10-Q
CAPITAL CITY BANK GROUP INC (CCBG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
20549
FORM
10-Q
☒
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-13358
Capital City Bank Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida
59-2273542
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
217 North Monroe Street
,
Tallahassee
,
Florida
32301
(Address of principal executive office)
(Zip Code)
(
850
)
402-7821
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par value $0.01
CCBG
Nasdaq Stock Market
, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or
an emerging growth company.
See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [
]
No
[X]
At October 26, 2023,
16,958,056
shares of the Registrant’s Common Stock, $.01 par value, were outstanding.
2
CAPITAL CITY BANK
GROUP,
INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
PART I –
Financial Information
Page
Item 1.
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition – September 30, 2023 and December 31, 2022
5
Consolidated Statements of Income – Three and Nine Months Ended September 30, 2023 and 2022
6
Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2023 and 2022
7
Consolidated Statements of Changes in Shareowners’ Equity – Three and Nine Months Ended September 30, 2023 and 2022
8
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2023 and 2022
9
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
48
Item 4.
Controls and Procedures
48
PART II –
Other Information
Item 1.
Legal Proceedings
49
Item 1A.
Risk Factors
49
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
49
Item 3.
Defaults Upon Senior Securities
49
Item 4.
Mine Safety Disclosure
49
Item 5.
Other Information
49
Item 6.
Exhibits
51
Signatures
52
3
INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of
which are beyond our control.
The words “may,” “could,” “should,” “would,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan,”
“target,” “goal,” and similar expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties.
Our actual future results may differ materially from
those set forth in our forward-looking statements.
Our ability to
achieve our financial objectives
could be adversely affected
by the factors discussed
in detail in Part
I, Item 2. “Management’s
Discussion and
Analysis of Financial
Condition and
Results of Operations”
and Part II,
Item 1A. “Risk
Factors” in this
Quarterly Report
on
Form 10-Q and
the following sections
of our Annual
Report on Form
10-K/A for the
year ended December
31, 2022, filed
on December 22,
2023 (the
“2022 Form
10-K/A”): (a)
“Introductory Note”
in Part
I, Item
- “Business”;
(b) “Risk
Factors” in
Part I,
Item 1A,
as updated
in
our
subsequent
quarterly
reports
filed
on
Form
10-Q;
and
(c)
“Introduction”
in
“Management’s
Discussion
and
Analysis
of
Financial
Condition and Results of Operations,” in Part II, Item 7, as well as:
●
our ability to successfully manage credit risk, interest rate risk, liquidity risk, and other risks inherent to our industry;
●
legislative or regulatory changes;
●
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, acts of war, 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 our previously issued financial statements as of and for the year ended December 31, 2022, the three
months ended March 31, 2022 and 2023, the three and six months ended June 30, 2022 and 2023, and the three and nine months ended
September 30, 2022;
●
any inability to implement and maintain effective internal control over financial reporting 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 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;
●
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.
4
However, other factors besides those listed in
Item 1A Risk Factors
or discussed in this Form 10-Q also could adversely affect our results,
and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.
Any forward-looking
statements made by us or on our behalf speak only as of the date they are made.
We do not undertake to update any forward-looking
statement, except as required by applicable law.
5
PART
I.
FINANCIAL INFORMATION
Item 1.
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
(Unaudited)
September 30,
December 31,
(Dollars in Thousands, Except Par Value)
2023
2022
ASSETS
Cash and Due From Banks
$
72,379
$
72,114
Federal Funds Sold and Interest Bearing Deposits
95,119
528,536
Total Cash and Cash Equivalents
167,498
600,650
Investment Securities, Available
for Sale, at fair value (amortized cost of $
375,476
and $
455,232
)
334,052
413,294
Investment Securities, Held to Maturity (fair value of $
582,648
and $
612,701
)
632,076
660,744
Equity Securities
3,585
10
Total Investment
Securities
969,713
1,074,048
Loans Held For Sale, at fair value
34,013
26,909
Loans Held for Investment
2,705,181
2,547,685
Allowance for Credit Losses
(29,083)
(25,068)
Loans Held for Investment, Net
2,676,098
2,522,617
Premises and Equipment, Net
81,677
82,138
Goodwill and Other Intangibles
92,973
93,093
Other Real Estate Owned
1
431
Other Assets
116,314
119,337
Total Assets
$
4,138,287
$
4,519,223
LIABILITIES
Deposits:
Noninterest Bearing Deposits
$
1,472,165
$
1,653,620
Interest Bearing Deposits
2,068,280
2,285,697
Total Deposits
3,540,445
3,939,317
Short-Term
Borrowings
41,696
56,793
Subordinated Notes Payable
52,887
52,887
Other Long-Term
Borrowings
364
513
Other Liabilities
75,585
73,675
Total Liabilities
3,710,977
4,123,185
Temporary Equity
7,604
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;
16,957,753
and
16,986,785
-
shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively
170
170
Additional Paid-In Capital
36,182
37,331
Retained Earnings
418,030
387,009
Accumulated Other Comprehensive Loss, net of tax
(34,676)
(37,229)
Total Shareowners’
Equity
419,706
387,281
Total Liabilities, Temporary
Equity, and Shareowners’ Equity
$
4,138,287
$
4,519,223
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
6
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF INCOME
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in Thousands, Except Per Share
Data)
2023
2022
2023
2022
INTEREST INCOME
Loans, including Fees
$
39,344
$
27,839
$
111,845
$
74,536
Investment Securities:
Taxable
4,550
4,360
14,265
11,083
Tax Exempt
11
12
35
25
Funds Sold
1,848
3,231
8,741
5,048
Total Interest Income
45,753
35,442
134,886
90,692
INTEREST EXPENSE
Deposits
5,214
1,052
11,710
1,542
Short-Term
Borrowings
630
536
1,542
1,071
Subordinated Notes Payable
625
443
1,800
1,130
Other Long-Term
Borrowings
4
6
15
23
Total Interest Expense
6,473
2,037
15,067
3,766
NET INTEREST INCOME
39,280
33,405
119,819
86,926
Provision for Credit Losses
2,393
2,154
7,689
3,878
Net Interest Income After Provision For Credit Losses
36,887
31,251
112,130
83,048
NONINTEREST INCOME
Deposit Fees
5,456
5,947
16,021
16,585
Bank Card Fees
3,684
3,860
11,205
11,657
Wealth Management
Fees
3,984
3,937
12,061
14,410
Mortgage Banking Revenues
1,839
2,895
8,072
11,807
Other
1,765
1,870
7,093
5,426
Total Noninterest
Income
16,728
18,509
54,452
59,885
NONINTEREST EXPENSE
Compensation
23,003
22,967
69,965
68,487
Occupancy, Net
6,980
6,153
20,562
18,321
Other
9,122
8,579
26,539
25,564
Total Noninterest
Expense
39,105
37,699
117,066
112,372
INCOME BEFORE INCOME TAXES
14,510
12,061
49,516
30,561
Income Tax Expense
3,004
2,493
10,130
5,898
NET INCOME
11,506
9,568
39,386
24,663
Loss (Income) Attributable to Noncontrolling Interests
1,149
37
1,153
(860)
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
12,655
$
9,605
$
40,539
$
23,803
BASIC NET INCOME PER SHARE
$
0.75
$
0.57
$
2.38
$
1.40
DILUTED NET INCOME PER SHARE
$
0.74
$
0.57
$
2.38
$
1.40
Average Common
Basic Shares Outstanding
16,985
16,960
17,001
16,947
Average Common
Diluted Shares Outstanding
17,025
16,996
17,031
16,973
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
7
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in Thousands)
2023
2022
2023
2022
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
12,655
$
9,605
$
40,539
$
23,803
Other comprehensive (loss) income, before
tax:
Investment Securities:
Change in net unrealized gain/loss on securities available for sale
to held to maturity
(3,405)
(2,618)
516
(38,778)
Unrealized losses on securities transferred from available for sale
to held to maturity
-
(9,384)
-
(9,384)
Amortization of unrealized losses on securities transferred from
available for sale to held to maturity
887
586
2,628
586
Derivative:
Change in net unrealized gain on effective cash flow
derivative
770
1,407
553
4,403
Benefit Plans:
Pension plan settlement
-
102
(217)
480
Total Benefit Plans
-
102
(217)
480
Other comprehensive (loss) income, before
tax
(1,748)
(9,907)
3,480
(42,693)
Deferred tax (benefit) expense related to other comprehensive income
(444)
(2,469)
927
(10,704)
Other comprehensive (loss) income, net of tax
(1,304)
(7,438)
2,553
(31,989)
TOTAL COMPREHENSIVE
INCOME (LOSS)
$
11,351
$
2,167
$
43,092
$
(8,186)
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
8
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREOWNERS’ EQUITY
(Unaudited)
Accumulated
Other
Additional
Comprehensive
Shares
Common
Paid-In
Retained
(Loss) Income,
(Dollars In Thousands, Except Share Data)
Outstanding
Stock
Capital
Earnings
Net of Taxes
Total
Balance, July 1, 2023
16,991,634
$
170
$
36,853
$
408,771
$
(33,372)
$
412,422
Net Income Attributable to Common Shareowners
-
-
-
12,655
-
12,655
Other Comprehensive Loss, net of tax
-
-
-
-
(1,304)
(1,304)
Cash Dividends ($
0.2000
per share)
-
-
-
(3,396)
-
(3,396)
Repurchase of Common Stock
(36,411)
-
(1,099)
-
-
(1,099)
Stock Based Compensation
-
-
346
-
-
346
Stock Compensation Plan Transactions, net
2,530
-
82
-
-
82
Balance, September 30, 2023
16,957,753
$
170
$
36,182
$
418,030
$
(34,676)
$
419,706
Balance, July 1, 2022
16,959,280
$
170
$
35,738
$
373,562
$
(40,765)
$
368,705
Net Income Attributable to Common Shareowners
-
-
-
9,605
-
9,605
Other Comprehensive Loss, net of tax
-
-
-
-
(7,438)
(7,438)
Cash Dividends ($
0.1700
per share)
-
-
-
(2,883)
-
(2,883)
Stock Based Compensation
-
-
415
-
-
415
Stock Compensation Plan Transactions, net
2,532
-
81
-
-
81
Balance, September 30, 2022
16,961,812
$
170
$
36,234
$
380,284
$
(48,203)
$
368,485
Balance, January 1, 2023
16,986,785
$
170
$
37,331
$
387,009
$
(37,229)
$
387,281
Net Income Attributable to Common Shareowners
-
-
-
40,539
-
40,539
Other Comprehensive Income, net of tax
-
-
-
-
2,553
2,553
Cash Dividends ($
0.5600
per share)
-
-
-
(9,518)
-
(9,518)
Repurchase of Common Stock
(102,147)
-
(3,121)
-
-
(3,121)
Stock Based Compensation
-
-
1,110
-
-
1,110
Stock Compensation Plan Transactions, net
73,115
-
862
-
-
862
Balance, September 30, 2023
16,957,753
$
170
$
36,182
$
418,030
$
(34,676)
$
419,706
Balance, January 1, 2022
16,892,060
$
169
$
34,423
$
364,788
$
(16,214)
$
383,166
Net Income Attributable to Common Shareowners
-
-
-
23,803
-
23,803
Other Comprehensive Loss, net of tax
-
-
-
-
(31,989)
(31,989)
Cash Dividends ($
0.4900
per share)
-
-
-
(8,307)
-
(8,307)
Stock Based Compensation
-
-
904
-
-
904
Stock Compensation Plan Transactions, net
69,752
1
907
-
-
908
Balance, September 30, 2022
16,961,812
$
170
$
36,234
$
380,284
$
(48,203)
$
368,485
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
9
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(Dollars in Thousands)
2023
2022
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
40,539
$
23,803
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Credit Losses
7,689
3,878
Depreciation
5,920
5,689
Amortization of Premiums, Discounts and Fees, net
3,216
6,618
Amortization of Intangible Asset
120
120
Pension Plan Settlement (Gain) Charge
(291)
480
Originations of Loans Held-for-Sale
(222,575)
(772,089)
Proceeds From Sales of Loans Held-for-Sale
223,543
813,267
Mortgage Banking Revenues
(8,072)
(11,807)
Net Additions for Capitalized Mortgage Servicing Rights
(392)
570
Stock Compensation
1,110
904
Net Tax Benefit from
Stock-Based Compensation
-
(19)
Deferred Income Taxes
(2,464)
(12,854)
Net Change in Operating Leases
(12)
(83)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
(1,915)
(136)
Net Decrease in Other Assets
8,207
3,696
Net Increase in Other Liabilities
1,069
12,839
Net Cash Provided By Operating Activities
55,692
74,876
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
-
(219,865)
Proceeds from Payments, Maturities, and Calls
28,159
40,096
Securities Available for
Sale:
Purchases
(9,399)
(41,880)
Proceeds from Sale of Securities
30,420
3,365
Proceeds from Payments, Maturities, and Calls
53,045
64,301
Purchases of Loans Held for Investment
(295,360)
(329,481)
Net Decrease (Increase) in Loans Held for Investment
132,105
(113,116)
Proceeds From Sales of Other Real Estate Owned
3,840
1,683
Purchases of Premises and Equipment
(5,459)
(4,013)
Noncontrolling Interest Contributions
-
2,867
Net Cash Used In Investing Activities
(62,649)
(596,043)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposits
(398,872)
46,516
Net (Decrease) Increase in Short-Term
Borrowings
(15,097)
17,592
Repayment of Other Long-Term
Borrowings
(149)
(200)
Dividends Paid
(9,518)
(8,307)
Payments to Repurchase Common Stock
(3,121)
-
Proceeds from Issuance of Common Stock Under Purchase Plans
562
577
Net Cash (Used In) Provided by Financing Activities
(426,195)
56,178
NET DECREASE IN CASH AND CASH EQUIVALENTS
(433,152)
(464,989)
Cash and Cash Equivalents at Beginning of Period
600,650
1,035,354
Cash and Cash Equivalents at End of Period
$
167,498
$
570,365
Supplemental Cash Flow Disclosures:
Interest Paid
$
15,026
$
3,588
Income Taxes Paid
$
7,395
$
6,410
Noncash Investing and Financing Activities:
Loans Transferred to Other Real Estate Owned
$
1,495
$
1,543
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
10
CAPITAL CITY BANK
GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
BUSINESS AND BASIS OF PRESENTATION
Nature of Operations
.
Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of
banking and banking-
related services to individual and corporate clients through its subsidiary,
Capital City Bank, with banking offices located in Florida,
Georgia, and Alabama.
The Company is subject to competition from other financial institutions, is subject to
regulation by certain
government agencies and undergoes periodic examinations
by those regulatory authorities.
On March 1, 2020, CCB completed its acquisition of
51
% of the membership interests in Brand Mortgage Group, LLC, which is now
operated as Capital City Home Loans, LLC (“CCHL”).
CCHL was consolidated into CCBG’s financial
statements effective upon the
date of the acquisition.
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.
Basis of Presentation
.
The consolidated financial statements in this Quarterly Report on Form
10-Q include the accounts of CCBG
and its wholly owned subsidiary,
Capital City Bank (“CCB” or the “Bank”).
All material inter-company transactions and accounts
have been eliminated.
Certain previously reported amounts have been reclassified to conform to the current year’s
presentation.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X.
Accordingly,
they do not include all of the information and notes required by generally accepted
accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included.
The Consolidated Statement of Financial Condition at December
31, 2022 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and notes
required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and notes
thereto included in the
Company’s annual report
on Form 10-K/A for the year ended December 31, 2022.
Accounting Standards Updates
Adoption of New Accounting Standard,
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2022-02,
“Financial Instruments – Credit Losses (Topic
326), Troubled Debt Restructurings and Vintage
Disclosures.” ASU 2022-02 eliminates
the accounting guidance for troubled debt restructurings in Accounting
Standards Codification (“ASC”) 310-40, “Receivables -
Troubled Debt Restructurings by Creditors
”
for entities that have adopted the current expected credit loss model introduced
by ASU
2016-13, “Financial Instruments – Credit Losses (Topic
326), Measurement of Credit Losses on Financial Instruments.”
ASU 2022-
02 also requires that public business entities disclose current-period
gross charge-offs by year of origination for financing receivables
and net investments in leases within the scope of Subtopic 326-20, “Financial
Instruments—Credit Losses—Measured at Amortized
Cost.”
Proposed Accounting Standards
,
ASU
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 2023-01 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.
11
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. The Company is currently evaluating the provisions of
the amendments and the impact on its future consolidated
statements.
12
NOTE 2 –
INVESTMENT SECURITIES
Investment Portfolio Composition
. The following table summarizes the amortized cost and related fair value of investment
securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”)
and the corresponding amounts of gross
unrealized gains and losses.
Available for
Sale
Amortized
Unrealized
Unrealized
Allowance for
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Credit Losses
Value
September 30, 2023
U.S. Government Treasury
$
22,036
$
-
$
1,727
$
-
$
20,309
U.S. Government Agency
160,275
15
11,328
-
148,962
States and Political Subdivisions
46,479
-
6,272
(12)
40,195
Mortgage-Backed Securities
(1)
74,556
-
13,954
-
60,602
Corporate Debt Securities
63,871
-
8,115
(31)
55,725
Other Securities
(2)
8,259
-
-
-
8,259
Total
$
375,476
$
15
$
41,396
$
(43)
$
334,052
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
September 30, 2023
U.S. Government Treasury
$
457,602
$
-
$
24,452
$
433,150
Mortgage-Backed Securities
(1)
174,474
-
24,976
149,498
Total
$
632,076
$
-
$
49,428
$
582,648
December 31, 2022
U.S. Government Treasury
$
457,374
$
-
$
25,641
$
431,733
Mortgage-Backed Securities
(1)
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 stock,
recorded at cost of $
3.2
million and $
5.1
million,
respectively,
at September 30, 2023 and $
2.1
million and $
5.1
million, respectively,
at December 31, 2022.
At September 30, 2023 and December 31, 2022, the investment portfolio
had $
3.6
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 $
463.6
million and $
656.1
million at September 30, 2023 and December 31, 2022, respectively,
were pledged to secure public deposits and for other purposes.
The Bank, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), is required
to own capital stock in the FHLB based
generally upon the balances of residential and commercial real estate loans and FHLB
advances.
FHLB stock, which is included in
other securities,
is pledged to secure FHLB advances.
No ready market exists for this stock, and it has no quoted fair value; however,
redemption of this stock has historically been at par value.
13
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 transfer.
The net unamortized, unrealized loss on the transferred securities included
in accumulated
other comprehensive loss in the accompanying statement of financial condition
at September 30, 2023 totaled $
5.3
million.
This
amount will continue to 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.
There were $
30.4
million in sales of investment securities for the three and nine months ended
September 30, 2023.
There were
no
significant sales of investment securities for the three months ended September 30, 2022
and $
3.4
million in sales for
the nine months ended September 30, 2022.
Maturity Distribution
.
At September 30, 2023, the Company’s
investment securities had the following maturity distribution based on
contractual maturity.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or
prepay obligations.
Mortgage-backed securities (“MBS”) and certain amortizing U.S. government
agency securities are shown
separately because they are not due at a certain maturity date.
Available for
Sale
Held to Maturity
(Dollars in Thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Due in one year or less
$
26,628
$
25,874
$
-
$
-
Due after one year through five years
132,264
119,087
457,602
433,150
Due after five year through ten years
45,924
37,331
-
-
Mortgage-Backed Securities
74,556
60,602
174,474
149,498
U.S. Government Agency
87,845
82,899
-
-
Other Securities
8,259
8,259
-
-
Total
$
375,476
$
334,052
$
632,076
$
582,648
14
Unrealized Losses on Investment Securities.
The following table summarizes the available for sale investment securities with
unrealized losses aggregated by major security type and length of time in a continuous
unrealized loss position:
Less Than
Greater Than
12 Months
12 Months
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Thousands)
Value
Losses
Value
Losses
Value
Losses
September 30, 2023
Available for
Sale
U.S. Government Treasury
$
-
$
-
$
19,318
$
1,727
$
19,318
$
1,727
U.S. Government Agency
11,833
89
134,243
11,239
146,076
11,328
States and Political Subdivisions
835
26
37,981
6,246
38,816
6,272
Mortgage-Backed Securities
91
1
60,492
13,953
60,583
13,954
Corporate Debt Securities
-
-
55,756
8,115
55,756
8,115
Total
$
12,759
$
116
$
307,790
$
41,280
$
320,549
$
41,396
Held to Maturity
U.S. Government Treasury
-
-
433,150
24,452
433,150
24,452
Mortgage-Backed Securities
998
38
148,500
24,938
149,498
24,976
Total
$
998
$
38
$
581,650
$
49,390
$
582,648
$
49,428
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
Corporate Debt 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 September 30, 2023, there were
894
positions (combined AFS and HTM) with unrealized losses totaling $
90.8
million.
86
of these
positions are U.S. Treasury bonds and carry
the full faith and credit of the U.S. Government.
705
are U.S. government agency
securities issued by U.S. government sponsored entities.
We believe
the long history of no credit losses on government securities
indicates that the expectation of nonpayment of the amortized cost basis is effectively
zero.
The remaining
103
positions (municipal
securities and corporate bonds) have a credit component.
At September 30, 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
September 30, 2023, corporate debt securities had an allowance for credit
losses of $
31,000
and municipal securities had an allowance
of $
12,000
.
Credit Quality Indicators
The Company monitors the credit quality of its investment securities through
various risk management procedures, including the
monitoring of credit ratings.
A majority of the debt securities in the Company’s
investment portfolio were issued by a U.S.
government entity or agency and are either explicitly or implicitly guaranteed
by the U.S. government.
The Company believes the
long history of no credit losses on these securities indicates that the expectation
of nonpayment of the amortized cost basis is
effectively 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.
15
NOTE 3 – LOANS HELD FOR INVESTMENT AND ALLOWANCE
FOR CREDIT LOSSES
Loan Portfolio Composition
.
The composition of the held for investment (“HFI”) loan portfolio was as follows:
(Dollars in Thousands)
September 30, 2023
December 31, 2022
Commercial, Financial and Agricultural
$
221,704
$
247,362
Real Estate – Construction
197,526
234,519
Real Estate – Commercial Mortgage
828,234
782,557
Real Estate – Residential
(1)
967,913
749,513
Real Estate – Home Equity
203,606
208,217
Consumer
(2)
286,198
325,517
Loans Held For Investment, Net of Unearned Income
$
2,705,181
$
2,547,685
(1)
Includes loans in process balance of $
2.3
million and $
6.1
million at both September 30, 2023 and December 31, 2022.
(2)
Includes overdraft balances of $
1.1
million at September 30, 2023 and December 31, 2022, respectively.
Net deferred loan costs, which include premiums on purchased loans,
included in loans were $
7.2
million at September 30, 2023 and
$
5.1
million at December 31, 2022.
Accrued interest receivable on loans which is excluded from amortized
cost totaled $
9.7
million at September 30, 2023 and $
8.0
million at December 31, 2022, and is reported separately in Other Assets.
The Company has pledged a blanket floating lien on all 1-4 family residential mortgage
loans, commercial real estate mortgage loans,
and home equity loans to support available borrowing capacity at the FHLB of
Atlanta and has pledged a blanket floating lien on all
consumer loans, commercial loans, and construction loans to support available
borrowing capacity at the Federal Reserve Bank of
Atlanta.
Loan Purchase and Sales
.
The Company will periodically purchase newly originated 1-4 family real
estate secured adjustable-rate
loans from Capital City Home Loans (“CCHL”), a related party.
Residential loan purchases from CCHL totaled $
293.1
million and
$
267.0
million for the nine months ended September 30, 2023 and September
30, 2022, respectively, and were not credit
impaired.
16
Allowance for Credit Losses
.
The methodology for estimating the amount of credit losses reported in the
allowance for credit losses
(“ACL”) has two basic components: first, an asset-specific component
involving loans that do not share risk characteristics and the
measurement of expected credit losses for such individual loans; and second,
a pooled component for expected credit losses for pools
of loans that share similar risk characteristics.
This allowance methodology is discussed further in Note 1 – Significant
Accounting
Policies in the Company’s 2022 Form
10-K/A.
The following table details the activity in the allowance for credit losses by portfolio
segment.
Allocation of a portion of the
allowance to one category of loans does not preclude its availability to absorb
losses in other categories.
Commercial,
Real Estate
Financial,
Real Estate
Commercial
Real Estate
Real Estate
(Dollars in Thousands)
Agricultural
Construction
Mortgage
Residential
Home Equity
Consumer
Total
Three Months Ended
September 30, 2023
Beginning Balance
$
1,446
$
2,848
$
5,453
$
13,388
$
1,783
$
3,325
$
28,243
Provision for Credit Losses
(59)
(536)
84
1,356
(71)
1,219
1,993
Charge-Offs
(76)
-
-
-
-
(1,999)
(2,075)
Recoveries
28
-
17
30
53
794
922
Net (Charge-Offs) Recoveries
(48)
-
17
30
53
(1,205)
(1,153)
Ending Balance
$
1,339
$
2,312
$
5,554
$
14,774
$
1,765
$
3,339
$
29,083
Nine Months Ended
September 30, 2023
Beginning Balance
$
1,506
$
2,654
$
4,815
$
10,741
$
1,864
$
3,488
$
25,068
Provision for Credit Losses
(67)
(344)
823
3,814
(269)
3,218
7,175
Charge-Offs
(294)
-
(120)
-
(39)
(6,252)
(6,705)
Recoveries
194
2
36
219
209
2,885
3,545
Net (Charge-Offs) Recoveries
(100)
2
(84)
219
170
(3,367)
(3,160)
Ending Balance
$
1,339
$
2,312
$
5,554
$
14,774
$
1,765
$
3,339
$
29,083
Three Months Ended
September 30, 2022
Beginning Balance
$
1,641
$
3,138
$
5,052
$
5,827
$
1,760
$
4,045
$
21,463
Provision for Credit Losses
(136)
(22)
(120)
1,388
127
749
1,986
Charge-Offs
(2)
-
(1)
-
-
(1,759)
(1,762)
Recoveries
58
2
8
44
22
926
1,060
Net Charge-Offs
56
2
7
44
22
(833)
(702)
Ending Balance
$
1,561
$
3,118
$
4,939
$
7,259
$
1,909
$
3,961
$
22,747
Nine Months Ended
September 30, 2022
Beginning Balance
$
2,191
$
3,302
$
5,810
$
4,129
$
2,296
$
3,878
$
21,606
Provision for Credit Losses
267
(194)
(697)
2,944
(501)
1,940
3,759
Charge-Offs
(1,179)
-
(267)
-
(33)
(4,354)
(5,833)
Recoveries
282
10
93
186
147
2,497
3,215
Net Charge-Offs
(897)
10
(174)
186
114
(1,857)
(2,618)
Ending Balance
$
1,561
$
3,118
$
4,939
$
7,259
$
1,909
$
3,961
$
22,747
For the nine months ended September 30, 2023, the allowance for
HFI loans increased by $
4.0
million and reflected a provision
expense of $
7.2
million and net loan charge-offs of $
3.2
million.
The increase was primarily driven by incremental reserves needed
for loan growth and a higher loss rate for the residential real estate portfolio due
to slower prepayment speeds.
For the nine months
ended September 30, 2022, the allowance increased by $
1.1
million and reflected a provision expense of $
3.8
million and net loan
charge-offs of $
2.6
million. The increase was driven by incremental reserves needed for loan growth, and
to a lesser extent, a higher
projected rate of unemployment and its potential effect on rates of default.
Unemployment forecast scenarios were utilized to estimate
probability of default and are weighted based on management’s
estimate of probability.
See Note 8 – Commitments and
Contingencies for information on the allowance for off-balance
sheet credit commitments.
17
Loan Portfolio Aging.
A loan is defined as a past due loan when one full payment is past due or a contractual maturity
is over 30 days
past due (“DPD”).
The following table presents the aging of the amortized cost basis in accruing
past due loans by class of loans.
30-59
60-89
90 +
Total
Total
Nonaccrual
Total
(Dollars in Thousands)
DPD
DPD
DPD
Past Due
Current
Loans
Loans
September 30, 2023
Commercial, Financial and Agricultural
$
306
$
106
$
-
$
412
$
221,236
$
56
$
221,704
Real Estate – Construction
-
-
-
-
197,251
275
197,526
Real Estate – Commercial Mortgage
393
44
-
437
826,888
909
828,234
Real Estate – Residential
331
117
-
448
965,171
2,294
967,913
Real Estate – Home Equity
420
27
-
447
202,692
467
203,606
Consumer
3,040
793
-
3,833
281,672
693
286,198
Total
$
4,490
$
1,087
$
-
$
5,577
$
2,694,910
$
4,694
$
2,705,181
December 31, 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 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.
September 30, 2023
December 31, 2022
Nonaccrual
Nonaccrual
Nonaccrual
Nonaccrual
With No
With
90 + Days
With No
With
90 + Days
(Dollars in Thousands)
ACL
ACL
Still Accruing
ACL
ACL
Still Accruing
Commercial, Financial and Agricultural
$
-
$
56
$
-
$
-
$
41
$
-
Real Estate – Construction
-
275
-
-
17
-
Real Estate – Commercial Mortgage
780
129
-
389
256
-
Real Estate – Residential
1,084
1,210
-
-
239
-
Real Estate – Home Equity
-
467
-
-
771
-
Consumer
-
693
-
-
584
-
Total Nonaccrual
Loans
$
1,864
$
2,830
$
-
$
389
$
1,908
$
-
18
Collateral Dependent Loans.
The following table presents the amortized cost basis of collateral-dependent
loans.
September 30, 2023
December 31, 2022
Real Estate
Non Real Estate
Real Estate
Non Real Estate
(Dollars in Thousands)
Secured
Secured
Secured
Secured
Commercial, Financial and Agricultural
$
-
$
-
$
-
$
-
Real Estate – Construction
275
-
-
-
Real Estate – Commercial Mortgage
781
-
389
-
Real Estate – Residential
1,084
-
160
-
Real Estate – Home Equity
-
-
130
-
Consumer
-
-
21
-
Total Collateral Dependent
Loans
$
2,140
$
-
$
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 September 30, 2023 and December 31, 2022, the Company had $
0.4
million and $
0.6
million, respectively, in
1-4 family residential real estate loans for which formal foreclosure proceedings were
in
process.
For the nine-month period ended September 30, 2023, the Company did
no
t modify any loans made to borrowers 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 review and
approve these policies and procedures on a regular basis (at least annually).
Reporting systems are used to monitor loan originations, loan quality,
concentrations of credit, loan delinquencies and nonperforming
loans and potential problem loans.
Management and the Credit Risk Oversight Committee periodically review
our lines of business to
monitor asset quality trends and the appropriateness of credit policies.
In addition, total borrower exposure limits are established and
concentration risk is monitored.
As part of this process, the overall composition of the portfolio is reviewed to gauge diversification
of risk, client concentrations, industry group, loan type, geographic area, or other
relevant classifications of loans.
Specific segments
of the loan portfolio are monitored and reported to the Board on a quarterly basis and
have strategic plans in place to supplement
Board approved credit policies governing exposure limits and underwriting
standards.
Detailed below are the types of loans within
the Company’s loan portfolio
and risk characteristics unique to each.
Commercial, Financial, and Agricultural – Loans in this category
are primarily made based on identified cash flows of the borrower
with consideration given to underlying collateral and personal or
other guarantees.
Lending policy establishes debt service coverage
ratio limits that require a borrower’s cash flow to be sufficient
to cover principal and interest payments on all new and existing debt.
The majority of these loans are secured by the assets being financed or other business assets such
as accounts receivable, inventory,
or
equipment.
Collateral values are determined based upon third party appraisals and evaluations.
Loan to value ratios at origination are
governed by established policy guidelines.
Real Estate Construction – Loans in this category consist of short-term
construction loans, revolving and non-revolving credit lines
and construction/permanent loans made to individuals and investors to finance
the acquisition, development, construction or
rehabilitation of real property.
These loans are primarily made based on identified cash flows of the borrower
or project and generally
secured by the property being financed, including 1-4 family residential properties
and commercial properties that are either owner-
occupied or investment in nature.
These properties may include either vacant or improved property.
Construction loans are generally
based upon estimates of costs and value associated with the completed project.
Collateral values are determined based upon third
party appraisals and evaluations.
Loan to value ratios at origination are governed by established policy guidelines.
The disbursement
of funds for construction loans is made in relation to the progress of the project and
as such these loans are closely monitored by on-
site inspections.
19
Real Estate Commercial Mortgage – Loans in this category consists of commercial
mortgage loans secured by property that is either
owner-occupied or investment in nature.
These loans are primarily made based on identified cash flows of the borrower or
project
with consideration given to underlying real estate collateral and
personal guarantees.
Lending policy establishes debt service
coverage ratios and loan to value ratios specific to the property type.
Collateral values are determined based upon third party
appraisals and evaluations.
Real Estate Residential – Residential mortgage loans held in the Company’s
loan portfolio are made to borrowers that demonstrate the
ability to make scheduled payments with full consideration to underwriting
factors such as current income, employment status, current
assets, and other financial resources, credit history,
and the value of the collateral.
Collateral consists of mortgage liens on 1-4 family
residential properties.
Collateral values are determined based upon third party appraisals and evaluations.
The Company does not
originate sub-prime loans.
Real Estate Home Equity – Home equity loans and lines are made to qualified individuals
for legitimate purposes generally secured
by senior or junior mortgage liens on owner-occupied
1-4 family homes or vacation homes.
Borrower qualifications include
favorable credit history combined with supportive income and debt ratio
requirements and combined loan to value ratios within
established policy guidelines.
Collateral values are determined based upon third party appraisals and evaluations.
Consumer Loans – This loan portfolio includes personal installment loans, direct
and indirect automobile financing, and overdraft
lines of credit.
The majority of the consumer loan category consists of direct and indirect automobile
loans.
Lending policy
establishes maximum debt to income ratios, minimum credit scores, and
includes guidelines for verification of applicants’ income and
receipt of credit reports.
Credit Quality Indicators
.
As part of the ongoing monitoring of the Company’s
loan portfolio quality, management
categorizes loans
into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial
information, historical payment performance, credit documentation,
and current economic and market trends, among other
factors.
Risk ratings are assigned to each loan and revised as needed through established monitoring
procedures for individual loan
relationships over a predetermined amount and review of smaller balance homogenous
loan pools.
The Company uses the definitions
noted below for categorizing and managing its criticized loans.
Loans categorized as “Pass” do not meet the criteria set forth below
and are not considered criticized.
Special Mention – Loans in this category are presently protected from loss, but
weaknesses are apparent which, if not corrected, could
cause future problems.
Loans in this category may not meet required underwriting criteria and
have no mitigating factors.
More than
the ordinary amount of attention is warranted for these loans.
Substandard – Loans in this category exhibit well-defined weaknesses that would
typically bring normal repayment into jeopardy.
These loans are no longer adequately protected due to well-defined
weaknesses that affect the repayment capacity of the
borrower.
The possibility of loss is much more evident and above average supervision is required for
these loans.
Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized
as Substandard, with the characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly
questionable and improbable.
Performing/Nonperforming – Loans within certain homogenous
loan pools (home equity and consumer) are not individually reviewed,
but are monitored for credit quality via the aging status of the loan and by payment
activity.
The performing or nonperforming status
is updated on an on-going basis dependent upon improvement and
deterioration in credit quality.
20
The following table summarizes gross loans held for investment at September
30, 2023 and current period gross write-offs for the nine
months ended September 30, 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,
Agriculture:
Pass
$
40,571
$
72,609
$
32,101
$
12,418
$
8,920
$
9,055
$
44,290
$
219,964
Special Mention
182
461
405
11
13
8
76
1,156
Substandard
-
106
108
82
27
150
111
584
Total
$
40,753
$
73,176
$
32,614
$
12,511
$
8,960
$
9,213
$
44,477
$
221,704
Current-Period Gross
Writeoffs
$
6
$
149
$
48
$
31
$
12
$
10
$
38
$
294
Real Estate -
Construction:
Pass
$
76,755
$
88,831
$
22,609
$
1,214
$
189
$
-
$
5,482
$
195,080
Special Mention
568
-
625
214
-
-
-
1,407
Substandard
-
-
378
661
-
-
-
1,039
Total
$
77,323
$
88,831
$
23,612
$
2,089
$
189
$
-
$
5,482
$
197,526
Real Estate -
Commercial Mortgage:
Pass
$
93,098
$
277,464
$
154,743
$
108,076
$
44,874
$
115,068
$
16,059
$
809,382
Special Mention
3,299
316
-
233
1,373
1,014
-
6,235
Substandard
-
1,250
6,781
1,651
614
1,627
694
12,617
Total
$
96,397
$
279,030
$
161,524
$
109,960
$
46,861
$
117,709
$
16,753
$
828,234
Current-Period Gross
Writeoffs
$
-
$
-
$
-
$
-
$
-
$
120
$
-
$
120
Real Estate - Residential:
Pass
$
294,155
$
434,902
$
86,357
$
39,468
$
26,126
$
71,667
$
8,031
$
960,706
Special Mention
269
90
225
510
-
542
-
1,636
Substandard
790
106
204
479
918
3,074
-
5,571
Total
$
295,214
$
435,098
$
86,786
$
40,457
$
27,044
$
75,283
$
8,031
$
967,913
Real Estate - Home
Equity:
Performing
$
71
$
145
$
130
$
11
$
388
$
997
$
201,397
$
203,139
Nonperforming
-
-
-
-
-
-
467
467
Total
$
71
$
145
$
130
$
11
$
388
$
997
$
202,257
$
203,606
Current-Period Gross
Writeoffs
$
-
$
-
$
-
$
-
$
-
$
-
$
39
$
39
Consumer:
Performing
$
57,755
$
99,327
$
79,230
$
24,375
$
12,417
$
6,387
$
6,014
$
285,505
Nonperforming
69
226
202
193
-
3
-
693
Total
$
57,824
$
99,553
$
79,432
$
24,568
$
12,417
$
6,390
$
6,014
$
286,198
Current-Period Gross
Writeoffs
$
2,322
$
2,199
$
1,075
$
228
$
200
$
94
$
134
$
6,252
21
NOTE 4 – MORTGAGE BANKING ACTIVITIES
The Company’s mortgage
banking activities include mandatory delivery loan sales, forward sales contracts used
to manage residential
loan pipeline price risk, utilization of warehouse lines to fund secondary
market residential loan closings, and residential mortgage
servicing.
Residential Mortgage Loan Production
The Company originates, markets, and services conventional and government
-sponsored residential mortgage loans.
Generally,
conforming fixed rate residential mortgage loans are held for sale in the secondary
market and non-conforming and adjustable-rate
residential mortgage loans may be held for investment.
The volume of residential mortgage loans originated for sale and secondary
market prices are the primary drivers of origination revenue.
Residential mortgage loan commitments are generally outstanding for 30
to 90 days, which represents the typical period from
commitment to originate a residential mortgage loan to when the closed
loan is sold to an investor.
Residential mortgage loan
commitments are subject to both credit and price risk.
Credit risk is managed through underwriting policies and procedures,
including
collateral requirements, which are generally accepted by the secondary
loan markets.
Price risk is primarily related to interest rate
fluctuations and is partially managed through forward sales of residential mortgage
-backed securities (primarily to-be announced
securities, or TBAs) or mandatory delivery commitments with investors.
The unpaid principal balance of residential mortgage loans held for
sale, notional amounts of derivative contracts related to residential
mortgage loan commitments and forward contract sales and their related fair values
are set- forth below.
September 30, 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
$
35,899
$
34,013
$
26,274
$
26,909
Residential Mortgage Loan Commitments ("IRLCs")
(1)
50,726
859
36,535
819
Forward Sales Contracts
(1)
28,500
180
15,500
187
$
35,052
$
27,915
(1)
Recorded in other assets at fair value
At September 30, 2023, the Company had
no
residential mortgage loans held for sale 30-89 days past due and $
0.6
million of loans
were on nonaccrual status. At December 31, 2022, the Company had $
0.6
million of residential mortgage loans held for sale 30-89
days past due and $
0.1
million of loans were on nonaccrual status.
Mortgage banking revenue was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Net realized gains on sales of mortgage loans
$
1,350
$
1,478
$
4,843
$
5,716
Net change in unrealized gain on mortgage loans held for sale
(1,223)
(1,205)
(1,700)
(1,600)
Net change in the fair value of mortgage loan commitments (IRLCs)
(412)
439
39
116
Net change in the fair value of forward sales contracts
80
655
(5)
616
Pair-Offs on net settlement of forward sales contracts
359
637
454
4,846
Mortgage servicing rights additions
184
126
471
449
Net origination fees
1,501
765
3,970
1,664
Total mortgage banking
revenues
$
1,839
$
2,895
$
8,072
$
11,807
22
Residential Mortgage Servicing
The Company may retain the right to service residential mortgage loans
sold.
The unpaid principal balance of loans serviced for
others is the primary driver of servicing revenue.
The following represents a summary of mortgage servicing rights.
(Dollars in Thousands)
September 30, 2023
December 31, 2022
Number of residential mortgage loans serviced for others
411
1,769
Outstanding principal balance of residential mortgage loans serviced
for others
$
97,479
$
410,740
Weighted average
interest rate
5.38%
3.62%
Remaining contractual term (in months)
306
298
Conforming conventional loans serviced by the Company are sold to 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 Government National
Mortgage Association (“GNMA”), whereby the Company is
insured against loss by the Federal Housing Administration or partially
guaranteed against loss by the Veterans
Administration.
At
September 30, 2023, the servicing portfolio balance consisted of
the following loan types: FNMA (
9
%), GNMA (
1
%), and private
investor (
90
%).
FNMA and private investor loans are structured as actual/actual payment remittance.
The Company had
no
delinquent residential mortgage loans in GNMA pools serviced by the Company
at September 30, 2023 and
$
0.3
million at December 31, 2022, respectively.
The right to repurchase these loans and the corresponding liability has been
recorded
in other assets and other liabilities, respectively,
in the Consolidated Statement of Financial Condition.
For the three and nine months
ended September 30, 2023, the Company repurchased $
0.8
million and $
2.2
million, respectively, in
delinquent residential loans that
were in GNMA pools.
For the three and nine months ended September 30, 2022, the Company repurchased
$
0.3
million and $
1.3
million, respectively,
in delinquent residential loans from the GNMA pools. When delinquent residential
loans are repurchased, the
Company has the intention to modify their terms and include the loans in new
GNMA pools.
Activity in the capitalized mortgage servicing rights was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Beginning balance
$
565
$
3,415
$
2,599
$
3,774
Additions due to loans sold with servicing retained
184
126
471
449
Deletions and amortization
(45)
(337)
(79)
(1,019)
Sale of servicing rights
(1)
-
-
(2,287)
-
Ending balance
$
704
$
3,204
$
704
$
3,204
(1)
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.
The Company did
no
t record any permanent impairment losses on mortgage servicing rights for the
three months ended September 30,
2023 or 2022.
The key unobservable inputs used in determining the fair value of the Company’s
mortgage servicing rights were as follows:
September 30, 2023
December 31, 2022
Minimum
Maximum
Minimum
Maximum
Discount rates
9.50%
12.00%
9.50%
12.00%
Annual prepayment speeds
10.58%
16.83%
12.33%
20.23%
Cost of servicing (per loan)
$
85
$
95
$
85
$
95
23
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
13.81
% at September 30, 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
September 30, 2023.
Amounts
(Dollars in Thousands)
Outstanding
$
50
million master repurchase agreement without defined expiration.
Interest is at the SOFR rate plus
2.00%
to
3.00%
, with a floor rate of
3.25%
.
A cash pledge deposit of $
0.5
million is required by the lender.
$
10,504
$
60
million warehouse line of credit agreement expiring in
December 2023
.
Interest is at the SOFR plus
2.25%
,
to
3.25%
.
8,282
Total Warehouse
Borrowings
$
18,786
Warehouse
line borrowings are classified as short-term borrowings.
At December 31, 2022, warehouse line borrowings totaled $
50.2
million. At September 30, 2023, the Company had residential mortgage
loans held for sale and construction loans held for investment
pledged as collateral under the above warehouse lines of credit and master repurchase
agreements.
The above agreements also contain
covenants which include certain financial requirements, including
maintenance of minimum tangible net worth, minimum liquid
assets, and maximum debt to net worth ratio, as defined in the agreements.
The Company was in compliance with all significant debt
covenants at September 30, 2023.
The Company has extended a $
50
million warehouse line of credit to CCHL, a
51
% owned subsidiary entity.
Balances and
transactions under this line of credit are eliminated in the Company’s
consolidated financial statements and thus not included in the
total short term borrowings noted on the Consolidated Statement of
Financial Condition.
The balance of this line of credit at
September 30, 2023 and December 31, 2022 was $
38.6
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 September 30, 2023 were designed as a cash flow hedge for
subordinated debt.
Under the swap arrangement, the Company will pay a fixed interest rate of
2.50
% and receive a variable interest
rate based on three-month 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 income (“AOCI”) and subsequently
reclassified into interest expense in the same period(s) during
which the hedged transaction affects earnings. Amounts reported
in accumulated other comprehensive income related to derivatives
will be reclassified to interest expense as interest payments are made on the
Company’s variable-rate subordinated
debt.
The following table reflects the cash flow hedges included in the consolidated
statements of financial condition
.
Statement of Financial
Notional
Fair
Weighted Average
(Dollars in Thousands)
Condition Location
Amount
Value
Maturity (Years)
September 30, 2023
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
6,748
6.8
December 31, 2022
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
6,195
7.5
24
The following table presents the net gains (losses) recorded in AOCI and the
consolidated statements of income related to the cash
flow derivative instruments (interest rate swaps related to subordinated
debt) for the three and nine months ended September 30, 2023.
Amount of (Loss)
Amount of Gain
Gain Recognized
(Loss) Reclassified
(Dollars in Thousands)
Category
in AOCI
from AOCI to Income
Three months ended September 30, 2023
Interest expense
$
574
$
375
Three months ended September 30, 2022
Interest expense
1,050
113
Nine months ended September 30, 2023
Interest expense
$
413
$
1,016
Nine months ended September 30, 2022
Interest expense
3,287
112
The Company estimates there will be approximately $
1.5
million reclassified as a decrease to interest expense within the next 12
months.
The Company had a collateral liability of $
7.0
million and $
5.8
million at September 30, 2023 and December 31, 2022, respectively.
NOTE 6 – LEASES
Operating leases in which the Company is the lessee are recorded as operating
lease right of use (“ROU”) assets and operating
liabilities, included in other assets and liabilities, respectively,
on its Consolidated Statement of Financial Condition.
The Company’s operating
leases primarily relate to banking offices with remaining lease terms
from
1
to
42
years.
The Company’s
leases are not complex and do not contain residual value guarantees, variable
lease payments, or significant assumptions or judgments
made in applying the requirements of Topic
842.
Operating leases with an initial term of 12 months or less are not recorded on the
Consolidated Statement of Financial Condition and the related lease expense is recognized on a straight-line basis over the lease term.
At September 30, 2023, the operating lease ROU assets and liabilities were $
23.8
million and $
24.2
million, respectively. At
December 31, 2022, 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 related
to the Company’s operating leases.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Operating lease expense
$
710
$
427
$
2,114
$
1,202
Short-term lease expense
167
158
438
495
Total lease expense
$
877
$
585
$
2,552
$
1,697
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
720
$
439
$
2,131
$
1,303
Right-of-use assets obtained in exchange for new operating lease liabilities
55
2,406
3,048
3,598
Weighted average
remaining lease term — operating leases (in years)
18.4
22.0
18.4
22.0
Weighted average
discount rate — operating leases
3.3%
2.2%
3.3%
2.2%
25
The table below summarizes the maturity of remaining lease liabilities:
(Dollars in Thousands)
September 30, 2023
2023
$
955
2024
2,723
2025
2,487
2026
2,336
2027
2,246
2028 and thereafter
21,045
Total
$
31,792
Less: Interest
(7,613)
Present Value
of Lease liability
$
24,179
At September 30, 2023, the Company had
one
additional operating lease obligation for a banking office that has not
yet commenced.
A related party is the lessor in an operating lease with the Company.
The Company’s minimum
payment is $
0.1
million annually
through 2052, for an aggregate remaining obligation of $
2.3
million at September 30, 2023.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all full-time
and eligible part-time associates and a
Supplemental Executive Retirement Plan (“SERP”) and a Supplemental
Executive Retirement Plan II (“SERP II”) covering its
executive officers.
The defined benefit plan was amended in December 2019 to remove plan eligibility
for new associates hired after
December 31, 2019.
The SERP II was adopted by the Company’s
Board on May 21, 2020 and covers certain executive officers that
were not covered by the SERP.
The components of the net periodic benefit cost for the Company’s
qualified benefit pension plan were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Service Cost
$
872
$
1,572
$
2,616
$
4,717
Interest Cost
1,458
1,166
4,374
3,499
Expected Return on Plan Assets
(1,701)
(2,675)
(5,104)
(8,026)
Prior Service Cost Amortization
1
4
4
11
Net Loss Amortization
234
428
701
1,285
Pension Settlement Charge
-
102
-
480
Net Periodic Benefit Cost
$
864
$
597
$
2,591
$
1,966
Discount Rate
5.63%
3.11%
5.63%
3.11%
Long-term Rate of Return on Assets
6.75%
6.75%
6.75%
6.75%
The components of the net periodic benefit cost for the Company’s
SERP and SERP II were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Service Cost
$
4
$
8
$
13
$
24
Interest Cost
120
79
381
237
Prior Service Cost Amortization
38
69
114
207
Net Loss Amortization
(111)
180
(420)
540
Pension Settlement Gain
-
-
(291)
-
Net Periodic Benefit Cost
$
51
$
336
$
(203)
$
1,008
Discount Rate
5.33%
2.80%
5.41%
2.80%
26
During the month of June 2023, lump sum payments made under the SERP triggered
settlement accounting and remeasurement of the
plan at June 30, 2023.
In accordance with applicable accounting guidance for retirement benefit plans,
the Company recorded a
settlement gain of $
0.3
million in June 2023.
No
settlement gain or loss was recorded during the third quarter of 2023.
The service cost component of net periodic benefit cost is reflected in
compensation expense in the accompanying statements of
income.
The other components of net periodic cost are included in “other” within the noninterest
expense category in the statements
of income.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Lending Commitments
.
The Company is a party to financial instruments with off-balance
sheet risks in the normal course of business
to meet the financing needs of its clients.
These financial instruments consist of commitments to extend credit and standby
letters of
credit.
The Company’s maximum exposure
to credit loss under standby letters of credit and commitments to extend credit is represented
by
the contractual amount of those instruments.
The Company uses the same credit policies in establishing commitments
and issuing
letters of credit as it does for on-balance sheet instruments.
The amounts associated with the Company’s
off-balance sheet
obligations were as follows:
September 30, 2023
December 31, 2022
(Dollars in Thousands)
Fixed
Variable
Total
Fixed
Variable
Total
Commitments to Extend Credit
(1)
$
212,312
$
562,402
$
774,714
$
243,614
$
531,873
$
775,487
Standby Letters of Credit
6,796
-
6,796
5,619
-
5,619
Total
$
219,108
$
562,402
$
781,510
$
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.
The allowance for credit losses for off-balance sheet credit commitments
that are not unconditionally cancellable by the bank is
adjusted as a provision for credit loss expense and is recorded in other liabilities.
The following table shows the activity in the
allowance.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in Thousands)
2023
2022
2023
2022
Beginning Balance
$
3,120
$
2,853
$
2,989
$
2,897
Provision for Credit Losses
382
159
513
115
Ending Balance
$
3,502
$
3,012
$
3,502
$
3,012
27
Other Commitments.
In the normal course of business, the Company enters into lease commitments
which are classified as operating
leases. See Note 6 – Leases for additional information on the maturity of the
Company’s operating lease commitments.
Furthermore,
the Company has a commitment of up to $
1.0
million in a bank tech venture capital fund focused on finding and funding
technology
solutions for community banks and commitments of up to $
15
million for
two
solar tax credit equity fund investments.
For the nine
months ended September 30, 2023, the Company had contributed $
0.2
million of the bank tech commitment and $
6.7
million of the
solar fund commitments.
At December 31, 2022, the Company had contributed $
0.2
million of the bank tech commitment and $
1.0
million of
one
of the solar fund commitments.
Contingencies
.
The Company is a party to lawsuits and claims arising out of the normal course of business.
In management's opinion,
there are
no
known pending claims or litigation, the outcome of which would, individually or in
the aggregate, have a material effect
on the consolidated results of operations, financial position, or cash flows
of the Company.
Indemnification Obligation
.
The Company is a member of the Visa U.S.A. network.
Visa U.S.A member banks are
required to
indemnify the Visa U.S.A.
network for potential future settlement of certain litigation (the “Covered Litigation”)
that relates to several
antitrust lawsuits challenging the practices of Visa
and MasterCard International.
In 2008, the Company, as a member
of the Visa
U.S.A. network, obtained Class B shares of Visa,
Inc. upon its initial public offering.
Since its initial public offering, Visa,
Inc. has
funded a litigation reserve for the Covered Litigation resulting in a reduction
in the Class B shares held by the Company.
During the
first quarter of 2011, the Company sold its remaining
Class B shares.
Associated with this sale, the Company entered into a swap
contract with the purchaser of the shares that requires a payment to the
counterparty in the event that Visa, Inc. makes
subsequent
revisions to the conversion ratio for its Class B shares.
Conversion ratio payments and ongoing fixed quarterly charges
are reflected in
earnings in the period incurred.
Fixed charges included in the swap liability are payable quarterly
until the litigation reserve is fully
liquidated and at which time the aforementioned swap contract will be terminated.
Quarterly fixed payments approximate $
0.3
million.
NOTE 9 – FAIR VALUE
MEASUREMENTS
The fair value of an asset or liability is the price that would be received to sell that asset or paid
to transfer that liability in an orderly
transaction occurring in the principal market (or most advantageous market in
the absence of a principal market) for such asset or
liability.
In estimating fair value, the Company utilizes valuation techniques that are consistent with
the market approach, the income
approach and/or the cost approach.
Such valuation techniques are consistently applied.
Inputs to valuation techniques include the
assumptions that market participants would use in pricing an asset or liability.
ASC Topic 820
establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets
for identical assets or liabilities and the lowest
priority to unobservable inputs.
The fair value hierarchy is as follows:
●
Level 1 Inputs -
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting
entity has the
ability to access at the measurement date
.
●
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly
or indirectly. These might
include quoted prices for similar assets or liabilities in active markets, quoted prices
for identical
or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.)
or inputs that are derived principally from, or
corroborated, by market data by correlation or other means
.
●
Level 3 Inputs -
Unobservable inputs for determining the fair values of assets or liabilities that reflect
an entity’s own
assumptions about the assumptions that market participants would
use in pricing the assets or liabilities.
Assets and Liabilities Measured at Fair Value
on a Recurring Basis
Securities Available for Sale.
U.S. Treasury securities are reported at fair value
utilizing Level 1 inputs.
Other securities classified as
available for sale are reported at fair value utilizing Level 2 inputs.
For these securities, the Company obtains fair value measurements
from an independent pricing service.
The fair value measurements consider observable data that may include dealer quotes,
market
spreads, cash flows, the U.S. Treasury yield curve,
live trading levels, trade execution data, credit information and the bond’s
terms
and conditions, among other things.
In general, the Company does not purchase securities that have a complicated structure.
The Company’s entire portfolio consists of
traditional investments, nearly all of which are U.S. Treasury
obligations, federal agency bullet or mortgage pass-through
securities, or
general obligation or revenue-based municipal bonds.
Pricing for such instruments is easily obtained.
At least annually, the Company
will validate prices supplied by the independent pricing service by compari
ng them to prices obtained from an independent third-party
source.
Equity Securities.
Investment securities classified as equity securities are measured at
fair value of the investment with changes in fair
value recorded in earnings.
28
Loans Held for Sale
.
The fair value of residential mortgage loans held for sale based on Level 2 inputs is determined,
when possible,
using either quoted secondary-market prices or investor commitments.
If no such quoted price exists, the fair value is determined
using quoted prices for a similar asset or assets, adjusted for the specific attributes of
that loan, which would be used by other market
participants.
The Company has elected the fair value option accounting for its held for sale loans.
Mortgage Banking Derivative Instruments.
The fair values of interest rate lock commitments (“IRLCs”) are derived by valuation
models incorporating market pricing for instruments with similar characteristics,
commonly referred to as best execution pricing, or
investor commitment prices for best effort IRLCs which have
unobservable inputs, such as an estimate of the fair value of the
servicing rights expected to be recorded upon sale of the loans, net estimated costs to originate
the loans, and the pull-through rate,
and are therefore classified as Level 3 within the fair value hierarchy.
The fair value of forward sale commitments is based on
observable market pricing for similar instruments and are therefore
classified as Level 2 within the fair value hierarchy.
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 September 30, 2023 and at December 31, 2022, there was a $
0.1
million payable.
A summary of fair values for assets and liabilities recorded at fair
value on a recurring basis consisted of the following:
Level 1
Level 2
Level 3
Total
Fair
(Dollars in Thousands)
Inputs
Inputs
Inputs
Value
September 30, 2023
ASSETS:
Securities Available for
Sale:
U.S. Government Treasury
$
20,309
$
-
$
-
$
20,309
U.S. Government Agency
-
148,962
-
148,962
States and Political Subdivisions
-
40,195
-
40,195
Mortgage-Backed Securities
-
60,602
-
60,602
Corporate Debt Securities
-
55,725
-
55,725
Equity Securities
-
508
-
508
Loans Held for Sale
-
34,013
-
34,013
Interest Rate Swap Derivative
-
6,748
-
6,748
Mortgage Banking Hedge Derivative
-
180
-
180
Mortgage Banking IRLC Derivative
-
-
859
859
December 31, 2022
ASSETS:
Securities Available for
Sale:
U.S. Government Treasury
$
22,050
$
-
$
-
$
22,050
U.S. Government Agency
-
186,052
-
186,052
States and Political Subdivisions
-
40,329
-
40,329
Mortgage-Backed Securities
-
69,405
-
69,405
Corporate Debt Securities
-
88,236
-
88,236
Loans Held for Sale
-
26,909
-
26,909
Interest Rate Swap Derivative
-
6,195
-
6,195
Mortgage Banking Hedge Derivative
-
187
-
187
Mortgage Banking IRLC Derivative
-
-
819
819
29
Mortgage Banking Activities
.
The Company had Level 3 issuances and transfers related to mortgage banking
activities of $
11.1
million and $
16.3
million, respectively,
for the nine months ended September 30, 2023, and $
11.4
million and $
23.4
million,
respectively, for the
nine months ended September 30, 2022.
Issuances are valued based on the change in fair value of the underlying
mortgage loan from inception of the IRLC to the Consolidated Statement
of Financial Condition date, adjusted for pull-through rates
and costs to originate.
IRLCs transferred out of Level 3 represent IRLCs that were funded and moved
to mortgage loans held for sale,
at fair value.
Assets Measured at Fair Value
on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis (i.e., the
assets are not measured at fair value on an ongoing basis
but are subject to fair value adjustments in certain circumstances).
An example would be assets exhibiting evidence of impairment.
The following is a description of valuation methodologies used for assets measured
on a non-recurring basis.
Collateral Dependent Loans
.
Impairment for collateral dependent loans is measured using the fair
value of the collateral less selling
costs.
The fair value of collateral is determined by an independent valuation
or professional appraisal in conformance with banking
regulations.
Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market,
and the judgment and
estimation involved in the real estate appraisal process.
Collateral dependent loans are reviewed and evaluated on at least a quarterly
basis for additional impairment and adjusted accordingly.
Valuation
techniques are consistent with those techniques applied in prior
periods.
Collateral-dependent loans had a carrying value of $
2.1
million with
no
valuation allowance at September 30, 2023 and a
carrying value of $
0.7
million and a $
0.1
million valuation allowance at December 31, 2022.
Other Real Estate Owned
.
During the first nine months of 2023, certain foreclosed assets, upon initial recognition,
were measured and
reported at fair value through a charge-off
to the allowance for credit losses based on the fair value of the foreclosed asset less
estimated cost to sell.
The fair value of the foreclosed asset is determined by an independent valuation or
professional appraisal in
conformance with banking regulations.
On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation
adjustments as necessary.
The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment
and estimation
involved in the real estate valuation process.
Mortgage Servicing Rights
.
Residential mortgage loan servicing rights are evaluated for impairment
at each reporting period based
upon the fair value of the rights as compared to the carrying amount.
Fair value is determined by a third party valuation model using
estimated prepayment speeds of the underlying mortgage loans serviced and
stratifications based on the risk characteristics of the
underlying loans (predominantly loan type and note interest rate).
The fair value is estimated using Level 3 inputs, including a
discount rate, weighted average prepayment speed, and the cost of loan
servicing.
Further detail on the key inputs utilized are
provided in Note 4 – Mortgage Banking Activities.
At each of September 30, 2023 and December 31, 2022, there was
no
valuation
allowance for loan servicing rights.
Assets and Liabilities Disclosed at Fair Value
The Company is required to disclose the estimated fair value of financial instruments,
both assets and liabilities, for which it is
practical to estimate fair value and the following is a description of valuation
methodologies used for those assets and liabilities.
Cash and Short-Term
Investments.
The carrying amount of cash and short-term investments is used to approximate
fair value, given
the short time frame to maturity and as such assets do not present unanticipated
credit concerns.
Equity 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.
Other Equity Securities.
Investment securities classified as other equity securities that do not have
readily determinable fair values, are
measured at cost, remeasured to fair value when impaired or upon observable
transaction prices and accounted for under the equity
method of accounting and reflected in other assets.
Securities Held to Maturity
.
Securities held to maturity are valued in accordance with the methodology
previously noted in the
caption “Assets and Liabilities Measured at Fair Value
on a Recurring Basis – Securities Available
for Sale.”
Loans.
The loan portfolio is segregated into categories and the fair value of each loan category is calculated
using present value
techniques based upon projected cash flows and estimated discount
rates.
Pursuant to the adoption of ASU 2016-01,
Recognition and
Measurement of Financial Assets and Financial
Liabilities
, the values reported reflect the incorporation of a liquidity discount to meet
the objective of “exit price” valuation.
30
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.
A summary of estimated fair values of significant financial instruments not
recorded at fair value consisted of the following:
September 30, 2023
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
72,379
$
72,379
$
-
$
-
Short-Term Investments
95,119
95,119
-
-
Investment Securities, Held to Maturity
632,076
433,150
149,498
-
Equity Securities
(1)
3,077
-
3,077
-
Other Equity Securities
(2)
2,848
-
2,848
-
Mortgage Servicing Rights
704
-
-
1,182
Loans, Net of Allowance for Credit Losses
2,676,098
-
-
2,472,305
LIABILITIES:
Deposits
$
3,540,445
$
-
$
3,081,702
$
-
Short-Term
Borrowings
41,696
-
41,696
-
Subordinated Notes Payable
52,887
-
44,910
-
Long-Term Borrowings
364
-
362
-
December 31, 2022
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
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
-
Equity Securities
(1)
10
-
10
-
Other Equity Securities
(2)
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
-
(1)
Not readily marketable securities.
(2)
Accounted for under the equity method – not readily
marketable securities – reflected in other assets.
All non-financial instruments are excluded from the above table.
The disclosures also do not include goodwill.
Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
31
NOTE 10 – ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
The amounts allocated to accumulated other comprehensive income
(loss) are presented in the table below.
Accumulated
Securities
Other
Available
Interest Rate
Retirement
Comprehensive
(Dollars in Thousands)
for Sale
Swap
Plans
(Loss) Income
Balance as of January 1, 2023
$
(37,349)
$
4,625
$
(4,505)
$
(37,229)
Other comprehensive income (loss) during the period
2,357
413
(217)
2,553
Balance as of September 30, 2023
$
(34,992)
$
5,038
$
(4,722)
$
(34,676)
Balance as of January 1, 2022
$
(4,588)
$
1,530
$
(13,156)
$
(16,214)
Other comprehensive (loss) income during the period
(35,634)
3,287
358
(31,989)
Balance as of September 30, 2022
$
(40,222)
$
4,817
$
(12,798)
$
(48,203)
32
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
Management’s discussion
and analysis (“MD&A”) provides supplemental information, which sets forth
the major factors that have
affected our financial condition and results of operations
and should be read in conjunction with the Consolidated Financial
Statements and related notes.
The following information should provide a better understanding of
the major factors and trends that
affect our earnings performance and financial condition,
and how our performance during 2023 compares with prior years.
Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively,
is referred to as “CCBG,” “Company,”
“we,”
“us,” or “our.”
CAUTION CONCERNING FORWARD
-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains
“forward-looking statements”
within the meaning of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements about
our
beliefs, plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are
subject to change based on various factors, many of which are beyond
our control.
The words “may,”
“could,” “should,” “would,”
“believe,” “anticipate,”
“estimate,” “expect,”
“intend,” “plan,”
“target,”
“vision,” “goal,”
and similar expressions are intended to
identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties.
Our actual future results may differ materially
from those set forth in our forward-looking statements.
Please see the Introductory Note of this quarterly report on Form 10-Q
as well
as the Introductory Note and
Item 1A. Risk Factors
of our 2022 Form 10-K/A, as updated in our subsequent quarterly reports filed
on
Form 10-Q/A, and in our other filings made from time to time with the SEC after the
date of this report.
However, other factors besides those listed in our
Quarterly Report or in our Annual Report also could adversely affect our
results,
and you should not consider any such list of factors to be a complete set of all potential risks or
uncertainties.
Any forward-looking
statements made by us or on our behalf speak only as of the date they are made.
We do not undertake to
update any forward-looking
statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial
holding company headquartered in Tallahassee,
Florida, and we are the parent of our wholly owned subsidiary,
Capital City Bank (the “Bank” or “CCB”).
We offer
a broad array of products and services through a total of 62 full-service offices
located in Florida, Georgia, and Alabama.
We provide a full range of
banking services, including traditional deposit and credit
services, mortgage banking, asset management, trust, merchant services, bankcards,
securities brokerage services and financial
advisory services, including life insurance products,
risk management and asset protection services.
Our profitability, like
most financial institutions, is dependent to a large extent upon net
interest income, which is the difference
between the interest and fees received on interest earning assets, such as loans and
securities, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings.
Results of operations are also affected by the provision for credit losses, operating
expenses such as salaries and employee benefits, occupancy and other
operating expenses including income taxes, and noninterest
income such as mortgage banking revenues, wealth management fees,
deposit fees, and bank card fees.
We have included
a detailed discussion of the economic conditions in our markets and our long-term strategic
objectives as part of the
MD&A section of our 2022 Form 10-K/A.
33
NON-GAAP FINANCIAL MEASURES (UNAUDITED)
We present a tangible
common equity ratio and a tangible book value per diluted share that, in each case, removes the
effect of
goodwill and other intangibles that resulted from merger
and acquisition activity. We
believe these measures are useful to investors
because it allows investors to more easily compare our capital adequacy to
other companies in the industry.
The generally accepted
accounting principles (“GAAP”) to non-GAAP reconciliation for
each quarter presented is provided below.
2023
2022
(Dollars in Thousands, except per share data)
Third
Second
First
Fourth
Third
Shareowners' Equity (GAAP)
$
419,706
$
412,422
$
403,260
$
387,281
$
368,485
Less: Goodwill and Other Intangibles (GAAP)
92,973
93,013
93,053
93,093
93,133
Tangible Shareowners' Equity (non-GAAP)
A
326,733
319,409
310,207
294,188
275,352
Total Assets (GAAP)
4,138,287
4,391,206
4,401,762
4,519,223
4,327,991
Less: Goodwill and Other Intangibles (GAAP)
92,973
93,013
93,053
93,093
93,133
Tangible Assets (non-GAAP)
B
$
4,045,314
$
4,298,193
$
4,308,709
$
4,426,130
$
4,234,858
Tangible Common Equity Ratio (non-GAAP)
A/B
8.08%
7.43%
7.20%
6.65%
6.50%
Actual Diluted Shares Outstanding (GAAP)
C
16,997,886
17,025,023
17,049,913
17,039,401
16,998,177
Tangible Book Value
per Diluted Share (non-GAAP)
A/C
19.22
$
18.76
$
18.19
$
17.27
$
16.20
34
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
2023
2022
(Dollars in Thousands, Except Per Share Data)
Third
Second
First
Fourth
Third
Summary of Operations
:
Interest Income
$
45,753
$
45,205
$
43,926
$
41,218
$
35,442
Interest Expense
6,473
5,068
3,526
3,122
2,037
Net Interest Income
39,280
40,137
40,400
38,096
33,405
Provision for Credit Losses
2,393
2,197
3,099
3,616
2,154
Net Interest Income After
Provision for Credit Losses
36,887
37,940
37,301
34,480
31,251
Noninterest Income
16,728
19,967
17,758
15,296
18,509
Noninterest Expense
39,105
40,285
37,675
39,262
37,699
Income Before Income Taxes
14,510
17,622
17,384
10,514
12,061
Income Tax Expense
3,004
3,417
3,710
1,900
2,493
(Income) Loss Attributable to NCI
1,149
(31)
35
995
37
Net Income Attributable to CCBG
12,655
14,174
13,709
9,609
9,605
Net Interest Income (FTE)
(1)
39,367
40,224
40,500
38,185
33,488
Per Common Share
:
Net Income Basic
$
0.75
$
0.83
$
0.81
$
0.56
$
0.57
Net Income Diluted
0.74
0.83
0.80
0.56
0.57
Cash Dividends Declared
0.20
0.18
0.18
0.17
0.17
Diluted Book Value
24.69
24.21
23.65
22.73
21.68
Diluted Tangible Book Value
(2)
19.22
18.76
18.19
17.27
16.20
Market Price:
High
33.44
34.16
36.86
36.23
33.93
Low
28.64
28.03
28.18
31.14
27.41
Close
29.83
30.64
29.31
32.50
31.11
Selected Average Balances
:
Investment Securities
$
1,005,003
$
1,043,858
$
1,064,212
$
1,081,092
$
1,120,728
Loans Held for Investment
2,672,653
2,657,693
2,582,395
2,439,379
2,264,075
Earning Assets
3,876,980
3,974,803
4,062,688
4,032,733
4,009,951
Total Assets
4,218,855
4,320,601
4,411,865
4,381,825
4,357,678
Deposits
3,596,816
3,719,564
3,817,314
3,803,042
3,769,864
Shareowners’ Equity
427,580
418,757
404,067
380,570
379,305
Common Equivalent Average Shares:
Basic
16,985
17,002
17,016
16,963
16,960
Diluted
17,025
17,035
17,045
17,016
16,996
Performance Ratios:
Return on Average Assets (annualized)
1.19
%
1.32
%
1.26
%
0.87
%
0.87
%
Return on Average Equity (annualized)
11.74
13.58
13.76
10.02
10.05
Net Interest Margin (FTE)
4.03
4.06
4.04
3.76
3.32
Noninterest Income as % of Operating Revenue
29.87
33.22
30.53
28.65
35.65
Efficiency Ratio
69.88
66.93
64.67
73.41
72.51
Asset Quality:
Allowance for Credit Losses (“ACL”)
$
29,083
$
28,243
$
26,808
$
25,068
$
22,747
Nonperforming Assets (“NPAs”)
4,695
6,624
4,602
2,728
2,422
ACL to Loans HFI
1.08
%
1.05
%
1.01
%
0.98
%
0.96
%
NPAs to Total
Assets
0.11
0.15
0.10
0.06
0.06
NPAs to Loans HFI plus OREO
0.17
0.25
0.17
0.11
0.10
ACL to Non-Performing Loans
619.58
426.44
584.18
1,091.33
944.36
Net Charge-Offs to Average Loans HFI
0.17
0.07
0.24
0.21
0.12
Capital Ratios:
Tier 1 Capital
15.11
%
14.56
%
14.23
%
14.27
%
14.59
%
Total Capital
16.30
15.68
15.29
15.30
15.58
Common Equity Tier 1
13.26
12.73
12.40
12.38
12.62
Leverage
9.98
9.54
9.09
8.91
8.80
Tangible Common Equity
(2)
8.08
7.43
7.20
6.65
6.50
(1)
Fully Tax Equivalent
(2)
Non-GAAP financial measure.
See non-GAAP reconciliation on page 33.
35
FINANCIAL OVERVIEW
Results of Operations
Performance Summary.
Net income attributable to common shareowners totaled $12.7 million, or $0.74
per diluted share, for the
third quarter of 2023 compared to $14.2 million, or $0.83 per diluted share, for
the second quarter of 2023, and $9.6 million, or $0.57
per diluted share, for the third quarter of 2022.
For the first nine months of 2023, net income attributable to common shareowners
totaled $40.5 million, or $2.38 per diluted share, compared to net income of $23.8
million, or $1.40 per diluted share, for the same
period of 2022.
Net Interest Income.
Tax-equivalent net
interest income for the third quarter of 2023 totaled $39.4 million, compared
to $40.2
million
for the second quarter of 2023, and $33.5 million for the third quarter of 2022.
Compared to the second quarter of 2023, the decrease
reflected higher deposit interest expense and a lower level of interest income
from overnight funds, partially offset by higher loan
interest due to loan growth and higher interest rates.
For the first nine months of 2023, tax-equivalent net interest income totaled
$120.1 million compared to $87.2 million for the same period of 2022.
The increases over both prior year periods were driven by
strong loan growth and higher interest rates across a majority of our
earning assets.
Provision and Allowance for Credit
Losses.
We recorded
a provision for credit losses of $2.4 million for the third quarter of 2023
compared to $2.2 million for the second quarter of 2023 and $2.2 million
for the third quarter of 2022.
The increase in the provision
compared to the second quarter of 2023 was primarily attributable to loan growth
and an increase in net loan charge-offs.
For the first
nine months of 2023, we recorded a provision for credit losses of $7.7 million
compared to $3.9 million for the same period of 2022.
The higher level of provision in 2023 was primarily driven by loan growth
and, also reflected the favorable impact in 2022 of the
release of reserves held for pandemic related losses that did not materialize
to the extent projected.
At September 30, 2023, the
allowance represented 1.08% of loans held for investment (“HFI”) compared
to 1.05% at June 30, 2023, and 0.98% at December 31,
2022.
Noninterest Income.
Noninterest income for the third quarter of 2023 totaled $16.7 million compared
to $20.0 million for the second
quarter of 2023 and $18.5 million for the third quarter of 2022.
The $3.3
million decrease from the second quarter of 2023 reflected a
decrease in other income of $1.6 million (we realized a $1.4 million gain on
sale of mortgage servicing rights in the second quarter of
2023), mortgage banking revenues of $1.5 million, wealth management
fees of $0.2 million and bank card fees of $0.1 million,
partially offset by an increase in deposit fees of $0.1 million.
For the first nine months of 2023, noninterest income totaled $54.5
million compared to $59.9 million for the same period of 2022 with the $5.4
million decrease primarily attributable to lower mortgage
banking revenues of $3.7 million, wealth management fees of $2.4 million,
deposit fees of $0.6 million, and bank card fees of $0.4
million, partially offset by a $1.7 million increase in other income.
Noninterest Expense.
Noninterest expense for the third quarter of 2023 totaled $39.1 million compared
to $40.3 million for the second
quarter of 2023 and $37.7 million for the third quarter of 2022.
Compared to the second quarter of 2023, the $1.2 million decrease
was due to a $0.9 million decrease in other expense which reflected a $0.8
million non-recurring expense in the second quarter of
2023 related to a consulting engagement.
For the first nine months of 2023, noninterest expense totaled $117.1
million compared to
$112.4 million for the same period of 2022
with the $4.7 million increase attributable to increases in occupancy expense of $2.2
million, compensation expense of $1.5 million, and other expense of
$1.0 million.
The increase in occupancy expense reflected the
addition of banking offices in 2022, higher insurance premiums,
and investment in network and security upgrades.
The increase in
compensation expense was primarily driven by higher salary expense
due to the addition of staffing in new banking offices added
in
- The increase in other expense was driven by higher pension plan
expense (non-service related component), the aforementioned
non-recurring consulting expense, and increases in FDIC insurance fees, partially
offset by lower OREO expense of $1.8 million
related to a gain from the sale of a banking office.
Financial Condition
Earning Assets.
Average earning assets totaled
$3.877 billion for the third quarter of 2023, a decrease of $97.8 million, or 2.5%,
from
the second quarter of 2023, and a decrease of $155.8 million, or 3.9%, from the fourth
quarter of 2022.
The decrease from both prior
periods was attributable to lower deposit balances.
The mix of earning assets continues to improve as overnight funds are being
utilized to fund loan growth.
Loans.
Average loans “HFI”
increased $15.0 million, or 0.6%, over the second quarter of 2023 and $233.3
million, or 9.6%, over the
fourth quarter of 2022.
Period end loans increased $21.7 million, or 0.81%, over the second quarter of 2023
and $157.5 million, or
6.2%, over the fourth quarter of 2022.
Compared to both prior periods, the loan growth was primarily in the residential real
estate
category and was partially offset by lower indirect auto and construction
loan balances.
36
Credit Quality.
Credit quality metrics remained strong for the quarter.
Nonperforming assets (nonaccrual loans and other real estate)
totaled $4.7 million at September 30, 2023 compared to $6.6 million at June
30, 2023 and $2.7 million at December 31, 2022.
At
September 30, 2023, nonperforming assets as a percent of total assets equaled 0.11%,
compared to 0.15% at June 30, 2023 and 0.06%
at December 31, 2022.
Nonaccrual loans totaled $4.7 million at September 30, 2023, a $1.9 million
decrease from June 30, 2023 and
a $2.4 million increase over December 31, 2022.
Further, classified loans totaled $21.8 million at September
30, 2023, a $6.8 million
increase over June 30, 2023 and a $2.5 million increase over December 31, 2022.
Deposits.
Average total
deposits were $3.597 billion for the third quarter of 2023, a decrease of $122.7
million, or 3.3%, from the
second quarter of 2023 and a decrease of $206.2 million, or 5.4%,
from the fourth quarter of 2022.
Compared to both prior periods,
the decreases were primarily attributable to lower noninterest bearing,
savings, and NOW balances, primarily offset by higher money
market balances.
Compared to the second quarter of 2023, the decrease in NOW account balances was primarily
due to the seasonal
reduction in public fund balances held by our institutional and municipal clients.
Capital.
At September 30, 2023, we were well-capitalized with a total risk-based capital ratio
of 16.30% and a tangible common
equity ratio (a non-GAAP financial measure) of 8.08% compared to
15.68% and 7.43%, respectively,
at June 30, 2023 and 15.30%
and 6.65%, respectively,
at December 31, 2022.
At September 30, 2023, all of our regulatory capital ratios exceeded the threshold
to
be well-capitalized under the Basel III capital standards.
RESULTS
OF OPERATIONS
The following table provides a condensed summary of our results of operations
- a discussion of the various components are discussed
in further detail below.
Three Months Ended
Nine Months Ended
September 30,
June 30,
September 30,
September 30,
September 30,
(Dollars in Thousands, except per share data)
2023
2023
2022
2023
2022
Interest Income
$
45,753
$
45,205
$
35,442
$
134,886
$
90,692
Taxable Equivalent Adjustments
87
87
83
274
237
Total Interest Income (FTE)
45,840
45,292
35,525
135,160
90,929
Interest Expense
6,473
5,068
2,037
15,067
3,766
Net Interest Income (FTE)
39,367
40,224
33,488
120,093
87,163
Provision for Credit Losses
2,393
2,197
2,154
7,689
3,878
Taxable Equivalent Adjustments
87
87
83
274
237
Net Interest Income After Provision for Credit Losses
36,887
37,940
31,251
112,130
83,048
Noninterest Income
16,728
19,967
18,509
54,452
59,885
Noninterest Expense
39,105
40,285
37,699
117,066
112,372
Income Before Income Taxes
14,510
17,622
12,061
49,516
30,561
Income Tax Expense
3,004
3,417
2,493
10,130
5,898
Pre-Tax (Income) Loss Attributable to Noncontrolling
Interest
1,149
(31)
37
1,153
(860)
Net Income Attributable to Common Shareowners
$
12,655
$
14,174
$
9,605
$
40,539
$
23,803
Basic Net Income Per Share
$
0.75
$
0.83
$
0.57
$
2.38
$
1.40
Diluted Net Income Per Share
$
0.74
$
0.83
$
0.57
$
2.38
$
1.40
Net Interest Income
Net interest income represents our single largest source of earnings
and is equal to interest income and fees generated by earning
assets less interest expense paid on interest bearing liabilities.
This information is provided on a “taxable equivalent” basis to reflect
the tax-exempt status of income earned on certain loans and state and local
government debt obligations.
We provide an analysis of
our net interest income including average yields and rates in Table
I on page 45.
37
Tax-equivalent net
interest income for the third quarter of 2023 totaled $39.4
million, compared to $40.2 million for the second
quarter of 2023, and $33.5 million for the third quarter of 2022.
Compared to the second quarter of 2023, the decrease reflected
higher deposit interest expense and a lower level of interest income from
overnight funds, partially offset by higher loan interest due to
loan growth and higher interest rates.
For the first nine months of 2023, tax-equivalent net interest income totaled
$120.1 million
compared to $87.2 million for the same period of 2022.
The increases over both prior year periods were driven by strong loan growth
and higher interest rates across a majority of our earning assets.
Our net interest margin for the third quarter of 2023 was 4.03%, a decrease
of three basis points from the second quarter of 2023 and
an increase of 71 basis points over the third quarter of 2022.
For the month of September 2023, our net interest margin was 4.10%.
For the first nine months of 2023, our net interest margin
was 4.04%, an increase of 111
basis points over the same period of 2022.
The increase compared to all prior periods reflected a combination of higher interest
rates and loan growth, partially offset by a higher
cost of deposits.
For the third quarter of 2023, our cost of funds was 66 basis points, an
increase of 15 basis points over the second
quarter of 2023 and an increase of 46 basis points over the third quarter of 2022.
Our total cost of deposits (including noninterest
bearing accounts) was 58 basis points, 43 basis points, and 11
basis points, respectively, for
the same periods.
Provision for Credit Losses
We recorded
a provision for credit losses of $2.4 million for the third quarter of 2023 compared to $2.2
million for the second quarter
of 2023 and $2.2 million for the third quarter of 2022.
The increase in the provision compared to the second quarter of 2023 was
primarily attributable to loan growth and an increase in net loan charge
-offs.
For the first nine months of 2023, we recorded a
provision for credit losses of $7.7 million compared to $3.9
million for the same period of 2022.
The higher level of provision in 2023
was primarily driven by loan growth and also reflected the favorable
impact in 2022 of the release of reserves held for pandemic-
related losses that did not materialize to the extent projected.
We discuss the allowance
for credit losses further below.
For more
information on charge-offs and recoveries,
see Note 3 – Loans Held for Investment and Allowance for Credit Losses.
Noninterest Income
Noninterest income for the third quarter of 2023 totaled $16.7 million compared
to $20.0 million for the second quarter of 2023 and
$18.5 million for the third quarter of 2022.
The $3.3 million decrease from the second quarter of 2023 reflected a decrease
in other
income of $1.6 million, mortgage banking revenues of $1.5 million,
wealth management fees of $0.2 million and bank card fees of
$0.1 million, partially offset by an increase in deposit fees of $0.1
million.
The decrease in other income was attributable to a $1.4
million gain from the sale of mortgage servicing rights realized in the second
quarter of 2023.
The decrease in mortgage banking
revenues was attributable to market driven lower gain on sale margins
and a lower volume of mandatory delivery loan sales which
provide a higher gain on sale percentage.
Compared to the third quarter of 2022, the $1.8 million decrease in noninterest
income reflected decreases in mortgage banking
revenues of $1.0 million, deposit fees of $0.5 million, bank card fees of $0.2 million,
and other income of $0.1
million. For the first
nine months of 2023, noninterest income totaled $54.5 million compared
to $59.9 million for the same period of 2022 with the $5.4
million decrease primarily attributable to lower mortgage banking revenues
of $3.7 million, wealth management fees of $2.4 million,
deposit fees of $0.6 million, and bank card fees of $0.4 million, partially offset
by a $1.7 million increase in other income.
Compared
to both prior year periods, the decrease in mortgage banking revenues was driven
by lower production volume in 2023 reflective of the
rapid increase in interest rates, lower market driven gain on sale margins,
and a lower level of mandatory delivery loan sales.
The
decrease in deposit fees from both prior year periods was primarily attributable
to a higher earnings credit rate for commercial deposit
accounts and lower service charge fees.
For the nine-month period, the decrease in wealth management fees was attributable
to lower
insurance commissions which reflected the sale of large
policies in 2022.
Further, the increase in other income was primarily
due to a
$1.4 million gain from the sale of mortgage servicing rights and
a $0.5 million increase in miscellaneous income.
Noninterest income represented 29.87% of operating revenues (net interest
income plus noninterest income) in the third quarter of
2023 compared to 33.22% in the second quarter of 2023
and 35.65% in the third quarter of 2022.
For the first nine months of 2023,
noninterest income represented 31.25% of operating revenues compared
to 40.79% for the same period of 2022.
The table below reflects the major components of noninterest income.
38
Three Months Ended
Nine Months Ended
September 30,
June 30,
September 30,
September 30,
September 30,
(Dollars in Thousands)
2023
2023
2022
2023
2022
Deposit Fees
$
5,456
$
5,326
$
5,947
$
16,021
$
16,585
Bank Card Fees
3,684
3,795
3,860
11,205
11,657
Wealth Management
Fees
3,984
4,149
3,937
12,061
14,410
Mortgage Banking Revenues
1,839
3,363
2,895
8,072
11,807
Other
1,765
3,334
1,870
7,093
5,426
Total
Noninterest Income
$
16,728
$
19,967
$
18,509
$
54,452
$
59,885
Significant components of noninterest income are discussed in more
detail below.
Deposit Fees
.
Deposit fees for the third quarter of 2023 totaled $5.5 million, an increase of $0.2 million,
or 2.5%, over the second
quarter of 2023, and a decrease of $0.5 million, or 8.3%, from the third quarter
of 2022.
For the first nine months of 2023, deposit
fees totaled $16.0 million, a decrease of $0.6 million, or 3.4%, from
the same period of 2022.
Compared to the second quarter of
2023, the increase reflected higher overdraft fees.
The decrease from both prior year periods was primarily attributable to a higher
earnings credit rate for commercial deposit accounts and lower service charge
fees.
Bank Card Fees
.
Bank card fees for the third quarter of 2023 totaled $3.7 million, a decrease of $0.1 million, or
2.9%, from the
second quarter of 2023, and a decrease of $0.2 million, or 4.6%, from
the third quarter of 2022.
For the first nine months of 2023,
bank card fees totaled $11.2 million, a decrease
of $0.5
million, or 3.9%, from the same period of 2022.
Compared to all prior
periods, the decline reflected lower debit card usage related
to lower consumer spending.
Wealth
Management Fees
.
Wealth management fees
include trust fees through Capital City Trust (i.e., managed
accounts and
trusts/estates), retail brokerage fees through Capital City Investments (i.e.,
investment, insurance products, and retirement accounts),
and financial advisory fees through Capital City Strategic Wealth
(i.e., including the sale of life insurance, risk management and asset
protection services).
Wealth management
fees for the third quarter of 2023 totaled $4.0 million, a decrease of $0.2
million, or 4.0%
from the second quarter of 2023, and comparable to the third quarter
of 2022.
For the first nine months of 2023, wealth management
fees totaled $12.1 million, a decrease of $2.3 million, or 16.3%, from
the same period of 2022, attributable to lower insurance
commissions which reflected the sale of large policies in 2022.
At September 30, 2023, total assets under management were
approximately $2.420 billion compared to $2.462 billion at June 30,
2023 and $2.273 billion at December 31, 2022.
Mortgage Banking Revenues.
Mortgage banking revenues totaled $1.8 million for the third quarter of 2023,
a decrease of $1.5 million,
or 45.3%, from the second quarter of 2023 and a decrease of $1.1
million, or 36.5%, from the third quarter of 2022.
For the first nine
months of 2023, revenues totaled $8.1 million compared to $11.8
million for the same period of 2022.
Compared to the second
quarter of 2023, the decrease was attributable to market driven lower
gain on sale margins and a lower volume of mandatory delivery
loan sales which provide a higher gain on sale percentage.
Compared to both prior year periods, the decrease was driven by lower
production volume in 2023 reflective of the rapid increase in interest rates, lower
market driven gain on sale margins, and a lower
level of mandatory delivery loan sales.
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 income totaled $1.8 million for the third quarter of 2023, a decrease of
$1.6 million, or 47.1%, from the second quarter
of 2023 and a decrease of $0.1 million, or 5.6%, from the third quarter
of 2022.
For the first nine months of 2023, other income
totaled $7.1 million compared to $5.4 million for the same period of 2022.
Compared to the second quarter of 2023, the decrease was
attributable to a $1.4 million gain from the sale of mortgage servicing rights
realized in the second quarter of 2023.
For the nine-
month period, the increase was primarily due to a $1.4 million gain from the
sale of mortgage servicing rights and a $0.5 million
increase in miscellaneous income.
39
Noninterest Expense
Noninterest expense for the third quarter of 2023 totaled $39.1 million compared
to $40.3 million for the second quarter of 2023 and
$37.7 million for the third quarter of 2022.
Compared to the second quarter of 2023, the $1.2 million decrease was primarily due
to a
$0.8 million non-recurring expense in the second quarter of 2023 related
to a consulting engagement to assist in negotiating a multi-
year contract for the outsourcing of our core processing system.
Compared to the third quarter of 2022, the $1.4 million increase in noninterest
expense was primarily due to increases in other
expense of $0.5
million and occupancy expense of $0.8 million.
The increase in other expense was largely driven by a $0.7 million
increase in pension plan expense (non-service-related component)
and the increase in occupancy reflected the addition of four new
banking offices in mid-to-late 2022 and higher property/equipment
insurance premiums.
For the first nine months of 2023,
noninterest expense totaled $117.1 million compared
to $112.4 million for the same period of 2022 with the $4.7 million
increase
attributable to increases in occupancy expense of $2.2 million, compensation
expense of $1.5 million, and other expense of $1.0
million. The increase in occupancy expense reflected the addition of banking
offices in 2022, higher insurance premiums, and
investment in network and security upgrades. The unfavorable variance
in compensation expense reflected a $3.0 million increase in
salary expense (primarily,
the addition of staffing in our new markets and annual merit) that was partially offset
by a $1.5 million
decrease in associate benefit expense.
The variance in associate benefit expense was primarily due to a $2.2 million decrease in
pension plan expense (service cost) that was partially offset by
increases in associate insurance expense of $0.5 million and stock-
based compensation of $0.1 million.
The increase in other expense was primarily due to a $1.6 million increase in pension
plan
expense (non-service related component), the aforementioned consulting
engagement expense of $0.8 million, and a $0.6 million
increase in FDIC insurance expense, partially offset by
lower OREO expense of $1.8 million related to a gain from the sale of a
banking office.
The table below reflects the major components of noninterest expense.
Three Months Ended
Nine Months Ended
September 30,
June 30,
September 30,
September 30,
September 30,
(Dollars in Thousands)
2023
2023
2022
2023
2022
Salaries
$
19,459
$
20,044
$
18,604
$
59,020
$
56,010
Associate Benefits
3,544
3,394
4,363
10,945
12,477
Total Compensation
23,003
23,438
22,967
69,965
68,487
Premises
3,217
3,170
2,784
9,632
8,278
Equipment
3,763
3,650
3,369
10,930
10,043
Total Occupancy
6,980
6,820
6,153
20,562
18,321
Legal Fees
366
419
357
1,147
1,022
Professional Fees
1,254
2,039
1,258
4,617
3,996
Processing Services
1,874
1,872
1,777
5,488
5,166
Advertising
756
959
726
2,590
2,479
Telephone
658
679
730
2,044
2,162
Insurance – Other
703
872
656
2,406
1,760
Other Real Estate Owned, net
9
(28)
(92)
(1,846)
(96)
Pension - Other
32
6
(761)
45
(2,283)
Pension Settlement (Gain) Charge
-
(291)
102
(291)
480
Miscellaneous
3,470
3,500
3,826
10,339
10,878
Total Other
9,122
10,027
8,579
26,539
25,564
Total
Noninterest Expense
$
39,105
$
40,285
$
37,699
$
117,066
$
112,372
40
Significant components of noninterest expense are discussed in more detail
below.
Compensation
.
Compensation expense totaled $23.0 million for the third quarter of 2023 compared
to $23.4 million for the second
quarter of 2023 and $23.0 million for the third quarter of 2022.
The $0.4 million decrease from the second quarter of 2023 reflected a
$0.6
million decrease in salary expense partially offset by a $0.2 million
increase in associate benefit expense.
The decrease in salary
expense was primarily attributable to higher realized loan cost (which are accounted
for as a credit offset to salary expense) and lower
payroll taxes.
The increase in associate benefit expense was due to higher stock based compensation
expense.
For the first nine
months of 2023, compensation expense totaled $70.0 million compared
to $68.5 million for the same period of 2022 with the $1.5
million increase attributable to an increase in salary expense of $3.0
million (primarily the addition of staffing in our new markets and
annual merit) that was partially offset by a $1.5 million decrease in
associate benefit expense, primarily pension plan expense (service
cost) due to an increased level of retirements in 2022.
Compared to the third quarter of 2022, the same factors above drove the
variances in salary and associate benefit expense.
Occupancy
.
Occupancy expense totaled $7.0 million for the third quarter of 2023 compared
to $6.8 million for the second quarter of
2023
and $6.2 million for the third quarter of 2022.
For the first nine months of 2023, occupancy expense totaled $20.6 million
compared to $18.3 million for the same period of 2022.
The addition of four new banking offices since mid to late 2022, higher
property and equipment insurance premiums,
and investment in network and security upgrades drove the increase for both prior year
comparisons.
Other
.
Other expense totaled $9.1 million for the third quarter of 2023 compared to $10.0 million
for the second quarter of 2023 and
$8.6 million for the third quarter of 2022.
For the first nine months of 2023, other expense totaled $26.5 million compared
to $25.6
million for the same period of 2022.
Compared to the second quarter of 2023, the $0.9 million decrease was primarily
due to a $0.8
million non-recurring expense in the second quarter of 2023 related to
a consulting engagement to assist in negotiating a multi-year
contract for the outsourcing of our core processing system.
For the nine month period, the $1.0 million increase was primarily
attributable to the aforementioned $0.8 million non-recurring consulting
expense and increases in pension plan expense (non-service-
related component) of $1.6 million, and FDIC insurance fees of
$0.6 million, partially offset by lower OREO expense of $1.7 million
related to a $1.8 million gain from the sale of a banking office in the first
quarter of 2023.
Compared to the third quarter of 2022, the
same factors above drove the variance, excluding the $0.8 million non
-recurring consulting expense.
Our operating efficiency ratio (expressed as noninterest
expense as a percentage of the sum of taxable-equivalent net interest income
plus noninterest income) was 69.88% for the third quarter of 2023 compared
to 66.93% for the second quarter of 2023 and 72.51% for
the third quarter of 2022.
The increase for the third quarter reflected a lower level of profitability from our mortgage
banking
operation.
For the first nine months of 2023, this ratio was 67.07% compared to 76.42% for the same period
of 2022.
Income Taxes
We realized income
tax expense of $3.0 million (effective rate of 20.7%) for the third quarter of
2023 compared to $3.4 million
(effective rate of 19.4%) for the second quarter of 2023
and $2.5 million (effective rate of 20.7%) for the third quarter of 2022.
For
the first nine months of 2023, we realized income tax expense of $10.1 million
(effective rate of 20.5%) compared to $5.9 million
(effective rate of 19.3%) for the same period of 2022.
The increase in our effective tax rate for the third quarter of 2023 was primarily
due to a lower level of pre-tax income from Capital City Home Loans (“CCHL”)
in relation to our consolidated income as the non-
controlling interest adjustment for CCHL is accounted for as a permanent tax adjustment.
Further, the second quarter of 2023
effective rate reflected a higher level of tax benefit accrued from an
investment in a solar tax credit equity fund.
Absent discrete items
or unexpected variance in the timing of the tax benefit accrued from our solar
tax credit equity fund investment, we expect our annual
effective tax rate to approximate 20-21% for 2023.
FINANCIAL CONDITION
Average earning
assets totaled $3.877 billion for the third quarter of 2023, a decrease of $97.8 million, or
2.5%, from the second
quarter of 2023, and a decrease of $155.8 million, or 3.9%, from the fourth
quarter of 2022.
The decrease from both prior periods was
attributable to lower deposit balances (see below –
Deposits
).
The mix of earning assets continues to improve as overnight funds are
being utilized to fund loan growth.
Investment Securities
Average investments
decreased $38.9 million, or 3.7%, from the second quarter of 2023
and decreased $76.1 million, or 7.0%, from
the fourth quarter of 2022.
Our investment portfolio represented 25.9% of our average earning
assets for the third quarter of 2023
compared to 26.3% for the second quarter of 2023 and 26.8% for the
fourth quarter of 2022.
For the remainder of 2023, we will
continue to monitor our overall liquidity position and allow cash flow from
the investment portfolio to run-off to overnight funds.
41
The investment portfolio is a significant component of our operations and, as such,
it functions as a key element of liquidity and
asset/liability management.
Two types of classifications are approved
for investment securities which are Available
-for-Sale (“AFS”)
and Held-to-Maturity (“HTM”).
At September 30, 2023, $325.8 million, or 33.6%, of our investment portfolio
was classified as AFS,
and $632.1 million, or 65.2%, classified as HTM.
The average maturity of our total portfolio at September 30, 2023 was 2.90
years
compared to 3.07 years at June 30, 2023 and 3.57 years at December 31,
2022.
The duration of our investment portfolio at September
30, 2023 was 2.61 years.
Additional information on unrealized gains/losses in the AFS and HTM portfolios
is provided in Note 2 –
Investment Securities.
We determine
the classification of a security at the time of acquisition based on how the purchase will affect
our asset/liability strategy
and future business plans and opportunities.
We consider multiple
factors in determining classification, including regulatory capital
requirements, volatility in earnings or other comprehensive income,
and liquidity needs.
Securities in the AFS portfolio are recorded
at fair value with unrealized gains and losses associated with these securities recorded
net of tax, in the accumulated other
comprehensive income component of shareowners’ equity.
HTM securities are acquired or owned with the intent of holding them
to
maturity.
HTM investments are measured at amortized cost.
We do not
trade, nor do we presently intend to begin trading investment
securities for the purpose of recognizing gains and therefore we do not maintain
a trading portfolio.
At September 30, 2023, there were 894 positions (combined AFS and HTM)
with unrealized losses totaling $90.8 million. 86 of these
positions are U.S. Treasuries and carry the full faith
and credit of the U.S. Government.
705 were U.S. government agency securities
issued by U.S. government sponsored entities. The remaining 103 positions
(municipal securities and corporate bonds) have a credit
component.
At September 30, 2023,
corporate debt securities had an allowance for credit losses of $31,000
and municipal securities
had an allowance of $12,000.
At September 30, 2023, all CMO, MBS, SBA, U.S. Agency,
and U.S. Treasury bonds held were AAA
rated.
Loans HFI
Average loans
HFI increased $15.0 million, or 0.6%, over the second quarter of 2023 and $233.3
million, or 9.6%, over the fourth
quarter of 2022.
Period end loans increased $21.7 million, or 0.8%, over the second quarter of
2023 and $157.5 million, or 6.2%, over
the fourth quarter of 2022.
Compared to both prior periods, the loan growth was primarily in the residential
real estate category and
was partially offset by lower indirect auto and construction
loan balances.
Without compromising our credit standards
,
changing our underwriting standards, or taking on inordinate interest rate risk,
we
continue to closely monitor our markets and make minor adjustments as necessary.
Credit Quality
Credit quality metrics remained strong for the quarter.
Nonperforming assets (nonaccrual loans and other real estate) totaled $4.7
million at September 30, 2023 compared to $6.6 million at June 30,
2023 and $2.7 million at December 31, 2022.
At September 30,
2023, nonperforming assets as a percent of total assets equaled 0.11%,
compared to 0.15% at June 30, 2023 and 0.06% at December
31, 2022.
Nonaccrual loans totaled $4.7 million at September 30, 2023, a $1.9 million
decrease from June 30, 2023 and a $2.4 million
increase over December 31, 2022.
Further, classified loans totaled $21.8 million
at September 30, 2023, a $6.8 million increase over
June 30, 2023 and a $2.5 million increase over December 31, 2022.
The increase in the current period was primarily attributable to
the downgrade of one hotel loan that is performing as agreed on scheduled payments.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the
loans’ amortized cost basis to present the net amount
expected to be collected on the loans.
The allowance for credit losses is adjusted by a credit loss provision which is reported in
earnings, and reduced by the charge-off
of loan amounts (net of recoveries).
Loans are charged off against the allowance when
management believes the uncollectability of a loan balance is confirmed.
Expected recoveries do not exceed the aggregate of amounts
previously charged-off and expected to be charged
-off.
Expected credit loss inherent in non-cancellable off-balance sheet credit
exposures is provided through the credit loss provision, but recorded as a separate
liability included in other liabilities.
Management estimates the allowance balance using relevant available information,
from internal and external sources relating to past
events, current conditions, and reasonable and supportable forecasts.
Historical loan default and loss experience provides the basis for
the estimation of expected credit losses.
Adjustments to historical loss information incorporate management’s
view of current
conditions and forecasts.
42
At September 30, 2023, the allowance for credit losses for HFI loans totaled $29.1
million compared to $28.2 million at June 30, 2023
and $25.1 million at December 31, 2022.
Activity within the allowance is provided in Note 3 – Loans Held for Investment and
Allowance for Credit Losses in the Consolidated Financial Statements.
The increase in the allowance over both prior periods was
driven primarily by loan growth.
Further, the increase from December 31, 2022
reflected a higher loss rate for the residential real
estate portfolio due to slower prepayment speeds.
At September 30, 2023, the allowance represented 1.08% of HFI loans compared
to
1.05% at June 30, 2023, and 0.98% at December 31, 2022.
At September 30, 2023, the allowance for credit losses for unfunded
commitments totaled $3.5 million compared to $3.1 million at
June 30, 2023 and $3.0 million at December 31, 2022. The allowance for
unfunded commitments is recorded in other liabilities.
Deposits
Average total
deposits were $3.597 billion for the third quarter of 2023, a decrease of $122.7 million, or 3.3%,
from the second quarter
of 2023 and a decrease of $206.2 million, or 5.4%, from the fourth quarter
of 2022.
Compared to both prior periods, the decreases
were primarily attributable to lower noninterest bearing, savings, and
NOW balances, partially offset by higher money market
balances.
Compared to the second quarter of 2023, the decrease in NOW account balances was primarily
due to the seasonal
reduction in public fund balances held by our institutional and municipal
clients.
At September 30, 2023, total deposits were $3.540 billion, a decrease of $248.4
million, or 6.6%, from June 30, 2023 and a decrease
of $398.9 million, or 10.1%, from December 31, 2022.
Our public fund deposit balances declined $205 million and $245 million from
June 30, 2023 and December 31, 2022, respectively,
and reflected the seasonal decline in those balances which will begin to increase
in the fourth quarter as municipal tax receipts are received.
In addition, the decrease from June 30, 2023 reflected a short-term deposit
of $103 million (in the NOW category) made late in June by a municipal client
that was subsequently moved in mid-July.
The
remaining portion of the decrease reflected continued client spend
of stimulus savings and clients seeking higher yielding investment
products outside the Bank, a portion of which have moved to our wealth division.
Additionally, compared
to both prior periods, we
realized a remix of deposit balances of $32 million and $99 million, respectively,
as noninterest bearing accounts migrated into
interest bearing accounts (primarily NOW and money market accounts).
Business deposit transaction accounts classified as repurchase agreements
averaged $25.4 million for the third quarter of 2023, an
increase of $7.5 million over the second quarter of 2023 and $16.9 million over
the fourth quarter of 2022.
At September 30, 2023,
repurchase agreement balances were $22.9 million compared to $22.6
million at June 30, 2023 and $6.6 million at December 31,
2022.
We continue
to closely monitor our cost of deposits and deposit mix as we manage through the current
rising rate environment.
MARKET RISK AND INTEREST RATE
SENSITIVITY
Market Risk and Interest Rate Sensitivity
Overview.
Market risk arises from changes in interest rates, exchange rates,
commodity prices, and equity prices.
We have risk
management policies designed to monitor and limit exposure to market
risk and we do not participate in activities that give rise to
significant market risk involving exchange rates, commodity prices, or
equity prices.
In asset and liability management activities, our
policies are designed to minimize structural interest rate risk.
Interest Rate Risk Management.
Our net income is largely dependent on net interest income.
Net interest income is susceptible to
interest rate risk to the degree that interest-bearing liabilities mature
or reprice on a different basis than interest-earning assets.
When
interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a given period, a significant increase in
market rates of interest could adversely affect net interest
income.
Similarly, when interest-earning
assets mature or reprice more
quickly than interest-bearing liabilities, falling market interest rates could
result in a decrease in net interest income.
Net interest
income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by
other sources of funds, such as noninterest-bearing deposits and shareowners’
equity.
43
We have established
what we believe to be a comprehensive interest rate risk management policy,
which is administered by
management’s Asset Liability Management
Committee (“ALCO”).
The policy establishes limits of risk, which are quantitative
measures of the percentage change in net interest income (a measure of net
interest income at risk) and the fair value of equity capital
(a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change
in interest rates for maturities from one
day to 30 years.
We measure the potential
adverse impacts that changing interest rates may have on our short-term
earnings, long-
term value, and liquidity by employing simulation analysis through the use of
computer modeling.
The simulation model captures
optionality factors such as call features and interest rate caps and floors imbedded
in investment and loan portfolio contracts.
As with
any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by
us.
When interest rates change, actual movements in different categories
of interest-earning assets and interest-bearing liabilities, loan
prepayments, and withdrawals of time and other deposits, may deviate significantly
from assumptions used in the model.
Finally, the
methodology does not measure or reflect the impact that higher rates may have
on adjustable-rate loan clients’ ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
The statement of financial condition is subject to testing for interest rate shock
possibilities to indicate the inherent interest rate risk.
We prepare
a current base case and several alternative interest rate simulations (-400, -300, -200,
-100, +100, +200, +300, and +400
basis points (bp)), at least once per quarter, and
report the analysis to ALCO, our Market Risk Oversight Committee (“MROC”), our
Enterprise Risk Oversight Committee (“EROC”) and the Board of Directors.
We augment our interest rate
shock analysis with
alternative interest rate scenarios on a quarterly basis that may include ramps,
parallel shifts, and a flattening or steepening of the yield
curve (non-parallel shift).
In addition, more frequent forecasts may be produced when interest rates are particularly
uncertain or when
other business conditions so dictate.
Our goal is to structure the statement of financial condition so that net interest earnings at risk over
12-month and 24-month periods
and the economic value of equity at risk do not exceed policy guidelines
at the various interest rate shock levels. We
attempt to
achieve this goal by balancing, within policy limits, the volume of floating-rate
liabilities with a similar volume of floating-rate assets,
by keeping the average maturity of fixed-rate asset and liability contracts
reasonably matched, by managing the mix of our core
deposits, and by adjusting our rates to market conditions on a continuing
basis.
Analysis.
Measures of net interest income at risk produced by simulation analysis are
indicators of an institution’s short-term
performance in alternative rate environments.
These measures are typically based upon a relatively brief period, and do not
necessarily indicate the long-term prospects or economic value of the institution.
ESTIMATED CHANGES
IN NET INTEREST INCOME
(1)
Percentage Change (12-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
-15.0%
-12.5%
-10.0%
-7.5%
-7.5%
-10.0%
-12.5%
-15.0%
September 30, 2023
3.2%
2.3%
1.4%
0.7%
-1.3%
-3.8%
-7.7%
-12.5%
June 30, 2023
4.1%
3.0%
1.9%
1.0%
-1.5%
-4.4%
-9.6%
-15.3%
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%
September 30, 2023
30.6%
25.6%
20.4%
15.9%
5.2%
-2.3%
-12.0%
-22.0%
June 30, 2023
28.4%
23.5%
18.4%
13.9%
3.4%
-4.4%
-15.1%
-25.6%
The Net Interest Income (“NII”) at Risk position indicates
that in the short-term (over the next 12 months), all rising rate environments
will positively impact the net interest margin of the Company,
while declining rate environments
will have a negative impact on the
net interest margin. Compared to the second quarter of 2023, these
metrics became less favorable in the rising rate scenarios primarily
due to loan growth, which reduced our level of overnight funds and made us slightly
less asset sensitive.
The converse applies in the
down rate scenarios where the metrics became more favorable due to loan growth
which increased asset duration and therefore
protection against falling rates.
The percent change over the 24-month shock is outside of policy in
the rates down 400 bps scenario
due to our limited ability to lower our deposit rates relative to the decline
in market rate.
The measures of equity value at risk indicate our ongoing economic value
by considering the effects of changes in interest rates on all
of our cash flows by discounting the cash flows to estimate the present value of
assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity,
which in theory approximates the fair value of our net
assets.
44
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%
September 30, 2023
9.2%
7.7%
5.6%
3.3%
-5.2%
-12.9%
-21.2%
-31.7%
June 30, 2023
10.7%
9.1%
6.7%
3.9%
-7.1%
-18.0%
-30.2%
-32.6%
EVE Ratio (policy minimum 5.0%)
20.9%
20.2%
19.4%
18.6%
16.4%
14.7%
13.1%
11.2%
(1) The down 400 bp rate scenario was added in the fourth quarter of 2022.
At September 30, 2023, the economic value of equity was favorable
in all rising rate environments and unfavorable in the falling rate
environments. Compared to the second quarter of 2023, EVE metrics were
slightly less favorable in the rising rate environment and
more favorable in falling rate environments.
EVE is currently in compliance with policy in all rate scenarios as the EVE ratio in each
rate scenario exceeds 5.0%.
As the interest rate environment and the dynamics of the economy continue to change,
additional simulations will be analyzed to
address not only the changing rate environment, but also the change
in mix of our financial assets and liabilities, measured over
multiple years, to help assess the risk to the Company.
LIQUIDITY AND CAPITAL
RESOURCES
Liquidity
In general terms, liquidity is a measurement of our ability to meet our
cash needs.
Our objective in managing our liquidity is to
maintain our ability to meet loan commitments, purchase securities or repay deposits and
other liabilities in accordance with their
terms, without an adverse impact on our current or future earnings.
Our liquidity strategy is guided by policies that are formulated and
monitored by our ALCO and senior management, which take into account
the marketability of assets, the sources and stability of
funding and the level of unfunded commitments.
We regularly evaluate
all of our various funding sources with an emphasis on
accessibility, stability,
reliability and cost-effectiveness.
Our principal source of funding has been our client deposits, supplemented
by our short-term and long-term borrowings, primarily from securities sold under
repurchase agreements, federal funds purchased and
FHLB borrowings.
We believe that the cash
generated from operations, our borrowing capacity and our access to capital resources
are
sufficient to meet our future operating capital and funding requirements.
At September 30, 2023, we had the ability to generate approximately $1.587 billion
(excludes overnight funds position of $95 million)
in additional liquidity through various sources including various federal funds
purchased lines, Federal Home Loan Bank borrowings,
the Federal Reserve Discount Window,
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 that certain credit facilities may no longer be available.
We conduct a liquidity
stress test on a quarterly basis based on
events that could potentially occur at the Bank and report results to ALCO, our
Market Risk Oversight Committee, Risk Oversight
Committee, and the Board of Directors.
At September 30, 2023, we believe the liquidity available to us was sufficient
to meet our on-
going needs and execute our business strategy.
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.
Additional information on our investment portfolio is provided within
Note
2 –
Investment Securities
.
The Bank maintained an average net overnight funds (deposits with banks plus
FED funds sold less FED funds purchased) sold
position of $136.6 million in the third quarter of 2023 compared to $218.9
million in the second quarter of 2023 and $469.4 million in
the fourth quarter of 2022.
The declining overnight funds position reflected growth in average loans and lower
average deposit
balances.
We expect our
capital expenditures will be approximately $8.0 million over the next 12 months, which
will primarily consist of
construction of new offices, office remodeling,
office equipment/furniture, and technology purchases.
Management expects that these
capital expenditures will be funded with existing resources without impairing
our ability to meet our on-going obligations.
45
Borrowings
Average short
-term borrowings totaled $49.7 million for the third quarter of 2023 compared to
$35.7 million for the second quarter of
2023 and $50.8 million for the fourth quarter of 2022.
The variance compared to both prior periods was primarily attributable to an
increase in short-term repurchase agreements and the fluctuation in CCHL’s
warehouse line. Additional detail on these warehouse
borrowings is provided in Note 4 – Mortgage Banking Activities in the Consolidated
Financial Statements.
We have issued two
junior subordinated deferrable interest notes to our wholly owned
Delaware statutory trusts.
The first note for
$30.9 million was issued to CCBG Capital Trust I in
November 2004, of which $10 million was retired in April 2016.
The second
note for $32.0 million was issued to CCBG Capital Trust II
in May 2005.
The interest payment for the CCBG Capital Trust I
borrowing is due quarterly and adjusts quarterly to a variable rate of three-month
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.
During the second quarter of 2020, we entered into a derivative cash
flow hedge of our interest rate risk related to our subordinated
debt.
The notional amount of the derivative is $30 million ($10 million of the CCBG Capital Trust
I borrowing and $20 million of the
CCBG Capital Trust II borrowing).
The interest rate swap agreement requires CCBG to pay fixed and receive variable (three-month
CME Term SOFR plus spread)
and has an average all-in fixed rate of 2.50% for 10 years.
Additional detail on the interest rate swap
agreement is provided in Note 5 – Derivatives in the Consolidated Financial
Statements.
Capital
Our capital ratios are presented in the Selected Quarterly Financial Data
table on page 34.
At September 30, 2023, our regulatory
capital ratios exceeded the threshold to be designated as “well-capitalized”
under the Basel III capital standards.
Shareowners’ equity was $419.7 million at September 30, 2023
compared to $412.4 million at June 30, 2023 and $387.3 million at
December 31, 2022.
For the first nine months of 2023, shareowners’ equity was positively impacted by net
income attributable to
common shareowners of $40.5 million, a $2.4 million decrease in the unrealized
loss on investment securities, the issuance of stock of
$2.2 million, stock compensation accretion of $1.0 million, and a $0.4 million
increase in the fair value of the interest rate swap
related to subordinated debt.
Shareowners’ equity was reduced by common stock dividends of $9.5
million ($0.56 per share), the
repurchase of stock of $3.1 million (102,147 shares), and net adjustments totaling
$1.5 million related to transactions under our stock
compensation plans.
At September 30, 2023, our total risk-based capital ratio was 16.30%
compared to 15.68% at June 30, 2023 and 15.30% at December
31, 2022.
Our common equity tier 1 capital ratio was 13.26%, 12.73%, and 12.38%, respectively,
on these dates.
Our leverage ratio
was 9.98%, 9.54%, and 8.91%, respectively,
on these dates.
At September 30, 2023, all our regulatory capital ratios exceeded the
threshold to be designated as “well-capitalized” under the Basel III capital
standards.
Further, our tangible common equity ratio was
8.08% at September 30, 2023 compared to 7.43% and 6.65% at June 30,
2023 and December 31, 2022, respectively.
If our unrealized
held-to-maturity securities losses of $33.1 million (after-tax)
were recognized in accumulated other comprehensive loss, our adjusted
tangible capital ratio would be 7.26%.
Our tangible capital ratio is also impacted by the recording of our unfunded pension
liability through other comprehensive income in
accordance with ASC Topic
715.
At September 30, 2023, the net pension liability reflected in other comprehensive loss was
$4.7
million compared to $4.7 million at June 30, 2023
and $4.5 million at December 31, 2022.
This liability is re-measured annually on
December 31
st
based on an actuarial calculation of our pension liability.
Significant assumptions used in calculating the liability
include the weighted average discount rate used to measure the present
value of the pension liability, the
weighted average expected
long-term rate of return on pension plan assets, and the assumed rate of annual compensation
increases, all of which will vary when
re-measured.
The discount rate assumption used to calculate the pension liability is subject to long
-term corporate bond rates at
December 31
st
.
These assumptions and sensitivities are discussed in our 2022 Form 10-K/A “Critical Accounting
Policies and
Estimates”.
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.
46
At September 30, 2023, we had $774.7 million in commitments to extend
credit and $6.8 million in standby letters of credit.
Commitments to extend credit are agreements to lend to a client so long as there is no violation of
any condition established in the
contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
Since
many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance
of a client to a third party.
We use the same credit
policies in establishing commitments and issuing letters of credit as we do for on-
balance sheet instruments.
If commitments arising from these financial instruments continue to require
funding at historical levels, management does not
anticipate that such funding will adversely impact our ability to meet our on-going
obligations.
In the event these commitments
require funding in excess of historical levels, management believes current
liquidity, advances available from the
FHLB and the
Federal Reserve, and investment security maturities provide a sufficient
source of funds to meet these commitments.
Certain agreements provide that the commitments are unconditionally
cancellable by the bank and for those agreements no allowance
for credit losses has been recorded.
We have recorded
an allowance for credit losses on loan commitments that are not
unconditionally cancellable by the bank, which is included in other
liabilities on the consolidated statements of financial condition and
totaled $3.5 million at September 30, 2023.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the Consolidated
Financial Statements included in our 2022 Form 10-
K/A.
The preparation of our Consolidated Financial Statements
in accordance with GAAP and reporting practices applicable to the
banking industry requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses, and to disclose contingent assets and liabilities.
Actual results could differ from those estimates.
We have identified
accounting for (i) the allowance for credit losses, (ii) goodwill,
(iii) pension assumptions, and (iv) income taxes as
our most critical accounting policies and estimates in that they are important
to the portrayal of our financial condition and results, and
they require our subjective and complex judgment as a result of the need to make estimates about
the effects of matters that are
inherently uncertain.
These accounting policies, including the nature of the estimates and types of assumptions
used, are described
throughout this Item 2, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and
Part II, Item 7,
Management’s Discussion and Analysis
of Financial Condition and Results of Operations included
in our 2022 Form 10-K/A.
47
TABLE I
AVERAGE BALANCES & INTEREST RATES (UNAUDITED)
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Average
Average
Average
Average
Average
Average
Average
Average
(Dollars in Thousands)
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Assets:
Loans Held for Sale
$
62,768
$
971
6.14
%
$
55,164
$
486
3.49
%
$
57,438
$
2,416
5.62
%
$
50,387
$
1,594
4.23
%
Loans Held for Investment
(1)(2)
2,672,653
38,455
5.71
2,264,075
27,432
4.81
2,637,911
109,688
5.56
2,105,211
73,168
4.65
Taxable Securities
1,002,547
4,549
1.80
1,117,789
4,359
1.55
1,034,825
14,265
1.84
1,105,822
11,082
1.34
Tax-Exempt Securities
(2)
2,456
17
2.66
2,939
17
2.30
2,649
50
2.49
2,614
37
1.90
Federal Funds Sold and Interest Bearing
Deposits
136,556
1,848
5.37
569,984
3,231
2.25
237,987
8,741
4.91
710,559
5,048
0.95
Total Earning Assets
3,876,980
45,840
4.69
%
4,009,951
35,525
3.52
%
3,970,810
135,160
4.55
%
3,974,593
90,929
3.06
%
Cash & Due From Banks
75,941
79,527
75,483
77,856
Allowance For Credit Losses
(29,172)
(21,509)
(27,581)
(21,382)
Other Assets
295,106
289,709
297,688
284,546
TOTAL ASSETS
$
4,218,855
$
4,357,678
$
4,316,400
$
4,315,613
Liabilities:
Noninterest Bearing Deposits
1,474,574
1,726,918
1,538,268
1,700,800
NOW Accounts
$
1,125,171
$
3,489
1.23
%
$
1,016,475
$
868
0.34
%
$
1,184,453
$
8,679
0.98
%
$
1,042,958
$
1,074
0.14
%
Money Market Accounts
322,623
1,294
1.59
288,758
71
0.10
293,089
2,249
1.03
286,804
140
0.07
Savings Accounts
579,245
200
0.14
643,640
80
0.05
603,643
396
0.09
623,986
229
0.05
Other Time Deposits
95,203
231
0.96
94,073
33
0.14
90,970
386
0.57
95,408
99
0.14
Total Interest Bearing Deposits
2,122,242
5,214
0.97
2,042,946
1,052
0.20
2,172,155
11,710
0.72
2,049,156
1,542
0.10
Total Deposits
3,596,816
5,214
0.58
3,769,864
1,052
0.11
3,710,423
11,710
0.42
3,749,956
1,542
0.05
Repurchase Agreements
25,356
190
2.98
11,665
5
0.18
17,588
314
2.39
7,971
6
0.11
Other Short-Term Borrowings
24,306
440
7.17
35,014
531
6.01
26,586
1,228
6.17
29,020
1,065
4.90
Subordinated Notes Payable
52,887
625
4.62
52,887
443
3.28
52,887
1,800
4.49
52,887
1,130
2.82
Other Long-Term Borrowings
387
4
4.73
580
6
4.74
433
15
4.78
710
23
4.58
Total Interest Bearing Liabilities
2,225,178
6,473
1.15
%
2,143,092
2,037
0.38
%
2,269,649
15,067
0.89
%
2,139,744
3,766
0.24
%
Other Liabilities
83,099
98,501
82,877
86,055
TOTAL LIABILITIES
3,782,851
3,968,511
3,890,794
3,926,599
Temporary Equity
8,424
9,862
8,719
10,156
TOTAL SHAREOWNERS’ EQUITY
427,580
379,305
416,887
378,858
TOTAL LIABILITIES, TEMPORARY
AND SHAREOWNERS’ EQUITY
$
4,218,855
$
4,357,678
$
4,316,400
$
4,315,613
Interest Rate Spread
3.54
%
3.14
%
3.66
%
2.82
%
Net Interest Income
$
39,367
$
33,488
$
120,093
$
87,163
Net Interest Margin
(3)
4.03
%
3.32
%
4.04
%
2.93
%
(1)
Average Balances include net loan fees, discounts and premiums and nonaccrual loans.
Interest income includes loans fees of $0.1 million
and less than $0.1 million for the three month periods
ended September 30, 2023 and
2022, respectively, and $0.1 million and $0.6 million for the nine month periods ended September
30, 2023 and 2022, respectively.
(2)
Interest income includes the effects of taxable equivalent adjustments
using a 21% Federal tax rate.
(3)
Taxable equivalent net interest income divided by average earning assets.
48
Item 3.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See “Market Risk and Interest Rate Sensitivity” in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, above, which is incorporated herein by reference.
Management has determined that no additional disclosures are
necessary to assess changes in information about market risk that have occurred
since December 31, 2022.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
At September 30, 2023, the end of the period covered by this Form 10-Q, our management,
including our Chief Executive Officer and
Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the
Securities Exchange Act of 1934).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded
that, as of the end of the period covered by this report these disclosure controls and procedures
were ineffective as of September 30,
2023 due to the identification of the material weakness discussed below.
Previously Reported Material Weakness
in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective
internal control over financial reporting, as such term is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. As reported
in our 2022 Form 10-K/A, we did not maintain
effective internal control as of December 31, 2022 as a result of
a material weakness in our internal control over financial reporting for
the review of certain inter-company mortgage sales and
servicing. 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 interim financial
statements will not be prevented or detected on a timely basis. Refer to our 2022
Form 10-K/A for
a description of our material weakness.
Ongoing Remediation Efforts to Address Material
Weakness
Our material weakness was not remediated as of September 30, 2023.
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,
which either have already been
implemented or are continuing to be implemented, 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.
Certain internal control and procedural enhancements and remedial
actions are in the process of completion, including:
●
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.
Management believes the foregoing effects will effectively
remediate the material weakness described above. As the Company
continues to evaluate and improve its internal control over financial reporting
and disclosure controls and procedures, management
may determine to take additional measures to improve controls and determine
to modify the remediation plan described above. The
Company is working to remediate the material weakness as efficiently
and effectively as possible. Procedures to implement the
remediation plan have required significant amounts of time, allocation of internal
resources and external costs, and remaining
remediation efforts will continue to place significant demands on
financial and operational resources until this plan is completed.
The material weakness described above 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 in
the activities affected by the material weakness described above.
Changes in Internal Control
Except as identified above with respect to remediation of the material weakness,
during the quarter ended on September 30, 2023,
there have been no significant changes in our internal control over
financial reporting during our most recently completed fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
49
PART
II.
OTHER INFORMATION
Item 1.
Legal Proceedings
We are party
to lawsuits arising out of the normal course of business.
In management's opinion, there is no known pending litigation,
the outcome of which would, individually or in the aggregate, have a material effect
on our consolidated results of operations,
financial position, or cash flows.
Item 1A.
Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider
the factors discussed in Part I,
Item 1A. “Risk Factors” in our 2022 Form 10-K/A, as updated in our subsequent
quarterly reports. The risks described in our 2022
Form 10-K/A and our subsequent quarterly reports are not the only risks facing
us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or
operating results.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
Purchases of Equity Securities by the Issuer and
Affiliated Purchasers
The following table contains information about all purchases made by,
or on behalf of, us and any affiliated purchaser (as defined
in
Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of
our equity securities that is registered pursuant to
Section 12 of the Exchange Act.
Total
number
Average
Total
number of shares
Maximum Number of shares
of shares
price paid
purchased under our
remaining for purchase under
Period
purchased
per share
share repurchase program
(1)
our share repurchase program
July 1, 2023 to
July 31, 2023
-
-
-
507,312
August 1, 2023 to
August 31, 2023
10,697
30.18
10,697
496,615
September 1, 2023 to
September 30, 2023
25,714
30.17
25,714
470,901
Total
36,411
$30.17
36,411
470,901
(1)
This amount represents the number of shares that were repurchased during
the third 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.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosure
Not Applicable.
Item 5.
Other Information
(c) Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none
of our directors or officers (as defined in Rule 16a-1(f) under the
Exchange
Act)
adopted
or
terminated
any contract, instruction or written plan for the purchase or sale of our securities that was intended
to
satisfy the affirmative defense conditions of Rule 10b5-1(c)
under the Exchange Act or any “
non-Rule
10b5-1
trading arrangement” as
defined in Item 408(c) of Regulation S-K.
50
51
Item 6.
Exhibits
(A)
Exhibits
31.1
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1
Pursuant to 18 U.S.C. Section 1350.
32.2
Pursuant to 18 U.S.C. Section 1350.
101.SCH
XBRL Taxonomy
Extension Schema Document
101.CAL
XBRL Taxonomy
Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy
Extension Label Linkbase Document
101.PRE
XBRL Taxonomy
Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy
Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its
behalf by the undersigned Chief Financial Officer hereunto duly
authorized.
CAPITAL CITY
BANK GROUP,
INC.
(Registrant)
/s/ Jeptha E. Larkin
Jeptha E. Larkin
Executive Vice President
and Chief Financial Officer
(Mr. Larkin is the Principal
Financial Officer and has
been duly authorized to sign on behalf of the Registrant)
Date: December 22, 2023
exhibit311
1
Exhibit 31.1
Certification of CEO Pursuant to Securities Exchange Act
Rule 13a-14(a) / 15d-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, William G. Smith, Jr.,
certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Capital City Bank Group,
Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report
is being prepared;
(b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the
registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation
of internal control over
financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s
board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the
registrant’s internal control
over financial reporting.
/s/ William G. Smith, Jr.
William G. Smith, Jr.
Chairman, President and
Chief Executive Officer
Date: December 22, 2023
exhibit312
1
Exhibit 31.2
Certification of CFO Pursuant to Securities Exchange Act
Rule 13a-14(a) / 15d-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeptha E. Larkin, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Capital City Bank Group,
Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report
is being prepared;
(b)
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the
registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation
of internal control over
financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s
board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the
registrant’s internal control
over financial reporting.
/s/ Jeptha E. Larkin
Jeptha E. Larkin
Executive Vice President
and
Chief Financial Officer
Date: December 22, 2023
exhibit321
1
Exhibit 32.1
Certification of CEO Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, I, William G. Smith,
Jr.,
Chairman, President, and Chief Executive Officer of Capital City Bank
Group, Inc., hereby certify that to my knowledge (1) this
Quarterly Report of the Company on Form 10-Q for the period ended September
30, 2023, as filed with the Securities and Exchange
Commission on the date hereof (this "Report"), fully complies with the requirements
of Section 13(a) of the Securities Exchange Act
of 1934, as amended, and (2) the information contained in this Report fairly presents,
in all material respects, the financial condition
of the Company and its results of operations as of and for the periods covered
therein.
/s/ William G. Smith, Jr.
William G. Smith, Jr.
Chairman, President, and
Chief Executive Officer
Date: December 22, 2023
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging or otherwise
adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its
staff upon request.
exhibit322
1
Exhibit 32.2
Certification of CFO Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, I, Jeptha E. Larkin,
Executive Vice President
and Chief Financial Officer of Capital City Bank Group, Inc., hereby certify that
to my knowledge (1) this
Quarterly Report of the Company on Form 10-Q for the period ended September
30, 2023, as filed with the Securities and Exchange
Commission on the date hereof (this "Report"), fully complies with the requirements
of Section 13(a) of the Securities Exchange Act
of 1934, as amended, and (2) the information contained in this Report fairly presents,
in all material respects, the financial condition
of the Company and its results of operations as of and for the periods covered
therein.
/s/ Jeptha E. Larkin
Jeptha E. Larkin
Executive Vice President
and
Chief Financial Officer
Date: December 22, 2023
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging or otherwise
adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its
staff upon request.