the rapid increase in
interest rates and lower market driven gain on sale margins which
continued to be under pressure in 2023.
2022 revenues
reflected a reduction in refinancing activity,
and, to a lesser degree, lower purchase mortgage originations primarily driven by
higher interest rates.
In addition, gain on sale margins were pressured due to a lower level of
governmental loan originations and
mandatory delivery loan sales (both of which provide a higher gain on sale percentage).
Throughout 2023 and 2022, best efforts
origination volume allowed us to book a steady flow of adjustable-rate residential
loans in our portfolio which contributed to loan
growth and earnings.
In addition, continued stability in our construction/permanent loan program partially offset
the slowdown in
secondary market originations.
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.
Other
.
Other noninterest income totaled $8.6 million in 2023 compared to $7.7 million
in 2022 and $7.3 million in 2021.
The
$0.9 million increase in 2023 was due to a $1.4 million gain from the sale of
mortgage servicing rights that was partially offset by
lower loan servicing income which reflected the aforementioned sale.
The $0.4 million increase in 2022
was primarily
attributable to a $0.4 million increase in miscellaneous income, primarily
from a $0.2 million gain on the termination of a lease.
Noninterest Expense
For 2023, noninterest expense totaled $157.0 million compared to $151.6
million for 2022 and reflected increases in occupancy
expense of $3.1 million and compensation expense of $2.3 million.
The increase in occupancy expense was primarily driven by
the addition of four new banking offices in mid-to-late 2022 and
early 2023, and, to a lesser extent, higher expense for property
insurance (increased premiums) and maintenance agreements (network
and security upgrades).
The increase in compensation
expense reflected a $4.7 million increase in salary expense that was partially offset
by a $2.4 million decrease in associate benefit
expense.
The increase in salary expense was primarily due to a $3.6 million increase in base salaries (primarily
the addition of
staffing in new markets and annual merit), a $3.0 million
decrease in realized cost (credit offset to salary expense - lower new
residential loan originations in 2023), and higher incentive expense of $1.2
million that was partially offset by lower commission
expense of $3.3 million (lower residential loan originations and
insurance policy sales in 2023).
The decrease in associate benefit
expense reflected a $2.9 million decrease in pension plan service cost expense that was partially
offset by a $0.5 million increase
in associate insurance expense (higher premiums).
The net variance in other expense was primarily due to lower expenses for
OREO of $1.6 million (gain from the sale of a banking office)
and miscellaneous expense of $1.2 million (mortgage servicing
asset amortization of $1.0 million - mid-2023 sale of servicing rights).
Further, there was no pension settlement expense in 2023
whereas we realized $2.3 million in total pension settlement expense
in 2022.
These favorable variances were partially offset by
increases in pension – other expense (non-service component) of $3.0
million, professional fees of $0.8 million (one-time
consulting expense related to our core processor outsourcing contract negotiation)
,
insurance – other (FDIC insurance fees) of
$0.7 million, processing fees of $0.5
million, and legal fees of $0.3 million.
For comparison purposes, the service cost component
of our pension plan expense is reflected in associate benefit expense and the non-service
component and any settlement expenses
are reflected in other expense.
For 2023, our total pension expense was $3.3 million compared to
$5.7 million in 2022 which
included $2.3 million in pension settlement expense due to a higher
level of retirements.
For 2022, noninterest expense totaled $151.6 million, a $10.9 million
decrease from 2021, due to a decrease in compensation
expense of $10.0 million and other expense of $1.6 million, partially
offset by an increase in occupancy expense of $0.6 million.
The decrease in compensation expense was primarily due to a decrease in salary
expense of $10.6 million that was partially offset
by an increase in associate benefit expense of $0.6 million. The variance in salary
expense was primarily due to higher realized
loan cost of $7.7 million and lower variable/performance-based compensation
of $4.5 million, partially offset by higher base
salary expense of $1.8 million (merit and new market staffing additions).
The increase in associate benefit expense was primarily
attributable to an increase in associate insurance expense (utilized self-insurance
reserves in 2021) of $0.4 million and stock
compensation expense of $0.7 million, partially offset by
lower pension service cost expense of $0.6 million.
The decrease in
other expense was primarily due to lower pension plan related costs, including a decrease
of $4.9 million for the non-service cost
component of our pension plan (reflected in pension – other) attributable
to the utilization of a lower discount rate for plan
liabilities and a decrease of $0.8 million for pension plan settlement expense.
These favorable variances were partially offset by
an increase in other real estate expense of $1.2 million, travel/entertainment and advertising
costs of $1.3 million (return to pre-
pandemic levels and market expansion), miscellaneous expense of
$1.5 million (other losses of $0.9 million (primarily debit card
and check fraud) and VISA share swap conversion ratio payments of $0.4 million),
and insurance – other of $0.3 million (FDIC
insurance fees). Gains from the sale of two banking offices
in 2021 drove the increase in other real estate expense.
The increase
in occupancy expense is related to lease expense for four new banking offices
added in 2022 and various software purchases,
including network security and end of life upgrades.
For 2021, our total pension expense was $12.0 million and reflected the
utilization of a lower discount rate for plan liabilities reflective of the low
rate environment at that time.
52
Our operating efficiency ratio (expressed as noninterest
expense as a percent of taxable equivalent net interest income plus
noninterest income) was 67.99%, 75.62% and 77.11%
in 2023, 2022 and 2021, respectively.
The decrease in this metric for 2023
and 2022 was primarily driven by higher taxable equivalent net interest income
(refer to caption headed Net Interest Income and
Margin).
For 2022, lower noninterest expense also contributed to the decrease.
Expense management is an important part of our culture and strategic focus.
We will continue
to review and evaluate
opportunities to optimize our delivery operations and invest in
technology that provides
favorable returns/scale and/or mitigates
risk.
The table below reflects the major components of noninterest expense.
Table 5
NONINTEREST EXPENSE
(Dollars in Thousands)
2023
2022
2021
Salaries
$
79,278
$
74,590
$
85,211
Associate Benefits
14,509
16,929
16,259
Total Compensation
93,787
91,519
101,470
Premises
13,033
11,184
10,879
Equipment
14,627
13,390
13,053
Total Occupancy,
net
27,660
24,574
23,932
Legal Fees
1,721
1,413
1,411
Professional Fees
6,245
5,437
5,633
Processing Services
6,984
6,534
6,569
Advertising
3,349
3,208
2,683
Travel and Entertainment
1,896
1,815
1,063
Telephone
2,729
2,851
2,975
Insurance – Other
3,120
2,409
2,096
Pension - Other
76
(3,043)
1,913
Pension Settlement (Gain) Charge
(291)
2,321
3,072
Other Real Estate, Net
(1,969)
(337)
(1,488)
Miscellaneous
11,716
12,933
11,179
Total Other Expense
35,576
35,541
37,106
Total Noninterest
Expense
$
157,023
$
151,634
$
162,508
53
Significant components of noninterest expense are discussed in more
detail below.
Compensation
.
Compensation expense totaled $93.8 million in 2023 compared to $91.5 million
in 2022, and $101.5 million in
2021.
For 2023, the $2.3 million, or 2.5%, net increase reflected an increase
in salary expense of $4.7 million that was partially
offset by a decrease in associate benefit expense of $2.4
million.
The increase in salary expense was primarily due to a $3.6
million increase in base salaries (primarily the addition of staffing
in new markets and annual merit), a $3.0 million reduction in
realized cost (credit offset to salary expense - lower new
residential loan originations in 2023) and higher incentive expense of
$1.2 million that was partially offset by lower commission
expense of $3.3 million (lower residential loan originations and
insurance policy sales in 2023).
The decrease in associate benefit expense reflected a $2.9 million decrease in pension
plan
service cost expense that was partially offset by a $0.5 million increase
in associate insurance expense (higher premiums).
For 2022, the $10.0 million, or 9.8%, net decrease reflected a decrease in salary
expense of $10.6 million that was partially offset
by an increase in associate benefit expense of $0.6 million.
The variance in salary expense was primarily due to higher realized
loan cost (credit offset to salary expense) of $7.7 million and lower variable/performance
-based compensation of $4.5 million
($6.7 million decrease at CCHL (lower loan volume) partially offset
by a $2.2 million increase at the Bank (primarily related to
higher insurance revenues).
These decreases were partially offset by higher base salary expense of
$1.8 million at the Bank
(merit and new market staffing additions).
The increase in associate benefit expense was primarily attributable to an increase
in
associate insurance expense (utilized self-insurance reserves in 2021)
of $0.4 million and stock compensation expense of $0.7
million, partially offset by lower pension service cost expense of
$0.6 million.
Occupancy
.
Occupancy expense (including premises and equipment) totaled $27.7 million for
2023
compared to $24.5 million
for 2022, and $23.9 million for 2021.
For 2023, the $3.1 million, or 12.6%, increase was a primarily driven by the addition of
four new banking offices in mid-to-late 2022 and early
2023, and, to a lesser extent higher expense for property insurance
(increased premiums) and maintenance agreements (network and security upgrades).
For 2022, the $0.6 million, or 2.7%, increase was attributable to increases in
software license expense of $0.5 million and banking
office lease expense of $0.3 million, partially offset
by a decrease in maintenance and repairs expense of $0.1 million.
The
increase in software license expense reflected software upgrades for personal
computers and network servers, and additional
investment in network security monitoring software.
Other
.
Other noninterest expense totaled $35.6 million in 2023 compared
to $35.5 million in 2022 and $37.1 million in 2021.
For 2023, $0.1 million variance in other expense was primarily due
to lower expenses for OREO of $1.6 million (gain from the
sale of a banking office in 2023) and miscellaneous expense
of $1.2 million (mortgage servicing asset amortization of $1.0
million - mid-2023 sale of servicing rights).
Further, there was no pension settlement expense in 2023
whereas we realized $2.3
million in total pension settlement expense in 2022.
These favorable variances were partially offset by increases in pension
–
other expense (non-service component) of $2.8 million, professional fees of $0.8
million (one-time consulting expense related to
our core processor outsourcing contract negotiation), insurance
– other (FDIC insurance fees) of $0.7 million, processing fees of
$0.5 million, and legal fees of $0.3 million.
For 2022, the $1.6 million, or 4.2%, decrease was due to lower pension
related costs, including a decrease of $4.9 million for the
non-service cost component of our pension plan (reflected in pension –
other) attributable to the utilization of a lower discount
rate for plan liabilities and a decrease of $0.8 million for pension plan
settlement expense. These favorable variances were
partially offset by an increase in other real estate expense of
$1.2 million, travel/entertainment and advertising costs of $1.3
million (return to pre-pandemic levels and market expansion), and miscellaneous
expense of $1.5 million (other losses of $0.9
million (primarily debit card and check fraud) and VISA share swap conversion
ratio payments of $0.4 million), and insurance –
other of $0.3 million (FDIC insurance fees). Gains from the sale of two banking
offices in 2021 drove the increase in other real
estate expense.
54
Income Taxes
For 2023, we realized income tax expense of $13.0 million (effective
rate of 20.4%) compared to $7.8 million (effective rate of
19.0%) for 2022 and $9.8 million (effective rate of 19.9%)
in 2021.
The increase in our effective tax rate for 2023 was
attributable to a higher level of consolidated income.
The effective rate was further increased due to a lower level of pre
-tax
income from CCHL, in relation to our consolidated income as the non-controlling interest adjustment
for CCHL is accounted for
as a permanent tax adjustment.
However, these increases were offset
by additional solar tax credits earned in 2023.
2022 income
tax expense was favorably impacted by discrete tax items totaling $0.7 million related to
a favorable deferred tax adjustment for
our SERP and a State of Florida corporate tax refund.
In September 2021, Florida enacted a corporate tax rate reduction from 4.5% to 3.535%
retroactive to January 1, 2021, with an
expiration date of December 31, 2021, therefore, there was no material
impact to our deferred tax accounts.
Our 2021 state tax
rate was adjusted to reflect the two percentage point reduction.
The Florida tax rate reverted to 5.5% effective January 1, 2022.
Absent discrete items or new tax credit investments,
we expect our annual effective tax rate to approximate 23-24% in 2024.
FINANCIAL CONDITION
Average assets totaled
approximately $4.279 billion for 2023, a decrease of $53.6
million, or 1.2%, from 2022.
Average earning
assets were approximately $3.934 billion for 2023, a decrease of $55.5 million, or 1.4%, from
2022.
Compared to 2022, the
average decrease was primarily attributable to a $446.6 million decrease
in overnight funds and a $82.8 million decrease in
investment securities that was partially offset by a $467.0 million increase
in loans HFI.
We discuss these variances
in more
detail below.
Table 2 provides
information on average balances and rates, Table
3 provides an analysis of rate and volume variances and Table
6 highlights the changing mix of our interest earning assets over the last three
fiscal years.
Loans
In 2023, average loans HFI increased $467.0 million, or 21.3%, compared
to an increase of $188.9 million, or 9.4%, in 2022.
Compared to 2022, the growth in average loans was broad based with increases
realized in most loan categories, more
significantly in the residential real estate and commercial real estate categories
which increased by $391.3 million and $110.0
million, respectively.
Declines were experienced in our consumer (primarily indirect auto) and commercial
loan segments of
$49.0 million and $9.1 million, respectively.
Total loans HFI at December 31,
2023
totaled $2.734 billion, a $186.2 million
increase over December 31, 2022 and primarily reflected higher balances
in residential real estate of $254.7 million and
commercial real estate of $42.9 million, partially offset
by declines in our consumer loans of $53.5 million and construction loans
of $38.4 million.
At December 31, 2023, our consumer loan balance reflected direct loans of
$23.0 million and indirect auto
loans of $248.0 million.
During 2023, indirect auto balances declined gradually as we focused on
reducing exposure to this loan
segment which totaled $302.8 million at December 31, 2022.
As part of our overall strategy,
we will purchase newly originated 1-4 family real estate secured adjustable-rate
loans from CCHL.
The strategic alliance with CCHL provides us a larger pool
of loan purchase opportunities, which in large part drove
the
aforementioned increases in residential real estate loans.
These purchases can vary according to the direction of residential
mortgage interest rates, and we expect that these purchases might slow in 2024
compared to the 2023 level of purchases.
Expansion into new markets in the Northern Arc of Atlanta, Georgia
(Cobb and Gwinnett Counties) and Walton
County, Florida
drove incremental loan growth of approximately $43 million in 2023
as we added to those banking teams throughout 2023.
In 2023, average loans held for sale (“HFS”) increased $7.0 million, or 14.
5%, from 2022.
Loans HFI and HFS as a percentage of
average earning assets increased to 68.9% in 2023 compared to 56.1%
in 2022, primarily attributable to strong loan growth during
the year.
55
Table 6
SOURCES OF EARNING ASSET GROWTH
2022 to
Percentage
Components of
2023
of Total
Average
Earning Assets
(Average Balances – Dollars In Thousands)
Change
Change
2023
2022
2021
Loans:
Loans HFS
$
7,008
12.6
%
1.4
%
1.2
%
2.1
%
Loans HFI:
Commercial, Financial, and Agricultural
(9,134)
(16.5)
5.9
6.0
8.5
Real Estate – Construction
14,458
26.1
5.8
5.4
4.3
Real Estate – Commercial Mortgage
110,013
198.4
20.7
17.6
18.6
Real Estate – Residential
391,287
705.7
22.5
12.3
10.0
Real Estate – Home Equity
9,284
16.7
5.2
4.9
5.3
Consumer
(48,954)
(88.3)
7.6
8.7
8.0
Total HFI Loans
466,954
842.1
67.7
54.9
54.7
Total Loans HFS and
HFI
$
473,962
854.7
69.1
56.1
56.8
%
Investment Securities:
Taxable
$
(82,326)
(148.5)
%
25.8
%
27.5
%
21.3
%
Tax-Exempt
(469)
(0.8)
0.1
0.1
0.1
Total Securities
$
(82,795)
(149.3)
%
25.9
%
27.6
%
21.4
%
Federal Funds Sold and Interest Bearing Deposits
(446,615)
(805.4)
5.0
16.3
21.8
Total Earning Assets
$
(55,448)
100
%
100
%
100
%
100
%
Our average total loans (HFS and HFI)-to-deposit ratio was 73.9%
in 2023, 59.5% in 2022, and 61.0% in 2021.
The composition of our HFI loan portfolio at December 31 for each of
the past three years is shown in Table
7.
Table 8 arrays
our HFI loan portfolio at December 31, 2023, by maturity period.
As a percentage of the HFI loan portfolio, loans with fixed
interest rates represented 29.1% at December 31, 2023 compared to 33.3% at December
31, 2022. 1-4 family real estate secured
adjustable-rate loan production in 2023 drove the decrease in the percentage.
Table 7
LOANS HFI BY CATEGORY
(Dollars in Thousands)
2023
2022
2021
Commercial, Financial and Agricultural
$
225,190
$
247,362
$
223,086
Real Estate – Construction
196,091
234,519
174,394
Real Estate – Commercial Mortgage
825,456
782,557
663,550
Real Estate – Residential
1,004,219
749,513
360,021
Real Estate – Home Equity
210,920
208,217
187,821
Consumer
272,042
325,517
322,593
Total Loans HFI, Net
of Unearned Income
$
2,733,918
$
2,547,685
$
1,931,465
56
Table 8
LOANS HFI MATURITIES
Maturity Periods
(Dollars in Thousands)
One Year
or Less
Over One
Through
Five Years
Five
Through
Fifteen
Years
Over
Fifteen
Years
Total
Commercial, Financial and Agricultural
$
37,692
$
144,978
$
39,563
$
2,957
$
225,190
Real Estate – Construction
119,397
48,295
1,751
26,648
196,091
Real Estate – Commercial Mortgage
58,142
136,164
330,093
301,057
825,456
Real Estate – Residential
15,579
18,619
132,848
837,173
1,004,219
Real Estate – Home Equity
2,208
9,698
60,668
138,346
210,920
Consumer
(1)
6,382
170,698
94,672
290
272,042
Total
$
239,400
$
528,452
$
659,595
$
1,306,471
$
2,733,918
Total Loans HFI with
Fixed Rates
$
96,749
$
407,059
$
248,494
$
43,529
$
795,831
Total Loans HFI with
Floating or Adjustable-Rates
142,651
121,393
411,101
1,262,942
1,938,087
Total
$
239,400
$
528,452
$
659,595
$
1,306,471
$
2,733,918
(1)
Demand loans and overdrafts are
reported in the category of one year or less.
Credit Quality
Table 9 provides
the components of nonperforming assets and various other credit quality and risk metrics
at December 31 for the
last three fiscal years.
Information regarding our accounting policies related to nonaccruals, past due
loans, and financial
difficulty modifications is provided in Note 3 – Loans
Held for Investment and Allowance for Credit Losses.
Nonperforming assets (nonaccrual loans and other real estate) totaled $6.2
million at December 31, 2023 compared to $2.7
million at December 31, 2022.
At December 31, 2023, nonperforming assets as a percent of total assets was 0.15%, compared
to
0.06% at December 31, 2022.
Nonaccrual loans totaled $6.2 million at December 31, 2023, a $3.9 million
increase over
December 31, 2022.
Further, classified loans totaled $22.2 million at December
31, 2023, a $2.9 million increase over December
31, 2022.
Table 9
CREDIT QUALITY
(Dollars in Thousands)
2023
2022
2021
Nonaccruing Loans:
Commercial, Financial and Agricultural
$
311
$
41
$
90
Real Estate – Construction
322
17
-
Real Estate – Commercial Mortgage
909
645
604
Real Estate – Residential
2,990
239
2,097
Real Estate – Home Equity
999
771
1,319
Consumer
711
584
212
Total Nonaccruing
Loans
6,242
2,297
4,322
Other Real Estate Owned
1
431
17
Total Nonperforming
Assets
$
6,243
$
2,728
$
4,339
Past Due Loans 30 – 89 Days
$
6,855
$
7,829
$
3,600
Classified Loans
$
22,203
$
19,342
$
17,912
Nonaccruing Loans/Loans
0.23
%
0.09
%
0.22
%
Nonperforming Assets/Total
Assets
0.15
0.06
0.10
Nonperforming Assets/Loans Plus OREO
0.23
0.11
0.22
Allowance/Nonaccruing Loans
479.70
%
1091.33
%
499.93
%
57
Nonaccrual Loans
.
Nonaccrual loans totaled $6.2 million at December 31, 2023, a $3.9 million increase
over December 31,
2022.
Generally, loans are placed
on nonaccrual status if principal or interest payments become 90 days past due or management
deems the collectability of the principal and interest to be doubtful.
Once a loan is placed in nonaccrual status, all previously
accrued and uncollected interest is reversed against interest income.
Interest income on nonaccrual loans is recognized when the
ultimate collectability is no longer considered doubtful.
Loans are returned to accrual status when the principal and interest
amounts contractually due are brought current or when future payments
are reasonably assured.
If interest on our loans classified
as nonaccrual during 2023 had been recognized on a fully accruing basis,
we would have recorded an additional $0.2 million of
interest income for the year ended December 31, 2023.
Other Real Estate Owned
.
OREO represents property acquired as the result of borrower defaults on
loans or by receiving a deed
in lieu of foreclosure.
OREO is recorded at the lower of cost or estimated fair value, less estimated selling costs, at the
time of
foreclosure.
Write-downs occurring at foreclosure are
charged against the allowance for credit losses.
On an ongoing basis,
properties are either revalued internally or by a third-party appraiser
as required by applicable regulations.
Subsequent declines in
value are reflected as other noninterest expense.
Carrying costs related to maintaining the OREO properties are expensed as
incurred and are also reflected as other noninterest expense.
OREO totaled $1,000 at December 31, 2023 versus $0.4 million at December 31,
2022.
During 2023, we added properties
totaling $1.5 million and sold properties totaling $1.9 million.
For 2022, we added properties totaling $2.4 million and sold
properties totaling $2.0 million.
Modifications to Borrowers Experiencing
Financial Difficulty
.
Occasionally, we will modify
loans to borrowers who are
experiencing financial difficulty.
Loan modifications to borrowers in financial difficulty are loans in
which we will grant an
economic concession to the borrower that we would not otherwise consider.
In these instances, as part of a work-out alternative,
we will make concessions including the extension of the loan term, a principal
moratorium, a reduction in the interest rate, or a
combination thereof.
A modified loan classification can be removed if the borrower’s financial condition
improves such that the
borrower is no longer in financial difficulty,
the loan has not had any forgiveness of principal or interest, and the loan is
subsequently refinanced or restructured at market terms and qualifies as a new
loan. At December 31, 2023, we did not maintain
any loans made to borrowers modified due to the borrower experiencing
financial difficulty.
Past Due Loans
.
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.
Past due loans at December 31, 2023 totaled $6.9 million compared to $7.8 million
at December 31, 2022.
Indirect
auto loans represented a large portion of the past due balances representing
76% and 73%, respectively,
of the total dollars past
due at December 31, 2023 and December 31, 2022, respectively.
Potential Problem Loans
.
Potential problem loans are defined as those loans which are now current but where management
has
doubt as to the borrower’s ability to comply with present
loan repayment terms.
At December 31, 2023, we had $3.4 million in
loans of this type which were not included in either of the nonaccrual or
90 days past due loan categories compared to $2.8
million at December 31, 2022.
Management monitors these loans closely and reviews their performance
on a regular basis.
Loan Concentrations
.
Loan concentrations exist when there are amounts loaned to multiple borrowers engaged
in similar
activities which cause them to be similarly impacted by economic or other conditions
and such amount exceeds 10% of total
loans.
Due to the lack of diversified industry within our markets and the relatively close proximity
of the markets, we have both
geographic concentrations as well as concentrations in the types of loans funded.
Specifically, due to the nature of our markets,
a
significant portion of our HFI loan portfolio has historically been
secured with real estate, approximately 82% at December 31,
2023 and 78% at December 31, 2022 with the increase driven by a higher volume
of 1-4 family residential real estate loans
originated in 2023 in comparison to other loan types.
The primary types of real estate collateral are commercial properties and 1-
4 family residential properties.
We review our
loan portfolio segments and concentration limits on an ongoing basis and will make
adjustments as needed to
mitigate/reduce risk to segments that reflect decline or stress.
We have established
an internal lending limit of $10 million for the total aggregate amount of credit
that will be extended to a
client and any related entities within our Board approved policies.
This compares to our legal lending limit of approximately $96
million.
58
The following table summarizes our real estate loan category as segregated
by the type of property.
Property type concentrations
are stated as a percentage of total real estate loans at December 31.
Table 10
REAL ESTATE
LOANS BY PROPERTY TYPE
2023
2022
Investor
Real Estate
Owner
Occupied
Real Estate
Investor
Real Estate
Owner
Occupied
Real Estate
Vacant
Land, Construction, and Land Development
13.3
%
-
14.8
%
-
Improved Property
27.2
59.5
%
27.4
57.8
%
Total Real Estate Loans
40.5
%
59.5
%
42.2
%
57.8
%
A major portion of our real estate loan category is centered in the owner occupied
category which carries a lower risk of non-
collection than certain segments of the investor category.
Approximately 41% of the investor real estate category was secured by
residential real estate at December 31, 2023 compared to 42% at December 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 separately in other liabilities.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to
past events, current conditions, and reasonable and supportable forecasts.
Historical loan default and loss experience provides the
basis for the estimation of expected credit losses.
Adjustments to historical loss information incorporate management’s
view of
current conditions and forecasts.
Detailed information regarding the methodology for estimating the
amount reported in the allowance for credit losses is provided
in Note 1 – Significant Accounting Policies/Allowance for Credit Losses in
the Consolidated Financial Statements.
Note 3 – Loans Held for Investment and Allowance for Credit Losses in the
Consolidated Financial Statements provides the
activity in the allowance and the allocation by loan type for each of
the past three fiscal years.
At December 31, 2023, the allowance for credit losses for HFI loans totaled $29.9
million compared to $25.1 million at December
31, 2022 and $21.6 million at December 31, 2021.
The $4.8 million increase in the allowance in 2023 reflected a credit loss
provision of $9.6 million and net loan charge-offs
of $4.7 million.
The $3.5 million increase in the allowance in 2022 reflected a
credit loss provision of $7.4 million and net loan charge
-offs of $3.9 million.
The increases in the allowance for both 2023 and
2022 were primarily attributable to incremental allowance related to loan growth,
primarily residential real estate, and slower
prepayment speeds (due to higher interest rates).
For 2022, a higher projected rate of unemployment and its effect
on rates of
default was also a contributing factor.
For 2023, we realized net loan charge-offs
of $4.7 million, or 0.18% of average HFI loans, compared to net loan charge
-offs of
$3.9 million, or 0.18%, for 2022, and net loan recoveries of $0.6
million, or 0.03%, for 2021.
A majority of the increase in 2023
and 2022 reflected higher consumer loan (indirect auto) net loan charge
-offs which represented 76% and 43%, respectively,
of
total net loan charge-offs.
Further, indirect auto net loan charge
-offs represented approximately 1.31% of average indirect auto
loans in 2023 and 0.53% in 2022.
Beginning in 2022 we began reducing our exposure to this loan segment in
advance of
potential economic slowing.
At December 31, 2023, the allowance for credit losses represented 1.10%
of HFI loans and provided coverage of 480% of
nonperforming loans compared to 0.98% and 1,091%, respectively,
at December 31, 2022
and 1.12% and 500%, respectively,
at
December 31, 2021.
59
Table 11
ALLOCATION OF
ALLOWANCE
FOR CREDIT LOSSES
2023
2022
2021
(Dollars in Thousands)
ACL
Amount
Percent of
Loans to
Total Loans
ACL
Amount
Percent of
Loans to
Total Loans
ACL
Amount
Percent of
Loans to
Total Loans
Commercial, Financial and Agricultural
$
1,482
8.2
%
$
1,506
9.7
%
$
2,191
11.6
%
Real Estate:
Construction
2,502
7.2
2,654
9.2
3,302
9.0
Commercial
5,782
30.2
4,815
30.7
5,810
34.4
Residential
15,056
36.7
10,741
29.4
4,129
18.6
Home Equity
1,818
7.7
1,864
8.2
2,296
9.7
Consumer
3,301
10.0
3,488
12.8
3,878
16.7
Total
$
29,941
100
%
$
25,068
100
%
$
21,606
100
%
Investment Securities
Through December 31, our average investment portfolio balance
was $1.019 billion in 2023, $1.102 billion in 2022, and $783
million in 2021.
As a percentage of average earning assets, our investment portfolio represented 25.9%
in 2023, compared to
27.6%
in 2022, and 21.4% in 2021.
For 2023, the decline in the investment portfolio was attributable to
the majority of our
investment cash flow not being reinvested in investment securities and to
a lesser extent the sale of $30.4 million of our floating
rate securities at a slight net gain, both of which were designed to support loan growth.
As we continue to monitor our overall
liquidity levels in 2024, cash flow from the investment portfolio should
continue to run-off, but we will review various investment
strategies,
as appropriate given loan demand and other liquidity management
strategies.
For 2023, average taxable investments decreased $82.3 million, or 7.5%,
while tax-exempt investments decreased $0.5 million, or
17.6%.
Both taxable and non-taxable bonds decreased as part of our overall investment
strategy to allow a majority of our
investments to run off in order to fund loan growth.
At December 31, 2023, municipal securities (taxable and non-taxable)
comprised 4.0% of the portfolio.
Our 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”).
For 2023
and 2022, we maintained securities under both the AFS and HTM
designations.
At December 31, 2023, $337.9 million, or 35.1%, of our investment portfolio was classified as AFS,
with $625.0
million, or 64.7%, classified as HTM and $3.5 million, or 0.2%, classified as equity securities.
At December 31, 2022, the AFS
and HTM portfolio comprised 38.5%
and 61.5%, respectively.
In the third quarter of 2022, U.S. Treasury obligations
totaling
$168.4 million with unrealized losses of $9.4 million were transferred from
AFS to HTM.
At December 31, 2023, $4.5 million
was remaining in unrealized losses for these securities.
Table 12 provides
the composition of our investment securities portfolio at December 31 for each of
the last three fiscal years.
60
Table 12
INVESTMENT SECURITIES COMPOSITION
2023
2022
2021
(Dollars in Thousands)
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Available for
Sale
U.S. Government Treasury
$
24,679
2.6
%
$
22,050
2.1
%
$
187,868
18.9
%
U.S. Government Agency
145,034
15.0
186,052
17.3
237,578
23.9
States and Political Subdivisions
39,083
4.0
40,329
3.8
46,980
4.7
Mortgage-Backed Securities
63,303
6.6
69,405
6.5
88,869
8.9
Corporate Debt Securities
57,552
6.0
88,236
8.2
86,222
8.7
Other Securities
8,251
0.9
7,222
0.6
7,094
0.7
Total
337,902
35.1
413,294
38.5
654,611
65.8
Held to Maturity
U.S. Government Treasury
457,681
47.4
457,374
42.6
115,499
11.6
Mortgage-Backed Securities
167,341
17.3
203,370
18.9
224,102
22.5
Total
625,022
64.7
660,744
61.5
339,601
34.1
Other Equity Securities
3,450
0.2
10
-
861
0.1
Total Investment
Securities
$
966,374
100
%
$
1,074,048
100
%
$
995,073
100
%
The classification of a security is determined upon acquisition based
on how the purchase will affect our asset/liability strategy
and future business plans and opportunities.
Classification determinations will also factor in 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 loss component of shareowners’ equity.
Securities designated as HTM are those acquired or owned with the
intent of holding them to maturity (final payment date).
HTM investments are measured at amortized cost.
It is neither
management’s current
intent nor practice to participate in the trading of investment securities for the purpose of recognizing
gains
and therefore we do not maintain a trading portfolio.
At December 31, 2023, there were 878 positions (combined AFS and HTM)
with pre-tax unrealized losses totaling $63.2 million.
The GNMA mortgage-backed securities, U.S. Treasuries,
and SBA securities held carry the full faith and credit guarantee of
the
U.S. Government and are deemed to be 0% risk-weighted assets.
Other mortgage-backed securities held (Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation)
are issued by U.S. Government sponsored entities.
Direct
obligations of U.S. Government agencies (Federal Farm Credit Bank and
Federal Home Loan Bank of Atlanta) are also owned.
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.
A large portion of the SBA securities float monthly or quarterly with
the prime rate and are
uncapped.
The remaining positions owned are municipal and corporate bonds.
At December 31, 2023, 14 corporate bond
positions had a total allowance for credit loss of $17,000 and 17
municipal bond positions had a total allowance for credit loss of
$8,000.
All of these positions maintain an overall rating of at least “A-”, and all are expected to mature at par.
The average maturity and duration of our investment portfolio was 2.91
and 2.53 years at December 31, 2023, respectively,
and
3.57 and 3.20 years at December 31, 2022, respectively.
The average life of our investment portfolio decreased primarily due to
the natural aging of the portfolio in conjunction with a majority of the
cash flow from the investment portfolio not being
reinvested in order to fund loan growth.
The weighted average taxable equivalent yield of our investment portfolio
at December 31, 2023 was 2.02% versus 2.03% in
2022.
This relatively unchanged yield reflected a minimal reinvestment of investment
securities.
Our bond portfolio contained
no investments in obligations, other than U.S. Governments, of any state, municipality,
political subdivision, or any other issuer
that exceeded 10% of our shareowners’ equity at December 31, 2023.
Table 13 and Note 2
in the Notes to Consolidated Financial Statements present a detailed analysis of our
investment securities as
to type, maturity, unrealized
losses, and yield at December 31.
61
Table 13
MATURITY DISTRIBUTION
OF INVESTMENT SECURITIES
Within 1 year
1 - 5 years
5 - 10 years
After 10 years
Total
(Dollars in
Thousands)
Amount
WAY
(3)
Amount
WAY
(3)
Amount
WAY
(3)
Amount
WAY
(3)
Amount
WAY
(3)
Available for Sale
U.S. Government
Treasury
$
10,557
1.97
%
$
14,122
0.79
%
$
-
-
%
$
-
-
%
$
24,679
1.54
%
U.S. Government
Agency
14,054
0.92
130,980
2.93
-
-
-
-
145,034
2.74
States and Political
Subdivisions
219
0.85
23,003
1.39
15,861
1.93
-
-
39,083
1.61
Mortgage-Backed
Securities
(1)
-
-
12,869
1.66
50,434
2.48
-
-
63,303
2.32
Corporate Debt
Securities
3,715
1.36
36,288
2.05
17,549
1.89
-
-
57,552
1.96
Other Securities
(2)
-
-
-
-
-
-
8,251
6.48
8,251
6.48
Total
$
28,545
1.60
%
$
217,262
2.47
%
$
83,844
2.25
%
$
8,251
6.48
%
$
337,902
2.40
%
Held to Maturity
U.S. Government
Treasury
$
89,799
1.87
%
$
367,882
1.72
%
$
-
-
%
$
-
-
%
$
457,681
1.75
%
Mortgage-Backed
Securities
(1)
3,201
2.86
151,466
1.83
12,674
2.93
-
-
167,341
1.93
Total
$
93,000
1.90
%
$
519,348
1.75
%
$
12,674
2.93
%
$
-
-
%
$
625,022
1.80
%
Equity Securities
$
-
-
%
$
-
-
%
$
-
-
%
$
3,450
1.93
%
$
3,450
1.93
%
Total Investment
Securities
$
121,545
1.83
%
$
736,610
1.96
%
$
96,518
2.34
%
$
11,701
6.48
%
$
966,374
2.02
%
(1)
Based on weighted-average maturity.
(2)
Federal Home Loan Bank Stock and Federal Reserve
Bank Stock are included in this category for weighted average yield, but
do not have stated maturities.
(3)
Weighted average yield ("WAY")
calculated based on current amortized cost balances – not presented on a tax equivalent basis.
Deposits
Average total
deposits for 2023 were $3.670 billion, a decrease of $93.7 million, or 2.5%, from
2022.
Average deposits increased
$356.5 million, or 10.5%, in 2022.
For 2023, the decline was experienced in noninterest bearing deposits and savings accounts,
partially offset by increases in NOW,
money market accounts and certificates of deposit.
Our public funds balances have
historically realized
growth in the fourth quarter of the year when municipalities collect tax receipts and
will be at a seasonal low
in the third quarter.
At December 31, 2023, public funds balances totaled $709.8 million and at December 31, 2022,
totaled
$720.7 million.
For 2022, the increase occurred in all deposit types except certificates of deposit, with
the largest increases
occurring in noninterest bearing accounts,
NOW accounts, and savings accounts.
The FOMC increased their benchmark rate by 100 basis points in 2023 to end the year
at a range of 5.25% to 5.50% and follows
an aggressive 425 basis point increase during 2022.
These rate increases have resulted in a shift in mix out of noninterest bearing
accounts into interest bearing accounts that we began experiencing in
the fourth quarter of 2022.
This shift occurred primarily in
NOW accounts, and, to a lesser degree, money market accounts and certificates
of deposit.
We have several
strategies in place to
protect core deposits and mitigate deposit run-off, and
we will continue to closely monitor several metrics such as the sensitivity
of our clients to our deposit rates, our overall liquidity position, and competitor
rates when pricing deposits.
This strategy is
consistent with previous rate cycles and allows us to manage the mix of our deposits as well
as the overall client relationship
rather than competing solely on rate.
Table 2 provides
an analysis of our average deposits, by category,
and average rates paid thereon for each of the last three fiscal
years. Table 14 reflects
the shift in our deposit mix over the last year and Table
15 provides a maturity distribution of time
deposits in denominations of $250,000 and over at December 31, 2023.
For 2023, noninterest bearing deposits represented 41.1%
of total average deposits.
This compares to 44.9% in 2022 and 44.7% in 2021.
62
Table 14
SOURCES OF DEPOSIT GROWTH
2022 to
Percentage
Components of
2023
of Total
Total
Deposits
(Average Balances - Dollars in
Thousands)
Change
Change
2023
2022
2021
Noninterest Bearing Deposits
$
(183,475)
195.8
%
41.1
%
44.9
%
44.7
%
NOW Accounts
107,023
(114.2)
32.0
28.3
28.3
Money Market Accounts
16,174
(17.3)
8.2
7.5
8.2
Savings Accounts
(36,280)
38.7
16.1
16.7
15.8
Time Deposits
2,834
(3.0)
2.6
2.6
3
Total Deposits
$
(93,724)
100
%
100
%
100
%
100
%
Table 15
MATURITY DISTRIBUTION
OF CERTIFICATES
OF DEPOSITS GREATER
THAN $250,000
2023
(Dollars in Thousands)
Certificates
of Deposit
Percent
Three months or less
$
3,717
18.2
%
Over three through six months
9,272
45.5
Over six through twelve months
3,607
17.7
Over twelve months
3,795
18.6
Total
$
20,391
100
%
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.
63
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, 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 Risk
Oversight Committee (“ROC”) and the Board of Directors.
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.
Table 16
ESTIMATED CHANGES
IN NET INTEREST INCOME
(1)
Percentage Change (12-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
-15.0
%
-12.5
%
-10.0
%
-7.5
%
-7.5
%
-10.0
%
-12.5
%
-15.0
%
December 31, 2023
3.0
%
2.1
%
1.3
%
0.7
%
-1.2
%
-3.6
%
-7.5
%
-12.8
%
December 31, 2022
11.3
%
8.4
%
5.5
%
2.8
%
-5.0
%
-12.3
%
-20.0
%
-27.1
%
Percentage Change (24-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
-17.5
%
-15.0
%
-12.5
%
-10.0
%
-10.0
%
-12.5
%
-15.0
%
-17.5
%
December 31, 2023
29.5
%
24.4
%
19.3
%
14.8
%
4.1
%
-3.5
%
-12.9
%
-23.6
%
December 31, 2022
31.3
%
25.2
%
19.0
%
13.1
%
-2.0
%
-13.8
%
-25.7
%
-36.3
%
The Net Interest Income at risk position was generally less favorable
at December 31, 2023 compared to December 31, 2022 for
the 12-month and 24-month shocks for the rising rate scenarios and more
favorable in the falling rate environments.
The
exception to this is the rates +100 bps and +200 bps scenarios over a 24-month
shock which became slightly more favorable
primarily due to the higher asset yields in the intermediate part of the inverted yield
curve compared to the prior year.
Strong loan
growth and a reduction in our overnight funds balance in 2023 resulted
in less asset sensitivity, which is less favorable
in rising
rate environments, and more favorable in a falling rate environment.
Net Interest Income at risk is within our prescribed policy limits over both
the 12-month and 24-month periods for all rising rate
scenarios with the exception of the down 400 bps scenario over the 24-month
period primarily due to our limited ability to lower
our deposit rates relative to the decline in market rate for that scenario.
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.
Table 17
ESTIMATED CHANGES
IN ECONOMIC VALUE
OF EQUITY
(1)
Changes in Interest Rates
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
-30.0
%
-25.0
%
-20.0
%
-15.0
%
-15.0
%
-20.0
%
-25.0
%
-30.0
%
December 31, 2023
12.9
%
10.7
%
7.8
%
4.4
%
-6.4
%
-14.0
%
-23.6
%
-27.8
%
December 31, 2022
11.0
%
9.0
%
6.4
%
3.6
%
-7.4
%
-18.8
%
-30.9
%
-40.1
%
EVE Ratio (policy minimum 5.0%)
18.9
%
18.2
%
17.3
%
16.5
%
14.2
%
12.8
%
11.2
%
10.4
%
(1)
Down 200, 300 and 400 bp rate scenarios have been added due to the current
interest rate environment.
64
At December 31, 2023, the economic value of equity was favorable in all rising
rate scenarios and unfavorable in the falling rate
scenarios.
EVE was within prescribed tolerance levels in all rate scenarios.
Factors that can impact EVE values include the
absolute level of rates, the overall structure of the balance sheet (including
liquidity levels), pre-payment speeds, loan floors, and
the change of model assumptions.
As the interest rate environment and the dynamics of the economy continue to change,
additional simulations will be analyzed to
address not only the changing rate environment, but also the changing
statement of financial condition mix, measured over
multiple years, to help assess the risk to the Company.
LIQUIDITY AND CAPITAL
RESOURCES
Liquidity
In general terms, liquidity is a measurement of our ability to meet our
cash needs.
Our objective in managing our liquidity is to
maintain our ability to fund loan commitments, purchase securities, accommodate
deposit withdrawals or repay other liabilities in
accordance with their terms, without an adverse impact on our current or
future earnings.
Our liquidity strategy is guided by
policies that are formulated and monitored by our ALCO and senior management,
and which take into account the marketability
of assets, the sources and stability of funding and the level of unfunded commitments.
We regularly evaluate
all of our various
funding sources with an emphasis on accessibility,
stability, reliability,
and cost-effectiveness.
For 2023 and 2022, our principal
source of funding was client deposits, supplemented by our short-term
and long-term borrowings, primarily from our trust-
preferred securities, 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 December 31, 2023, we had the ability to generate approximately $1.488
billion (excludes overnight funds position of $229
million) in additional liquidity through various sources including
various Federal Home Loan Bank borrowings, the Federal
Reserve Discount Window,
federal funds purchased lines, and 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 certain credit facilities may no longer
be available.
We conduct quarterly
liquidity
stress tests and the results are reported to ALCO, MROC, ROC and the Board of Directors.
We believe the
liquidity available to
us is sufficient to meet our ongoing needs.
We also view our
investment portfolio as a liquidity source and have the option to pledge securities in our
portfolio as collateral
for borrowings or deposits, and/or to sell selected securities.
Our portfolio consists of debt issued by the U.S. Treasury,
U.S.
governmental agencies, municipal governments, and corporate entities.
At December 31, 2023, the weighted-average maturity
and duration of our portfolio were 2.91 years and 2.53, respectively,
and the AFS portfolio had a net unrealized tax-effected loss
of $22.3 million.
Our average net overnight funds sold position (defined as funds sold plus interest-bearing
deposits with other banks less funds
purchased) was $203.1 million in 2023 compared to an average net overnight
funds sold position of $649.8 million in 2022.
The
decline in our overnight funds position in 2023 reflected strong growth in
average loans and lower average deposit balances.
We expect capital
expenditures over the next 12 months to be approximately $12.0 million, which
will consist primarily of
technology purchases for banking offices, office
leasehold improvements, business applications, and information technology
security needs as well as furniture and fixtures and banking office
remodels.
We expect that these capital
expenditures will be
funded with existing resources without impairing our ability to meet our
ongoing obligations.
Borrowings
Average short
-term borrowings increased $3.6 million compared to 2022 as higher repurchase agreement
balances (business
deposit accounts classified as repurchase agreements) of $11.8
million were partially offset by a $8.2 million decrease in
warehouse line of credit borrowings which reflected lower utilization of our
warehouse lines of credit to support loans held for
sale.
Additional detail on these warehouse borrowings is provided in Note 4
– Mortgage Banking Activities in the Consolidated
Financial Statements.
At December 31, 2023, total advances from the FHLB consisted of
$0.3 million in outstanding debt comprised of one note.
A
$20 million FHLB Daily Rate Credit advance was obtained for six days in
November 2023 for general liquidity purposes.
FHLB
advances are collateralized by a floating lien on certain 1-4 family residential
mortgage loans, commercial real estate mortgage
loans, and home equity mortgage loans.
65
We have issued two
junior subordinated deferrable interest notes to 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 CME Term
SOFR (secured overnight
financing rate) 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 interest rate based on three-month CME Term
SOFR 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.
In 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).
Under the swap arrangement, CCBG will
pay a fixed interest rate of 2.50% and receive a variable interest rate based on three-month
CME Term SOFR.
Additional detail
on the interest rate swap agreement is provided in Note 5 – Derivatives in the Consolidated
Financial Statements.
See Note 11 – Short Term
Borrowings and Note 12 – Long Term
Borrowings in the Notes to Consolidated Financial Statements
for additional information on borrowings.
In the ordinary course of business, we have entered into contractual obligations
and have made other commitments to make future
payments. Refer to the accompanying notes to consolidated financial
statements elsewhere in this report for the expected timing
of such payments as of December 31, 2023. These include payments related
to (i) long-term borrowings (Note 12 – Long-Term
Borrowings), (ii) short-term borrowings (Note 11
– Short-Term Borrowings),
(iii) operating leases (Note 7 – Leases), (iv) time
deposits with stated maturities (Note 10 – Deposits), and (v) commitments
to extend credit and standby letters of credit (Note 21 –
Commitments and Contingencies).
Capital Resources
Shareowners’ equity was $440.6 million at December 31, 2023
compared to $387.3 million at December 31, 2022.
For 2023,
shareowners’ equity was positively impacted by net income attributable
to common shareowners of $52.3 million, a $4.1 million
decrease in the accumulated other comprehensive loss for our pension plan,
a $11.7 million decrease in the unrealized loss on
investment securities, the issuance of stock of $2.5 million, and stock compensation
accretion of $1.3 million.
Shareowners’
equity was reduced by common stock dividends of $12.9 million ($0.76 per
share), the repurchase of stock of $3.7 million
(122,538 shares), net adjustments totaling $1.3 million related to transactions
under our stock compensation plans,
and a $0.7
million decrease in the fair value of the interest rate swap related to subordinated debt.
Additional historical information on capital changes is provided in
the Consolidated Statements of Changes in Shareowners’
Equity in the Consolidated Financial Statements.
We continue
to maintain a strong capital position.
The ratio of shareowners' equity to total assets at December 31, 2023 was
10.24% compared to 8.57% at December 31, 2022.
Further, our tangible common equity ratio was 8.26%
(non-GAAP financial
measure) at December 31, 2023 compared to 6.65% at December 31, 2022.
If our unrealized HTM securities losses of $21.5
million (after-tax) were recognized in accumulated other comprehensive
loss, our adjusted tangible capital ratio would be 7.74%.
The improvement in the ratios in 2023
was primarily attributable to strong earnings and a decrease in the unrealized loss on
AFS
securities which is recognized in accumulated other comprehensive loss.
We are subject to
regulatory risk-based capital requirements that measure capital relative
to risk-weighted assets and off-balance
sheet financial instruments.
At December 31, 2023, our total risk-based capital ratio was 16.57% compared to
15.30% at
December 31, 2022.
Our common equity tier 1 capital ratio was 13.52% and 12.38%, respectively,
on these dates.
Our leverage
ratio was 10.30% and 8.91%, respectively,
on these dates.
For a detailed discussion of our regulatory capital requirements, refer
to the “Regulatory Considerations – Capital Regulations” section
on page 15.
See Note 17 in the Notes to Consolidated Financial
Statements for additional information as to our capital adequacy.
At December 31, 2023, our common stock had a book value of $25.92 per diluted
share compared to $22.73 at December 31,
2022.
Book value is impacted by the net unrealized gains and losses on investment
securities.
At December 31, 2023, the net
unrealized loss was $25.7 million compared to an unrealized loss of $37.3
million at December 31, 2022.
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 December 31, 2023, the net pension liability reflected in accumulated other comprehensive
loss was $0.4 million compared to $4.5 million at December 31, 2022.
The favorable adjustment to our unfunded pension
liability was primarily attributable to a higher than estimated return
on plan assets.
These adjustments
also favorably impacted
our tangible capital ratio.
Further, book value is impacted by the periodic adjustment
made to record temporary equity at
redemption value which totaled $0.1 million at December 31, 2023.
There no adjustments made during 2022.
66
In January 2019, our Board of Directors authorized the repurchase of up to
750,000 shares of our outstanding common stock over
a five-year period.
Repurchases could be made in the open market or in privately negotiated transactions;
however, we were not
obligated to repurchase any specified number of shares.
122,538 shares were repurchased in 2023 at an average price of $30.24
per share.
No shares were repurchased in 2022
or 2021.
99,952 shares were repurchased in 2020 at an average price of $20.39
and 77,000 shares were repurchased in 2019 at an average price of $23.40.
As of December 31, 2023, a total of 299,490 shares of
our outstanding common stock have been repurchased at an average
price of $25.19 under our 2019 stock repurchase plan.
Dividends
Adequate capital and financial strength are paramount to our stability
and the stability of CCB.
Cash dividends declared and paid
should not place unnecessary strain on our capital levels.
When determining the level of dividends,
the following factors are
considered:
●
Compliance with state and federal laws and regulations;
●
Our capital position and our ability to meet our financial obligations;
●
Projected earnings and asset levels; and
●
The ability of the Bank and us to fund dividends.
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.
See Note 21 in the Notes to Consolidated Financial Statements.
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 on-going
obligations.
In the event these commitments
require funding in excess of historical levels, management believes current
liquidity, investment security
maturities, available
advances from the FHLB and Federal Reserve Bank, and warehouse
lines of credit provide a sufficient source of funds to meet
these commitments.
In conjunction with the sale and securitization of loans held for sale and their related
servicing rights, we may be exposed to
liability resulting from recourse, repurchase,
and make-whole agreements.
If it is determined subsequent to our sale of a loan or
its related servicing rights that a breach of the representations or warranties
made in the applicable sale agreement has occurred,
which may include guarantees that prepayments will not occur within a specified
and customary time frame, we may have an
obligation to either (a) repurchase the loan for the unpaid principal balance,
accrued interest, and related advances; (b) indemnify
the purchaser against any loss it suffers;
or (c) make the purchaser whole for the economic benefits of the
loan and its related
servicing rights.
Our repurchase, indemnification and make-whole obligations vary based upon
the terms of the applicable agreements, the nature
of the asserted breach, and the status of the mortgage loan at the time a claim is made.
We establish reserves for
estimated losses
of this nature inherent in the origination of mortgage loans by estimating the losses inherent
in the population of all loans sold
based on trends in claims and actual loss severities experienced. The reserve
will include accruals for probable contingent losses
in addition to those identified in the pipeline of claims received. The estimation
process is designed to include amounts based on
actual losses experienced from actual activity.
ACCOUNTING POLICIES
Critical Accounting Policies and Estimates
The consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which require us to make various estimates and
assumptions (see Note 1 in the Notes to Consolidated Financial Statements).
We believe that,
of our significant accounting
policies, the following may involve a higher degree of judgment and
complexity.
67
Allowance for Credit Losses
.
The amount of the allowance for credit losses represents management’s
best estimate of current
expected credit losses considering available information, from internal
and external sources, relevant to assessing exposure to
credit loss over the contractual term of the instrument.
Relevant available information includes historical credit loss experience,
current conditions,
and reasonable and supportable forecasts.
While historical credit loss experience provides
the basis for the
estimation of expected credit losses, adjustments to historical loss information
may be made for changes in loan risk grades, loss
experience trends, loan prepayment trends, differences
in current portfolio-specific risk characteristics, environmental conditions,
future expectations, or other relevant factors.
While management utilizes its best judgment and information available, the
ultimate adequacy of our allowance accounts is dependent upon
a variety of factors beyond our control, including the
performance of our portfolios, the economy,
changes in interest rates, and the view of the regulatory authorities toward
classification of assets. Detailed information on the Allowance
for Credit Losses valuation, and the assumptions used are provided
in Note 1 – Significant Accounting Policies of the Notes to Consolidated
Financial Statements.
Goodwill
.
Goodwill represents the excess of the cost of acquired businesses over the fair value
of their identifiable net
assets.
We perform
an impairment review on an annual basis or more frequently if events or changes in circumstances
indicate
that the carrying value may not be recoverable.
Adverse changes in the economic environment, declining operations, or other
factors could result in a decline in the estimated implied fair value of goodwill.
If the estimated implied fair value of goodwill is
less than the carrying amount, a loss would be recognized to reduce the
carrying amount to the estimated implied fair value.
We evaluate goodwill
for impairment on an annual basis.
Accounting Standards Update 2017-04, Intangibles – Goodwill and
Other (Topic 350):
Simplifying Accounting for Goodwill Impairment allows for a qualitative assessment of
goodwill impairment
indicators.
If the assessment indicates that impairment has more than likely occurred, the Company
must compare the estimated
fair value of the reporting unit to its carrying amount.
If the carrying amount of the reporting unit exceeds its estimated fair value,
an impairment charge is recorded equal to the excess.
During the fourth quarter of 2023, we performed our annual impairment
testing.
We proceeded with qualitative
assessment by
evaluating impairment indicators and concluded there were none that
indicated that goodwill impairment had occurred.
Pension Assumptions
.
We have a defined benefit
pension plan for the benefit of a portion of our associates.
On December 30,
2019, the plan was amended to remove plan eligibility for new associates hired after
December 31, 2019.
Our funding policy
with respect to the pension plan is to contribute, at a minimum, amounts sufficient
to meet minimum funding requirements as set
by law.
Pension expense is determined by an external actuarial valuation based on assumptions that are
evaluated annually as of
December 31, the measurement date for the pension obligation.
The service cost component of pension expense is reflected as
“Compensation Expense” in the Consolidated Statements of Income.
All other components of pension expense are reflected as
“Other Expense”.
The Consolidated Statements of Financial Condition reflect an accrued
pension benefit cost due to funding levels and
unrecognized actuarial amounts.
The most significant assumptions used in calculating the pension
obligation are the weighted-
average discount rate used to determine the present value of the pension obligation,
the weighted-average expected long-term rate
of return on plan assets, and the assumed rate of annual compensation increases.
These assumptions are re-evaluated annually
with the external actuaries, taking into consideration both current market
conditions and anticipated long-term market conditions.
The discount rate is determined by matching the anticipated defined pension
plan cash flows to the spot rates of a corporate AA-
rated bond index/yield curve and solving for the single equivalent discount
rate which would produce the same present value.
This methodology is applied consistently from year to year.
The discount rate utilized in 2023 was 5.63%.
The estimated impact
to 2023 pension expense of a 25 basis point increase or decrease in the discount
rate would have been an approximate $0.6
million decrease or increase, respectively.
We anticipate using
a 5.29% discount rate in 2024.
Based on the balances at the December 31, 2023 measurement date, the
estimated impact on accumulated other comprehensive
loss of a 25 basis point increase or decrease in the discount rate would have been a
decrease or increase of approximately $3.2
million (after-tax).
The estimated impact on accumulated other comprehensive loss of a 1% favorable/unfavorable
variance in the
actual rate of return on plan assets versus the assumed rate of return
on plan assets of 6.75% would have been an approximate
$0.8 million (after-tax) decrease/increase,
respectively.
The weighted-average expected long-term rate of return on plan assets is determined
based on the current and anticipated future
mix of assets in the plan.
The assets currently consist of equity securities, U.S. Government and Government
agency debt
securities, and other securities (typically temporary liquid funds awaiting investment).
The weighted-average expected long-term
rate of return on plan assets utilized for 2023 was 6.75%.
The estimated impact to 2023 pension expense of a 25 basis point
increase or decrease in the rate of return would have been an approximate
$0.3 million decrease or increase, respectively.
We
anticipate using a rate of return on plan assets of 6.75% for 2024.
68
The assumed rate of annual compensation increases of 5.10% for 2023 was based on
an experience study performed for the plan
during 2022. It is anticipated that this compensation increase assumption
will remain unchanged for the next several years, until
the next experience study is performed.
Detailed information on the pension plan, the actuarially determined
disclosures, and the assumptions used are provided in Note
15 of the Notes to Consolidated Financial Statements.
Income Taxes
.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred
tax
assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted
tax rates.
A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax
examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax
benefit is recorded.
We
recognize interest and/or penalties related to income tax matters in other
expenses.
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
See “Financial Condition - 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.
69
Item 8.
Financial Statements and Supplementary Data
2023 Report of Independent Registered Public Accounting Firm (PCAOB ID
686
)
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED FINANCIAL
STATEMENTS
PAGE
70
Report of Independent Registered Public Accounting Firm
73
Consolidated Statements of Financial Condition
74
Consolidated Statements of Income
75
Consolidated Statements of Comprehensive Income
76
Consolidated Statements of Changes in Shareowners’ Equity
77
Consolidated Statements of Cash Flows
78
Notes to Consolidated Financial Statements
70
Report of Independent Registered Public Accounting Firm
To the Shareowners,
Board of Directors and Audit Committee
Capital City Bank Group, Inc.
Tallahassee, Florida
Opinion on the Consolidated Financial Statements
We have audited
the accompanying consolidated statements of financial condition of Capital City Bank
Group, Inc. (the
“Company”) as of December 31, 2023 and 2022, the related consolidated
statements of income, comprehensive income, changes
in shareowners’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2023, and the related
notes (collectively referred to as the “financial statements”). In our opinion,
the consolidated financial statements referred to
above present fairly, in
all material respects, the financial position of the Company as of December 31,
2023 and 2022, and the
results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2023, in conformity
with accounting principles generally accepted in the United States of America.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United
States)
(“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2023, based on criteria
established in
Internal Control – Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway
Commission and our report dated March 13, 2024, expressed an adverse
opinion on the effectiveness of the Company’s
internal
control over financial reporting because of a material weakness described in
Management’s Annual Report on Internal
Control
over Financial Reporting.
Restatement of Previously Issued Financial Statements
As discussed
in
Note 1
to the
consolidated
financial statements,
the 2022
and 2021
consolidated financial
statements have
been
restated to correct a misstatement.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based
on our audits.
We are a public
accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such
procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial
statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below arises from the current-period
audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments.
The
communication of critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the
accounts or disclosures to which it relates.
71
Allowance for Credit Losses
The Company’s
loans held
for investment
portfolio totaled
$2.73 billion
as of
December 31,
2023, and
the allowance
for credit
losses on
loans held
for investment
was $29.9
million. The Company’s
unfunded loan
commitments totaled
$748.4 million,
with
an allowance for credit loss
on unfunded loan commitments of
$3.2 million. The Company’s
held-to-maturity securities portfolios
totaled
$625.0
million
as
of
December
31,
2023,
and
there
was
no
allowance
for
credit
losses
on
held-to-maturity
securities.
Together,
these allowance amounts represent the allowance for credit losses (ACL).
As more
fully described
in
Notes 1
,
2
,
3
and
21
to the
Company’s
consolidated financial
statements, the
Company estimates
its
exposure
to
expected
credit
losses
as
of
the
statement
of
financial
condition
date
for
existing
financial
instruments
held
at
amortized
cost
and
off-balance
sheet
exposures,
such
as
unfunded
loan
commitments,
lines
of
credit
and
other
unused
commitments that are not unconditionally cancelable by the Company.
The determination
of the
ACL requires
management to
exercise significant
judgment
and consider
numerous subjective
factors,
including
determining
qualitative
factors
utilized
to
adjust
historical
loss
rates,
loan
credit
risk
grading
and
identifying
loans
requiring individual evaluation among others. As disclosed by
management, different assumptions and conditions
could result in a
materially different amount for the estimate of the ACL.
We
identified the
ACL at
December 31,
2023 as
a critical audit
matter.
Auditing the
ACL involved
a high degree
of subjectivity
in
evaluating
management’s
estimates,
such
as
evaluating
management’s
identification
of
credit
quality
indicators,
grouping
of
loans determined to
be similar into pools,
estimating the remaining
life of loans in
a pool, assessment of
economic conditions and
other
environmental
factors,
evaluating
the
adequacy
of
specific
allowances
associated
with
individually
evaluated
loans
and
assessing the appropriateness of loan credit risk grades.
The primary procedures we performed as of December 31, 2023 to address
this critical audit matter included:
●
Obtained
an
understanding
of
the
Company’s
process
for
establishing
the
ACL,
including
the
qualitative
factor
adjustments of the ACL.
●
Tested
the
design
and
operating
effectiveness
of
controls,
including
those
related
to
technology,
over
the
ACL,
including:
o
loan data completeness and accuracy
o
reconciliation of loan balances accounted for at amortized cost and underlying detail
o
classifications of loans by loan pool
o
historical charge-off data
o
evaluation of appraisals
o
the establishment of qualitative adjustments
o
back testing and stress testing
o
loan credit risk ratings
o
establishment of specific ACL on individually evaluated loan
o
management’s review and disclosure
controls over the ACL
●
Tested
the
completeness
and
accuracy
of
the
information
utilized
in
the
ACL,
including
evaluating
the
relevance
and
reliability of such information.
●
Tested the ACL model’s
computational accuracy.
●
Evaluated
the qualitative
adjustments to
the ACL,
including assessing
the basis
for adjustments
and the
reasonableness
of the significant assumptions.
●
Tested the loan review
functions and evaluated the reasonableness of loan credit risk ratings.
●
Evaluated the reasonableness of specific allowances on individually
evaluated loans.
●
Evaluated
the
overall
reasonableness
of
assumptions
used
by
management
considering
trends
identified
within
peer
groups.
●
Evaluated
the
accuracy
and
completeness
of
Accounting
Standards
Codification
Topic
326,
Financial
Instruments
–
Credit Losses
, disclosures in the consolidated financial statements.
●
Evaluated credit quality trends in delinquencies, non-accruals, charge
-offs and loan risk ratings.
●
Tested estimated utilization
rate of unfunded loan commitments.
●
Evaluated
documentation
prepared
to
assess
the
methodology
utilized
in
the
ACL
calculation
for
securities
for
reasonableness.
FORVIS, LLP
We have served
as the Company’s auditor since 2021.
Little Rock, Arkansas
72
March 13, 2024
73
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
As of December 31,
(Dollars in Thousands)
2023
2022
ASSETS
Cash and Due From Banks
$
83,118
$
72,114
Federal Funds Sold and Interest Bearing Deposits
228,949
528,536
Total Cash and Cash Equivalents
312,067
600,650
Investment Securities, Available
for Sale, at fair value (amortized cost of $
367,747
and $
455,232
)
337,902
413,294
Investment Securities, Held to Maturity (fair value of $
591,751
and $
612,701
)
625,022
660,744
Equity Securities
3,450
10
Total Investment
Securities
966,374
1,074,048
Loans Held For Sale, at fair value
28,211
26,909
Loans, Held for Investment
2,733,918
2,547,685
Allowance for Credit Losses
(29,941)
(25,068)
Loans Held for Investment, Net
2,703,977
2,522,617
Premises and Equipment, Net
81,266
82,138
Goodwill and Other Intangibles
92,933
93,093
Other Real Estate Owned
1
431
Other Assets
119,648
119,337
Total Assets
$
4,304,477
$
4,519,223
LIABILITIES
Deposits:
Noninterest Bearing Deposits
$
1,377,934
$
1,653,620
Interest Bearing Deposits
2,323,888
2,285,697
Total Deposits
3,701,822
3,939,317
Short-Term
Borrowings
35,341
56,793
Subordinated Notes Payable
52,887
52,887
Other Long-Term
Borrowings
315
513
Other Liabilities
66,080
73,675
Total Liabilities
3,856,445
4,123,185
Temporary Equity
7,407
8,757
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;
16,950,222
and
16,986,785
shares issued and outstanding at December 31, 2023 and 2022, respectively
170
170
Additional Paid-In Capital
36,326
37,331
Retained Earnings
426,275
387,009
Accumulated Other Comprehensive Loss, Net of Tax
(22,146)
(37,229)
Total Shareowners’
Equity
440,625
387,281
Total Liabilities, Temporary
Equity, and Shareowners’ Equity
$
4,304,477
$
4,519,223
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
74
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF INCOME
For the Years
Ended December 31,
(Dollars in Thousands, Except Per Share
Data)
2023
2022
2021
INTEREST INCOME
Loans, including Fees
$
152,250
$
106,444
$
96,561
Investment Securities:
Taxable
18,652
15,917
8,724
Tax Exempt
40
38
68
Federal Funds Sold and Interest Bearing Deposits
10,126
9,511
998
Total Interest Income
181,068
131,910
106,351
INTEREST EXPENSE
Deposits
17,582
3,444
839
Short-Term
Borrowings
2,051
1,761
1,360
Subordinated Notes Payable
2,427
1,652
1,228
Other Long-Term
Borrowings
20
31
63
Total Interest Expense
22,080
6,888
3,490
NET INTEREST INCOME
158,988
125,022
102,861
Provision for Credit Losses
9,714
7,494
(1,553)
Net Interest Income After Provision for Credit Losses
149,274
117,528
104,414
NONINTEREST INCOME
Deposit Fees
21,325
22,121
18,882
Bank Card Fees
14,918
15,401
15,274
Wealth Management
Fees
16,337
18,059
13,693
Mortgage Banking Revenues
10,400
11,909
52,425
Other
8,630
7,691
7,271
Total Noninterest
Income
71,610
75,181
107,545
NONINTEREST EXPENSE
Compensation
93,787
91,519
101,470
Occupancy, Net
27,660
24,574
23,932
Other
35,576
35,541
37,106
Total Noninterest
Expense
157,023
151,634
162,508
INCOME BEFORE INCOME TAXES
63,861
41,075
49,451
Income Tax Expense
13,040
7,798
9,835
NET INCOME
$
50,821
$
33,277
$
39,616
Loss (Income) Attributable to Noncontrolling Interests
1,437
135
(6,220)
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
52,258
$
33,412
$
33,396
BASIC NET INCOME PER SHARE
$
3.08
$
1.97
$
1.98
DILUTED NET INCOME PER SHARE
$
3.07
$
1.97
$
1.98
Average Basic Common
Shares Outstanding
16,987
16,951
16,863
Average Diluted
Common Shares Outstanding
17,023
16,985
16,893
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
75
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
For the Years
Ended December 31,
(Dollars in Thousands)
2023
2022
2021
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
52,258
$
33,412
$
33,396
Other comprehensive income (loss), before
tax:
Investment Securities:
Net unrealized (loss) gain on securities available-for-sale
12,076
(35,814)
(9,673)
Unrealized losses on securities transferred from available-for-sale
to
held-to-maturity
-
(9,384)
-
Amortization of unrealized losses on securities transferred from
available-for-sale to held-to-maturity
3,479
1,469
26
Derivative:
Change in net unrealized gain on effective cash flow derivative
(878)
4,146
1,476
Benefit Plans:
Reclassification adjustment for amortization of prior service cost
156
292
234
Reclassification adjustment for amortization of net loss
112
4,752
10,806
Defined benefit plan settlement (gain) charge
(291)
2,321
3,072
Current year actuarial gain
4,905
4,223
31,339
Total Benefit Plans
4,882
11,588
45,451
Other comprehensive income (loss), before
tax:
19,559
(27,995)
37,280
Deferred tax (expense) benefit related to other comprehensive income
(4,476)
6,980
(9,352)
Other comprehensive income (loss), net of tax
15,083
(21,015)
27,928
TOTAL COMPREHENSIVE
INCOME
$
67,341
$
12,397
$
61,324
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
76
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREOWNERS' EQUITY
Accumulated
Other
Comprehensive
Loss,
Net of Taxes
(Dollars in Thousands, Except Share Data)
Shares
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Total
Balance, January 1, 2021
16,790,573
$
168
$
32,283
$
332,528
$
(44,142)
$
320,837
Net Income Attributable to Common Shareowners
-
-
-
33,396
-
33,396
Reclassification to Temporary Equity
(1)
-
-
-
9,323
-
9,323
Other Comprehensive Income, Net of Tax
-
-
-
-
27,928
27,928
Cash Dividends ($
0.62
per share)
-
-
-
(10,459)
-
(10,459)
Stock Based Compensation
-
-
843
-
-
843
Stock Compensation Plan Transactions, net
101,487
1
1,297
-
-
1,298
Balance, December 31, 2021
16,892,060
169
34,423
364,788
(16,214)
383,166
Net Income Attributable to Common Shareowners
-
-
-
33,412
-
33,412
Other Comprehensive Loss, Net of Tax
-
-
-
-
(21,015)
(21,015)
Cash Dividends ($
0.66
per share)
-
-
-
(11,191)
-
(11,191)
Stock Based Compensation
-
-
1,630
-
-
1,630
Stock Compensation Plan Transactions, net
94,725
1
1,278
-
-
1,279
Balance, December 31, 2022
16,986,785
170
37,331
387,009
(37,229)
387,281
Net Income Attributable to Common Shareowners
-
-
-
52,258
-
52,258
Reclassification to Temporary Equity
(1)
-
-
-
(87)
-
(87)
Other Comprehensive Income, Net of Tax
-
-
-
-
15,083
15,083
Cash Dividends ($
0.76
per share)
-
-
-
(12,905)
-
(12,905)
Stock Based Compensation
-
-
1,237
-
-
1,237
Stock Compensation Plan Transactions, net
85,975
-
1,468
-
-
1,468
Repurchase of Common Stock
(122,538)
-
(3,710)
-
-
(3,710)
Balance, December 31, 2023
16,950,222
$
170
$
36,326
$
426,275
$
(22,146)
$
440,625
(1)
Adjustments to redemption value for non-controlling interest in CCHL
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
77
CAPITAL CITY BANK GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the Years Ended
December 31,
(As Restated)
(As Restated)
(Dollars in Thousands)
2023
2022
2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income Attributable to Common Shareowners
$
52,258
$
33,412
$
33,396
Adjustments to Reconcile Net Income to Cash From Operating Activities:
Provision for Credit Losses
9,714
7,494
(1,553)
Depreciation
7,918
7,596
7,607
Amortization of Premiums, Discounts, and Fees, net
4,221
7,772
14,072
Amortization of Intangible Assets
160
160
107
Gain on Securities Transactions
3
-
-
Pension Settlement (Gain) Charges
(291)
2,321
3,072
Originations of Loans Held for Sale
(306,714)
(437,827)
(1,262,746)
Proceeds From Sales of Loans Held for Sale
315,812
475,359
1,376,678
Mortgage Banking Revenues
(10,400)
(11,909)
(52,425)
Net Additions for Capitalized Mortgage Servicing Rights
419
726
72
Change in Valuation Provision for Mortgage Servicing Rights
-
-
(250)
Stock Compensation
1,237
1,630
843
Net Tax Benefit from Stock Compensation
(48)
(27)
(4)
Deferred Income Taxes
(483)
(3,870)
(4,157)
Net Change in Operating Leases
79
(108)
(165)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(2,053)
(422)
(1,662)
Net (Increase) Decrease in Other Assets
(1,029)
(8,636)
10,885
Net (Decrease) Increase in Other Liabilities
(4,452)
8,837
(7,846)
Net Cash Provided By (Used In) Operating Activities
66,351
82,508
115,924
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(1,483)
(219,865)
(251,525)
Payments, Maturities, and Calls
36,600
55,314
78,544
Securities Available for Sale:
Purchases
(8,379)
(52,238)
(523,961)
Proceeds from the Sale of Securities
30,420
3,365
495
Payments, Maturities, and Calls
62,861
81,596
178,425
Equity Securities:
Purchases
(13,566)
-
-
Net Decrease in Equity Securities
10,127
-
-
Purchases of Loans Held for Investment
(2,488)
(16,753)
(20,209)
Net (Increase) Decrease
in Loans
(191,151)
(606,011)
88,545
Net Cash Paid for Acquisitions
-
-
(4,482)
Proceeds From Sales of Other Real Estate Owned
3,995
2,406
4,502
Purchases of Premises and Equipment, net
(7,046)
(6,322)
(5,193)
Noncontrolling Interest Contributions
-
2,867
7,139
Net Cash Used In Investing Activities
(80,110)
(755,641)
(447,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposits
(237,495)
226,455
495,302
Net (Decrease) Increase in Short-Term Borrowings
(21,452)
22,114
(45,938)
Repayment of Other Long-Term Borrowings
(199)
(249)
(1,332)
Dividends Paid
(12,905)
(11,191)
(10,459)
Payments to Repurchase Common Stock
(3,710)
-
-
Issuance of Common Stock Under Compensation Plans
937
1,300
1,028
Net Cash (Used in) Provided By Financing Activities
(274,824)
238,429
438,601
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(288,583)
(434,704)
106,805
Cash and Cash Equivalents at Beginning of Year
600,650
1,035,354
928,549
Cash and Cash Equivalents at End of Year
$
312,067
$
600,650
$
1,035,354
Supplemental Cash Flow Disclosures:
Interest Paid
$
21,775
$
6,586
$
3,547
Income Taxes Paid
$
9,118
$
7,466
$
16,339
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
1,512
$
2,398
$
1,717
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
78
Notes to Consolidated Financial Statements
Note 1
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Capital City Bank Group, Inc. (“CCBG”) provides a full range of banking
and banking-related services to individual and
corporate clients through its wholly-owned subsidiary,
Capital City Bank (“CCB” or the “Bank” and together with CCBG, the
“Company”), 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 include the accounts of CCBG
and CCB.
CCBG also maintains an insurance subsidiary,
Capital City Strategic Wealth,
LLC.
CCB has two primary subsidiaries, which are wholly owned, Capital City Trust
Company
and Capital City Investments. On March 1, 2020, CCB acquired a
51
% membership interest in Brand Mortgage Group, LLC
(“Brand”) which is now operated as Capital City Home Loans, LLC (“CCHL”), a consolidated
entity in the Company’s financial
statements. The terms of the transaction included a buyout call/put option
for CCB to purchase the remaining
49
% of the
membership interests in CCHL (“the
49
% Interest”) that are held by BMGBMG, LLC (“BMG”). The option requires 12 months
advance notice to the other party,
and under the terms of the option, January 1, 2025 is the earliest date the transfer
of the
49
%
Interest may be completed. On December 20, 2023, BMG notified CCB that BMG will exercise
its put option and the transfer of
the
49
% Interest will become effective on January 1, 2025.
The Company, which operates
a single reportable business segment that is comprised of commercial banking
within the states of
Florida, Georgia, and Alabama, follows accounting principles generally
accepted in the United States of America and reporting
practices applicable to the banking industry.
The principles which materially affect the financial position, results of
operations
and cash flows are summarized below.
The Company determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a
voting interest entity or a variable interest entity under accounting principles
generally accepted in the United States of America.
Voting
interest entities are entities in which the total equity investment at risk is sufficient
to enable the entity to finance itself
independently and provide the equity holders with the obligation to absorb losses, the
right to receive residual returns and the
right to make decisions about the entity’s
activities.
The Company consolidates voting interest entities in which it has all, or at
least a majority of, the voting interest.
As defined in applicable accounting standards, variable interest entities (“VIE’s”)
are
entities that lack one or more of the characteristics of a voting interest entity.
A controlling financial interest in an entity is
present when an enterprise has a variable interest, or a combination of variable
interests, that will absorb a majority of the entity’s
expected losses, receive a majority of the entity’s
expected residual returns, or both.
The enterprise with a controlling financial
interest, known as the primary beneficiary,
consolidates the VIE.
Two of CCBG’s
wholly owned subsidiaries, CCBG Capital
Trust I (established November 1, 2004) and
CCBG Capital Trust II (established May 24, 2005) are VIEs for
which the Company
is not the primary beneficiary.
Accordingly, the
accounts of these entities are not included in the Company’s
consolidated
financial statements.
Certain previously reported amounts have been reclassified to conform
to the current year’s presentation. All material inter-
company transactions and accounts have been eliminated in consolidation.
The Company has evaluated subsequent events for
potential recognition and/or disclosure through the date the consolidated
financial statements included in this Annual Report on
Form 10-K were filed with the United States Securities and Exchange
Commission.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of financial statements and
the reported amounts of revenues and
expenses during the reporting period.
Actual results could vary from these estimates.
Material estimates that are particularly
susceptible to significant changes in the near-term
relate to the determination of the allowance for credit losses, pension expense,
income taxes, loss contingencies, valuation of other real estate owned, and
valuation of goodwill and their respective analysis of
impairment.
Restatement of Previously Issued Consolidated Financial
Statements
79
We have restated
herein the Company’s Impacted Statements
of Cash Flows for the years ended December 31, 2021 and
December 31, 2022 and for each of the three month periods ended March
31, 2022 and 2023, six month periods ended June 30,
2022 and 2023 and nine month periods ended September 30, 2022 and 2023.
Prior Restatement Background
On December 22, 2023, the Company filed a Form 10-K/A to amend and
restate certain items in the 10K for the year ended
December 31, 2022 related to inter-company transactions
between its subsidiaries, CCHL and CCB, involving residential
mortgage loan purchases that were not properly recorded. The material impact
to Consolidated Statements of Income,
Consolidated Statements of Financial Condition and various key performance
indicators resulted in a restatement of the
Company’s financial statements for
the year ended December 31, 2022, and the three, six and nine months ended March 31,
2022
and 2023, June 30, 2022 and 2023, and September 30, 2022, respectively (collectively,
the “Previously Restated Financial
Statements”). As part of the Company’s
assessment of the misstatements noted in the Form 10-K/A filed December 22, 2023,
it
was concluded that the impact of the inter-company
loan sale and participation transactions was immaterial to the consolidated
financial statements for the year ended December 31, 2021.
Description of Current Misstatements
In connection with the preparation of the Company’s
consolidated financial statements for the year ended December 31, 2023, the
Company concluded that it had not appropriately eliminated intercompany
loan sale and participations transactions from the
Consolidated Statements of Cash Flows for the years ended December
31, 2022 and 2021 in its Previously Restated Financial
Statements. These errors led to misstatements of the following line items within
the Consolidated Statements of Cash Flows:
Within the Cash Flows from Operating Activities
section:
●
An overstatement of Originations of Loans Held for Sale of $
558
million and $
279
million for the years ended December
31, 2022 and 2021, respectively.
●
An overstatement of Proceeds from Sales of Loans Held for Sale of $
558
million and $
279
million for the years ended
December 31, 2022 and 2021, respectively.
As these misstatements offset one another within the Cash Flows from
Operating Activities section of the Consolidated Statement
of Cash Flows, there was no impact to the Net Cash Provided By Operating Activities
line item.
Within the Cash Flows from Investing Activities
section:
●
An overstatement of Purchases of Loans Held for Investment of $
422
million and $
95
million for the years ended
December 31, 2022 and 2021, respectively.
●
An understatement of Net (Increase) Decrease in Loans of $
422
million and $
95
million for the years ended December
31, 2022 and 2021, respectively.
As these misstatements offset one another within the Cash Flows Used In
Investing section of the Consolidated Statement of Cash
Flows, there was no impact to the Net Cash Used In Investing Activities line item.
The impacts of the restatement for the years ended December 31, 2022 and 2021
as described above are reflected in the
Consolidated Statements of Cash Flows and had no impact on the Consolidated
Statements of Financial Condition, Consolidated
Statements of Income, Consolidated Statements of Comprehensive Income,
Consolidated Statements in Changes in Shareowners’
Equity or the Notes to the Consolidated Financial Statements. The impacts of the restatement
for each of the quarterly periods are
presented in Note 24, Restated Quarterly Consolidated Statements of
Cash Flows (Unaudited).
Description of Current Restatement Tables
The following tables present the amounts previously reported and a reconciliation
of the restatement amounts reported on the
restated Consolidated Statement of Cash Flows for the years ended
December 31, 2022 and December 31, 2021. The amounts
previously reported were derived from the Company’s
Amended Annual Report on Form 10-K/A for the year ended December
31, 2022 and 2021, filed with the SEC on December 22, 2023.
80
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS
For the Year
Ended December 31, 2022
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
33,412
$
-
$
33,412
Adjustments to Reconcile Net Income to
Provision for Credit Losses
7,494
-
7,494
Depreciation
7,596
-
7,596
Amortization of Premiums, Discounts, and Fees, net
7,772
-
7,772
Amortization of Intangible Assets
160
-
160
Pension Settlement Charge
2,321
-
2,321
Originations of Loans Held-for-Sale
(996,312)
558,485
(437,827)
Proceeds From Sales of Loans Held-for-Sale
1,033,844
(558,485)
475,359
Mortgage Banking Revenues
(11,909)
-
(11,909)
Net Additions for Capitalized Mortgage Servicing Rights
726
-
726
Stock Compensation
1,630
-
1,630
Net Tax Benefit From Stock-Based
Compensation
(27)
-
(27)
Deferred Income Taxes Benefit
(3,870)
-
(3,870)
Net Change in Operating Leases
(108)
-
(108)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(422)
-
(422)
Net Increase in Other Assets
(8,636)
-
(8,636)
Net Decrease in Other Liabilities
8,837
-
8,837
Net Cash Provided (Used In) By Operating Activities
82,508
-
82,508
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(219,865)
-
(219,865)
Payments, Maturities, and Calls
55,314
-
55,314
Securities Available for
Sale:
Purchases
(52,238)
-
(52,238)
Proceeds from Sale of Securities
3,365
-
3,365
Payments, Maturities, and Calls
81,596
-
81,596
Purchase of loans held for investment
(438,415)
421,662
(16,753)
Net Increase in Loans Held for Investment
(184,349)
(421,662)
(606,011)
Proceeds From Sales of Other Real Estate Owned
2,406
-
2,406
Purchases of Premises and Equipment, net
(6,322)
-
(6,322)
Noncontrolling interest contributions received
2,867
-
2,867
Net Cash Used In Investing Activities
(755,641)
-
(755,641)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
226,455
-
226,455
Net Increase in Other Short-Term
Borrowings
22,114
-
22,114
Repayment of Other Long-Term
Borrowings
(249)
-
(249)
Dividends Paid
(11,191)
-
(11,191)
Issuance of Common Stock Under Compensation Plans
1,300
-
1,300
Net Cash Provided By Financing Activities
238,429
-
238,429
NET DECREASE IN CASH AND CASH EQUIVALENTS
(434,704)
-
(434,704)
Cash and Cash Equivalents at Beginning of Period
1,035,354
-
1,035,354
Cash and Cash Equivalents at End of Period
$
600,650
$
-
$
600,650
Supplemental Cash Flow Disclosures:
Interest Paid
$
6,586
$
-
$
6,586
Income Taxes Paid
$
7,466
$
-
$
7,466
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
2,398
$
-
$
2,398
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
81
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS
For the Year
Ended December 31, 2021
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
33,396
$
-
$
33,396
Adjustments to Reconcile Net Income to
Provision for Credit Losses
(1,553)
-
(1,553)
Depreciation
7,607
-
7,607
Amortization of Premiums, Discounts, and Fees, net
14,072
-
14,072
Amortization of Intangible Assets
107
-
107
Pension Settlement Charge
3,072
-
3,072
Originations of Loans Held-for-Sale
(1,541,356)
278,610
(1,262,746)
Proceeds From Sales of Loans Held-for-Sale
1,655,288
(278,610)
1,376,678
Mortgage Banking Revenues
(52,425)
-
(52,425)
Net Additions for Capitalized Mortgage Servicing Rights
72
-
72
Change in Valuation
Provision for Mortgage Servicing Rights
(250)
-
(250)
Stock Compensation
843
-
843
Net Tax Benefit From Stock-Based
Compensation
(4)
-
(4)
Deferred Income Taxes Benefit
(4,157)
-
(4,157)
Net Change in Operating Leases
(165)
-
(165)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,662)
-
(1,662)
Net Decrease in Other Assets
10,885
-
10,885
Net Decrease in Other Liabilities
(7,846)
-
(7,846)
Net Cash Provided By Operating Activities
115,924
-
115,924
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(251,525)
-
(251,525)
Payments, Maturities, and Calls
78,544
-
78,544
Securities Available for
Sale:
Purchases
(523,961)
-
(523,961)
Proceeds from Sale of Securities
495
-
495
Payments, Maturities, and Calls
178,425
-
178,425
Purchase of loans held for investment
(114,913)
94,704
(20,209)
Net Decrease in Loans Held for Investment
183,249
(94,704)
88,545
Net Cash Paid for Acquisitions
(4,482)
-
(4,482)
Proceeds From Sales of Other Real Estate Owned
4,502
-
4,502
Purchases of Premises and Equipment, net
(5,193)
-
(5,193)
Noncontrolling interest contributions received
7,139
-
7,139
Net Cash Used In Investing Activities
(447,720)
-
(447,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
495,302
-
495,302
Net Decrease
in Other Short-Term
Borrowings
(45,938)
-
(45,938)
Repayment of Other Long-Term
Borrowings
(1,332)
-
(1,332)
Dividends Paid
(10,459)
-
(10,459)
Issuance of Common Stock Under Compensation Plans
1,028
-
1,028
Net Cash Provided By Financing Activities
438,601
-
438,601
NET DECREASE IN CASH AND CASH EQUIVALENTS
106,805
-
106,805
Cash and Cash Equivalents at Beginning of Period
928,549
-
928,549
Cash and Cash Equivalents at End of Period
$
1,035,354
$
-
$
1,035,354
Supplemental Cash Flow Disclosures:
Interest Paid
$
3,547
$
-
$
3,547
Income Taxes Paid
$
16,339
$
-
$
16,339
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
1,717
$
-
$
1,717
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
82
Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits in other banks, and federal funds
sold. Generally,
federal funds are purchased and sold for one-day periods and all other cash equivalents
have a maturity of 90
days or less.
The Company is required to maintain average reserve balances with the Federal Reserve Bank
based upon a
percentage of deposits.
On March 26, 2020, the Federal Reserve reduced the amount of the required reserve balance
to
zero
.
The Company maintains certain cash balances that are restricted under warehouse
lines of credit and master repurchase
agreements.
The restricted cash balance at December 31, 2023 was $
0.1
million.
Investment Securities
Investment securities are classified as held-to-maturity (“HTM”) and
carried at amortized cost when the Company has the positive
intent and ability to hold them until maturity.
Investment securities not classified as HTM are classified as available-for-sale
(“AFS”) and carried at fair value.
The Company does not have trading investment securities. Investment securities classified
as
equity securities that do not have readily determinable fair values, are
measured at cost and remeasured to fair value when
impaired or upon observable transaction prices.
The Company determines the appropriate classification of securities at the time
of purchase.
For reporting and risk management purposes, the Company further
segments
investment securities by the issuer of
the security which correlates to its risk profile: U.S. government treasury,
U.S. government agency, state and
political
subdivisions, mortgage-backed securities,
and corporate debt securities.
Certain equity securities with limited marketability,
such
as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are classified
as AFS and carried at cost.
Interest income includes amortization and accretion of purchase premiums
and discounts.
Realized gains and losses are derived
from the amortized cost of the security sold.
Gains and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
Securities transferred from AFS to HTM are recorded at amortized cost plus
or minus any unrealized gain or loss at the time of transfer.
Any existing unrecognized gain or loss continues to be reported
in
accumulated other comprehensive loss (net of tax) and amortized as an adjustment
to interest income over the remaining life of
the security.
Any existing allowance for credit loss is reversed at the time of transfer.
Subsequent to transfer, the allowance for
credit losses on the transferred security is evaluated in accordance with the accounting
policy for HTM securities.
Additionally,
any allowance amounts reversed or established as part of the transfer
are presented on a gross basis in the Consolidated Statement
of Income.
The accrual of interest is generally suspended on securities more than 90 days
past due with respect to principal or interest.
When
a security is placed on nonaccrual status, all previously accrued and uncollected interest
is reversed against current income and
thus not included in the estimate of credit losses.
Credit losses and changes thereto, are established as an allowance for credit loss through
a provision for credit loss expense.
Losses are charged against the allowance when management
believes the uncollectability of a security is confirmed or when
either of the criteria regarding intent or requirement to sell is met.
Certain debt securities in the Company’s
investment portfolio were issued by a U.S. government entity or agency and are either
explicitly or implicitly guaranteed by the U.S. government.
The Company considers the long history of no credit losses on these
securities indicates that the expectation of nonpayment of the amortized
cost basis is zero, even if the U.S. government were to
technically default.
Further, certain municipal securities held by the Company
have been pre-refunded and secured by
government guaranteed treasuries.
Therefore, for the aforementioned securities, the Company does not
assess or record expected
credit losses due to the zero loss assumption.
83
Impairment - Available
-for-Sale Securities
.
Unrealized gains on AFS securities are excluded from earnings and reported,
net of tax, in other comprehensive income.
For AFS
securities that are in an unrealized loss position, the Company first assesses whether it intends
to sell, or whether it is more likely
than not it will be required to sell the security before recovery of its amortized
cost basis.
If either of the criteria regarding intent
or requirement to sell is met, the security’s
amortized cost basis is written down to fair value through income.
For AFS securities
that do not meet the aforementioned criteria or have a zero loss assumption,
the Company evaluates whether the decline in fair
value has resulted from credit losses or other factors.
In making this assessment, management considers the extent to which
fair
value is less than amortized cost, any changes to the rating of the security by a
rating agency, and adverse
conditions specifically
related to the security, among
other factors.
If the assessment indicates that a credit loss exists, the present value of cash flows to
be collected from the security are compared to the amortized cost basis of the security.
If the present value of cash flows
expected to be collected is less than the amortized cost basis, a credit loss exists and
an allowance for credit losses is recorded
through a provision for credit loss expense, limited by the amount that fair value is less than
the amortized cost basis.
Any
impairment that is not credit related is recognized in other comprehensive
income.
Allowance for Credit Losses - Held-to-Maturity Securities.
Management measures expected credit losses on each individual HTM
debt security that has not been deemed to have a zero
assumption.
Each security that is not deemed to have zero credit losses is individually measured
based on net realizable value, or
the difference between the discounted value of the expected
cash flows, based on the original effective rate, and the recorded
amortized basis of the security.
To the extent a shortfall is related
to credit loss, an allowance for credit loss is recorded through a
provision for credit loss expense.
Loans Held for Investment
Loans held for investment (“HFI”) are stated at amortized cost which includes the
principal amount outstanding, net premiums
and discounts, and net deferred loan fees and costs.
Accrued interest receivable on loans is reported in other assets and is not
included in the amortized cost basis of loans.
Interest income is accrued on the effective yield method based on outstanding
principal balances and includes loan late fees.
Fees charged to originate loans and direct loan origination
costs are deferred and
amortized over the life of the loan as a yield adjustment.
The Company defines loans as past due when one full payment is past due or a contractual maturity
is over 30 days late.
The
accrual of interest is generally suspended on loans more than 90 days past due
with respect to principal or interest.
When a loan is
placed on nonaccrual status, all previously accrued and uncollected interest
is reversed against current income and thus a policy
election has been made to not include accrued interest in the estimate of credit
losses.
Interest income on nonaccrual loans is
recognized when the ultimate collectability is no longer considered doubtful.
Loans are returned to accrual status when the
principal and interest amounts contractually due are brought current
or when future payments are reasonably assured.
Loan charge-offs on commercial and investor
real estate loans are recorded when the facts and circumstances of the individual
loan confirm the loan is not fully collectible and the loss is reasonably quantifiable.
Factors considered in making these
determinations are the borrower’s and any guarantor’s
ability and willingness to pay,
the status of the account in bankruptcy court
(if applicable), and collateral value.
Charge-off decisions for consumer loans are dictated by
the Federal Financial Institutions
Examination Council’s Uniform
Retail Credit Classification and Account Management Policy which establishes standards
for the
classification and treatment of consumer loans, which generally require
charge-off after 120 days of delinquency.
The Company has adopted comprehensive lending policies, underwriting
standards and loan review procedures designed to
maximize loan income within an acceptable level of risk.
Reporting systems are used to monitor loan originations, loan ratings,
concentrations, loan delinquencies, nonperforming and potential problem
loans, and other credit quality metrics.
The ongoing
review of loan portfolio quality and trends by Management and the Credit Risk Oversight
Committee support the process for
estimating the allowance for credit losses.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the
loans’ amortized cost basis to present the net
amount expected to be collected on the loans.
The allowance for credit losses is adjusted by a credit loss provision which is
reported in earnings, and reduced by the charge-off
of loan amounts, net of recoveries.
Loans are charged off against the
allowance when management believes the 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 for through the credit
loss provision, but recorded separately in other liabilities.
84
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to
past events, current conditions, and reasonable and supportable forecasts.
Historical loan default and loss experience provides the
basis for the estimation of expected credit losses.
Adjustments to historical loss information incorporate management’s
view of
current conditions and forecasts.
The methodology for estimating the amount of credit losses reported in the
allowance for credit losses has two basic components:
first, an asset-specific component involving loans that do not share risk characteristics
and the measurement of expected credit
losses for such individual loans; and second, a pooled component for expected
credit losses for pools of loans that share similar
risk characteristics.
Loans That Do Not Share Risk Characteristics (Individually
Analyzed)
Loans that do not share similar risk characteristics are evaluated on an individual
basis.
Loans deemed to be collateral dependent
have differing risk characteristics and are individually analyzed to
estimate the expected credit loss.
A loan is collateral
dependent when the borrower is experiencing financial difficulty
and repayment of the loan is dependent on the liquidation and
sale of the underlying collateral.
For collateral dependent loans where foreclosure is probable, the expected credit loss is
measured based on the difference between the fair
value of the collateral (less selling cost) and the amortized cost basis of the
asset.
For collateral dependent loans where foreclosure is not probable, the
Company has elected the practical expedient allowed
by Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic
326-20 to measure the
expected credit loss under the same approach as those loans where foreclosure
is probable.
For loans with balances greater than
$250,000,
the fair value of the collateral is obtained through independent appraisal of the underlying
collateral.
For loans with
balances less than $250,000, the Company has made a policy election to measure expected
loss for these individual loans utilizing
loss rates for similar loan types.
Loans That Share Similar Risk Characteristics (Pooled
Loans)
The general steps in determining expected credit losses for the pooled loan component
of the allowance are as follows:
●
Segment loans into pools according to similar risk characteristics
●
Develop historical loss rates for each loan pool segment
●
Incorporate the impact of forecasts
●
Incorporate the impact of other qualitative factors
●
Calculate and review pool specific allowance for credit loss estimate
A discounted cash flow methodology is utilized to calculate expected
cash flows for the life of each individual loan.
The
discounted present value of expected cash flow is then compared to
the loan’s amortized cost basis to determine
the credit loss
estimate.
Individual loan results are aggregated at the pool level in determining total
reserves for each loan pool.
The primary inputs used to calculate expected cash flows include historical
loss rates which reflect probability of default (“PD”)
and loss given default (“LGD”), and prepayment rates.
The historical look-back period is a key factor in the calculation of the PD
rate and is based on management’s assessment
of current and forecasted conditions and may vary by loan pool.
Loans subject to
the Company’s risk rating process are
further sub-segmented by risk rating in the calculation of PD rates.
LGD rates generally
reflect the historical average net loss rate by loan pool.
Expected cash flows are further adjusted to incorporate the impact of loan
prepayments which will vary by loan segment and interest rate conditions.
In general, prepayment rates are based on observed
prepayment rates occurring in the loan portfolio and consideration of forecasted
interest rates.
85
In developing loss rates, adjustments are made to incorporate the impact of forecasted
conditions.
Certain assumptions are also
applied, including the length of the forecast and reversion periods.
The forecast period is the period within which management is
able to make a reasonable and supportable assessment of future conditions.
The reversion period is the period beyond which
management believes it can develop a reasonable and supportable forecast,
and bridges the gap between the forecast period and
the use of historical default and loss rates.
The remainder period reflects the remaining life of the loan.
The length of the forecast
and reversion periods are periodically evaluated and based on management’s
assessment of current and forecasted conditions and
may vary by loan pool.
For purposes of developing a reasonable and supportable assessment
of future conditions, management
utilizes established industry and economic data points and sources,
including the Federal Open Market Committee forecast, with
the forecasted unemployment rate being a significant factor.
PD rates for the forecast period will be adjusted accordingly based
on management’s assessment of
future conditions.
PD rates for the remainder period will reflect the historical mean PD rate.
Reversion period PD rates reflect the difference between forecast
and remainder period PD rates calculated using a straight-line
adjustment over the reversion period.
Loss rates are further adjusted to account for other risk factors that impact loan defaults
and losses.
These adjustments are based
on management’s assessment of
trends and conditions that impact credit risk and resulting credit losses, more
specifically internal
and external factors that are independent of and not reflected in the quantitative
loss rate calculations.
Risk factors management
considers in this assessment include trends in underwriting standards,
nature/volume/terms of loan originations, past due loans,
loan review systems, collateral valuations, concentrations, legal/regulatory/political
conditions, and the unforeseen impact of
natural disasters.
Allowance for Credit Losses on Off-Balance
Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period
in which it is exposed to credit risk through a
contractual obligation to extend credit, unless that obligation is unconditionally
cancellable by the Company.
The allowance for
credit losses on off-balance sheet credit exposures is adjusted as a provision
for credit loss expense and is recorded in other
liabilities.
The estimate includes consideration of the likelihood that funding will occur
and an estimate of expected credit losses
on commitments expected to be funded over its estimated life and applies the same
estimated loss rate as determined for current
outstanding loan balances by segment.
Off-balance sheet credit exposures are identified and classified in the same categories as
the allowance for credit losses with similar risk characteristics that have been previously
mentioned.
Mortgage Banking Activities
Mortgage Loans Held for Sale and Revenue Recognition
Mortgage loans held for sale (“HFS”) are carried at fair value under the fair value
option with changes in fair value recorded in
mortgage banking revenues on the Consolidated Statements of
Income. The fair value of mortgage loans held for sale committed
to investors is calculated using observable market information such
as the investor commitment, assignment of trade or other
mandatory delivery commitment prices. The Company bases loans committed
to Federal National Mortgage Association
(“FNMA”), Government National Mortgage Association (“GNMA”), and
Federal Home Loan Mortgage Corporation
(“FHLMC”) (“Agency”) investors based on the Agency’s
quoted mortgage backed security (“MBS”) prices. The fair value of
mortgage loans held for sale not committed to investors is based on quoted best execution
secondary market prices. If no such
quoted price exists, the fair value is determined using quoted prices for
a similar asset or assets, such as MBS prices, adjusted for
the specific attributes of that loan, which would be used by other market
participants.
Gains and losses from the sale of mortgage loans held for sale are recognized based upon
the difference between the sales
proceeds and carrying value of the related loans upon sale and are recorded
in mortgage banking revenues on the Consolidated
Statements of Income. Sales proceeds reflect the cash received from investors
through the sale of the loan and servicing release
premium. If the related mortgage loan is sold with servicing retained, the
MSR addition is recorded in mortgage banking revenues
on the Consolidated Statements of Income.
Mortgage banking revenues also includes the unrealized gains and losses associated
with the changes in the fair value of mortgage loans held for sale, and the realized and
unrealized gains and losses from derivative
instruments.
Mortgage loans held for sale are considered sold when the Company surrenders
control over the financial assets. Control is
considered to have been surrendered when the transferred assets have been
isolated from the Company, beyond
the reach of the
Company and its creditors; the purchaser obtains the right (free of conditions that
constrain it from taking advantage of that right)
to pledge or exchange the transferred assets; and the Company does not
maintain effective control over the transferred assets
through either an agreement that both entitles and obligates the Company
to repurchase or redeem the transferred assets before
their maturity or the ability to unilaterally cause the holder to return specific
assets. The Company typically considers the above
criteria to have been met upon acceptance and receipt of sales proceeds
from the purchaser.
86
Government National Mortgage Association (“GNMA”) optional
repurchase programs allow financial institutions to buy back
individual delinquent mortgage loans that meet certain criteria from
the securitized loan pool for which the institution provides
servicing.
At the servicer’s option and without GNMA’s
prior authorization, the servicer may repurchase such a delinquent loan
for an amount equal to 100 percent of the remaining principal balance of
the loan.
Under FASB ASC Topic
860, “Transfers and
Servicing,” this buy-back option is considered a conditional option until
the delinquency criteria are met, at which time the option
becomes unconditional.
When the Company is deemed to have regained effective control over
these loans under the
unconditional buy-back option, the loans can no longer be reported
as sold and must be brought back onto the Consolidated
Statement of Financial Condition, regardless of whether there is intent to exercise
the buy-back option.
These loans are reported
in other assets with the offsetting liability being reported
in other liabilities.
Derivative Instruments (IRLC/Forward Commitments)
The Company holds and issues derivative financial instruments such as interest rate
lock commitments (“IRLCs”) and other
forward sale commitments. IRLCs are subject to price risk primarily related
to fluctuations in market interest rates. To
hedge the
interest rate risk on certain IRLCs, the Company uses forward sale commitments,
such as to-be-announced securities (“TBAs”) or
mandatory delivery commitments with investors. Management expects
these forward sale commitments to experience changes in
fair value opposite to the changes in fair value of the IRLCs thereby reducing
earnings volatility. Forward
sale commitments are
also used to hedge the interest rate risk on mortgage loans held for sale that are not
committed to investors and still subject to
price risk. If the mandatory delivery commitments are not fulfilled, the Company
pays a pair-off fee. Best effort
forward sale
commitments are also executed with investors, whereby certain loans
are locked with a borrower and simultaneously committed
to an investor at a fixed price. If the best effort IRLC does not fund,
there is no obligation to fulfill the investor commitment.
The Company considers various factors and strategies in determining
what portion of the IRLCs and uncommitted mortgage loans
held for sale to economically hedge.
All derivative instruments are recognized as other assets or other liabilities
on the
Consolidated Statements of Financial Condition at their fair value.
Changes in the fair value of the derivative instruments are
recognized in mortgage banking revenues on the Consolidated Statements
of Income in the period in which they occur.
Gains and
losses resulting from the pairing-out of forward sale commitments are recognized
in mortgage banking revenues on the
Consolidated Statements of Income. The Company accounts for all derivative
instruments as free-standing derivative instruments
and does not designate any for hedge accounting.
Mortgage Servicing Rights (“MSRs”) and Revenue Recognition
The Company sells residential mortgage loans in the secondary market and may
retain the right to service the loans sold. Upon
sale, an MSR asset is capitalized, which represents the then current fair value of
future net cash flows expected to be realized for
performing servicing activities.
As the Company has not elected to subsequently measure any class of servicing
assets under the
fair value measurement method, the Company follows the amortization method.
MSRs are amortized to noninterest income
(other income) in proportion to and over the period of estimated net servicing
income, and are assessed for impairment at each
reporting date.
MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization,
or estimated fair
value, and included in other assets, net, on the Consolidated Statements of
Financial Condition.
The Company periodically evaluates its MSRs asset for impairment.
Impairment is assessed based on fair value at each reporting
date using estimated prepayment speeds of the underlying mortgage
loans serviced and stratifications based on the risk
characteristics of the underlying loans (predominantly loan type and note
interest rate).
As mortgage interest rates fall,
prepayment speeds are usually faster and the value of the MSRs asset generally
decreases, requiring additional valuation reserve.
Conversely, as mortgage
interest rates rise, prepayment speeds are usually slower and the value of the MSRs asset generally
increases, requiring less valuation reserve.
A valuation allowance is established, through a charge to earnings, to
the extent the
amortized cost of the MSRs exceeds the estimated fair value by stratification.
If it is later determined that all or a portion of the
temporary impairment no longer exists for a stratification, the valuation
is reduced through a recovery to earnings.
An other-than-
temporary impairment (i.e., recoverability is considered remote when
considering interest rates and loan pay off activity) is
recognized as a write-down of the MSRs asset and the related valuation allowance
(to the extent a valuation allowance is
available) and then against earnings.
A direct write-down permanently reduces the carrying value of the MSRs asset and
valuation allowance, precluding subsequent recoveries.
87
Derivative/Hedging Activities
At the inception of a derivative contract, the Company designates the derivative
as one of three types based on the Company’s
intentions and belief as to the likely effectiveness as a hedge. These three
types are (1) a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment (“fair value
hedge”), (2) a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized
asset or liability (“cash flow hedge”), or (3) an instrument
with no hedging designation (“standalone derivative”). For a fair value hedge,
the gain or loss on the derivative, as well as the
offsetting loss or gain on the hedged item, are recognized
in current earnings as fair values change. For a cash flow hedge, the
gain or loss on the derivative is reported in other comprehensive income and is reclassified
into earnings in the same periods
during which the hedged transaction affects earnings. For
both types of hedges, changes in the fair value of derivatives that are
not highly effective in hedging the changes in fair value or expected
cash flows of the hedged item are recognized immediately in
current earnings. Net cash settlements on derivatives that qualify for hedge
accounting are recorded in interest income or interest
expense, based on the item being hedged. Net cash settlements on derivatives
that do not qualify for hedge accounting are
reported in non-interest income. Cash flows on hedges are classified in the cash flow
statement the same as the cash flows of the
items being hedged.
The Company formally documents the relationship between derivatives
and hedged items, as well as the risk-management
objective and the strategy for undertaking hedge transactions at the inception
of the hedging relationship. This documentation
includes linking fair value or cash flow hedges to specific assets and liabilities on the
Consolidated Statement of Financial
Condition or to specific firm commitments or forecasted transactions. The Company
also formally assesses, both at the hedge’s
inception and on an ongoing basis, whether the derivative instruments that are used
are highly effective in offsetting changes in
fair values or cash flows of the hedged items. The Company discontinues hedge
accounting when it determines that the derivative
is no longer effective in offsetting changes in the
fair value or cash flows of the hedged item, the derivative is settled or
terminates, a hedged forecasted transaction is no longer probable, a hedged
firm commitment is no longer firm, or treatment of the
derivative as a hedge is no longer appropriate or intended. When hedge accounting
is discontinued, subsequent changes in fair
value of the derivative are recorded as non-interest income. When a fair
value hedge is discontinued, the hedged asset or liability
is no longer adjusted for changes in fair value and the existing basis adjustment is amortized
or accreted over the remaining life of
the asset or liability. When
a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are
still
expected to occur, gains or losses that were accumulated
in other comprehensive income are amortized into earnings over the
same periods, in which the hedged transactions will affect earnings.
Long-Lived Assets
Premises and equipment is stated at cost less accumulated depreciation,
computed on the straight-line method over the estimated
useful lives for each type of asset with premises being depreciated over
a range of
10
to
40
years, and equipment being
depreciated over a range of
3
to
10
years.
Additions, renovations and leasehold improvements to premises are capitalized and
depreciated over the lesser of the useful life or the remaining lease term.
Repairs and maintenance are charged to noninterest
expense as incurred.
Long-lived assets are evaluated for impairment if circumstances suggest that their
carrying value may not be recoverable, by
comparing the carrying value to estimated undiscounted cash flows.
If the asset is deemed impaired, an impairment charge is
recorded equal to the carrying value less the fair value. See Note 6 – Premises and
Equipment for additional information.
Leases
The Company has entered into various operating leases, primarily for
banking offices.
Generally, these leases have initial
lease
terms from one to ten years.
Many of the leases have one or more lease renewal options.
The exercise of lease renewal options is
at the Company’s sole discretion.
The Company does not consider exercise of any lease renewal options reasonably
certain.
Certain leases contain early termination options.
No renewal options or early termination options have been included in the
calculation of the operating right-of-use assets or operating lease liabilities.
Certain lease agreements provide for periodic
adjustments to rental payments for inflation.
At the commencement date of the lease, the Company recognizes a lease liability at
the present value of the lease payments not yet paid, discounted using
the discount rate for the lease or the Company’s
incremental borrowing rate.
As the majority of the Company’s
leases do not provide an implicit rate, the Company uses its
incremental borrowing rate at the commencement date in determining
the present value of lease payments.
The incremental
borrowing rate is based on the term of the lease.
At the commencement date, the Company also recognizes a right-of-use asset
measured at (i) the initial measurement of the lease liability; (ii) any lease payments made
to the lessor at or before the
commencement date less any lease incentives received; and (iii) any initial direct
costs incurred by the lessee.
Leases with an
initial term of 12 months or less are not recorded on the Consolidated Statement
of Financial Condition.
For these short-term
leases, lease expense is recognized on a straight-line basis over the lease term.
The Company has no leases classified as finance
leases.
See Note 7 – Leases for additional information.
88
Bank Owned Life Insurance
The Company, through
its subsidiary bank, has purchased life insurance policies on certain key officers.
Bank owned life
insurance is recorded at the amount that can be realized under the insurance contract
at the statement of financial condition date,
which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
Goodwill and Other Intangibles
Goodwill represents the excess of the cost of businesses acquired over the fair
value of the net assets acquired.
In accordance
with FASB ASC Topic
350, the Company determined it has one goodwill reporting unit.
Goodwill is tested for impairment
annually during the fourth quarter or on an interim basis if an event occurs
or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying value.
Other intangible assets relate to customer intangibles
purchased as part of a business acquisition.
Intangible assets are tested for impairment at least annually or whenever changes in
circumstances indicate the carrying amount of the assets may not
be recoverable from future undiscounted cash flows.
See Note 8
– Goodwill and Other Intangibles for additional information
.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at the lower of cost or fair value
less estimated selling costs, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair value
less cost to sell.
The valuation of foreclosed
assets is subjective in nature and may be adjusted in the future because of changes in economic
conditions.
Revenue and
expenses from operations and changes in value are included in noninterest
expense.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary
course of business are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
See Note 21 – Commitments and
Contingencies for additional information.
Noncontrolling Interest
To the extent
the Company’s interest in a consolidated
entity represents less than 100% of the entity’s
equity, the Company
recognizes noncontrolling interests in subsidiaries.
In the case of the CCHL acquisition, the noncontrolling interest represents
equity which is redeemable or convertible for cash at the option of the equity holder
and is classified within temporary equity in
the mezzanine section of the Consolidated Statements of Financial
Condition.
The call/put option is redeemable at the option of
either CCBG (call) or the noncontrolling interest holder (put) on or
after January 1, 2025, and therefore, not entirely within
CCBG’s control.
The subsidiary’s net income or loss and
related dividends are allocated to CCBG and the noncontrolling interest
holder based on their relative ownership percentages.
The noncontrolling interest carrying value is adjusted on a quarterly basis
to the higher of the carrying value or current redemption value, at the Statement
of Financial Condition date, through a
corresponding adjustment to retained earnings.
The redemption value is calculated quarterly and is based on the higher of a
predetermined book value or pre-tax earnings multiple.
To the extent the redemption
value exceeds the fair value of the
noncontrolling interest, the Company’s
earnings per share attributable to common shareowners is adjusted by that
amount.
The
Company uses an independent valuation expert to assist in estimating the fair value
of the noncontrolling interest using: 1) the
discounted cash flow methodology under the income approach, and (2)
the guideline public company methodology under the
market approach.
The estimated fair value is derived from equally weighting the result of each of the two methodologies.
The
estimation of the fair value includes significant assumptions concerning:
(1) projected loan volumes; (2) projected pre-tax profit
margins; (3) tax rates and (4) discount rates.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable
and the change in deferred tax assets and
liabilities (excluding deferred tax assets and liabilities related to business
combinations or components of other comprehensive
income).
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences
between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax
rates.
A valuation allowance, if needed, reduces
deferred tax assets to the expected amount most likely to be realized.
Realization of deferred tax assets is dependent upon the
generation of a sufficient level of future taxable income and recoverable
taxes paid in prior years.
The income tax effects related
to settlements of share-based payment awards are reported in earnings as an
increase or decrease in income tax expense.
The Company files a consolidated federal income tax return and a separate
federal tax return for CCHL. Each subsidiary files a
separate state income tax return.
89
Earnings Per Common Share
Basic earnings per common share is based on net income divided by the weighted
-average number of common shares outstanding
during the period excluding non-vested stock.
Diluted earnings per common share include the dilutive effect of
stock options and
non-vested stock awards granted using the treasury stock method.
A reconciliation of the weighted-average shares used in
calculating basic earnings per common share and the weighted average
common shares used in calculating diluted earnings per
common share for the reported periods is provided in Note 16 — Earnings
Per Share.
Comprehensive Income
Comprehensive income includes all changes in shareowners’ equity
during a period, except those resulting from transactions with
shareowners.
Besides net income, other components of the Company’s
comprehensive income include the after tax effect of
changes in the net unrealized gain/loss on securities AFS, unrealized gain/loss
on cash flow derivatives, and changes in the funded
status of defined benefit and supplemental executive retirement plans.
Comprehensive income is reported in the accompanying
Consolidated Statements of Comprehensive Income and Changes in Shareowners’
Equity.
Stock Based Compensation
Compensation cost is recognized for share-based awards issued to employees,
based on the fair value of these awards at the date
of grant.
Compensation cost is recognized over the requisite service period, generally
defined as the vesting period.
The market
price of the Company’s common
stock at the date of the grant is used for restricted stock awards.
For stock purchase plan awards,
a Black-Scholes model is utilized to estimate the fair value of the award.
The impact of forfeitures of share-based awards on
compensation expense is recognized as forfeitures occur.
Revenue Recognition
FASB ASC Topic
606, Revenue from Contracts with Customers (“ASC 606”), establishes principles
for reporting information
about the nature, amount, timing and uncertainty of revenue and cash flows
arising from the entity’s contracts to provide goods
or
services to customers. The core principle requires an entity to recognize revenue
to depict the transfer of goods or services to
customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or
services recognized as performance obligations are satisfied.
The majority of the Company’s revenue
-generating transactions are not subject to ASC 606, including revenue generated
from
financial instruments, such as our loans, letters of credit, and investment securities,
and revenue related to the sale of residential
mortgages in the secondary market, as these activities are subject to other
GAAP discussed elsewhere within our disclosures.
The
Company recognizes revenue from these activities as it is earned based on
contractual terms, as transactions occur, or as services
are provided and collectability is reasonably assured.
Descriptions of the major revenue-generating activities that are within the
scope of ASC 606, which are presented in the accompanying Consolidated
Statements of Income as components of non-interest
income are as follows:
Deposit Fees - these represent general service fees for monthly account maintenance
and activity- or transaction-based fees and
consist of transaction-based revenue, time-based revenue (service period),
item-based revenue or some other individual attribute-
based revenue.
Revenue is recognized when the Company’s performance
obligation is completed which is generally monthly for
account maintenance services or when a transaction has been completed.
Payment for such performance obligations are generally
received at the time the performance obligations are satisfied.
Wealth Management
- trust fees and retail brokerage fees – trust fees represent monthly fees due from wealth
management clients
as consideration for managing the client’s
assets. Trust services include custody of assets, investment
management, fees for trust
services and similar fiduciary activities. Revenue is recognized when the Company’s
performance obligation is completed each
month or quarter, which is the time that payment is received.
Also, retail brokerage fees are received from a third-party broker-
dealer, for which the Company acts as an agent,
as part of a revenue-sharing agreement for fees earned from
customers that are
referred to the third party.
These fees are for transactional and advisory services and are paid by the third party on a monthly
basis and recognized ratably throughout the quarter as the Company’s
performance obligation is satisfied.
Bank Card Fees – bank card related fees primarily includes interchange
income from client use of consumer and business debit
cards.
Interchange income is a fee paid by a merchant bank to the card-issuing bank through
the interchange network.
Interchange fees are set by the credit card associations and are based on cardholder purchase volumes.
The Company records
interchange income as transactions occur.
90
Gains and Losses from the Sale of Bank Owned Property – the performance
obligation in the sale of other real estate owned
typically will be the delivery of control over the property to the buyer.
If the Company is not providing the financing of the sale,
the transaction price is typically identified in the purchase and sale agreement.
However, if the Company provides seller
financing, the Company must determine a transaction price, depending
on if the sale contract is at market terms and taking into
account the credit risk inherent in the arrangement.
Insurance Commissions – insurance commissions recorded by the
Company are received from various insurance carriers based on
contractual agreements to sell policies to customers on behalf of the carriers.
The performance obligation for the Company is to
sell life and health insurance policies to customers.
This performance obligation is met when a new policy is sold (effective
date)
or when an existing policy renews. New policies and renewals generally have
a one-year term. In the agreements with the
insurance carriers, a commission rate is agreed upon. The commission is recognized
at the time of the sale of the policy (effective
date) or when a policy renews.
Insurance commissions are recorded within other noninterest income.
Other non-interest income primarily includes items such as mortgage
banking fees (gains from the sale of residential mortgage
loans held for sale), bank-owned life insurance, and safe deposit box fees,
none of which are subject to the requirements of ASC
606.
The Company has made no significant judgments in applying the revenue guidance
prescribed in ASC 606 that affects the
determination of the amount and timing of revenue from the above-described
contracts with clients.
Recently Adopted Accounting Pronouncements
Accounting Standards Update (“ASU”)
2022-02, “Financial Instruments – Credit Losses
(Topic
326): Troubled
Debt
Restructurings and Vintage
Disclosures”.
The amendments eliminate the accounting guidance for troubled debt restructurings
by
creditors that have adopted the CECL model and enhance the disclosure requirements
for loan modifications and restructurings
made with borrowers experiencing financial difficulty.
In addition, the amendments require disclosure of current-period gross
write-offs for financing receivables and net investment
in leases by year of origination in the vintage disclosures.
The
amendments in this update are for fiscal years beginning after December
15, 2022, including interim periods within those fiscal
years.
The Company adopted ASU 2022-02 using the prospective approach and the adoption of the standard
did not have a
material impact on its consolidated financial statements.
Issued But Not Yet
Effective Accounting Standards
ASU No.
2023-01, “Leases (Topic
842):
Common Control Arrangements.” ASU 2023-01 requires entities to amortize leasehold
improvements associated with common control leases over the useful life
to the common control group. ASU 2023-01 also
provides certain practical expedients applicable to private companies and not
-for-profit organizations. ASU 2023-01 will be
effective for the Company on January 1, 2024, though early adoption
is permitted. The Company is evaluating the effect that ASU
2023-02 will have on its consolidated financial statements and related disclosures.
ASU No.
2023-02, “Investments—Equity Method and Joint Ventures
(Topic
323): Accounting for Investments in Tax
Credit
Structures Using the Proportional
Amortization Method.”
ASU 2023-02 is intended to improve the accounting and disclosures
for investments in tax credit structures. ASU 2023-02 allows entities to elect to account
for qualifying tax equity investments
using the proportional amortization method, regardless of the program giving
rise to the related income tax credits. Previously,
this method was only available for qualifying tax equity investments in low-income
housing tax credit structures. ASU 2023-02
will be effective for the Company on January 1, 2024, though
early adoption is permitted. The Company is evaluating the effect
that ASU 2023-02 will have on its consolidated financial statements and related disclosures.
ASU No. 2023-06, “Disclosure Improvements:
Codification Amendments in Response to the SEC’s
Disclosure Update and
Simplification Initiative.”
ASU 2023-06 is intended to clarify or improve disclosure and presentation
requirements of a variety of
topics, which will allow users to more easily compare entities subject to the SEC’s
existing disclosures with those entities that
were not previously subject to the requirements and align the requirements in the
FASB accounting standard
codification with the
SEC’s regulations. ASU 2023-06
is to be applied prospectively,
and early adoption is prohibited. For reporting entities subject to
the SEC’s existing disclosure requirements,
the effective dates of ASU 2023-06 will be the date on which the SEC’s
removal of
that related disclosure requirement from Regulation S-X or Regulation S-K
becomes effective. If by June 30, 2027, the SEC has
not removed the applicable requirement from Regulation S-X or Regulation
S-K, the pending content of the related amendment
will be removed from the Codification and will not become effective
for any entities. The Company is currently evaluating the
provisions of the amendments and the impact on its future consolidated statements
.
91
ASU No. 2023-09, “Income Taxes
(Topic
740): Improvements to Income Tax
Disclosures.”
ASU 2023-09 is intended to enhance
transparency and decision usefulness of income tax disclosures. The ASU addresses
investor requests for more transparency about
income tax information through improvements to income tax disclosures,
primarily related to the rate reconciliation and income
taxes paid information. Retrospective application in all prior periods is permitted.
ASU 2023-09 will be effective for the company
on January 1, 2025. The Company is currently evaluating the impact of the incremental
income taxes information that will be
required to be disclosed as well as the impact to Note 13- Income Taxes.
92
Note 2
INVESTMENT SECURITIES
Investment Portfolio Composition
.
The following tables summarize the amortized cost and related fair value of investment
securities AFS and securities HTM, the corresponding amounts of
gross unrealized gains and losses, and allowance for credit
losses.
Available for
Sale
Amortized
Unrealized
Unrealized
Allowance for
Carrying
(Dollars in Thousands)
Cost
Gains
Losses
Credit Losses
Value
December 31, 2023
U.S. Government Treasury
$
25,947
$
1
$
1,269
$
-
$
24,679
U.S. Government Agency
152,983
104
8,053
-
145,034
States and Political Subdivisions
43,951
1
4,861
(8)
39,083
Mortgage-Backed Securities
(1)
73,015
2
9,714
-
63,303
Corporate Debt Securities
63,600
-
6,031
(17)
57,552
Other Securities
(2)
8,251
-
-
-
8,251
Total
$
367,747
$
108
$
29,928
$
(25)
$
337,902
December 31, 2022
U.S. Government Treasury
$
23,977
$
1
$
1,928
$
-
$
22,050
U.S. Government Agency
198,888
27
12,863
-
186,052
States and Political Subdivisions
47,197
-
6,855
(13)
40,329
Mortgage-Backed Securities
(1)
80,829
2
11,426
-
69,405
Corporate Debt Securities
97,119
19
8,874
(28)
88,236
Other Securities
(2)
7,222
-
-
-
7,222
Total
$
455,232
$
49
$
41,946
$
(41)
$
413,294
Held to Maturity
Amortized
Unrealized
Unrealized
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Value
December 31, 2023
U.S. Government Treasury
$
457,681
$
-
$
16,492
$
441,189
Mortgage-Backed Securities
167,341
13
16,792
150,562
Total
$
625,022
$
13
$
33,284
$
591,751
December 31, 2022
U.S. Government Treasury
$
457,374
$
-
$
25,641
$
431,733
Mortgage-Backed Securities
203,370
8
22,410
180,968
Total
$
660,744
$
8
$
48,051
$
612,701
(1)
Comprised of residential mortgage-backed
securities.
(2)
Includes Federal Home Loan Bank and Federal Reserve Bank recorded
at cost of $
3.2
million and $
5.1
million, respectively,
at
December 31, 2023 and of $
2.1
million and $
5.1
million, respectively,
at December 31, 2022.
At December 31, 2023, and 2022, the investment portfolio had $
3.5
million and $
0.01
million, respectively, in equity
securities.
These securities do not have a readily determinable fair value and were not
credit impaired.
Securities with an amortized cost of $
578.5
million and $
656.1
million at December 31, 2023 and 2022, respectively,
were
pledged to secure public deposits and for other purposes.
At December 31, 2023 and 2022, there were
no
holdings of securities of any one issuer, other than
the U.S. Government and its
agencies, in an amount greater than 10% of shareowners’ equity.
93
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.
During the third quarter of 2022, the Company transferred certain securities from
the AFS to HTM classification.
Transfers are
made at fair value on the date of the transfer.
The
33
securities had an amortized cost basis and fair value of $
168.4
million and
$
159.0
million, respectively at the time of the transfer.
The net unamortized, unrealized loss on the transferred securities included
in accumulated other comprehensive loss in the accompanying Consolidated
Statement of Financial Condition totaled $
4.5
million and $
7.9
million at December 31, 2023 and 2022, respectively.
This amount will be amortized out of accumulated other
comprehensive loss over the remaining life of the underlying securities as an adjustment
of the yield on those securities.
Investment Sales
. During 2023, the Company sold $
30.4
million of investment securities. There were no significant sales of
investment securities during 2022 and 2021.
Maturity Distribution
.
The following table shows the Company’s
AFS and HTM investment securities maturity distribution
based on contractual maturity at December 31, 2023.
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 since they are not due at a certain maturity
date.
Equity securities do not have a
contractual maturity date.
Available for
Sale
Held to Maturity
Amortized
Fair
Amortized
Fair
(Dollars in Thousands)
Cost
Value
Cost
Value
Due in one year or less
$
28,545
$
27,854
$
90,119
$
88,588
Due after one through five years
138,299
127,843
367,562
352,601
Due after five through ten years
39,090
33,420
-
-
Mortgage-Backed Securities
73,015
63,303
167,341
150,562
U.S. Government Agency
80,547
77,231
-
-
Other Securities
8,251
8,251
-
-
Total
$
367,747
$
337,902
$
625,022
$
591,751
94
Unrealized Losses
. The following table summarizes the investment securities with unrealized
losses at December 31, aggregated
by major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months
Greater Than 12 Months
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Thousands)
Value
Losses
Value
Losses
Value
Losses
December 31, 2023
Available for
Sale
U.S. Government Treasury
$
-
$
-
$
19,751
$
1,269
$
19,751
$
1,269
U.S. Government Agency
12,890
74
121,220
7,979
134,110
8,053
States and Political Subdivisions
1,149
31
37,785
4,830
38,934
4,861
Mortgage-Backed Securities
23
-
63,195
9,714
63,218
9,714
Corporate Debt Securities
-
-
57,568
6,031
57,568
6,031
Total
14,062
105
299,519
29,823
313,581
29,928
Held to Maturity
U.S. Government Treasury
153,880
3,178
287,310
13,314
441,190
16,492
Mortgage-Backed Securities
786
14
148,282
16,778
149,068
16,792
Total
$
154,666
$
3,192
$
435,592
$
30,092
$
590,258
$
33,284
December 31, 2022
Available for
Sale
U.S. Government Treasury
$
983
$
-
$
19,189
$
1,928
$
20,172
$
1,928
U.S. Government Agency
63,112
2,572
113,004
10,291
176,116
12,863
States and Political Subdivisions
1,425
2
38,760
6,853
40,185
6,855
Mortgage-Backed Securities
6,594
959
60,458
10,467
67,052
11,426
Equity Securities
26,959
878
58,601
7,996
85,560
8,874
Total
99,073
4,411
290,012
37,535
389,085
41,946
Held to Maturity
U.S. Government Treasury
177,552
11,018
254,181
14,623
431,733
25,641
Mortgage-Backed Securities
88,723
6,814
91,462
15,596
180,185
22,410
Total
$
266,275
$
17,832
$
345,643
$
30,219
$
611,918
$
48,051
At December 31, 2023, there were
878
positions (combined AFS and HTM securities) with pre-tax unrealized
losses totaling
$
63.2
million.
At December 31, 2022 there were
928
positions (combined AFS and HTM securities) with pre-tax unrealized
losses totaling $
90.0
million.
For 2023,
86
of these of these positions were U.S. Treasury bonds
and carry the full faith and credit
of the U.S. Government.
691
of these positions were U.S. government agency and mortgage-backed
securities issued by U.S.
government sponsored entities.
We believe the
long history of
no
credit losses on government securities indicates that the
expectation of nonpayment of the amortized cost basis is
zero
.
The remaining
101
positions (municipal securities and corporate
bonds) have a credit component.
At December 31, 2023, all collateralized mortgage obligation securities (“CMO”), MBS,
Small
Business Administration securities (“SBA”), U.S. Agency,
and U.S. Treasury bonds held were AAA rated.
At December 31,
2023, corporate debt securities had an allowance for credit losses of $
17,000
and municipal securities had an allowance $
8,000
.
No
ne of the securities held by the Company were past due or in nonaccrual status at December
31, 2023.
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 large portion 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
no
t 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.
95
Note 3
LOANS HELD FOR INVESTMENT AND ALLOWANCE
FOR CREDIT LOSSES
Loan Portfolio Composition
.
The composition of the HFI loan portfolio at December 31 was as follows:
(Dollars in Thousands)
2023
2022
Commercial, Financial and Agricultural
$
225,190
$
247,362
Real Estate – Construction
196,091
234,519
Real Estate – Commercial Mortgage
825,456
782,557
Real Estate – Residential
(1)
1,004,219
749,513
Real Estate – Home Equity
210,920
208,217
Consumer
(2)
272,042
325,517
Loans Held for Investment, Net of Unearned Income
$
2,733,918
$
2,547,685
(1)
Includes loans in process with outstanding balances
of $
3.2
million and $
6.1
million for 2023 and 2022, respectively.
(2)
Includes overdraft balances of $
1
.0 million and $
1.1
million for December 31, 2023 and 2022, respectively.
Net deferred costs, which include premiums on purchased loans, included
in loans were $
7.8
million at December 31, 2023 and
$
5.1
million at December 31, 2022.
Accrued interest receivable on loans which is excluded from amortized
cost totaled $
10.1
million at December 31, 2023 and $
8.0
million at December 31, 2022, and is reported separately in Other Assets.
The Company has pledged a floating lien on certain 1-4 family residential
mortgage loans, commercial real estate mortgage loans,
and home equity loans to support available borrowing capacity at the FHLB and
has pledged a blanket floating lien on all
consumer loans, commercial loans, and construction loans to support available
borrowing capacity at the Federal Reserve Bank of
Atlanta.
Loan Purchases and Sales
.
The Company will purchase newly originated 1-4 family real estate secured
adjustable-rate loans
from CCHL, a related party effective on March 1, 2020 (see Note 1
– Significant Accounting Policies). These loan purchases
totaled $
364.8
million and $
421.7
million for the years ended December 31, 2023 and 2022, respectively,
and were not credit
impaired.
In addition, the Company purchased commercial real estate loans that
were not credit impaired from a third party
totaling $
15.0
million for the year ended December 31, 2022.
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 methodology is discussed further in Note 1 – Significant
Accounting Policies.
96
The following table details the activity in the allowance for credit losses by portfolio
segment for the years ended December 31.
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
2023
Beginning Balance
$
1,506
$
2,654
$
4,815
$
10,741
$
1,864
$
3,488
$
25,068
Provision for Credit Losses
210
(154)
1,035
4,141
(233)
4,596
9,595
Charge-Offs
(511)
-
(120)
(79)
(39)
(8,543)
(9,292)
Recoveries
277
2
52
253
226
3,760
4,570
Net (Charge-Offs) Recoveries
(234)
2
(68)
174
187
(4,783)
(4,722)
Ending Balance
$
1,482
$
2,502
$
5,782
$
15,056
$
1,818
$
3,301
$
29,941
2022
Beginning Balance
$
2,191
$
3,302
$
5,810
$
4,129
$
2,296
$
3,878
$
21,606
Provision for Credit Losses
316
(658)
(746)
6,328
(422)
2,579
7,397
Charge-Offs
(1,308)
-
(355)
-
(193)
(6,050)
(7,906)
Recoveries
307
10
106
284
183
3,081
3,971
Net (Charge-Offs) Recoveries
(1,001)
10
(249)
284
(10)
(2,969)
(3,935)
Ending Balance
$
1,506
$
2,654
$
4,815
$
10,741
$
1,864
$
3,488
$
25,068
2021
Beginning Balance
$
2,204
$
2,479
$
7,029
$
5,440
$
3,111
$
3,553
$
23,816
Provision for Credit Losses
(227)
813
(1,679)
(1,956)
(1,125)
1,332
(2,842)
Charge-Offs
(239)
-
(405)
(108)
(103)
(3,972)
(4,827)
Recoveries
453
10
865
753
413
2,965
5,459
Net (Charge-Offs) Recoveries
214
10
460
645
310
(1,007)
632
Ending Balance
$
2,191
$
3,302
$
5,810
$
4,129
$
2,296
$
3,878
$
21,606
The $
4.9
million increase in the allowance for credit losses in 2023 reflected a credit loss provision
of $
9.6
million and net loan
charge-offs of $
4.7
million.
The $
3.5
million increase in the allowance in 2022 reflected a credit loss provision of $
7.4
million
and net loan charge-offs of $
3.9
million.
The increases in the allowance for both 2023 and 2022 were primarily attributable to
incremental allowance related to loan growth, primarily residential real
estate, and slower prepayment speeds (due to higher
interest rates).
For 2022, a higher projected rate of unemployment and its effect on
rates of default was also a contributing factor.
Four unemployment rate forecast scenarios continue to be utilized to estimate
probability of default and are weighted based on
management’s estimate of probability.
See Note 1 – Significant accounting policies for more on the calculation of
the provision
for credit losses.
See Note 21 – Commitments and Contingencies for information on the provision
for credit losses related to off-
balance sheet commitments.
97
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 at December 31,
30-59
60-89
90 +
Total
Total
Nonaccrual
Total
(Dollars in Thousands)
DPD
DPD
DPD
Past Due
Current
Loans
Loans
2023
Commercial, Financial and Agricultural
$
311
$
105
$
-
$
416
$
224,463
$
311
$
225,190
Real Estate – Construction
206
-
-
206
195,563
322
196,091
Real Estate – Commercial Mortgage
794
-
-
794
823,753
909
825,456
Real Estate – Residential
670
34
-
704
1,000,525
2,990
1,004,219
Real Estate – Home Equity
268
-
-
268
209,653
999
210,920
Consumer
3,693
774
-
4,467
266,864
711
272,042
Total
$
5,942
$
913
$
-
$
6,855
$
2,720,821
$
6,242
$
2,733,918
2022
Commercial, Financial and Agricultural
$
109
$
126
$
-
$
235
$
247,086
$
41
$
247,362
Real Estate – Construction
359
-
-
359
234,143
17
234,519
Real Estate – Commercial Mortgage
158
149
-
307
781,605
645
782,557
Real Estate – Residential
845
530
-
1,375
747,899
239
749,513
Real Estate – Home Equity
-
35
-
35
207,411
771
208,217
Consumer
3,666
1,852
-
5,518
319,415
584
325,517
Total
$
5,137
$
2,692
$
-
$
7,829
$
2,537,559
$
2,297
$
2,547,685
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 Company did not recognize a significant amount of interest income on nonaccrual
loans for the years ended December 31,
2023 and 2022.
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.
2023
2022
Nonaccrual
Nonaccrual
90 + Days
Nonaccrual
Nonaccrual
90 + Days
With No
With
Still
With No
With
Still
(Dollars in Thousands)
ACL
ACL
Accruing
ACL
ACL
Accruing
Commercial, Financial and Agricultural
$
-
$
311
$
-
$
-
$
41
$
-
Real Estate – Construction
-
322
-
-
17
-
Real Estate – Commercial Mortgage
781
128
-
389
256
-
Real Estate – Residential
1,705
1,285
-
-
239
-
Real Estate – Home Equity
-
999
-
-
771
-
Consumer
-
711
-
-
584
-
Total
Nonaccrual Loans
$
2,486
$
3,756
$
-
$
389
$
1,908
$
-
98
Collateral Dependent Loans
.
The following table presents the amortized cost basis of collateral dependent loans
at December 31:
2023
2022
Real Estate
Non Real Estate
Real Estate
Non Real Estate
(Dollars in Thousands)
Secured
Secured
Secured
Secured
Commercial, Financial and Agricultural
$
-
$
30
$
-
$
-
Real Estate – Construction
275
-
-
-
Real Estate – Commercial Mortgage
1,296
-
389
-
Real Estate – Residential
1,706
-
160
-
Real Estate – Home Equity
-
-
130
-
Consumer
-
-
21
-
Total
$
3,277
$
30
$
700
$
-
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 December 31, 2023 and 2022, the Company had $
0.5
million and
$
0.6
million, respectively, in 1-4 family
residential real estate loans for which formal foreclosure proceedings were
in process.
Modifications to Borrowers Experiencing
Financial Difficulty
.
Occasionally, the Company may
modify loans to borrowers who
are experiencing financial difficulty.
Loan modifications to borrowers in financial difficulty are
loans in which the Company has
granted an economic concession to the borrower that it would not otherwise consider.
In these instances, as part of a work-out
alternative, the Company will make concessions including the extension
of the loan term, a principal moratorium, a reduction in
the interest rate, or a combination thereof.
The impact of the modifications and defaults are factored into the allowance for
credit
losses on a loan-by-loan basis.
Thus, specific reserves are established based upon the results of either a discounted
cash flow
analysis or the underlying collateral value, if the loan is deemed to be collateral dependent.
A modified loan classification can be
removed if the borrower’s financial condition improves
such that the borrower is no longer in financial difficulty,
the loan has not
had any forgiveness of principal or interest, and the loan is subsequently
refinanced or restructured at market terms and qualifies
as a new loan.
At December 31, 2023, the Company did
no
t
maintain any loans made to borrowers due to the borrower experiencing
financial
difficulty.
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 of the
Company (the “Board”) 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 loan
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.
99
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 consist 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, 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 category includes personal installment loans,
direct and indirect automobile financing, and overdraft
lines of credit.
The majority of the consumer loan category consists of indirect and direct automobile
loans.
Lending policy
establishes maximum debt to income ratios, minimum credit scores, and includes
guidelines for verification of applicants’ income
and receipt of credit reports.
Credit Quality Indicators
.
As part of the ongoing monitoring of the Company’s
loan portfolio quality, management
categorizes
loans into risk categories based on relevant information about the ability
of borrowers to service their debt such as: current
financial information, historical payment performance, credit documentation,
and current economic and market trends, among
other factors.
Risk ratings are assigned to each loan and revised as needed through established monitoring
procedures for
individual loan relationships over a predetermined amount and review
of smaller balance homogenous loan pools.
The Company
uses the definitions noted below for categorizing and managing its criticized loans.
Loans categorized as “Pass” do not meet the
criteria set forth below and are not considered criticized.
Special Mention – Loans in this category are presently protected from loss, but
weaknesses are apparent which, if not corrected,
could cause future problems.
Loans in this category may not meet required underwriting criteria and
have no mitigating
factors.
More than the ordinary amount of attention is warranted for these loans.
Substandard – Loans in this category exhibit well-defined weaknesses that would
typically bring normal repayment into jeopardy.
These loans are no longer adequately protected due to well-defined
weaknesses that affect the repayment capacity of the
borrower.
The possibility of loss is much more evident and above average supervision is required for
these loans.
Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized
as Substandard, with the characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly
questionable and improbable.
Performing/Nonperforming – Loans within certain homogenous
loan pools (home equity and consumer) are not individually
reviewed, but are monitored for credit quality via the aging status of the loan and by payment
activity.
The performing or
nonperforming status is updated on an on-going basis dependent upon improvement
and deterioration in credit quality.
100
The following table summarizes gross loans held for investment at December
31, 2023
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)
2023
2022
2021
2020
2019
Prior
Loans
Total
Commercial, Financial,
Agricultural:
Pass
$
57,320
$
66,671
$
28,933
$
10,610
$
7,758
$
7,502
$
44,350
$
223,144
Special Mention
168
608
356
10
9
-
76
1,227
Substandard
164
177
98
77
20
122
161
819
Total
$
57,652
$
67,456
$
29,387
$
10,697
$
7,787
$
7,624
$
44,587
$
225,190
Current-Period Gross
Writeoffs
$
6
$
252
$
65
$
31
$
41
$
19
$
97
$
511
Real Estate -
Construction:
Pass
$
101,684
$
68,265
$
18,181
$
-
$
188
$
-
$
4,617
$
192,935
Special Mention
631
500
539
212
-
-
-
1,882
Substandard
-
47
576
651
-
-
-
1,274
Total
$
102,315
$
68,812
$
19,296
$
863
$
188
$
-
$
4,617
$
196,091
Current-Period Gross
Writeoffs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Real Estate - Commercial
Mortgage:
Pass
$
117,840
$
275,079
$
135,663
$
101,210
$
43,878
$
109,878
$
18,367
$
801,915
Special Mention
3,266
5,684
-
229
1,358
573
-
11,110
Substandard
-
1,226
6,695
1,637
605
1,574
694
12,431
Total
$
121,106
$
281,989
$
142,358
$
103,076
$
45,841
$
112,025
$
19,061
$
825,456
Current-Period Gross
Writeoffs
$
-
$
-
$
-
$
-
$
-
$
120
$
-
$
120
Real Estate - Residential:
Pass
$
372,394
$
400,437
$
83,108
$
35,879
$
24,848
$
68,685
$
8,252
$
993,603
Special Mention
268
89
83
502
-
313
-
1,255
Substandard
570
1,110
1,906
1,626
1,007
3,142
-
9,361
Total
$
373,232
$
401,636
$
85,097
$
38,007
$
25,855
$
72,140
$
8,252
$
1,004,219
Current-Period Gross
Writeoffs
$
-
$
-
$
79
$
-
$
-
$
-
$
-
$
79
Real Estate - Home
Equity:
Performing
$
890
$
48
$
127
$
11
$
386
$
950
$
207,509
$
209,921
Nonperforming
-
-
-
-
-
-
999
999
Total
$
890
48
127
11
386
950
208,508
210,920
Current-Period Gross
Writeoffs
$
-
$
-
$
-
$
-
$
-
$
-
$
39
$
39
Consumer:
Performing
$
68,496
$
90,031
$
70,882
$
21,314
$
10,210
$
4,258
$
5,431
$
270,622
Nonperforming
293
355
58
4
-
-
710
1,420
Total
$
68,789
$
90,386
$
70,940
$
21,318
$
10,210
$
4,258
$
6,141
$
272,042
Current-Period Gross
Writeoffs
$
3,137
$
3,224
$
1,362
$
329
$
230
$
99
$
162
$
8,543
101
Note 4
MORTGAGE BANKING ACTIVITIES
The Company’s mortgage
banking activities include mandatory delivery loan sales, forward sales contracts used to
manage
residential loan pipeline price risk, utilization of warehouse lines to fund
secondary market residential loan closings, and
residential mortgage servicing.
Residential Mortgage Loan Production
The Company originates, markets, and services conventional and government
-sponsored residential mortgage loans.
Generally,
conforming fixed rate residential mortgage loans are held for sale in the secondary
market and non-conforming and adjustable-
rate residential mortgage loans may be held for investment.
The volume of residential mortgage loans originated for sale and
secondary market prices are the primary drivers of origination revenue.
Residential mortgage loan commitments are generally outstanding for 30
to 90 days, which represents the typical period from
commitment to originate a residential mortgage loan to when the closed
loan is sold to an investor.
Residential mortgage loan
commitments are subject to both credit and price risk.
Credit risk is managed through underwriting policies and procedures,
including collateral requirements, which are generally accepted by
the secondary loan markets.
Price risk is primarily related to
interest rate fluctuations and is partially managed through forward sales of residential
mortgage-backed securities (primarily
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.
December 31, 2023
December 31, 2022
Unpaid Principal
Unpaid Principal
(Dollars in Thousands)
Balance/Notional
Fair Value
Balance/Notional
Fair Value
Residential Mortgage Loans Held for Sale
$
27,944
$
28,211
$
26,274
$
26,909
Residential Mortgage Loan Commitments
(1)
23,545
523
36,535
819
Forward Sales Contracts
(2)
24,500
209
15,500
187
$
28,943
$
27,915
(1)
Recorded in other assets at fair value
(2)
Recorded in other assets and (other liabilities)
at fair value
At December 31, 2023, the Company had
no
residential mortgage loans held for sale 30-89 days past due and $
0.7
million of
loans were on nonaccrual status.
At December 31, 2022, the Company had $
0.6
million residential mortgage loans held for sale
30-89 days past due and $
0.1
million of loans were on nonaccrual status.
Mortgage banking revenues for the year ended December 31, was as follows:
(Dollars in Thousands)
2023
2022
2021
Net realized gain on sales of mortgage loans
$
5,297
$
5,565
$
49,355
Net change in unrealized gain on mortgage loans held for sale
(252)
(1,164)
(2,410)
Net change in the fair value of mortgage loan commitments
(296)
(439)
(3,567)
Net change in the fair value of forward sales contracts
(395)
192
900
Pair-Offs on net settlement of forward
sales contracts
367
4,956
2,956
Mortgage servicing rights additions
651
565
1,416
Net origination fees
5,028
2,234
3,775
Total mortgage banking
revenues
$
10,400
$
11,909
$
52,425
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.
102
The following represents a summary of mortgage servicing rights.
(Dollars in Thousands)
2023
2022
Number of residential mortgage loans serviced for others
450
1,769
Outstanding principal balance of residential mortgage loans serviced
for others
$
108,897
$
410,470
Weighted average
interest rate
5.37%
3.62%
Remaining contractual term (in months)
309
298
Conforming conventional loans serviced by the Company are sold to the
Federal National Mortgage Association (“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 the GNMA, whereby
the Company is insured against loss by the Federal
Housing Administration or partially guaranteed against loss by
the Veterans
Administration.
At December 31, 2023, the
servicing portfolio balance consisted of the following loan types: FNMA
(
53.3
%), GNMA (
4.7
%), and private investor (
42.0
%).
FNMA and private investor loans are structured as actual/actual payment remittance
.
At December 31, 2023 the Company did
no
t have delinquent residential mortgage loans currently in GNMA pools serviced
by the
Company and had $
0.3
million at December 31, 2022.
The right to repurchase these loans and the corresponding liability has
been recorded in other assets and other liabilities, respectively,
in the Consolidated Statements of Financial Condition.
During the
years ended December 31, 2023 and 2022, respectively,
the Company repurchased $
0.3
million and $
1.7
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 for the year ended
December 31, was as follows:
(Dollars in Thousands)
2023
2022
2021
Beginning balance
$
2,599
$
3,774
$
3,452
Additions due to loans sold with servicing retained
651
565
1,416
Deletions and amortization
(232)
(1,291)
(1,344)
Valuation
Allowance reversal
-
-
250
Sale of Servicing Rights
(1)
(2,187)
(449)
-
Ending balance
$
831
$
2,599
$
3,774
(1)
In 2023, the Company sold an MSR portfolio with an unpaid principal balance of
$
334
million for a sales price of $
4.0
million,
recognizing a $
1.38
million gain on sale, recorded
in other noninterest income on the Consolidated Statement
of Income.
In 2022, the Company sold an MSR portfolio with an unpaid principal balance
of $
50
million for a sales price of $
0.6
million,
recognizing a $
0.2
million gain on sale, recorded
in other noninterest income on the Consolidated Statement
of Income.
The Company did
no
t record any permanent impairment losses on mortgage servicing rights for the
years ended December 31,
2023
and 2022.
The key unobservable inputs used in determining the fair value of the Company’s
mortgage servicing rights at December 31, was
as follows:
2023
2022
Minimum
Maximum
Minimum
Maximum
Discount rates
9.50%
12.00%
9.50%
12.00%
Annual prepayment speeds
11.23%
17.79%
12.33%
20.23%
Cost of servicing (per loan)
$
85
95
$
85
95
103
Changes in residential mortgage interest rates directly affect
the prepayment speeds used in valuing the Company’s
mortgage
servicing rights.
A separate third-party model is used to estimate prepayment speeds based on interest rates, housing
turnover
rates, estimated loan curtailment, anticipated defaults, and other relevant
factors.
The weighted average annual prepayment speed
was
14.22
% at December 31, 2023 and
13.42
% at December 31, 2022.
Warehouse
Line Borrowings
The Company has the following warehouse lines of credit and master repurchase
agreements with various financial institutions at
December 31, 2023.
Amounts
(Dollars in Thousands)
Outstanding
$
25
million master repurchase agreement without defined expiration.
Interest is at the SOFR rate plus
2.00%
to
plus
3.00%
, with a floor rate of
3.25%
to
4.25%
.
A cash pledge deposit of $
0.1
million is required by the
lender.
$
192
$
60
million warehouse line of credit agreement expiring in
December 2024
.
Interest is at the SOFR plus
2.75%
to
3.25%
.
8,192
$
8,384
Warehouse
line borrowings are classified as short-term borrowings.
At December 31, 2022, warehouse line borrowings totaled
$
50.2
million.
At December 31, 2023, the Company had mortgage loans held for sale and construction
permanent loans 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 December 31, 2023.
The Company intends to renew the warehouse lines of credit and master
repurchase agreements when they mature.
The Company has extended a $
50
million warehouse line of credit to CCHL.
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, 2023 and December 31,
2022 was $
31.4
million and $
22.9
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 December 31, 2023 and 2022 were designated 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 CME Term
SOFR (secured overnight financing rate).
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 loss (“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 loss related to
derivatives will be reclassified to interest expense as interest payments are
made on the Company’s variable-rate
subordinated
debt.
104
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)
Interest rate swaps related to subordinated debt:
December 31, 2023
Other Assets
$
30,000
$
5,317
6.5
December 31, 2022
Other Assets
$
30,000
$
6,195
7.5
The following table presents the net gains (losses) recorded in AOCI and
the Consolidated Statement of Income related to the
cash flow derivative instruments (interest rate swaps related to subordinated debt).
Amount of Gain
Amount of Gain
(Loss) Recognized
(Loss) Reclassified
(Dollars in Thousands)
Category
in AOCI
from AOCI to Income
December 31, 2023
Interest Expense
$
3,969
$
1,395
December 31, 2022
Interest Expense
$
4,625
$
337
December 31, 2021
Interest Expense
$
1,530
$
(151)
The Company estimates there will be approximately $
1.3
million reclassified as a decrease to interest expense within the next 12
months.
At December 31, 2023 and 2022, the Company had a collateral liability of
$
5.5
million and $
5.8
million, respectively.
Note 6
PREMISES AND EQUIPMENT
The composition of the Company’s
premises and equipment at December 31 was as follows:
(Dollars in Thousands)
2023
2022
Land
$
22,393
$
22,847
Buildings
110,472
109,849
Fixtures and Equipment
61,051
59,627
Total Premises and Equipment
193,916
192,323
Accumulated Depreciation
(112,650)
(110,185)
Premises and Equipment, Net
$
81,266
$
82,138
Depreciation expense for the above premises and equipment was approximately
$
7.9
. million, $
7.6
million, and $
7.6
million in
2023, 2022, and 2021, respectively
.
105
Note 7
LEASES
Operating leases in which the Company is the lessee are recorded as operating
lease right of use (“ROU”) assets and operating
liabilities, included in
other assets
and
liabilities
, respectively,
on its Consolidated Statement of Financial Condition.
Operating lease ROU assets represent the Company’s
right to use an underlying asset during the lease term and operating lease
liabilities represent the Company’s
obligation to make lease payments arising from the lease.
ROU assets and operating lease
liabilities are recognized at lease commencement based on the present value of
the remaining lease payments using a discount rate
that represents the Company’s incremental
borrowing rate at the lease commencement date.
Operating lease expense, which is
comprised of amortization of the ROU asset and the implicit interest accreted
on the operating lease liability,
is recognized on a
straight-line basis over the lease term, and is recorded in occupancy expense in
the Consolidated Statement of Income.
The Company’s operating
leases primarily relate to banking offices with remaining lease terms
from
one
to
forty-two 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 ASC 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 December 31, 2023, ROU assets and liabilities were $
27.0
million and $
27.4
million, respectively.
At December 31, 2022, the operating lease ROU assets and liabilities were $
22.3
million and $
22.7
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 at
December 31, related to the Company’s
operating leases:
(Dollars in Thousands)
2023
2022
2021
Operating lease expense
$
2,919
$
1,719
$
1,445
Short-term lease expense
622
658
663
Total lease expense
$
3,541
$
2,377
$
2,108
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
2,847
$
1,937
$
1,609
Right-of-use assets obtained in exchange for new operating lease liabilities
6,748
12,475
784
Weighted-average
remaining lease term — operating leases (in years)
16.9
19.5
25.3
Weighted-average
discount rate — operating leases
3.5
%
3.1
%
2.0
%
The table below summarizes the maturity of remaining lease liabilities:
(Dollars in Thousands)
December 31, 2023
2024
$
3,127
2025
3,105
2026
2,966
2027
2,888
2028
2,611
2028 and thereafter
20,670
Total
$
35,367
Less: Interest
(7,976)
Present Value
of Lease Liability
$
27,391
A related party is the lessor in an operating lease with the Company.
The terms of this lease agreement are further described in
Note 19 – Related Party Transactions.
106
Note 8
GOODWILL AND OTHER INTANGIBLES
At December 31, 2023 and 2022, the Company had goodwill of $
91.8
million.
Goodwill is tested for impairment on an annual
basis, or more often if impairment indicators exist.
Testing allows for a qualitative assessment
of goodwill impairment indicators.
If the assessment indicates that impairment has more than likely occurred, the
Company must compare the estimated fair value of
the reporting unit to its carrying amount.
If the carrying amount of the reporting unit exceeds its estimated fair value, an
impairment charge is recorded equal to the excess.
On April 30, 2021, CCSW acquired substantially all of the assets of Strategic Wealth
Group, LLC (“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 (
10 year
life) of $
1.6
million.
Amortization expense related to the customer relationship intangible
totaled $
0.2
million in each of 2023 and 2022.
The intangible asset balance as of December 31, 2023 and December 31, 2022 was $
1.2
million and $
1.3
million, respectively. The
estimated amortization expense for each of the eight succeeding fiscal years is $
0.2
million per year.
During the fourth quarter of 2023, the Company performed its annual goodwill
impairment testing and determined that
no
goodwill impairment existed at December 31, 2023 and
no
goodwill impairment existed at December 31, 2022.
The Company
will continue to evaluate goodwill for impairment as defined by ASC Topic
350.
Note 9
OTHER REAL ESTATE
OWNED
The following table presents other real estate owned activity at December 31,
(Dollars in Thousands)
2023
2022
2021
Beginning Balance
$
431
$
17
$
808
Additions
1,512
2,398
1,717
Valuation
Write-Downs
(16)
(11)
(31)
Sales
(1,926)
(1,973)
(2,809)
Other
-
-
332
Ending Balance
$
1
$
431
$
17
Net expenses applicable to other real estate owned for the three years ended December
31, was as follows:
(Dollars in Thousands)
2023
2022
2021
Gains from the Sale of Properties
$
(2,072)
$
(480)
$
(1,711)
Losses from the Sale of Properties
3
47
18
Rental Income from Properties
-
(21)
-
Property Carrying Costs
84
106
174
Valuation
Adjustments
16
11
31
Total
$
(1,969)
$
(337)
$
(1,488)
Note 10
DEPOSITS
The composition of the Company’s
interest bearing deposits at December 31 was as follows:
(Dollars in Thousands)
2023
2022
NOW Accounts
$
1,327,420
$
1,290,494
Money Market Accounts
319,319
267,383
Savings Deposits
547,634
637,374
Time Deposits
129,515
90,446
Total Interest Bearing
Deposits
$
2,323,888
$
2,285,697
107
At December 31, 2023 and 2022, $
1.0
million and $
1.1
million in overdrawn deposit accounts were reclassified as loans,
respectively.
The amount of time deposits that meet or exceed the FDIC insurance limit of $250,000
totaled $
14.7
million and $
11.1
million at
December 31, 2023 and 2022, respectively.
At December 31, the scheduled maturities of time deposits were as follows:
(Dollars in Thousands)
2023
2024
$
112,448
2025
7,349
2026
3,554
2027
4,211
2028
1,953
Total
$
129,515
Interest expense on deposits for the three years ended December 31, was as follows:
(Dollars in Thousands)
2023
2022
2021
NOW Accounts
$
12,375
$
2,800
$
294
Money Market Accounts
3,670
203
134
Savings Deposits
598
309
263
Time Deposits < $250,000
117
129
145
Time Deposits > $250,000
822
3
3
Total Interest Expense
$
17,582
$
3,444
$
839
108
Note 11
SHORT-TERM BORROWINGS
Short-term borrowings included the following:
(Dollars in Thousands)
Federal Funds
Purchased
Securities
Sold Under
Repurchase
Agreements
(1)
Other
Short-Term
Borrowings
(2)
2023
Balance at December 31
$
-
$
26,957
$
8,384
Maximum indebtedness at any month end
-
32,426
42,345
Daily average indebtedness outstanding
12
19,917
24,134
Average rate paid
for the year
7.03
%
2.57
%
6.37
%
Average rate paid
on period-end borrowings
-
%
2.81
%
9.51
%
2022
Balance at December 31
$
-
$
6,582
$
50,211
Maximum indebtedness at any month end
-
9,452
50,211
Daily average indebtedness outstanding
2
8,095
32,386
Average rate paid
for the year
3.39
%
0.17
%
5.40
%
Average rate paid
on period-end borrowings
-
%
0.40
%
7.61
%
2021
Balance at December 31
$
-
$
4,955
$
29,602
Maximum indebtedness at any month end
-
6,755
58,309
Daily average indebtedness outstanding
2
5,762
47,748
Average rate paid
for the year
2.39
%
0.04
%
2.84
%
Average rate paid
on period-end borrowings
-
%
0.04
%
2.36
%
(1)
Balances are fully collateralized by government treasury or agency securities held in the Company's investment portfolio.
(2)
Comprised of warehouse lines of credit totaling $
8.4
million at December 31, 2023.
Note 12
LONG-TERM BORROWINGS
Federal Home Loan Bank Advances.
The Company had one FHLB long-term advance totaling $
0.3
million at December 31,
2023.
The advance matures in 2025 and has a rate of 4.80%. The Company had one FHLB long-term advance totaling $0.5
million at December 31, 2022 with a weighted-average rate of 4.80%.
The FHLB advances are collateralized by a floating lien on
certain 1-4 family residential mortgage loans, commercial real estate mortgage
loans, and home equity mortgage loans.
Interest
on the FHLB advances is paid on a monthly basis.
Scheduled minimum future principal payments on our other long-term
borrowings at December 31 were as follows:
(Dollars in Thousands)
2023
2024
$
198
2025
116
Total
$
314
Junior Subordinated Deferrable Interest
Notes.
The Company has issued
two
junior subordinated deferrable interest notes to
wholly owned Delaware statutory trusts.
The first note for $
30.9
million was issued to CCBG Capital Trust I.
The second note
for $
32.0
million was issued to CCBG Capital Trust II. The
two
trusts are considered variable interest entities for which the
Company is not the primary beneficiary.
Accordingly, the accounts of
the trusts are not included in the Company’s consolidated
financial statements. See Note 1 - Significant Accounting Policies for additional
information about the Company’s consolidation
policy.
Details of the Company’s transaction with
the two trusts are provided below.
109
In November 2004, CCBG Capital Trust I
issued $
30.0
million of trust preferred securities which represent interest in the assets
of the trust.
The interest payments are due quarterly and adjust quarterly to a variable rate of
3-month CME Term SOFR
plus a
margin of
1.90
%.
The trust preferred securities will mature on
December 31, 2034
, and are redeemable upon approval of the
Federal Reserve in whole or in part at the option of the Company at any
time after December 31, 2009 and in whole at any time
upon occurrence of certain events affecting their tax or regulatory
capital treatment. Distributions on the trust preferred securities
are payable quarterly on March 31, June 30, September 30, and December 31 of
each year.
CCBG Capital Trust I also issued
$
0.9
million of common equity securities to CCBG.
The proceeds of the offering of trust preferred securities and
common equity
securities were used to purchase a $
30.9
million junior subordinated deferrable interest note issued by the Company,
which has
terms similar to the trust preferred securities.
On April 12, 2016, the Company retired $
10
million in face value of trust preferred
securities that were auctioned as part of a liquidation of a pooled collateralized
debt obligation fund.
The trust preferred securities
were originally issued through CCBG Capital Trust I.
In May 2005, CCBG Capital Trust II issued
$
31.0
million of trust preferred securities which represent interest in the assets of the
trust.
The interest payments are due quarterly and adjust quarterly to a variable rate of
3-month CME Term SOFR
plus a margin
of
1.80
%.
The trust preferred securities will mature on
June 15, 2035
, and are redeemable upon approval of the Federal
Reserve in whole or in part at the option of the Company and in whole at any time upon
occurrence of certain events affecting
their tax or regulatory capital treatment.
Distributions on the trust preferred securities are payable quarterly on March 15,
June
15, September 15, and December 15 of each year.
CCBG Capital Trust II also issued $
0.9
million of common equity securities to
CCBG.
The proceeds of the offering of trust preferred securities and common
equity securities were used to purchase a $
32.0
million junior subordinated deferrable interest note issued by the Company,
which has terms substantially similar to the trust
preferred securities.
The Company has the right to defer payments of interest on the two notes at any time
or from time to time for a period of up to
twenty consecutive quarterly interest payment periods.
Under the terms of each note, in the event that under certain
circumstances there is an event of default under the note or the Company has elected
to defer interest on the note, the Company
may not, with certain exceptions, declare or pay any dividends or distributions
on its capital stock or purchase or acquire any of
its capital stock.
At December 31, 2023, the Company has paid all interest payments
in full.
The Company has entered into agreements to guarantee the payments of distributions
on the trust preferred securities and
payments of redemption of the trust preferred securities.
Under these agreements, the Company also agrees, on a subordinated
basis, to pay expenses and liabilities of the two trusts other than those arising under the
trust preferred securities.
The obligations
of the Company under the two junior subordinated notes, the trust agreements establishing
the two trusts, the guarantee and
agreement as to expenses and liabilities, in aggregate, constitute a full and unconditional
guarantee by the Company of the two
trusts’ obligations under the two trust preferred security issuances.
Despite the fact that the accounts of CCBG Capital Trust
I and CCBG Capital Trust II are not included
in the Company’s
consolidated financial statements, the $
20.0
million and $
31.0
million, respectively, in
trust preferred securities issued by these
subsidiary trusts are included in the Tier 1 Capital of
Capital City Bank Group, Inc. as allowed by Federal Reserve guidelines.
110
Note 13
INCOME TAXES
The provision for income taxes reflected in the Consolidated Statements of Comprehensive
Income is comprised of the following
components:
(Dollars in Thousands)
2023
2022
2021
Current:
Federal
$
11,630
$
10,646
$
12,039
State
1,893
1,022
1,044
13,523
11,668
13,083
Deferred:
Federal
(391)
(2,994)
(3,246)
State
(351)
(899)
(10)
Change in Valuation
Allowance
259
23
8
(483)
(3,870)
(3,248)
Total:
Federal
11,239
7,652
8,793
State
1,542
123
1,034
Change in Valuation
Allowance
259
23
8
Total
$
13,040
$
7,798
$
9,835
Income taxes provided were different than the tax expense
computed by applying the statutory federal income tax rate of
21
% to
pre-tax income as a result of the following:
(Dollars in Thousands)
2023
2022
2021
Tax Expense at Federal
Statutory Rate
$
13,411
$
8,625
$
10,385
Increases (Decreases) Resulting From:
Tax-Exempt Interest
Income
(259)
(248)
(271)
State Taxes, Net of Federal
Benefit
1,218
94
819
Other
(1,695)
(546)
375
Change in Valuation
Allowance
259
23
8
Tax-Exempt Cash Surrender
Value
Life Insurance Benefit
(187)
(175)
(173)
Noncontrolling Interest
293
25
(1,308)
Actual Tax Expense
$
13,040
$
7,798
$
9,835
Deferred income tax liabilities and assets result from differences between
assets and liabilities measured for financial reporting
purposes and for income tax return purposes.
These assets and liabilities are measured using the enacted tax rates and laws that
are currently in effect.
111
The net deferred tax asset and the temporary differences comprising
that balance at December 31, 2023 and 2022 are as follows:
(Dollars in Thousands)
2023
2022
Deferred Tax Assets Attributable
to:
Allowance for Credit Losses
$
7,236
$
6,042
Accrued Pension/SERP
144
1,530
State Net Operating Loss and Tax
Credit Carry-Forwards
2,069
1,920
Other Real Estate Owned
887
917
Accrued SERP Liability
2,594
3,246
Lease Liability
5,911
4,547
Net Unrealized Losses on Investment Securities
8,601
12,499
Other
2,665
3,043
Investment in Partnership
3,241
1,544
Total Deferred
Tax Assets
$
33,348
$
35,288
Deferred Tax Liabilities
Attributable to:
Depreciation on Premises and Equipment
$
3,733
$
3,382
Deferred Loan Fees and Costs
2,614
2,372
Intangible Assets
3,344
3,310
Accrued Pension Liability
1,688
1,043
Right of Use Asset
5,829
4,474
Investments
469
469
Other
1,851
2,099
Total Deferred
Tax Liabilities
19,528
17,149
Valuation
Allowance
1,930
1,671
Net Deferred Tax
Asset
$
11,890
$
16,468
In the opinion of management, it is more likely than not that all of the deferred tax
assets, with the exception of certain state net
operating loss carry-forwards and certain state tax credit carry-forwards
expected to expire prior to utilization, will be realized.
Accordingly, a valuation
allowance of $
1.9
million and $
1.7
million is recorded at December 31, 2023 and December 31, 2022,
respectively.
At December 31, 2023, the Company had state loss and tax credit carry-forwards of
approximately $
2.1
million,
which expire at various dates from
2024
through
2037
.
The following table presents a reconciliation of the beginning and ending amount
of unrecognized tax benefits:.
(Dollars in Thousands)
2023
2022
2021
Balance at January 1,
$
136
$
52
$
-
Additions Based on Tax
Positions Related to Current Year
97
84
52
Balance at December 31
$
233
$
136
$
52
Of this total, $
0.2
million represents the amount of unrecognized tax benefits that, if recognized, would favorably
affect the
effective tax rate in future periods. The Company does not
expect the total amount of unrecognized tax benefits to significantly
increase or decrease in the next twelve months.
It is the Company’s policy to recognize
interest and penalties accrued relative to unrecognized tax benefits in their respective
federal or state income taxes accounts.
There were
no
penalties and interest related to income taxes recorded in the Consolidated
Statements of Income for the years ended December 31, 2023, 2022,
and 2021.
There were
no
amounts accrued in the
Consolidated Statements of Financial Condition for penalties and interest
as of December 31, 2023 and 2022.
The Company files a consolidated U.S. federal income tax return and a separate
U.S. federal income tax return for CCHL. Each
subsidiary files various returns in states where its banking offices are
located.
The Company is no longer subject to U.S. federal
or state tax examinations for years before 2020.
112
Note 14
STOCK-BASED COMPENSATION
At December 31, 2023, the Company had three stock-based compensation
plans, consisting of the 2021 Associate Incentive Plan
(“AIP”), the 2021 Associate Stock Purchase Plan (“ASPP”), and
the 2021 Director Stock Purchase Plan (“DSPP”).
These plans,
which were approved by the shareowners in April 2021, replaced substantially
similar plans approved by the shareowners in
2011.
Total compensation
expense associated with these plans for 2021 through 2023 was $
1.6
million, $
2.3
million, and $
2.1
million, respectively.
AIP.
The AIP allows key associates and directors to earn various forms of equity-based
incentive compensation.
Under the AIP,
there were
700,000
shares reserved for issuance.
On an annual basis, the Company, pursuant
to the terms and conditions of the
AIP,
will create an annual incentive plan (“Plan”), under which all participants are
eligible to earn performance shares.
Awards
to
associates under the 2021 Plan were tied to internally established goals.
At base level targets, the grant-date fair value of the
shares eligible to be awarded in 2023 was approximately $
1.1
million.
For 2023, a total of
27,577
shares were eligible for
issuance, but additional shares could be earned if performance exceeded
established goals.
A total of
26,614
shares were earned
for 2023 that were issued in January 2024.
For the years ended December 31, 2023 and 2022, Directors earned
8,840
and
11,847
shares, respectively,
under the Plan. The Company recognized expense of $
1.1
million, $
1.9
million, and $
1.2
million for the
years ended December 31, 2023, 2022 and 2021, respectively,
related to the AIP.
Executive Long-Term
Incentive Plan (“LTIP”)
.
The Company has established a Performance Share Unit Plan under the
provisions of the AIP that allows William G. Smith, Jr.,
the Chairman, President, and Chief Executive Officer of CCBG, Inc.
and
Thomas A. Barron, the President of CCB to earn shares based on the compound
annual growth rate in diluted earnings per share
over a three-year period.
The Company recognized expense of $
0.9
million, $
0.2
million, and $
0.2
million for the years ended
December 31, 2023, 2022 and 2021, respectively.
Shares issued under the plan were
4,909
,
6,849
, and
27,915
for the years ended
December 31, 2023, 2022 and 2021, respectively.
A total of
17,334
shares were earned in 2023 that were issued in January 2024.
After deducting the shares earned, but not issued, in 2023 under the AIP and
LTIP,
492,247
shares remain eligible for issuance
under the 2021 AIP.
DSPP.
The Company’s DSPP allows the directors
to purchase the Company’s common
stock at a price equal to
90
% of the
closing price on the date of purchase.
Stock purchases under the DSPP are limited to the amount of the directors’ annual retainer
and meeting fees.
Under the DSPP,
there were
300,000
shares reserved for issuance.
The Company recognized $
0.1
million in
expense under the DSPP for each of the years ended December 31, 2023,
2022
and 2021.
The Company issued shares under the
DSPP totaling
13,090
,
14,977
and
19,362
for the years ended December 31, 2023, 2022 and 2021, respectively.
At December 31,
2023, there were
252,571
shares eligible for issuance under the DSPP.
ASPP.
Under the Company’s ASPP,
substantially all associates may purchase the Company’s
common stock through payroll
deductions at a price equal to
90
% of the lower of the fair market value at the beginning or end of each six-month offering
period.
Stock purchases under the ASPP are limited to
10
% of an associate’s eligible compensation,
up to a maximum of $
25,000
(fair market value on each enrollment date) in any plan year.
Under the ASPP,
there were
400,000
shares of common stock
reserved for issuance.
The Company recognized $
0.1
million in expense under the ASPP for each of the years ended December
31, 2023, 2022 and 2021, respectively.
The Company issued shares under the ASPP totaling
17,651
,
31,101
and
22,126
for the
years ended December 31, 2023, 2022 and 2021, respectively.
At December 31, 2023,
329,122
shares remained eligible for
issuance under the ASPP.
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of each of the purchase rights
granted under the ASPP was $
5.32
for 2023.
For 2022 and 2021, the weighted average fair value purchase right granted was
$
4.03
and $
3.96
, respectively.
In calculating compensation, the fair value of each stock purchase right was estimated
on the date
of grant using the following weighted average assumptions:
2023
2022
2021
Dividend yield
2.3
%
2.4
%
2.5
%
Expected volatility
22.5
%
17.6
%
21.8
%
Risk-free interest rate
5.1
%
1.4
%
0.1
%
Expected life (in years)
0.5
0.5
0.5
113
Note 15
EMPLOYEE BENEFIT PLANS
Pension Plan
The Company sponsors a noncontributory pension plan covering
a portion of its associates.
On December 30, 2019, the plan was
amended to remove plan eligibility for new associates hired after December 31,
2019. There were no amendments to the Plan in
2020 or 2021. The Plan was also amended in December 2022, effective
January 1, 2020, increasing the required minimum
distribution age to
72
, per the SECURE Act 1.0. Benefits under this plan generally are based on the associate’s
total years of
service and average of the
five
highest years of compensation during the
ten years
immediately preceding their departure.
The
Company’s general funding
policy is to contribute amounts sufficient to meet minimum funding requirements
as set by law and to
ensure deductibility for federal income tax purposes.
The following table details on a consolidated basis the changes in benefit
obligation, changes in plan assets, the funded status of
the plan, components of pension expense, amounts recognized in the
Company’s Consolidated Statements of
Financial Condition,
and major assumptions used to determine these amounts.
114
(Dollars in Thousands)
2023
2022
2021
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year
$
108,151
$
172,508
$
212,566
Service Cost
3,488
6,289
6,971
Interest Cost
5,831
4,665
4,885
Actuarial Loss (Gain)
6,936
(39,962)
(14,934)
Benefits Paid
(3,843)
(2,139)
(2,087)
Expenses Paid
(276)
(416)
(259)
Settlements
-
(32,794)
(34,634)
Projected Benefit Obligation at End of Year
$
120,287
$
108,151
$
172,508
Change in Plan Assets:
Fair Value
of Plan Assets at Beginning of Year
$
104,276
$
165,274
$
171,775
Actual Return on Plan Assets
19,138
(25,649)
30,479
Employer Contributions
6,000
-
-
Benefits Paid
(3,843)
(2,139)
(2,087)
Expenses Paid
(276)
(416)
(259)
Settlements
-
(32,794)
(34,634)
Fair Value
of Plan Assets at End of Year
$
125,295
$
104,276
$
165,274
Funded Status of Plan and Accrued Liability Recognized at End of Year:
Other (Assets) Liabilities
$
(5,008)
$
3,875
$
7,234
Accumulated Benefit Obligation at End of Year
$
102,642
$
91,770
$
149,569
Components of Net Periodic Benefit Costs:
Service Cost
$
3,488
$
6,289
$
6,971
Interest Cost
5,831
4,665
4,885
Expected Return on Plan Assets
(6,805)
(10,701)
(11,147)
Amortization of Prior Service Costs
5
15
15
Net Loss Amortization
934
1,713
6,764
Net Loss Settlements
-
2,321
3,072
Net Periodic Benefit Cost
$
3,453
$
4,302
$
10,560
Weighted-Average
Assumptions Used to Determine Benefit Obligation:
Discount Rate
5.29%
5.63%
3.11%
Rate of Compensation Increase
(1)
5.10%
5.10%
4.40%
Measurement Date
12/31/23
12/31/22
12/31/21
Weighted-Average
Assumptions Used to Determine Benefit Cost:
Discount Rate
5.63%
3.11%
2.88%
Expected Return on Plan Assets
6.75%
6.75%
6.75%
Rate of Compensation Increase
(1)
5.10%
4.40%
4.00%
Amortization Amounts from Accumulated Other Comprehensive Loss:
Net Actuarial Loss (Gain)
$
(5,397)
$
(3,612)
$
(34,265)
Prior Service Cost
(5)
(15)
(15)
Net Loss
(934)
(4,034)
(9,836)
Deferred Tax Expense
1,606
1,942
11,183
Other Comprehensive Gain, net of tax
$
(4,730)
$
(5,719)
$
(32,933)
Amounts Recognized in Accumulated Other Comprehensive Loss:
Net Actuarial Losses
$
1,322
$
7,653
$
15,300
Prior Service Cost
-
5
20
Deferred Tax Benefit
(335)
(1,941)
(3,884)
Accumulated Other Comprehensive Loss, net of tax
$
987
$
5,717
$
11,436
(1)
The Company utilized an age-graded approach that varies the rate based
on the age of the participants.
115
During 2022 and 2021, lump sum payments made under the Company’s
defined benefit pension plan triggered settlement
accounting.
In accordance with applicable accounting guidance for defined benefit plans, the Company recorded
no
settlement
losses during 2023 and $
2.3
million and $
3.1
million during 2022 and 2021, respectively.
The service cost component of net periodic benefit cost is reflected in compensation
expense in the accompanying Consolidated
Statements of Income.
The other components of net periodic cost are included in “other” within the noninterest
expense category
in the Consolidated Statements of Income.
See Note 1 – Significant Accounting Policies for additional information.
The Company expects to recognize $
0.2
million of the net actuarial loss reflected in accumulated other comprehensive
loss at
December 31, 2023 as a component of net periodic benefit cost during 2024.
Plan Assets.
The Company’s pension
plan asset allocation at December 31, 2023 and 2022, and the target
asset allocation for
2023 are as follows:
Target
Percentage of Plan
Allocation
Assets at December 31
(1)
2024
2023
2022
Equity Securities
68
%
70
%
73
%
Debt Securities
27
%
18
%
23
%
Cash and Cash Equivalents
5
%
12
%
4
%
Total
100
%
100
%
100
%
(1)
Represents asset allocation at December 31 which
may differ from the average target
allocation for the year due to the year-
end cash contribution to the plan.
The Company’s pension plan assets are overseen
by the CCBG Retirement Committee.
Capital City Trust Company acts as the
investment manager for the plan.
The investment strategy is to maximize return on investments while minimizing risk.
The
Company believes the best way to accomplish this goal is to take a conservative
approach to its investment strategy by investing
in mutual funds that include various high-grade equity securities and investment
-grade debt issuances with varying investment
strategies.
The target asset allocation will periodically be adjusted based
on market conditions and will operate within the
following investment policy statement allocation ranges: equity securities ranging
from
55
% and
81
%, debt securities ranging
from
17
% and
37
%, and cash and cash equivalents ranging from
0
% and
10
%.
The overall expected long-term rate of return on
assets is a weighted-average expectation for the return on plan assets.
The Company considers historical performance data and
economic/financial data to arrive at expected long-term rates of return for each asset category.
The major categories of assets in the Company’s
pension plan at December 31 are presented in the following table.
Assets are
segregated by the level of the valuation inputs within the fair value hierarchy
established by ASC Topic 820
utilized to measure
fair value (see Note 22 – Fair Value
Measurements).
(Dollars in Thousands)
2023
2022
Level 1:
U.S. Treasury Securities
$
16,126
$
17,264
Mutual Funds
92,991
81,231
Cash and Cash Equivalents
15,717
5,327
Level 2:
Corporate Notes/Bonds
461
454
Total Fair Value
of Plan Assets
$
125,295
$
104,276
116
Expected Benefit Payments.
At December 31, expected benefit payments related to the defined benefit pension
plan were as
follows:
(Dollars in Thousands)
2023
2024
$
10,105
2025
11,119
2026
10,496
2027
10,042
2028
8,983
2029 through 2033
45,942
Total
$
96,687
Contributions.
The following table details the amounts contributed to the pension plan in 2023
and 2022, and the expected
amount to be contributed in 2024.
Expected
Contribution
(Dollars in Thousands)
2022
2023
2024
(1)
Actual Contributions
$
-
$
6,000
$
5,000
(1)
For 2023, the Company will have the option to make a cash contribution
to the plan or utilize pre-funding balances.
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (“SERP”) and
a Supplemental Executive Retirement Plan II
(“SERP II”) covering selected executive officers.
Benefits under this plan generally are based on the same service and
compensation as used for the pension plan, except the benefits are calculated without
regard to the limits set by the Internal
Revenue Code on compensation and benefits.
The net benefit payable from the SERP is the difference between
this gross benefit
and the benefit payable by the pension plan.
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.
117
The following table details on a consolidated basis the changes in benefit
obligation, the funded status of the plan, components of
pension expense, amounts recognized in the Company’s
Consolidated Statements of Financial Condition, and major assumptions
used to determine these amounts.
(Dollars in Thousands)
2023
2022
2021
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year
$
10,948
$
13,534
$
13,402
Service Cost
18
31
35
Interest Cost
501
315
243
Actuarial (Gain) Loss
201
(2,932)
(146)
Net Settlements
(2,464)
-
-
Projected Benefit Obligation at End of Year
$
9,204
$
10,948
$
13,534
Funded Status of Plan and Accrued Liability Recognized at End of Year:
Other Liabilities
$
9,204
$
10,948
$
13,534
Accumulated Benefit Obligation at End of Year
$
8,943
$
10,887
$
12,803
Components of Net Periodic Benefit Costs:
Service Cost
$
18
$
31
$
35
Interest Cost
501
315
243
Amortization of Prior Service Cost
151
277
277
Net Loss Amortization
(531)
718
970
Net Gain Settlements
(291)
-
-
Net Periodic Benefit Cost
$
(152)
$
1,341
$
1,525
Weighted-Average
Assumptions Used to Determine Benefit Obligation:
Discount Rate
5.11%
5.45%
2.80%
Rate of Compensation Increase
(1)
5.10%
5.10%
4.40%
Measurement Date
12/31/23
12/31/22
12/31/21
Weighted-Average
Assumptions Used to Determine Benefit Cost:
Discount Rate
5.45%
2.80%
2.38%
Rate of Compensation Increase
(1)
5.10%
4.40%
4.00%
Amortization Amounts from Accumulated Other Comprehensive Loss:
Net Actuarial Loss (Gain)
$
201
$
(2,932)
$
(146)
Prior Service (Benefit) Cost
(151)
(277)
(219)
Net Gain (Loss)
531
(718)
(970)
Settlement Gain
291
-
-
Deferred Tax (Benefit)
Expense
(222)
995
154
Other Comprehensive (Gain) Loss, net of tax
$
650
$
(2,932)
$
(1,181)
Amounts Recognized in Accumulated Other Comprehensive Loss:
Net Actuarial (Loss) Gain
$
(753)
$
(1,775)
$
1,875
Prior Service Cost
-
151
429
Deferred Tax Benefit
(Expense)
191
412
(584)
Accumulated Other Comprehensive (Loss) Gain, net of tax
$
(562)
$
(1,212)
$
1,720
(1)
The Company utilized an age-graded approach that varies the rate based
on the age of the participants.
The Company expects to recognize approximately $
0.3
million of the net actuarial gain reflected in accumulated other
comprehensive loss at December 31, 2023 as a component of net periodic
benefit cost during 2024.
In June 2023, lump sum retirement distributions to two plan participants
required the application of settlement accounting.
The
amount of the settlement gain was $
0.3
million.
118
Expected Benefit Payments
. As of December 31, expected benefit payments related to the SERP were as follows:
(Dollars in Thousands)
2023
2024
$
8,800
2025
32
2026
38
2027
42
2028
64
2029 through 2033
748
Total
$
9,724
401(k) Plan
The Company has a 401(k) Plan which enables CCB and CCBG associates to defer
a portion of their salary on a pre-tax
basis.
The plan covers substantially all associates of the Company who meet
minimum age requirements.
The plan is designed to
enable participants to contribute any amount, up to the maximum annual limit allowed
by the IRS, of their compensation withheld
in any plan year placed in the 401(k) Plan trust account.
Matching contributions of
50
% from the Company are made for up to
6
% of the participant’s compensation for
eligible associates.
Further, in addition to the
50
% match, all associates hired after
December 31, 2019 will receive annually a contribution by the Company
equal to
3
% of their compensation.
For 2023, the
Company made annual matching contributions of $
1.7
million.
For 2022 and 2021, the Company made annual matching
contributions of $
1.4
million and $
1.0
million, respectively.
The participant may choose to invest their contributions into thirty-
four investment options available to 401(k) participants, including the Company’s
common stock.
A total of
50,000
shares of
CCBG common stock have been reserved for issuance.
Shares issued to participants have historically been purchased in the open
market.
CCHL has a 401(k) Plan available to all CCHL associates who are
employed.
The plan allows participants to contribute any
amount, up to the maximum annual limit allowed by the IRS, of their compensation
withheld in any plan year placed in the
401(k) Plan trust account.
A discretionary matching contribution is determined annually by CCHL.
For 2023, 2022, and 2021,
matching contributions were made by CCHL up to
3
% of eligible participant’s
compensation totaling $
0.4
million, $
0.4
million,
and $
0.7
million, respectively.
Other Plans
The Company has a Dividend Reinvestment and Optional Stock Purchase
Plan.
A total of
250,000
shares have been reserved for
issuance.
In recent years, shares for the Dividend Reinvestment and Optional Stock Purchase Plan have
been acquired in the open
market and, thus, the Company did
no
t issue any new shares under this plan in 2023, 2022 and 2021.
Note 16
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
(Dollars and Per Share Data in Thousands)
2023
2022
2021
Numerator:
Net Income Attributable to Common Shareowners
$
52,258
$
33,412
$
33,396
Denominator:
Denominator for Basic Earnings Per Share Weighted
-Average Shares
16,987
16,951
16,863
Effects of Dilutive Securities Stock Compensation
Plans
36
34
30
Denominator for Diluted Earnings Per Share Adjusted Weighted
-Average
Shares and Assumed Conversions
17,023
16,985
16,893
Basic Earnings Per Share
$
3.08
$
1.97
$
1.98
Diluted Earnings Per Share
$
3.07
$
1.97
$
1.98
119
Note 17
REGULATORY
MATTERS
Regulatory Capital Requirements
.
The Company (on a consolidated basis) and the Bank are subject to various regulatory
capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on
the Company and Bank’s financial statements.
Under
capital
adequacy guidelines
and the
regulatory framework
for
prompt
corrective action
,
the Company and the Bank must meet specific capital guidelines that involve quantitative
measures of their
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices.
The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies.
A detailed description of these regulatory
capital requirements is provided in the section captioned “Regulatory
Considerations – Capital Regulations” section on page 15.
Management believes, at December 31, 2023 and 2022, that the Company
and the Bank meet all capital adequacy requirements to
which they are subject.
At December 31, 2023, the most recent notification from the Federal Deposit Insurance
Corporation
categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action.
To be categorized as well
capitalized, an institution must maintain minimum common equity
Tier 1, total risk-based, Tier
1 risk based and Tier 1 leverage
ratios as set forth in the following tables.
There are not conditions or events since the notification that management believes have
changed the Bank’s category.
The Company and Bank’s actual capital
amounts and ratios at December 31, 2023 and 2022 are
presented in the following table.
120
To Be Well
-
Capitalized Under
Required
Prompt
For Capital
Corrective
Actual
Adequacy Purposes
Action Provisions
(Dollars in Thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
2023
Common Equity Tier 1:
CCBG
$
373,206
13.52%
$
124,192
4.50%
*
*
CCB
383,211
13.89%
124,158
4.50%
$
179,340
6.50%
Tier 1 Capital:
CCBG
424,206
15.37%
165,589
6.00%
*
*
CCB
383,211
13.89%
165,545
6.00%
220,726
8.00%
Total Capital:
CCBG
457,339
16.57%
220,785
8.00%
*
*
CCB
416,343
15.09%
220,726
8.00%
275,908
10.00%
Tier 1 Leverage:
CCBG
424,206
10.30%
164,691
4.00%
*
*
CCB
383,211
9.31%
164,680
4.00%
205,850
5.00%
2022
Common Equity Tier 1:
CCBG
$
335,512
12.38%
$
121,918
4.50%
*
*
CCB
358,882
13.25%
121,913
4.50%
$
176,096
6.50%
Tier 1 Capital:
CCBG
386,512
14.27%
162,557
6.00%
*
*
CCB
358,882
13.25%
162,550
6.00%
216,733
8.00%
Total Capital:
CCBG
414,569
15.30%
216,743
8.00%
*
*
CCB
386,067
14.25%
216,733
8.00%
270,917
10.00%
Tier 1 Leverage:
CCBG
386,512
8.91%
173,546
4.00%
*
*
CCB
358,882
8.27%
173,505
4.00%
216,881
5.00%
*
Not applicable to bank holding companies.
Dividend Restrictions
.
In the ordinary course of business, the Company is dependent upon dividends
from its banking subsidiary
to provide funds for the payment of dividends to shareowners and to provide
for other cash requirements.
Banking regulations
may limit the amount of dividends that may be paid.
Approval by regulatory authorities is required if the effect of dividends
declared would cause the regulatory capital of the Company’s
banking subsidiary to fall below specified minimum levels.
Approval is also required if dividends declared exceed the net profits of
the banking subsidiary for that year combined with the
retained net profits for proceeding two years.
In 2024, the bank subsidiary may declare dividends without regulatory approval
of
$
44.4
million plus an additional amount equal to net profits of the Company’s
subsidiary bank for 2024 up to the date of any such
dividend declaration.
121
Note 18
ACCUMULATED OTHER
COMPREHENSIVE LOSS
FASB Topic
ASC 220, “Comprehensive Income” requires that certain transactions
and other economic events that bypass the
Consolidated Statements of Income be displayed as other comprehensive
income.
Total comprehensive income
is reported in
the Consolidated
Statements of Comprehensive Income (net of tax) and Changes in Shareowners’
Equity (net of tax).
The following table shows the amounts allocated to accumulated other
comprehensive loss.
Accumulated
Securities
Other
Available
Interest Rate
Retirement
Comprehensive
(Dollars in Thousands)
for Sale
Swap
Plans
Loss
Balance as of January 1, 2023
$
(37,349)
$
4,625
$
(4,505)
$
(37,229)
Other comprehensive income (loss) during the period
11,658
(655)
4,080
15,083
Balance as of December 31, 2023
$
(25,691)
$
3,970
$
(425)
$
(22,146)
Balance as of January 1, 2022
$
(4,588)
$
1,530
$
(13,156)
$
(16,214)
Other comprehensive (loss) income during the period
(32,761)
3,095
8,651
(21,015)
Balance as of December 31, 2022
$
(37,349)
$
4,625
$
(4,505)
$
(37,229)
Balance as of January 1, 2021
$
2,700
$
428
$
(47,270)
$
(44,142)
Other comprehensive (loss) income during the period
(7,288)
1,102
34,114
27,928
Balance as of December 31, 2021
$
(4,588)
$
1,530
$
(13,156)
$
(16,214)
Note 19
RELATED PARTY
TRANSACTIONS
At December 31, 2023 and 2022, certain officers and directors were indebted
to the Bank in the aggregate amount of $
6.3
million
and $
7.3
million, respectively.
During 2023 and 2022, $
1.7
million and $
8.5
million in new loans were made and repayments
totaled $
2.7
million and $
5.0
million, respectively.
These loans were all current at December 31, 2023 and 2022.
Deposits from certain directors, executive officers, and
their related interests totaled $
36.9
million and $
66.3
million at December
31, 2023 and 2022, respectively.
The Company leases land from a partnership (Smith Interests General
Partnership L.L.P.)
in which William G. Smith, Jr.
has an
interest.
The Company made lease payments totaling $
0.2
million in 2023 and in December 2023 the lease payments adjusted to
$
0.1
million annually due to a reduction in the size of the parcel leased by the Company.
The payments under the lease
agreement provide for annual lease payments of approximately $
0.1
million annually through December 2033, and thereafter,
increase by
5
% every
10
years until 2053 at which time the rent amount will adjust based on reappraisal of the parcel
rental value.
The Company then has
four
successive options to extend the lease for
five years
each with rental increases of
5
% at each
extension.
William G. Smith, III, the son of our Chairman,
President and Chief Executive Officer,
William G. Smith, Jr.,
is employed as
President, North Florida Region at Capital City Bank.
In 2023, William G. Smith, III’s
total compensation (consisting of annual
base salary, annual bonus,
and stock-based compensation) was determined in accordance with the Company’s
standard
employment and compensation practices applicable to associates with similar responsibilities
and positions.
122
Note 20
OTHER NONINTEREST EXPENSE
Components of other noninterest expense in excess of
1
% of the sum of total interest income and noninterest income, which are
not disclosed separately elsewhere, are presented below for each of
the respective years.
(Dollars in Thousands)
2023
2022
2021
Legal Fees
$
1,721
$
1,413
$
1,411
Professional Fees
6,245
5,437
5,633
Telephone
2,729
2,851
2,975
Advertising
3,349
3,208
2,683
Processing Services
6,984
6,534
6,569
Insurance – Other
3,120
2,409
2,096
Pension – Other
76
(3,043)
1,913
Pension – Settlement
(291)
2,321
3,072
Other
11,643
14,411
10,754
Total
$
35,576
35,541
37,106
Note 21
COMMITMENTS AND CONTINGENCIES
Lending Commitments
.
The Company is a party to financial instruments with off-balance
sheet risks in the normal course of
business to meet the financing needs of its clients.
These financial instruments consist of commitments to extend credit and
standby letters of credit.
The Company’s maximum exposure
to credit loss under standby letters of credit and commitments to extend credit is
represented by the contractual amount of those instruments.
The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet instruments.
At December 31, the amounts associated
with the Company’s off-balance
sheet obligations were as follows:
2023
2022
(Dollars in Thousands)
Fixed
Variable
Total
Fixed
Variable
Total
Commitments to Extend Credit
(1)
$
207,605
$
534,745
$
742,350
$
243,614
$
531,873
$
775,487
Standby Letters of Credit
6,094
-
6,094
5,619
-
5,619
Total
$
213,699
$
534,745
$
748,444
$
249,233
$
531,873
$
781,106
(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.
123
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.
(Dollars in Thousands)
2023
2022
2021
Beginning Balance
$
2,989
$
2,897
$
1,644
Provision for Credit Losses
202
92
1,253
Ending Balance
$
3,191
$
2,989
$
2,897
Other Commitments
.
In the normal course of business, the Company enters into lease commitments
which are classified as
operating leases.
See Note 7 – Leases for additional information on the maturity of the Company’s
operating lease commitments.
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. During 2022
and 2023, the Company contributed $
0.1
million and $
0.4
million, respectively to the bank tech venture capital fund. At December
31, 2023, the Company had a remaining outstanding
commitment of $
0.5
million to the bank tech capital venture fund.
The Company, in 2022,
committed $
7.2
million to a solar tax equity investment of which $
1.0
million was paid in 2022 and $
6.2
million was paid in 2023.
After utilization of the related tax credits, the balance of this investment at December
31, 2023 was
$
0.4
million.
Further, in 2023, the Company committed $
7.0
million to a second solar tax equity investment of which $
7.0
was
paid in 2023.
After utilization of the related tax credits, the balance of this investment at December
31, 2023 was $
1.7
million.
Contingencies
.
The Company is a party to lawsuits and claims arising out of the normal course of business.
In management’s
opinion, there are
no
known pending claims or litigation, the outcome of which would, individually
or in the aggregate, have a
material effect on the consolidated results of operations,
financial position, or cash flows of the Company.
Indemnification Obligation
.
The Company is a member of the Visa U.S.A. network.
Visa U.S.A believes that its member
banks
are required to indemnify it 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.
Conversion ratio payments and ongoing fixed quarterly charges
are reflected in earnings in the period incurred.
Payments during
2023 totaled $
0.8
million.
Payments totaled $
0.9
million and $
0.8
million for the years 2022 and 2021, respectively.
At
December 31, 2023, there was
no
amount payable.
There was $
0.1
million payable December 31, 2022 and 2021.
Note 22
FAIR VALUE
MEASUREMENTS
The fair value of an asset or liability is the exchange price that would be received
were the Bank to sell that asset or paid to
transfer that liability (exit price) 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
.
124
●
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 AFS are reported at fair value utilizing Level 2 inputs.
For these securities, the Company obtains fair value
measurements from an independent pricing service.
The fair value measurements consider observable data that may include
dealer quotes, market spreads, cash flows, the U.S. Treasury
yield curve, live trading levels, trade execution data, credit
information and the bond’s
terms and conditions, among other things.
In general, the Company does not purchase securities that have a complicated structure.
The Company’s entire portfolio consists
of traditional investments, nearly all of which are U.S. Treasury
obligations, federal agency bullet or mortgage pass-through
securities, or general obligation or revenue based municipal bonds.
Pricing for such instruments is easily obtained.
At least
annually, the Company
will validate prices supplied by the independent pricing service by comparing them
to prices obtained
from an independent third-party source.
Equity Securities.
Investments securities classified as equity securities are carried at cost and the share of
earnings or losses is
reported through net income as an adjustment to the investment balance.
These securities are not readily marketable and therefore
are classified as a Level 3 input within the fair value hierarchy.
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 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.
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 December 31, 2023, there was
no
amount payable and at December 31, 2022, there was $
0.1
million payable.
125
A summary of fair values for assets and liabilities at December 31 consisted
of the following:
(Dollars in Thousands)
Level 1
Level 2
Level 3
Total
Fair
Inputs
Inputs
Inputs
Value
2023
ASSETS:
Securities Available
for Sale:
U.S. Government Treasury
$
24,679
$
-
$
-
$
24,679
U.S. Government Agency
-
145,034
-
145,034
States and Political Subdivisions
-
39,083
-
39,083
Mortgage-Backed Securities
-
63,303
-
63,303
Corporate Debt Securities
-
57,552
-
57,552
Equity Securities
-
-
3,450
3,450
Loans Held for Sale
-
28,211
-
28,211
Interest Rate Swap Derivative
-
5,317
-
5,317
Residential Mortgage Loan Commitments ("IRLC")
-
-
523
523
LIABILITIES:
Forward Sales Contracts ("Hedge Derivative")
-
209
-
209
2022
ASSETS:
Securities Available for
Sale:
U.S. Government Treasury
$
22,050
$
-
$
-
$
22,050
U.S. Government Agency
-
186,052
-
186,052
State and Political Subdivisions
-
40,329
-
40,329
Mortgage-Backed Securities
-
69,405
-
69,405
Corporate Debt Securities
-
88,236
-
88,236
Equity Securities
-
-
10
10
Loans Held for Sale
-
26,909
-
26,909
Interest Rate Swap Derivative
-
6,195
-
6,195
Forward Sales Contracts ("Hedge Derivative")
-
187
-
187
Residential Mortgage Loan Commitments ("IRLC")
-
-
819
819
Mortgage Banking Activities.
The Company had Level 3 issuances and transfers related to mortgage
banking activities of $
13.2
million and $
11.6
million, respectively,
for the year ended December 31, 2023.
The Company had Level 3 issuances and
transfers related to mortgage banking activities of $
15.4
million and $
28.5
million, respectively, for the year
ended December 31,
2022.
Issuances are valued based on the change in fair value of the underlying mortgage
loan from inception of the IRLC to the
statement of financial condition date, adjusted for pull-through rates and
costs to originate.
IRLCs transferred out of Level 3
represent IRLCs that were funded and moved to mortgage loans held for sale, at fair
value.
Assets Measured at Fair Value
on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis (i.e., the
assets are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in certain circumstances).
An example would be assets exhibiting evidence of
impairment.
The following is a description of valuation methodologies used for assets measured on a non-recurring
basis.
Collateral Dependent Loans
.
Impairment for collateral dependent loans is measured using the fair
value of the collateral less
selling costs.
The fair value of collateral is determined by an independent valuation
or professional appraisal in conformance with
banking regulations.
Collateral values are estimated using Level 3 inputs due to the volatility in the real
estate market, and the
judgment and estimation involved in the real estate appraisal process.
Collateral dependent loans are reviewed and evaluated on
at least a quarterly basis for additional impairment and adjusted accordingly.
Valuation
techniques are consistent with those
techniques applied in prior periods.
Collateral dependent loans had a carrying value of $
3.3
million with a valuation allowance of
$
0.1
million at December 31, 2023.
Collateral dependent loans had a carrying value of $
0.7
million with a valuation allowance of
$
0.1
million at December 31, 2022.
126
Other Real Estate Owned
.
During 2023 and 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.
At December 31, 2023 and 2022, these assets were recorded at fair value, which
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 record 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 December 31, 2023 and 2022, there was
no
valuation
allowance for mortgage servicing rights.
Other Fair Value
Disclosures
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”.
Other Equity Securities.
Other equity securities are accounted for under the equity method (Topic
323) and recorded at cost.
These securities are not readily marketable securities and are reflected in
Other Assets on the Statement of Financial Condition.
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.
127
A summary of estimated fair values of significant financial instruments at
December 31 consisted of the following:
2023
(Dollars in Thousands)
Carrying
Level 1
Level 2
Level 3
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
83,118
$
83,118
$
-
$
-
Fed Funds Sold and Interest Bearing Deposits
228,949
228,949
-
-
Investment Securities, Held to Maturity
625,022
441,189
150,562
-
Other Equity Securities
(1)
2,848
-
2,848
-
Mortgage Servicing Rights
831
-
-
1,280
Loans, Net of Allowance for Credit Losses
2,703,977
-
-
2,510,529
LIABILITIES:
Deposits
$
3,701,822
$
-
$
3,243,896
$
-
Short-Term
Borrowings
35,341
-
35,341
-
Subordinated Notes Payable
52,887
-
44,323
-
Long-Term Borrowings
315
-
315
-
2022
(Dollars in Thousands)
Carrying
Level 1
Level 2
Level 3
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
72,114
$
72,114
$
-
$
-
Short-Term Investments
528,536
528,536
-
-
Investment Securities, Held to Maturity
660,774
431,733
180,968
-
Other Equity Securities
(1)
2,848
-
2,848
-
Mortgage Servicing Rights
2,599
-
-
4,491
Loans, Net of Allowance for Credit Losses
2,522,617
-
-
2,377,229
LIABILITIES:
Deposits
$
3,939,317
$
-
$
3,310,383
$
-
Short-Term
Borrowings
56,793
-
56,793
-
Subordinated Notes Payable
52,887
-
45,763
-
Long-Term Borrowings
513
-
513
-
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.
The following tables present quantitative information about Level 3
fair value measurements for financial instruments measured
at fair value on a non-recurring basis at December 31, 2023 and December
31, 2022.
128
Note 23
PARENT COMPANY
FINANCIAL INFORMATION
The following are condensed statements of financial condition of the parent company
at December 31:
Parent Company Statements of Financial Condition
(Dollars in Thousands, Except Per Share
Data)
2023
2022
ASSETS
Cash and Due From Subsidiary Bank
$
54,004
$
42,737
Equity Securities
569
199
Investment in Subsidiary Bank
445,441
404,892
Goodwill and Other Intangibles
3,838
3,998
Other Assets
10,758
11,297
Total Assets
$
514,610
$
463,123
LIABILITIES
Subordinated Notes Payable
$
52,887
$
52,887
Other Liabilities
21,098
22,955
Total Liabilities
73,985
75,842
SHAREOWNERS’ EQUITY
Common Stock, $
0.01
par value;
90,000,000
shares authorized;
16,950,222
and
16,986,785
shares issued and outstanding at December 31, 2023 and 2022, respectively
170
170
Additional Paid-In Capital
36,326
37,331
Retained Earnings
426,275
387,009
Accumulated Other Comprehensive Loss, Net of Tax
(22,146)
(37,229)
Total Shareowners’
Equity
440,625
387,281
Total Liabilities and Shareowners’
Equity
$
514,610
$
463,123
129
The operating results of the parent company for the three years ended December
31 are shown below:
Parent Company Statements of Operations
(Dollars in Thousands)
2023
2022
2021
OPERATING INCOME
Income Received from Subsidiary Bank:
Administrative Fees
$
6,367
$
5,396
$
5,516
Dividends
30,000
23,000
10,000
Other Income
453
253
174
Total Operating
Income
36,820
28,649
15,690
OPERATING EXPENSE
Salaries and Associate Benefits
4,257
5,034
3,558
Interest on Subordinated Notes Payable
2,427
1,652
1,233
Professional Fees
859
616
1,113
Advertising
214
232
134
Legal Fees
683
370
589
Other
1,670
2,186
2,087
Total Operating
Expense
10,110
10,090
8,714
Earnings Before Income Taxes
and Equity in Undistributed
Earnings of Subsidiary Bank
26,710
18,559
6,976
Income Tax Benefit
(650)
(661)
(717)
Earnings Before Equity in Undistributed Earnings of Subsidiary Bank
27,360
19,220
7,693
Equity in Undistributed Earnings of Subsidiary Bank
24,898
14,192
25,703
Net Income Attributable to Common Shareowners
$
52,258
$
33,412
$
33,396
130
The cash flows for the parent company for the three years ended December 31 were
as follows:
Parent Company Statements of Cash Flows
(Dollars in Thousands)
2023
2022
2021
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income Attributable to Common Shareowners
$
52,258
$
33,412
$
33,396
Adjustments to Reconcile Net Income to Net Cash Provided By
Operating Activities:
Equity in Undistributed Earnings of Subsidiary Bank
(24,898)
(14,192)
(25,703)
Stock Compensation
1,468
1,278
843
Amortization of Intangible Asset
160
160
107
Increase in Other Assets
(117)
(336)
(21)
Increase in Other Liabilities
(1,557)
5,847
3,131
Net Cash Provided By Operating Activities
$
27,314
$
26,169
$
11,753
CASH FROM INVESTING ACTIVITIES:
Purchase of Equity Securities
$
(369)
$
(79)
$
(120)
Net Cash Paid for Acquisition
-
-
(4,482)
Decrease (Increase) in Investment in Subsidiaries
-
770
(10,770)
Net Cash Provided by (Used in) Investing Activities
$
(369)
$
691
$
(15,372)
CASH FROM FINANCING ACTIVITIES:
Repayment of Long-Term
Borrowings
-
-
(900)
Dividends Paid
(12,905)
(11,191)
(10,459)
Issuance of Common Stock Under Compensation Plans
937
1,300
1,028
Payments to Repurchase Common Stock
(3,710)
-
-
Net Cash Used In Financing Activities
$
(15,678)
$
(9,891)
$
(10,331)
Net Increase (Decrease) in Cash and Due from Subsidiary Bank
11,267
16,969
(13,950)
Cash and Due from Subsidiary Bank at Beginning of Year
42,737
25,768
39,718
Cash and Due from Subsidiary Bank at End of Year
$
54,004
$
42,737
$
25,768
Note 24
RESTATED
QUARTERLY
CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)
As further described in Note 1, the Impacted Statements of Cash Flows for each of
the three month periods ended March 31, 2022
and 2023, six month periods ended June 30, 2022 and 2023, and nine month periods
ended September 30, 2022 and 2023 have
been restated and are reflected in the tables that follow.
See “Restatement of Previously Issued Consolidated Financial
Statements” in Note 1. The unaudited interim Consolidated Statements of Cash Flows reflect
all adjustments that are, in the
opinion of management, necessary for a fair statement of the cash flows for the interim
periods presented. Restated amounts are
computed independently for each quarter presented; therefore, the sum of the quarterly
amounts may not equal the total amount
for the respective year due to rounding.
131
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS (Unaudited)
As Restated
(Dollars in Thousands)
For Three
Months
Ended
Mar 31, 2022
For Six
Months
Ended
Jun 30, 2022
For Nine
Months
Ended
Sept 30, 2022
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
6,938
$
14,198
$
23,803
Adjustments to Reconcile Net Income to
Provision for Credit Losses
32
1,724
3,878
Depreciation
1,907
3,802
5,689
Amortization of Premiums, Discounts, and Fees, net
2,610
5,053
6,618
Amortization of Intangible Assets
40
80
120
Pension Settlement Charge
209
378
480
Originations of Loans Held-for-Sale
(177,933)
(316,372)
(399,041)
Proceeds From Sales of Loans Held-for-Sale
188,264
352,830
440,219
Mortgage Banking Revenues
(4,055)
(8,912)
(11,807)
Net Additions for Capitalized Mortgage Servicing Rights
364
360
570
Stock Compensation
245
489
904
Net Tax Benefit From Stock-Based
Compensation
(19)
(19)
(19)
Deferred Income Taxes Benefit
(6,682)
(9,887)
(12,854)
Net Change in Operating Leases
(27)
(72)
(83)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
-
(26)
(136)
Net Decrease in Other Assets
1,897
3,516
3,696
Net Increase in Other Liabilities
7,036
22,040
12,839
Net Cash Provided By Operating Activities
20,826
69,182
74,876
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(194,448)
(218,548)
(219,865)
Payments, Maturities, and Calls
14,441
28,111
40,096
Securities Available for
Sale:
Purchases
(25,139)
(37,044)
(41,880)
Proceeds from Sale of Securities
3,365
3,365
3,365
Payments, Maturities, and Calls
24,824
47,413
64,301
Purchase of loans held for investment
(381)
(15,985)
(16,324)
Net Increase in Loans Held for Investment
(57,592)
(289,707)
(426,273)
Proceeds From Sales of Other Real Estate Owned
-
30
1,683
Purchases of Premises and Equipment, net
(1,013)
(3,322)
(4,013)
Noncontrolling interest contributions received
1,838
2,573
2,867
Net Cash Used In Investing Activities
(234,105)
(483,114)
(596,043)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
52,645
73,396
46,516
Net (Decrease) Increase in Other Short-Term
Borrowings
(3,692)
4,784
17,592
Repayment of Other Long-Term
Borrowings
(78)
(150)
(200)
Dividends Paid
(2,712)
(5,424)
(8,307)
Issuance of Common Stock Under Compensation Plans
190
496
577
Net Cash Provided By Financing Activities
46,353
73,102
56,178
NET DECREASE IN CASH AND CASH EQUIVALENTS
(166,926)
(340,830)
(464,989)
Cash and Cash Equivalents at Beginning of Period
1,035,354
1,035,354
1,035,354
Cash and Cash Equivalents at End of Period
$
868,428
$
694,524
$
570,365
Supplemental Cash Flow Disclosures:
Interest Paid
$
715
$
1,617
$
3,588
Income Taxes Paid
$
20
$
3,765
$
6,410
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
-
$
77
$
1,543
132
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS (Unaudited)
As Restated
(Dollars in Thousands)
For Three
Months
Ended
Mar 31, 2023
For Six
Months
Ended
Jun 30, 2023
For Nine
Months
Ended
Sept 30, 2023
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
13,709
$
27,883
$
40,539
Adjustments to Reconcile Net Income to
Provision for Credit Losses
3,099
5,296
7,689
Depreciation
1,969
3,927
5,920
Amortization of Premiums, Discounts, and Fees, net
1,067
2,117
3,216
Amortization of Intangible Assets
40
80
120
Pension Settlement Charge
-
(291)
(291)
Originations of Loans Held-for-Sale
(62,745)
(164,173)
(246,198)
Proceeds From Sales of Loans Held-for-Sale
64,050
152,657
247,166
Mortgage Banking Revenues
(2,871)
(6,234)
(8,072)
Net Additions for Capitalized Mortgage Servicing Rights
(91)
(253)
(392)
Stock Compensation
536
764
1,110
Deferred Income Taxes Benefit
(1,170)
(2,849)
(2,464)
Net Change in Operating Leases
(3)
(3)
(12)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,858)
(1,900)
(1,915)
Net (Increase) Decrease in Other Assets
(4,349)
4,593
8,207
Net Increase in Other Liabilities
12,471
3,815
1,069
Net Cash Provided By Operating Activities
23,854
25,429
55,692
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Payments, Maturities, and Calls
8,820
18,992
28,159
Securities Available for
Sale:
Purchases
(2,017)
(4,634)
(9,399)
Proceeds from Sale of Securities
-
-
30,420
Payments, Maturities, and Calls
16,559
32,490
53,045
Purchase of loans held for investment
(923)
(1,463)
(2,249)
Net Increase in Loans Held for Investment
(110,477)
(138,244)
(161,006)
Proceeds From Sales of Other Real Estate Owned
2,699
3,772
3,840
Purchases of Premises and Equipment, net
(1,886)
(3,851)
(5,459)
Net Cash Used In Investing Activities
(87,225)
(92,938)
(62,649)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits
(115,397)
(150,451)
(398,872)
Net Decrease in Other Short-Term
Borrowings
(30,161)
(6,120)
(15,097)
Repayment of Other Long-Term
Borrowings
(50)
(99)
(149)
Dividends Paid
(3,064)
(6,121)
(9,518)
Payments to Repurchase Common Stock
(819)
(2,022)
(3,121)
Issuance of Common Stock Under Compensation Plans
164
480
562
Net Cash Provided By Financing Activities
(149,327)
(164,333)
(426,195)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(212,698)
(231,842)
(433,152)
Cash and Cash Equivalents at Beginning of Period
600,650
600,650
600,650
Cash and Cash Equivalents at End of Period
$
387,952
$
368,808
$
167,498
Supplemental Cash Flow Disclosures:
Interest Paid
$
3,723
$
8,720
$
15,026
Income Taxes Paid
$
7,466
$
3,860
$
7,395
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
423
$
1,442
$
1,495
133
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2022
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income
$
6,938
$
-
$
6,938
Adjustments to Reconcile Net Income to
Provision for Credit Losses
32
-
32
Depreciation
1,907
-
1,907
Amortization of Premiums, Discounts, and Fees, net
2,610
-
2,610
Amortization of Intangible Assets
40
-
40
Pension Settlement Charges
209
-
209
Originations of Loans Held for Sale
(242,253)
64,320
(177,933)
Proceeds From Sales of Loans Held for Sale
252,584
(64,320)
188,264
Mortgage Banking Revenues
(4,055)
-
(4,055)
Net Additions for Capitalized Mortgage Servicing Rights
364
-
364
Stock Compensation
245
-
245
Net Tax Benefit from
Stock Compensation
(19)
-
(19)
Deferred Income Taxes Benefit
(6,682)
-
(6,682)
Net Change in Operating Leases
(27)
-
(27)
Net Decrease in Other Assets
1,897
-
1,897
Net Increase in Other Liabilities
7,036
-
7,036
Net Cash Provided By Operating Activities
20,826
-
20,826
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(194,448)
-
(194,448)
Payments, Maturities, and Calls
14,441
-
14,441
Securities Available for
Sale:
Purchases
(25,139)
-
(25,139)
Proceeds from the Sale of Securities
3,365
-
3,365
Payments, Maturities, and Calls
24,824
-
24,824
Purchases of Loans Held for Investment
(26,713)
26,332
(381)
Net Decrease in Loans Held for Investment
(31,260)
(26,332)
(57,592)
Purchases of Premises and Equipment, net
(1,013)
-
(1,013)
Noncontrolling Interest Contributions
1,838
-
1,838
Net Cash Used In Investing Activities
(234,105)
-
(234,105)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
52,645
-
52,645
Net Decrease in Other Short-Term
Borrowings
(3,692)
-
(3,692)
Repayment of Other Long-Term
Borrowings
(78)
-
(78)
Dividends Paid
(2,712)
-
(2,712)
Issuance of Common Stock Under Compensation Plans
190
-
190
Net Cash Provided By Financing Activities
46,353
-
46,353
NET DECREASE IN CASH AND CASH EQUIVALENTS
(166,926)
-
(166,926)
Cash and Cash Equivalents at Beginning of Period
1,035,354
-
1,035,354
Cash and Cash Equivalents at End of Period
$
868,428
$
-
$
868,428
Supplemental Cash Flow Disclosures:
Interest Paid
$
715
$
-
$
715
Income Taxes Paid
$
20
$
-
$
20
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
134
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2022
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
14,198
$
-
$
14,198
Adjustments to Reconcile Net Income to
Provision for Credit Losses
1,724
-
1,724
Depreciation
3,802
-
3,802
Amortization of Premiums, Discounts, and Fees, net
5,053
-
5,053
Amortization of Intangible Assets
80
-
80
Pension Settlement Charges
378
-
378
Originations of Loans Held for Sale
(549,018)
232,646
(316,372)
Proceeds From Sales of Loans Held for Sale
585,476
(232,646)
352,830
Mortgage Banking Revenues
(8,912)
-
(8,912)
Net Additions for Capitalized Mortgage Servicing Rights
360
-
360
Stock Compensation
489
-
489
Net Tax Benefit from
Stock Compensation
(19)
-
(19)
Deferred Income Taxes Benefit
(9,887)
-
(9,887)
Net Change in Operating Leases
(72)
-
(72)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(26)
-
(26)
Net Decrease in Other Assets
3,516
-
3,516
Net Increase in Other Liabilities
22,040
-
22,040
Net Cash Provided By Operating Activities
69,182
-
69,182
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(218,548)
-
(218,548)
Payments, Maturities, and Calls
28,111
-
28,111
Securities Available
for Sale:
Purchases
(37,044)
-
(37,044)
Proceeds from the Sale of Securities
3,365
-
3,365
Payments, Maturities, and Calls
47,413
-
47,413
Purchases of Loans Held for Investment
(174,779)
158,794
(15,985)
Net Increase in Loans Held for Investment
(130,913)
(158,794)
(289,707)
Proceeds From Sales of Other Real Estate Owned
30
-
30
Purchases of Premises and Equipment, net
(3,322)
-
(3,322)
Noncontrolling Interest Contributions
2,573
-
2,573
Net Cash Used In Investing Activities
(483,114)
-
(483,114)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
73,396
-
73,396
Net Increase in Other Short-Term
Borrowings
4,784
-
4,784
Repayment of Other Long-Term
Borrowings
(150)
-
(150)
Dividends Paid
(5,424)
-
(5,424)
Issuance of Common Stock Under Compensation Plans
496
-
496
Net Cash Provided By Financing Activities
73,102
-
73,102
NET DECREASE IN CASH AND CASH EQUIVALENTS
(340,830)
-
(340,830)
Cash and Cash Equivalents at Beginning of Period
1,035,354
-
1,035,354
Cash and Cash Equivalents at End of Period
$
694,524
$
-
$
694,524
Supplemental Cash Flow Disclosures:
Interest Paid
$
1,617
$
-
$
1,617
Income Taxes Paid
$
3,765
$
-
$
3,765
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
77
$
-
$
77
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
135
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2022
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
23,803
$
-
$
23,803
Adjustments to Reconcile Net Income to
Provision for Credit Losses
3,878
-
3,878
Depreciation
5,689
-
5,689
Amortization of Premiums, Discounts, and Fees, net
6,618
-
6,618
Amortization of Intangible Assets
120
-
120
Pension Settlement Charge
480
-
480
Originations of Loans Held for Sale
(772,089)
373,048
(399,041)
Proceeds From Sales of Loans Held for Sale
813,267
(373,048)
440,219
Mortgage Banking Revenues
(11,807)
-
(11,807)
Net Additions for Capitalized Mortgage Servicing Rights
570
-
570
Stock Compensation
904
-
904
Net Tax Benefit from
Stock Compensation
(19)
-
(19)
Deferred Income Taxes Benefit
(12,854)
-
(12,854)
Net Change in Operating Leases
(83)
-
(83)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(136)
-
(136)
Net Decrease in Other Assets
3,696
-
3,696
Net Increase in Other Liabilities
12,839
-
12,839
Net Cash Provided By Operating Activities
74,876
-
74,876
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(219,865)
-
(219,865)
Payments, Maturities, and Calls
40,096
-
40,096
Securities Available for
Sale:
Purchases
(41,880)
-
(41,880)
Proceeds from the Sale of Securities
3,365
-
3,365
Payments, Maturities, and Calls
64,301
-
64,301
Purchases of Loans Held for Investment
(329,481)
313,157
(16,324)
Net Increase in Loans Held for Investment
(113,116)
(313,157)
(426,273)
Proceeds From Sales of Other Real Estate Owned
1,683
-
1,683
Purchases of Premises and Equipment, net
(4,013)
-
(4,013)
Noncontrolling Interest Contributions
2,867
-
2,867
Net Cash Used In Investing Activities
(596,043)
-
(596,043)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
46,516
-
46,516
Net Increase in Other Short-Term
Borrowings
17,592
-
17,592
Repayment of Other Long-Term
Borrowings
(200)
-
(200)
Dividends Paid
(8,307)
-
(8,307)
Issuance of Common Stock Under Compensation Plans
577
-
577
Net Cash Provided By Financing Activities
56,178
-
56,178
NET DECREASE IN CASH AND CASH EQUIVALENTS
(464,989)
-
(464,989)
Cash and Cash Equivalents at Beginning of Period
1,035,354
-
1,035,354
Cash and Cash Equivalents at End of Period
$
570,365
$
-
$
570,365
Supplemental Cash Flow Disclosures:
Interest Paid
$
3,588
$
-
$
3,588
Income Taxes Paid
$
6,410
$
-
$
6,410
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
1,543
$
-
$
1,543
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
136
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2023
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income
$
13,709
$
-
$
13,709
Adjustments to Reconcile Net Income to
Provision for Credit Losses
3,099
-
3,099
Depreciation
1,969
-
1,969
Amortization of Premiums, Discounts, and Fees, net
1,067
-
1,067
Amortization of Intangible Assets
40
-
40
Originations of Loans Held for Sale
(213,240)
150,495
(62,745)
Proceeds From Sales of Loans Held for Sale
214,545
(150,495)
64,050
Mortgage Banking Revenues
(2,871)
-
(2,871)
Net Additions for Capitalized Mortgage Servicing Rights
(91)
-
(91)
Stock Compensation
536
-
536
Deferred Income Taxes Benefit
(1,170)
-
(1,170)
Net Change in Operating Leases
(3)
-
(3)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,858)
-
(1,858)
Net Increase in Other Assets
(4,349)
-
(4,349)
Net Increase in Other Liabilities
12,471
-
12,471
Net Cash Provided By Operating Activities
23,854
-
23,854
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Payments, Maturities, and Calls
8,820
-
8,820
Securities Available for
Sale:
Purchases
(2,017)
-
(2,017)
Payments, Maturities, and Calls
16,559
-
16,559
Purchases of Loans Held for Investment
(121,029)
120,106
(923)
Net Decrease (Increase) in Loans Held for Investment
9,629
(120,106)
(110,477)
Proceeds From Sales of Other Real Estate Owned
2,699
-
2,699
Purchases of Premises and Equipment, net
(1,886)
-
(1,886)
Net Cash Used In Investing Activities
(87,225)
-
(87,225)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits
(115,397)
-
(115,397)
Net Decrease in Other Short-Term
Borrowings
(30,161)
-
(30,161)
Repayment of Other Long-Term
Borrowings
(50)
-
(50)
Dividends Paid
(3,064)
-
(3,064)
Payments to Repurchase Common Stock
(819)
-
(819)
Issuance of Common Stock Under Compensation Plans
164
-
164
Net Cash Provided By Financing Activities
(149,327)
-
(149,327)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(212,698)
-
(212,698)
Cash and Cash Equivalents at Beginning of Period
600,650
-
600,650
Cash and Cash Equivalents at End of Period
$
387,952
$
-
$
387,952
Supplemental Cash Flow Disclosures:
Interest Paid
$
3,723
$
-
$
3,723
Income Taxes Paid
$
7,466
$
-
$
7,466
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
423
$
-
$
423
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
137
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2023
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
27,883
$
-
$
27,883
Adjustments to Reconcile Net Income to
Provision for Credit Losses
5,296
-
5,296
Depreciation
3,927
-
3,927
Amortization of Premiums, Discounts, and Fees, net
2,117
-
2,117
Amortization of Intangible Assets
80
-
80
Pension Settlement Gain
(291)
-
(291)
Originations of Loans Held for Sale
(214,364)
50,191
(164,173)
Proceeds From Sales of Loans Held for Sale
202,848
(50,191)
152,657
Mortgage Banking Revenues
(6,234)
-
(6,234)
Net Additions for Capitalized Mortgage Servicing Rights
(253)
-
(253)
Stock Compensation
764
-
764
Deferred Income Taxes Benefit
(2,849)
-
(2,849)
Net Change in Operating Leases
(3)
-
(3)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,900)
-
(1,900)
Net Decrease in Other Assets
4,593
-
4,593
Net Increase in Other Liabilities
3,815
-
3,815
Net Cash Provided By Operating Activities
25,429
-
25,429
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Payments, Maturities, and Calls
18,992
-
18,992
Securities Available for
Sale:
Purchases
(4,634)
-
(4,634)
Payments, Maturities, and Calls
32,490
-
32,490
Purchases of Loans Held for Investment
(201,000)
199,537
(1,463)
Net Decrease (Increase) in Loans Held for Investment
61,293
(199,537)
(138,244)
Proceeds From Sales of Other Real Estate Owned
3,772
-
3,772
Purchases of Premises and Equipment, net
(3,851)
-
(3,851)
Net Cash Used In Investing Activities
(92,938)
-
(92,938)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits
(150,451)
-
(150,451)
Net Decrease in Other Short-Term
Borrowings
(6,120)
-
(6,120)
Repayment of Other Long-Term
Borrowings
(99)
-
(99)
Dividends Paid
(6,121)
-
(6,121)
Payments to Repurchase Common Stock
(2,022)
-
(2,022)
Issuance of Common Stock Under Compensation Plans
480
-
480
Net Cash Provided By Financing Activities
(164,333)
-
(164,333)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(231,842)
-
(231,842)
Cash and Cash Equivalents at Beginning of Period
600,650
-
600,650
Cash and Cash Equivalents at End of Period
$
368,808
$
-
$
368,808
Supplemental Cash Flow Disclosures:
Interest Paid
$
8,720
$
-
$
8,720
Income Taxes Paid
$
3,860
$
-
$
3,860
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
1,442
$
-
$
1,442
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
138
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2023
(Dollars in Thousands)
As Previously
Reported
Restatement
Impact
As Restated
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
40,539
$
-
$
40,539
Adjustments to Reconcile Net Income to
Provision for Credit Losses
7,689
-
7,689
Depreciation
5,920
-
5,920
Amortization of Premiums, Discounts, and Fees, net
3,216
-
3,216
Amortization of Intangible Assets
120
-
120
Pension Settlement Gain
(291)
-
(291)
Originations of Loans Held for Sale
(222,575)
(23,623)
(246,198)
Proceeds From Sales of Loans Held for Sale
223,543
23,623
247,166
Mortgage Banking Revenues
(8,072)
-
(8,072)
Net Additions for Capitalized Mortgage Servicing Rights
(392)
-
(392)
Stock Compensation
1,110
-
1,110
Deferred Income Taxes Benefit
(2,464)
-
(2,464)
Net Change in Operating Leases
(12)
-
(12)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,915)
-
(1,915)
Net Decrease in Other Assets
8,207
-
8,207
Net Increase in Other Liabilities
1,069
-
1,069
Net Cash Provided By Operating Activities
55,692
-
55,692
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Payments, Maturities, and Calls
28,159
-
28,159
Securities Available for
Sale:
Purchases
(9,399)
-
(9,399)
Proceeds from the Sale of Securities
30,420
-
30,420
Payments, Maturities, and Calls
53,045
-
53,045
Purchases of Loans Held for Investment
(295,360)
293,111
(2,249)
Net Decrease (Increase) in Loans Held for Investment
132,105
(293,111)
(161,006)
Proceeds From Sales of Other Real Estate Owned
3,840
-
3,840
Purchases of Premises and Equipment, net
(5,459)
-
(5,459)
Net Cash Used In Investing Activities
(62,649)
-
(62,649)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits
(398,872)
-
(398,872)
Net Decrease in Other Short-Term
Borrowings
(15,097)
-
(15,097)
Repayment of Other Long-Term
Borrowings
(149)
-
(149)
Dividends Paid
(9,518)
-
(9,518)
Payments to Repurchase Common Stock
(3,121)
-
(3,121)
Issuance of Common Stock Under Compensation Plans
562
-
562
Net Cash Provided By Financing Activities
(426,195)
-
(426,195)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(433,152)
-
(433,152)
Cash and Cash Equivalents at Beginning of Period
600,650
-
600,650
Cash and Cash Equivalents at End of Period
$
167,498
$
-
$
167,498
Supplemental Cash Flow Disclosures:
Interest Paid
$
15,026
$
-
$
15,026
Income Taxes Paid
$
7,395
$
-
$
7,395
Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned
$
1,495
$
-
$
1,495
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
139
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
for 2023
.
At December 31, 2023, the end of the period covered by this
Annual Report on Form 10-K, our management, including our Chief
Executive Officer and Chief Financial Officer,
evaluated the
effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934).
Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer each concluded that our disclosure controls
and procedures were ineffective as of December 31, 2023 due to the
identification of the material weakness discussed in
“Existence of Material Weakness
as of December 31, 2023” below.
Evaluation of Disclosure Controls
and Procedures
for 2022
. As discussed in Part III, Item 9A, of the Company’s
Annual Report
on Form 10-K/A for the year ended December 31, 2022 filed with the SEC on December
22, 2023 (the “2022 Form 10-K/A”), our
management, including our Chief Executive Officer
and Chief Financial Officer, after re-assessing
the effectiveness of our
disclosure controls and procedures, concluded that our disclosure controls
and procedures were ineffective as of December 31,
2022 due to the identification of the material weakness discussed in “Existence
of Material Weakness as of
December 31, 2023”
below.
Evaluation of Disclosure Controls
and Procedures
for 2021
. At December 31, 2021, the end of the period covered by the
Company’s Annual Report
on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022 (the “2021
Form 10-K”), our management, including our Chief Executive Officer
and Chief Financial Officer, evaluated
the effectiveness of
our disclosure controls and procedures. Based upon that evaluation, at the
time the 2021 Form 10-K was filed, our Chief
Executive Officer and Chief Financial Officer
each concluded that at December 31, 2021, we maintained effective
disclosure
controls and procedures. Subsequent to that evaluation, management
conducted a reevaluation, concluding that our disclosure
controls and procedures were ineffective as of December 31,
2021 due to the identification of the material weakness discussed in
“Existence of Material Weakness
as of December 31, 2023” below.
Management’s
Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and
maintaining effective internal control over financial
reporting.
Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting
principles.
Internal control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of
its inherent limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation
of the consolidated financial statements and other
financial information contained in this report. The accompanying consolidated
financial statements were prepared in conformity
with U.S. generally accepted accounting principles and include, as necessary,
best estimates and judgments by management.
Under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial
Officer, we conducted
an evaluation of the effectiveness of internal control over financial reporting based
on the framework in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway
Commission
(2013 framework) (the COSO criteria).
Based on this evaluation under the framework in Internal Control -
Integrated
Framework, our management has concluded that our internal control over financial
reporting, as such term is defined in Exchange
Act Rule 13a-15(f), was ineffective as of December 31, 2023 due
to the identification of the material weakness discussed below.
As discussed in Part III, Item 9A, of the 2022 Form 10-K/A, management conducted
a reevaluation under the framework in
Internal Control - Integrated Framework as of December 31, 2022 and
concluded that our internal control over financial reporting
was ineffective as of December 31, 2022 due to the identification
of the material weakness discussed in “Existence of Material
Weakness as of December
31, 2023” below. At the
time the 2021 Form 10-K was filed, under the framework in Internal Control -
Integrated Framework, our management concluded that we maintained
effective internal control over financial reporting as of
December 31, 2021. Subsequent to that evaluation, management conducted
a reevaluation, concluding that our internal control
over financial reporting was ineffective as of December 31,
2021 due to the identification of the material weakness discussed in
“Existence of Material Weakness
as of December 31, 2023” below.
Existence of Material Weakness
as of December 31, 2023
140
A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting such
that there is
a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be
prevented or detected on a timely basis. As a result of the material weakness noted
below, management has
concluded that our
internal control over financial reporting was not effective
as of December 31, 2023. Based on management’s
assessment
described above, the Company’s
control over the review of significant inter-company
mortgage loan sales and servicing
transactions was not designed effectively.
Specifically, its management
review control over the completeness and accuracy of
elimination entries in its consolidation process was not designed effectively
as it was not sufficiently precise to identify all of the
necessary elimination entries between CCB and its subsidiary,
CCHL. The material weakness resulted in the restatement of the
Company’s consolidated
financial statements as of and for the year ended December 31, 2022 and the restatement of the
Company’s Consolidated
Statement of Cash Flows for the year ended December 31, 2021.
Remediation Plan
Since identifying the material weakness described above, management,
with oversight from the Audit Committee and input from
the Board of Directors, has devoted substantial resources to the ongoing
implementation of remediation efforts. These
remediation efforts, summarized below are intended to
address both the identified material weakness and to enhance the
Company’s overall internal
control over financial reporting and disclosure controls and procedures. Based on
additional
procedures and post-closing review,
management concluded that the Consolidated Financial Statements included
in this report
present fairly, in all material
respects, our financial position, results of operations, and cash flows for the periods
presented, in
conformity with GAAP.
The internal control and procedural enhancements and remedial actions that
have been implemented include:
●
Enhance the precision level for the review of existing accounts subject to elimination
and confirmation of proper
elimination in consolidation;
●
Enhance the procedures for identifying new inter-company
accounts and activities subject to elimination in
consolidation;
●
Increase the granularity of general ledger mapping for inter-company
accounts subject to elimination in consolidation;
and
●
Enhance financial close checklist and pre-close meeting agenda to ensure proper
and timely identification of inter-
company activities subject to elimination.
The Company implemented the internal control and procedural enhancements
noted above during the fourth quarter of 2023 to
remediate the material weakness. The material weakness cannot be considered
remediated until the applicable controls have
operated for a sufficient period of time and management has concluded,
through testing, that these controls are designed and
operating effectively.
Accordingly, management
will continue to monitor and evaluate the effectiveness of our internal control
over financial reporting and the disclosure controls and procedures.
FORVIS, LLP,
an independent registered public accounting firm, has audited
our consolidated financial statements as of and for
the year ended December 31, 2023, and adversely opined as to the effectiveness
of internal control over financial reporting at
December 31, 2023, as stated in its report, which is included herein on
page 141.
Change in Internal Control
.
Except as identified above with respect to remediation of the material weakness,
there have been no
changes in our internal control during our most recently completed fiscal quarter
that materially affected, or are likely to
materially affect, our internal control over financial reporting.
141
Report of Independent Registered Public Accounting Firm
To the Shareowners,
Board of Directors and Audit Committee
Capital City Bank Group, Inc.
Tallahassee, Florida
Opinion on the Internal Control over Financial Reporting
We have audited
Capital City Bank Group, Inc.’s (the “Company”)
internal control over financial reporting as of December 31,
2023, based on criteria established in Internal Control – Integrated Framework:
(2013) issued by the Committee of Sponsoring
Organizations of the Treadway
Commission (COSO).
A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting,
such that there
is a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be
prevented or detected on a timely basis. The following material weakness has been
identified and included in management’s
assessment.
●
The Company's control over the review of significant inter-company
mortgage loan sales and servicing transactions did
not operate effectively.
Specifically, its management
review control over the completeness and accuracy of elimination
entries in its consolidation process was not designed effectively,
as it was not sufficiently precise to identify all of the
necessary elimination entries between Capital City Bank and its subsidiary,
Capital City Home Loans. The Company
determined inter-company transactions related to the sale of residential
mortgage loans between wholly owned
subsidiaries were not properly eliminated and net loan fees were not
properly recorded.
This material weakness was considered in determining the nature, timing,
and extent of auditing procedures applied in our audit
of the Company’s consolidated
financial statements, and this report does not affect our report dated
March 13, 2024, on those
consolidated financial statements.
In our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control
criteria, the Company has not maintained effective internal
control over financial reporting as of December 31, 2023, based on
criteria established in Internal Control – Integrated Framework: (2013)
issued by the COSO.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United
States)
(“PCAOB”), the consolidated financial statements of the Company
as of December 31, 2023 and 2022, and for each of the years
in the three-year period ended December 31, 2023, and our report dated March
13, 2024, expressed an unqualified opinion on
those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible
for maintaining effective internal control over financial reporting
and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s
Report
on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s
internal control over
financial reporting based on our audit.
142
We are a public
accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted
our audit in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the
audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of reliable financial
statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations
of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.
FORVIS, LLP
Little Rock, Arkansas
March 13, 2024
143
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
144
Part III
Item 10.
Directors, Executive Officers, and Corporate Governance
Incorporated herein by reference to the sections entitled “Proposal No.
1 – Election of Directors”, “Corporate Governance at
Capital City,” “Share Ownership,”
and “Board Committee Membership” in the Registrant’s
Proxy Statement relating to its
Annual Meeting of Shareowners to be held on April 23, 2024.
Item 11.
Executive Compensation
Incorporated herein by reference to the sections entitled “Compensation
Discussion and Analysis,” “Executive Compensation,”
and “Director Compensation” in the Registrant’s
Proxy Statement relating to its Annual Meeting of Shareowners to be held on
April 23, 2024.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Shareowners Matters.
Information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the sections
captioned “Share Ownership” and “Equity Compensation Plan Information”
in the Registrant’s Proxy Statement relating to its
Annual Meeting of Shareowners to be held on April 23, 2024.
Item 13.
Certain Relationships and Related Transactions,
and Director Independence
Incorporated herein by reference to the sections entitled “Transactions
With Related Persons” and “Corporate Governance
at
Capital City” in the Registrant’s Proxy
Statement relating to its Annual Meeting of Shareowners to be held on
April 23, 2024.
Item 14.
Principal Accountant Fees and Services
Incorporated herein by reference to the section entitled “Audit Committee Matters”
in the Registrant’s Proxy Statement
relating to
its Annual Meeting of Shareowners to be held on April 23, 2024.
145
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
The following documents are filed as part of this report
1.
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at the End of Fiscal Years
2023 and 2022
Consolidated Statements of Income for Fiscal Years
2023, 2022, and 2021
Consolidated Statements of Comprehensive Income for Fiscal Years
2023, 2022, and 2021
Consolidated Statements of Changes in Shareowners’ Equity for
Fiscal Years
2023, 2022, and 2021
Consolidated Statements of Cash Flows for Fiscal Years
2023, 2022, and 2021
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Other schedules and exhibits are omitted because the required information
either is not applicable or is shown in the
financial statements or the notes thereto.
3.
Exhibits Required to be Filed by Item 601 of Regulation S-K
Reg. S-K
Exhibit
Table
Item No.
Description of Exhibit
3.1
Amended and Restated Articles of Incorporation - incorporated herein by reference to Exhibit 3.1 of
the Registrant’s Form 8-K (filed 5/3/21) (No. 0-13358).
3.2
Amended and Restated Bylaws - incorporated herein by reference to Exhibit 3.2 of the Registrant’s
Form 8-K (filed 5/3/21) (No. 0-13358).
4.1
See Exhibits 3.1 and 3.2 for provisions of Amended and Restated Articles of Incorporation
and
Amended and Restated Bylaws, which define the rights of the Registrant’s
shareowners.
4.2
Capital City Bank Group, Inc. 2021 Director Stock Purchase Plan - incorporated herein by reference to
Exhibit 4.3 of the Registrant’s Form S-8 (filed 5/14/21) (No. 333-256134).
4.3
Capital City Bank Group, Inc. 2021 Associate Stock Purchase Plan - incorporated herein by reference
to Exhibit 4.4 of the Registrant’s Form S-8 (filed 5/14/21) (No. 333-256134).
4.4
Capital City Bank Group, Inc. 2021 Associate Incentive Plan - incorporated herein by reference to
Exhibit 4.5 of the Registrant’s Form S-8 (filed 5/14/21) (No. 333-256134).
4.5
In accordance with Regulation S-K, Item 601(b)(4)(iii)(A) certain instruments
defining the rights of
holders of long-term debt of Capital City Bank Group, Inc. not exceeding 10%
of the total assets of
Capital City Bank Group, Inc. and its consolidated subsidiaries have
been omitted.
The Registrant
agrees to furnish a copy of any such instruments to the Commission upon request.
10.1
Capital City Bank Group, Inc. 1996 Dividend Reinvestment and Optional Stock Purchase Plan -
incorporated herein by reference to Exhibit 10 of the Registrant’s Form S-3 (filed 01/30/97) (No. 333-
20683).
10.2
Capital City Bank Group, Inc. Supplemental Executive Retirement Plan - incorporated herein by
reference to Exhibit 10(d) of the Registrant’s Form 10-K (filed 3/27/03) (No. 0-13358).
10.3
Capital City Bank Group, Inc. 401(k) Profit Sharing Plan – incorporated herein by reference to Exhibit
4.3 of Registrant’s Form S-8 (filed 09/30/97) (No. 333-36693).
10.4
Capital City Bank Group, Inc. Supplemental Executive Retirement Plan II - incorporated herein by
reference to Exhibit 10.1 of the Registrant's Form 10-Q (filed 8/3/2020) (No. 0-13358).
10.5
Form of Participant Agreement for Long-Term Incentive Plan – incorporated herein by reference to
Exhibit 10.6 of the Registrant’s Form 10-K (filed 3/1/2023)(No.0-13358).
146
14
Capital City Bank Group, Inc. Code of Ethics for the Chief Financial Officer and Senior Financial
Officers - incorporated herein by reference to Exhibit 14 of the Registrant's Form 8-K (filed 3/11/05)
(No. 0-13358).
21
Capital City Bank Group, Inc. Subsidiaries, as of December 31, 2023.**
23.1
Consent of Independent Registered Public Accounting Firm.**
31.1
Certification of CEO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act
of 2002.**
31.2
Certification of CFO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act
of 2002.**
32.1
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
32.2
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
97
Clawback Policy
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)
*
Information required to be presented in Exhibit 11
is provided in Note 14 to the consolidated financial statements under
Part II, Item 8 of this Form 10-K in accordance with the provisions of U.S.
generally accepted accounting principles.
**
Filed electronically herewith.
Item 16.
Form 10-K Summary
None.
147
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this
report to be signed on March 13, 2024, on its behalf by the undersigned, thereunto
duly authorized.
CAPITAL CITY
BANK GROUP,
INC.
/s/ William G. Smith, Jr.
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed on March 13, 2024 by the
following persons in the capacities indicated.
/s/ William G. Smith, Jr.
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jeptha E. Larkin
Jeptha E. Larkin
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
148
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this
report to be signed on March 13, 2024, on its behalf by the undersigned, thereunto
duly authorized.
Directors:
/s/ Robert Antoine
/s/ William Eric Grant
Robert Antoine
William Eric Grant
/s/ Thomas A. Barron
/s/ Laura L. Johnson
Thomas A. Barron
Laura L. Johnson
/s/ William F.
Butler
/s/ John G. Sample, Jr.
William F.
Butler
John G. Sample, Jr
/s/ Stanley W. Connally,
Jr.
/s/ William G. Smith, Jr.
Stanley W.
Connally, Jr
William G. Smith, Jr.
/s/ Marshall M. Criser III
/s/ Ashbel C. Williams
Marshall M. Criser III
Ashbel C. Williams
/s/ Kimberly A. Crowell
/s/ Bonnie Davenport
Kimberly A. Crowell
Bonnie Davenport