UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended June 30, 2009
OR
|
o
|
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)
402-7000
|
|
(Registrant's
telephone number, including area
code)
|
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer”, “accelerated
filer", and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
|
(Do
not check if smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
At July
31, 2009,17,024,508 shares of the Registrant's Common Stock, $.01 par value,
were outstanding.
CAPITAL
CITY BANK GROUP, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE PERIOD ENDED JUNE 30, 2009
TABLE
OF CONTENTS
|
PART
I – Financial Information
|
Page
|
||
|
Item
1.
|
|||
|
Consolidated
Statements of Financial Condition – June 30, 2009 and December 31,
2008
|
4
|
||
|
Consolidated
Statements of Income – Three and Six Months Ended June 30, 2009 and
2008
|
5
|
||
|
Consolidated
Statement of Changes in Shareowners’ Equity – Six Months Ended June 30,
2009
|
6
|
||
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Consolidated
Statements of Cash Flow – Six Months Ended June 30, 2009 and
2008
|
7
|
||
|
Notes
to Consolidated Financial Statements
|
8
|
||
|
Item
2.
|
16
|
||
|
Item
3.
|
29
|
||
|
Item
4.
|
29
|
||
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PART
II – Other Information
|
|||
|
Item
1.
|
29
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||
|
Item
1A.
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29
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||
|
Item
2.
|
29
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||
|
Item
3.
|
29
|
||
|
Item
4.
|
29
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||
|
Item
5.
|
29
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||
|
Item
6.
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30
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||
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31
|
|||
| Exhibit Index |
32
|
||
-2-
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, the following sections of
our Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008
Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”; (b) “Risk
Factors” in Part I, Item 1A., as updated in our subsequent quarterly reports
filed on Form 10-Q, and (c) “Introduction” in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in Part II, Item 7.
as well as:
|
§
|
the
frequency and magnitude of foreclosure of our
loans;
|
|
§
|
the
adequacy of collateral underlying collateralized loans and our ability to
resell the collateral if we foreclose on the
loans;
|
|
§
|
the
effects of our lack of a diversified loan portfolio, including the risks
of geographic and industry
concentrations;
|
|
§
|
the
accuracy of our financial statement estimates and assumptions, including
the estimate for our loan loss
provision;
|
|
§
|
the
extent to which our nonperforming loans increase or decrease as a
percentage of our total loan
portfolio;
|
|
§
|
our
ability to integrate the business and operations of companies and banks
that we have acquired, and those we may acquire in the
future;
|
|
§
|
our
need and our ability to incur additional debt or equity
financing;
|
|
§
|
the
strength of the United States economy in general and the strength of the
local economies in which we conduct
operations;
|
|
§
|
the
effects of harsh weather conditions, including
hurricanes;
|
|
§
|
inflation,
interest rate, market and monetary
fluctuations;
|
|
§
|
effect
of changes in the stock market and other capital
markets;
|
|
§
|
legislative
or regulatory changes;
|
|
§
|
our
ability to comply with the extensive laws and regulations to which we are
subject;
|
|
§
|
the
willingness of clients to accept third-party products and services rather
than our products and services and vice
versa;
|
|
§
|
changes
in the securities and real estate
markets;
|
|
§
|
increased
competition and its effect on
pricing;
|
|
§
|
technological
changes;
|
|
§
|
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;
|
|
§
|
changes
in consumer spending and saving
habits;
|
|
§
|
growth
and profitability of our noninterest
income;
|
|
§
|
changes
in accounting principles, policies, practices or
guidelines;
|
|
§
|
the
limited trading activity of our common
stock;
|
|
§
|
the
concentration of ownership of our common
stock;
|
|
§
|
anti-takeover
provisions under federal and state law as well as our Articles of
Incorporation and our Bylaws;
|
|
§
|
other
risks described from time to time in our filings with the Securities and
Exchange Commission; and
|
|
§
|
our
ability to manage the risks involved in the
foregoing.
|
However,
other factors besides those referenced 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.
-3-
-4-
-5-
-6-
-7-
CAPITAL
CITY BANK GROUP, INC.
|
NOTE 1
- SIGNIFICANT
ACCOUNTING POLICIES
|
Basis
of Presentation
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.
The
unaudited consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission, including Regulation S-X. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and
regulations. Prior period financial statements have been reformatted
and amounts reclassified, as necessary, to conform with the current
presentation. The Company and its subsidiary follow accounting
principles generally accepted in the United States (“GAAP”) and reporting
practices applicable to the banking industry. The principles that
materially affect its financial position, results of operations and cash flows
are set forth in the Notes to Consolidated Financial Statements which are
included in the 2008 Form 10-K.
In the
opinion of management, the consolidated financial statements contain all
adjustments, which are those of a recurring nature, and disclosures necessary to
present fairly the financial position of the Company as of June 30, 2009 and
December 31, 2008, the results of operations for the three and six months ended
June 30, 2009 and 2008, and cash flows for the six months ended June 30, 2009
and 2008. The Company has evaluated subsequent events for potential
recognition and/or disclosure through August 10, 2009, the date the consolidated
financial statements included in this Quarterly Report on Form 10-Q were
issued.
|
NOTE
2 - INVESTMENT SECURITIES
|
The
amortized cost and related market value of investment securities
available-for-sale were as follows:
|
June
30, 2009
|
||||||||||||||||
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Market
Value
|
||||||||||||
|
U.S.
Treasury
|
$
|
27,899
|
$
|
297
|
$
|
-
|
$
|
28,196
|
||||||||
|
U.S.
Government Agencies
|
5,597
|
61
|
-
|
5,658
|
||||||||||||
|
States
and Political Subdivisions
|
105,925
|
1,420
|
68
|
107,277
|
||||||||||||
|
Residential
Mortgage-Backed Securities
|
39,493
|
677
|
18
|
40,152
|
||||||||||||
|
Other
Securities(1)
|
12,719
|
-
|
-
|
12,719
|
||||||||||||
|
Total
Investment Securities
|
$
|
191,633
|
$
|
2,455
|
$
|
86
|
$
|
194,002
|
||||||||
|
December
31, 2008
|
||||||||||||||||
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Market
Value
|
||||||||||||
|
U.S.
Treasury
|
$
|
29,094
|
$
|
577
|
$
|
-
|
$
|
29,671
|
||||||||
|
U.S.
Government Agencies
|
7,091
|
180
|
-
|
7,271
|
||||||||||||
|
States
and Political Subdivisions
|
100,370
|
1,224
|
32
|
101,562
|
||||||||||||
|
Residential
Mortgage-Backed Securities
|
39,860
|
332
|
116
|
40,076
|
||||||||||||
|
Other
Securities(1)
|
12,882
|
107
|
-
|
12,989
|
||||||||||||
|
Total
Investment Securities
|
$
|
189,297
|
$
|
2,420
|
$
|
148
|
$
|
191,569
|
||||||||
|
(1)
|
Includes Federal Home Loan
Bank and Federal Reserve Bank stock recorded at cost of $6.9 million and
$4.8 million, respectively, at June 30, 2009, and $7.0 million and $4.8
million, respectively, at December 31, 2008. Also, balance includes a bank
preferred
stock issue
recorded at $1.0 million and $1.1 million at June 30, 2009 and December
31, 2008,
respectively.
|
The
Company’s subsidiary, Capital City Bank, as a member of the Federal Home Loan
Bank (“FHLB”) of Atlanta, is required to own capital stock in the FHLB of
Atlanta based generally upon the balances of residential and commercial real
estate loans, and FHLB advances. FHLB stock of $6.9 million which is
included in other securities is pledged to secure FHLB advances. No
ready market exists for this stock, and it has no quoted market
value. However, redemption of this stock has historically been at par
value.
Maturity Distribution. As of
June 30, 2009, the Company's investment securities had the following maturity
distribution based on contractual maturities:
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Market
Value
|
||||||
|
Due
in one year or less
|
$
|
80,324
|
$
|
81,143
|
||||
|
Due
after one through five years
|
96,207
|
97,682
|
||||||
|
Due
after five through ten years
|
1,833
|
1,847
|
||||||
|
Due
over ten years
|
1,550
|
1,611
|
||||||
|
No
Maturity
|
11,719
|
11,719
|
||||||
|
Total
Investment Securities
|
$
|
191,633
|
$
|
194,002
|
||||
Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
NOTE
3 - LOANS
The
composition of the Company's loan portfolio was as follows:
|
(Dollars
in Thousands)
|
June
30, 2009
|
December
31, 2008
|
||||||
|
Commercial,
Financial and Agricultural
|
$
|
201,589
|
$
|
206,230
|
||||
|
Real
Estate-Construction
|
153,507
|
141,973
|
||||||
|
Real
Estate-Commercial
|
686,420
|
656,959
|
||||||
|
Real
Estate-Residential(1)
|
448,216
|
481,034
|
||||||
|
Real
Estate-Home Equity
|
235,473
|
218,500
|
||||||
|
Real
Estate-Loans Held-for-Sale
|
7,369
|
3,204
|
||||||
|
Consumer
|
244,489
|
249,897
|
||||||
|
Loans,
Net of Unearned Interest
|
$
|
1,977,063
|
$
|
1,957,797
|
||||
|
(1)
|
Includes
loans in process with outstanding balances of $8.4 million and $13.9
million for June 30, 2009 and December 31, 2008,
respectively.
|
Net
deferred fees included in loans at June 30, 2009 and December 31, 2008 were $2.0
million and $1.9 million, respectively.
-8-
NOTE
4 - ALLOWANCE FOR LOAN LOSSES
An
analysis of the changes in the allowance for loan losses for the six month
periods ended June 30 was as follows:
|
(Dollars
in Thousands)
|
2009
|
2008
|
||||||
|
Balance,
Beginning of Period
|
$
|
37,004
|
$
|
18,066
|
||||
|
Provision
for Loan Losses
|
16,836
|
9,574
|
||||||
|
Recoveries
on Loans Previously Charged-Off
|
1,604
|
1,287
|
||||||
|
Loans
Charged-Off
|
(13,662
|
)
|
(6,409
|
)
|
||||
|
Balance,
End of Period
|
$
|
41,782
|
$
|
22,518
|
||||
Impaired
Loans. Loans are considered impaired when, based on current
information and events, it is probable the Company will be unable to collect all
amounts due in accordance with the original contractual terms of the loan
agreement, including scheduled principal and interest
payments. Selected information pertaining to impaired loans is
depicted in the table below:
|
June
30, 2009
|
December
31, 2008
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Balance
|
Valuation
Allowance
|
Balance
|
Valuation
Allowance
|
||||||||||||
|
Impaired
Loans:
|
||||||||||||||||
|
With
Related Valuation Allowance
|
$
|
99,646
|
$
|
18,483
|
$
|
68,705
|
$
|
15,901
|
||||||||
|
Without
Related Valuation Allowance
|
26,656
|
-
|
37,723
|
-
|
||||||||||||
|
NOTE
5 - INTANGIBLE ASSETS
|
The
Company had net intangible assets of $90.9 million and $92.9 million at June 30,
2009 and December 31, 2008, respectively. Intangible assets were as
follows:
|
June
30, 2009
|
December
31, 2008
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Gross
Amount
|
Accumulated
Amortization
|
Gross
Amount
|
Accumulated
Amortization
|
||||||||||||
|
Core
Deposit Intangibles
|
$
|
47,176
|
$
|
42,017
|
$
|
47,176
|
$
|
40,092
|
||||||||
|
Goodwill
|
84,811
|
-
|
84,811
|
-
|
||||||||||||
|
Customer
Relationship Intangible
|
1,867
|
975
|
1,867
|
879
|
||||||||||||
|
Total
Intangible Assets
|
$
|
133,854
|
$
|
42,992
|
$
|
133,854
|
$
|
40,971
|
||||||||
Net
Core Deposit Intangibles: As of June 30, 2009 and December 31,
2008, the Company had net core deposit intangibles of $5.1 million and $7.1
million, respectively. Amortization expense for the first six months
of 2009 and 2008 was approximately $2.0 million and $2.9 million,
respectively. Estimated annual amortization expense for 2009 is $3.8
million.
Goodwill: As of June 30, 2009 and December 31, 2008, the Company had goodwill, net of accumulated amortization, of $84.8 million. Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”
Other: As
of June 30, 2009 and December 31, 2008, the Company had a customer relationship
intangible asset, net of accumulated amortization, of $0.9 million and $1.0
million, respectively. This intangible asset was recorded as a result
of the March 2004 acquisition of trust customer relationships from Synovus Trust
Company. Amortization expense for the first six months of 2009 and
2008 was approximately $96,000. Estimated annual amortization expense
is approximately $191,000 based on use of a 10-year useful
life.
NOTE
6 - DEPOSITS
The
composition of the Company's interest bearing deposits at June 30, 2009 and
December 31, 2008 was as follows:
|
(Dollars
in Thousands)
|
June
30, 2009
|
December
31, 2008
|
||||||
|
NOW
Accounts
|
$
|
733,526
|
$
|
758,976
|
||||
|
Money
Market Accounts
|
300,683
|
324,646
|
||||||
|
Savings
Deposits
|
123,257
|
115,261
|
||||||
|
Other
Time Deposits
|
424,339
|
373,595
|
||||||
|
Total
Interest Bearing Deposits
|
$
|
1,581,805
|
$
|
1,572,478
|
||||
|
NOTE
7 - STOCK-BASED COMPENSATION
|
The
Company recognizes the cost of stock-based associate stock compensation in
accordance with SFAS No. 123R, "Share-Based Payment” (Revised) under the
fair value method.
As of
June 30, 2009, the Company had three stock-based compensation plans, consisting
of the 2008 Associate Stock Incentive Plan ("ASIP"), the 2005 Associate Stock
Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan
("DSPP"). Total compensation expense associated
with these plans for the six months ended June 30, 2009 and 2008 was $81,000 and
$208,000, respectively. In the first quarter of 2008, under the
provisions of an incentive plan substantially similar to the ASIP, the Company
reversed approximately $577,000 in related stock compensation expense in
conjunction with the termination of the Company’s 2011 strategic
initiative.
ASIP. The
Company's ASIP allows the Company's Board of Directors to award key associates
various forms of equity-based incentive compensation. Under the ASIP,
all participants in this plan are eligible to earn an equity award, in the form
of restricted stock. The award for 2009 is tied to an internally
established earnings goal. The grant-date fair value of the shares
eligible to be awarded in 2009 is approximately $718,000. In
addition, each plan participant is eligible to receive from the Company a tax
supplement bonus equal to 31% of the stock award value at the time of
issuance. A total of 53,795 shares are eligible for
issuance. There has been no expense recognized for the first six
months of 2009 as results fell short of the earnings performance
goal.
A total
of 875,000 shares of common stock have been reserved for issuance under the
ASIP. To date, the Company has issued a total of 67,022 shares of
common stock under the ASIP.
Executive Stock Option
Agreement. Prior to 2007, the Company maintained a
stock option arrangement for a key executive officer (William G. Smith, Jr. -
Chairman, President and CEO, CCBG). The status of the options granted
under this arrangement is detailed in the table provided below. In
2007, the Company replaced its practice of entering into a stock option
arrangement by establishing a Performance Share Unit Plan under the provisions
of the ASIP that allows the executive to earn shares based on the compound
annual growth rate in diluted earnings per share over a three-year
period. The details of this program for the executive are outlined in
a Form 8-K filing dated January 31, 2007. No expense related to this
plan was recognized for the first six months of 2009 and 2008 as results fell
short of the earnings performance goal.
-9-
A summary
of the status of the Company’s option shares as of June 30, 2009 is presented
below:
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2009
|
60,384 | $ | 32.79 | 5.9 | $ | - | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Exercised
|
- | - | - | - | ||||||||||||
|
Forfeited
or expired
|
- | - | - | - | ||||||||||||
|
Outstanding
at June 30, 2009
|
60,384 | $ | 32.79 | 5.4 | $ | - | ||||||||||
|
Exercisable
at June 30, 2009
|
60,384 | $ | 32.79 | 5.4 | $ | - | ||||||||||
Compensation
expense associated with the aforementioned option shares was fully recognized as
of December 31, 2007.
DSPP. The
Company's DSPP allows the directors to purchase the Company's common stock at a
price equal to 90% of the closing price on the date of
purchase. Stock purchases under the DSPP are limited to the amount of
the director’s annual cash compensation. The DSPP has 93,750 shares
reserved for issuance. A total of 50,736 shares have been issued
since the inception of the DSPP. For the first six months 2009, the
Company recognized approximately $14,000 in expense related to this
plan. For the first six months of 2008, the Company recognized
approximately $21,000 in expense related to the DSPP.
ASPP. Under the
Company's ASPP, substantially all associates may purchase the Company's common
stock through payroll deductions at a price equal to 90% of the lower of the
fair market value at the beginning or end of each six-month offering
period. Stock purchases under the ASPP are limited to 10% of an
associate's eligible compensation, up to a maximum of $25,000 (fair market value
on each enrollment date) in any plan year. Shares are issued at the
beginning of the quarter following each six-month offering
period. The ASPP has 593,750 shares of common stock reserved for
issuance. A total of 96,757 shares have been issued since inception
of the ASPP. For the first six months of 2009, the Company recognized
approximately $67,000 in expense related to the ASPP plan compared to $58,000 in
expense for the same period in 2008.
NOTE
8 - 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”) covering its executive officers.
The
components of the net periodic benefit costs for the Company's qualified benefit
pension plan were as follows:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
|
(Dollars
in Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Discount
Rate
|
6.00
|
%
|
6.25
|
%
|
6.00
|
%
|
6.25
|
%
|
||||||||
|
Long-Term
Rate of Return on Assets
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
||||||||
|
Service
Cost
|
$
|
1,525
|
$
|
1,279
|
$
|
3,050
|
$
|
2,558
|
||||||||
|
Interest
Cost
|
1,200
|
1,063
|
2,400
|
2,126
|
||||||||||||
|
Expected
Return on Plan Assets
|
(1,275
|
)
|
(1,253
|
)
|
(2,550
|
)
|
(2,506
|
)
|
||||||||
|
Prior
Service Cost Amortization
|
125
|
75
|
250
|
151
|
||||||||||||
|
Net
Loss Amortization
|
750
|
280
|
1,500
|
561
|
||||||||||||
|
Net
Periodic Benefit Cost
|
$
|
2,325
|
$
|
1,444
|
$
|
4,650
|
$
|
2,890
|
||||||||
The
components of the net periodic benefit costs for the Company's SERP were as
follows:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
|
(Dollars
in Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Discount
Rate
|
6.00
|
%
|
6.25
|
%
|
6.00
|
%
|
6.25
|
%
|
||||||||
|
Service
Cost
|
$
|
5
|
$
|
22
|
$
|
10
|
$
|
44
|
||||||||
|
Interest
Cost
|
74
|
56
|
148
|
111
|
||||||||||||
|
Prior
Service Cost Amortization
|
45
|
2
|
90
|
4
|
||||||||||||
|
Net
Loss Amortization
|
(5)
|
1
|
(11)
|
3
|
||||||||||||
|
Net
Periodic Benefit Cost
|
$
|
119
|
$
|
81
|
$
|
237
|
$
|
162
|
||||||||
|
NOTE
9 - 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. As of June 30, 2009, the amounts associated with
the Company’s off-balance sheet obligations were as follows:
|
(Dollars
in Millions)
|
Amount
|
|||
|
Commitments
to Extend Credit(1)
|
$
|
393
|
||
|
Standby
Letters of Credit
|
$
|
17
|
||
|
(1)
|
Commitments include unfunded
loans, revolving lines of credit, and other unused
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.
Contingencies. The
Company is a party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims
or litigation, the outcome of which would, individually or in the aggregate,
have a material effect on the consolidated results of operations, financial
position, or cash flows of the Company.
Indemnification
Obligation. The Company is a member of the Visa U.S.A.
network. Visa U.S.A believes that its member banks are required to
indemnify Visa U.S.A. for potential future settlement of certain litigation (the
“Covered Litigation”). The Company recorded a charge in its fourth
quarter 2007 financial statements of approximately $1.9 million, or $0.07 per
diluted common share, to recognize its proportionate contingent liability
related to the costs of the judgments and settlements from the Covered
Litigation.
-10-
The
Company reversed a portion of the Covered Litigation accrual in the amount of
approximately $1.1 million to account for the establishment of a litigation
escrow account by Visa Inc., the parent company of Visa U.S.A., in conjunction
with Visa’s initial public offering during the first quarter of
2008. This escrow account was established to pay the costs of the
judgments and settlements from the Covered Litigation. Approximately
$0.8 million remains accrued for the contingent liability related to remaining
Covered Litigation.
In
October 2008 and July 2009, Visa Inc. funded additional amounts of $1.1 billion
and $700 million into the litigation escrow account to fund the settlement of
the Discover Financial Services litigation and additional pending litigation,
which in effect reduced the exchange ratio for the Company’s Class B shares of
Visa Inc. While the Company could be required to separately fund its
proportionate share of any Covered Litigation losses, it is expected that this
litigation escrow account will be used to pay all or a substantial amount of the
losses.
NOTE
10 - COMPREHENSIVE INCOME
SFAS No.
130, "Reporting Comprehensive Income," requires that certain transactions and
other economic events that bypass the income statement be displayed as other
comprehensive income. Comprehensive income totaled $1.4 million for
the six months ended June 30, 2009 and $12.0 million for the comparable period
in 2008. The Company’s comprehensive income consists of net income
and changes in unrealized gains and losses on securities available-for-sale (net
of income taxes) and changes in the pension liability (net of
taxes). The after-tax increase in net unrealized gains on securities
totaled approximately $24,000 for the six months ended June 30,
2009. The after-tax decrease in the net unrealized gains on
securities totaled approximately $79,000 for the six months ended June 30,
2008. Reclassification adjustments consist only of realized gains and
losses on sales of investment securities and were not material for the same
comparable periods. There was no change in the company’s pension
liability for the period ended June 30, 2009 as this liability is adjusted on an
annual basis at December 31st.
NOTE
11 – FAIR VALUE MEASUREMENTS
The
Company adopted the provisions of SFAS No. 157, "Fair Value
Measurements," for financial assets and financial liabilities effective January
1, 2008. Subsequently, on January 1, 2009, the Company adopted SFAS
No. 157-2 "Effective Date of FASB Statement No. 157" for non-financial
assets and non-financial liabilities. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. A
fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous)
market used to measure the fair value of the asset or liability shall not be
adjusted for transaction costs. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable,
(iii) able to transact, and (iv) willing to transact.
SFAS 157
requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert
future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity's own assumptions
about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. In that regard, SFAS 157 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.
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value effective January 1, 2008.
In
general, fair value is based upon quoted market prices, where
available. If such quoted market prices are not available, fair value
is based upon models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments
may include amounts to reflect counterparty credit quality, the Company’s
creditworthiness, among other things, as well as unobservable
parameters. Any such valuation adjustments are applied consistently
over time. The Company’s valuation methodologies may produce a fair
value calculation that may not be indicative of net realizable value or
reflective of future fair values. While management believes the Company’s
valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date.
Securities Available for
Sale. Securities
classified as available for sale are reported at fair value on a recurring basis
utilizing Level 1, 2, or 3 inputs. For these securities, the
Company obtains fair value measurements from an independent pricing service or a
model that uses, as inputs, observable market based parameters. The
fair value measurements consider observable data that may include quoted prices
in active markets, or other inputs, including dealer quotes, market spreads,
cash flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, and credit information and the bond's
terms and conditions.
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of June 30, 2009, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
|
(Dollars
in Thousands)
|
Level
1 Inputs
|
Level
2 Inputs
|
Level
3 Inputs(1)
|
Total
Fair
Value
|
||||||||||||
|
Securities
Available for Sale
|
$ | 33,670 | $ | 147,613 | $ | 1,000 | $ | 182,283 | ||||||||
|
(1)
|
Reflects
one bank preferred stock issue of $1.0 million whose fair value has been
determined based on an internal valuation
model.
|
The
change in the fair value of Level 3 securities from December 31, 2008 to June
30, 2009 primarily relates to the change in the unrealized gain for one
security and was not material to the Company’s financial
statements.
-11-
Certain
financial and non-financial assets measured at fair value on a nonrecurring
basis are detailed below; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial and non-financial liabilities measured at fair
value on a nonrecurring basis were not significant at June 30,
2009.
Impaired Loans. On
a non-recurring basis, certain impaired loans are reported at the fair value of
the underlying collateral if repayment is expected solely from the liquidation
of collateral. Collateral values are estimated using Level 3 inputs
based on customized discounting criteria. Impaired loans had a
carrying value of $126.3 million, with a valuation allowance of $18.5 million,
resulting in an additional provision for loan losses of $2.6 million for the six
month period ended June 30, 2009.
Loans Held for Sale. Loans held
for sale were $7.4 million as of June 30, 2009. These loans are
carried at the lower of cost or fair value and are adjusted to fair value on a
nonrecurring basis. Fair value is based on observable markets rates
for comparable loan products which is considered a Level 2 fair value
measurement.
Other Real Estate
Owned. During the first six months of 2009, certain foreclosed
assets, upon initial recognition, were measured and reported at fair value
through a charge-off to the allowance for possible loan losses based on the fair
value of the foreclosed asset. The fair value of the foreclosed
asset, upon initial recognition, is estimated using Level 2 inputs based on
observable market data. Foreclosed assets measured at fair value upon
initial recognition totaled $19.2 million during the six months ended June 30,
2009. In connection with the measurement and initial recognition of
the foregoing foreclosed assets, the Company recognized gross charge-offs to the
allowance for loan losses totaling $5.7 million. In addition, the
Company recognized subsequent losses totaling $1.6 million for foreclosed assets
that were re-valued during the six months ended June 30, 2009. The
carrying value of foreclosed assets was $19.7 million at June 30,
2009.
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115." SFAS 159 permits
the Company to choose to measure eligible items at fair value at specified
election dates. Changes in fair value on items for which the fair
value measurement option has been elected are reported in earnings at each
subsequent reporting date. The fair value option (i) is applied
instrument by instrument, with certain exceptions, thus the Company may record
identical financial assets and liabilities at fair value or by another
measurement basis permitted under generally accepted accounting principals,
(ii) is irrevocable (unless a new election date
occurs), and (iii) is applied only to entire instruments and not to
portions of instruments. Adoption of SFAS 159 on January 1,
2008 did not have a significant impact on the Company’s financial statements
because the Company did not elect fair value measurement under SFAS
159.
SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” as amended, requires
disclosure of the fair value of financial assets and financial liabilities,
including those financial assets and financial liabilities that are not measured
and reported at fair value on a recurring basis or non-recurring
basis. A detailed description of the valuation methodologies used in
estimating the fair value of financial instruments is set forth in the 2008 Form
10-K.
The
Company’s financial instruments that have estimated fair values are presented
below:
|
June
30, 2009
|
December
31, 2008
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
|
$
|
92,394
|
$
|
92,394
|
$
|
88,143
|
$
|
88,143
|
||||||||
|
Short-Term Investments
|
2,016
|
2,016
|
6,806
|
6,806
|
||||||||||||
|
Investment
Securities
|
194,002
|
194,002
|
191,569
|
191,569
|
||||||||||||
|
Loans,
Net of Allowance for Loan Losses
|
1,935,281
|
1,931,278
|
1,920,793
|
1,915,887
|
||||||||||||
|
Total
Financial Assets
|
$
|
2,223,693
|
$
|
2,219,690
|
$
|
2,207,311
|
$
|
2,202,405
|
||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Deposits
|
$
|
2,005,930
|
$
|
1,945,804
|
$
|
1,992,174
|
$
|
1,960,361
|
||||||||
|
Short-Term
Borrowings
|
73,989
|
73,239
|
62,044
|
61,799
|
||||||||||||
|
Subordinated
Notes Payable
|
62,887
|
60,984
|
62,887
|
63,637
|
||||||||||||
|
Long-Term
Borrowings
|
52,354
|
55,939
|
51,470
|
57,457
|
||||||||||||
|
Total
Financial Liabilities
|
$
|
2,195,160
|
$
|
2,135,966
|
$
|
2,168,575
|
$
|
2,143,254
|
||||||||
All
non-financial instruments are excluded from the above table. The
disclosures also do not include certain intangible assets such as client
relationships, deposit base intangibles and goodwill. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
-12-
NOTE
12 – NEW ACCOUNTING STANDARDS
Statement
of Financial Accounting Standards
SFAS No. 141, “Business
Combinations (Revised 2007).” SFAS 141R replaces
SFAS 141, “Business Combinations,” and applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141R requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated to
the individual assets acquired and liabilities assumed based on their estimated
fair value. SFAS 141R requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under
SFAS 141. Under SFAS 141R, the requirements of
SFAS 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” would have to be met in order to accrue for a restructuring plan in
purchase accounting. Pre-acquisition contingencies are to be
recognized at fair value, unless it is a non-contractual contingency that is not
likely to materialize, in which case, nothing should be recognized in purchase
accounting and, instead, that contingency would be subject to the probable and
estimable recognition criteria of SFAS 5, “Accounting for
Contingencies.” SFAS 141R is applicable to the Company’s
accounting for business combinations closing on or after January 1,
2009.
SFAS No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement
No. 51.” SFAS 160 amends Accounting Research
Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, SFAS 160
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling
interest. SFAS 160 became effective for the Company on
January 1, 2009 and did not have an impact on the Company’s financial
statements.
SFAS No. 161, “Disclosures
About Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133.” SFAS 161 amends SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” to amend and expand the
disclosure requirements of SFAS 133 to provide greater transparency about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedge items are accounted for under
SFAS 133 and its related interpretations, and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations and cash flows. To meet those objectives,
SFAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative
agreements. SFAS 161 became effective for the Company on
January 1, 2009 and did not have an impact on the Company’s financial
statements.
SFAS No. 165, “Subsequent
Events.” SFAS 165 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. SFAS 165
defines (i) the period after the balance sheet date during which a reporting
entity’s management should evaluate events or transactions that may have
occurred for potential recognition or disclosure in the financial statements
(ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements,
and (iii) the disclosure an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 became effective for
the Company’s financial statement for periods ending after June 15,
2009. SFAS 165 did not have a significant impact on the Company’s
financial statements.
SFAS No. 166, “Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement No.
140.” SFAS 166 amends SFAS 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance
reporting about transfers of financial assets, including securitizations, and
where companies have continuing exposure to the risks related to transferred
financial assets. SFAS 166 eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. SFAS 166 also requires additional disclosures about all
continuing involvements with transferred financial assets including information
about gains and losses resulting from transfers during the
period. SFAS 166 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.
SFAS No. 167, Amendments to FASB
Interpretation No. 46(R).” SFAS 167 amends FIN 46 (Revised
December 2003), “Consolidation of Variable Interest
Entities.” to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. SFAS 167 requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. SFAS 167 will be
effective January 1, 2010 and is not expected to have a significant impact on
the Company’s financial statements.
SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a Replacement of FASB Statement 162.” SFAS 168
replaces SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles” and establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by non-governmental entities in
the preparation of financial statements in conformity with generally accepted
accounting principles. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
guidance for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. All
non-grandfathered, non-SEC accounting literature not included in the
Codification is superseded and deemed non-authoritative. SFAS 168
will be effective for the Company’s financial statements for the periods ending
after September 15, 2009.
Financial
Accounting Standards Board Staff Positions and Interpretations
FSP No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” FSP EITF 03-6-1 provides
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. FSP EITF 03-6-1 became
effective on January 1, 2009 and did not have a significant impact on the
Company’s financial statements.
FSP No. 132(R)-1 “Employers’
Disclosures about Postretirement Benefit Plan
Assets.” FSP 132(R)-1 provides guidance related to an
employer’s disclosures about plan assets of defined benefit pension or other
post-retirement benefit plans. Under FSP 132(R)-1, disclosures
should provide users of financial statements with an understanding of how
investment allocation decisions are made, the factors that are pertinent to an
understanding of investment policies and strategies, the major categories of
plan assets, the inputs and valuation techniques used to measure the fair value
of plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period and significant
concentrations of risk within plan assets. The disclosures required
by FSP 132(R)-1 will be included in the Company’s financial statements
beginning with the financial statements for the year-ended December 31,
2009.
FSP SFAS 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly.” FSP SFAS 157-4 affirms that the objective
of fair value when the market for an asset is not active is the price that would
be received to sell the asset in an orderly transaction, and clarifies and
includes additional factors for determining whether there has been a significant
decrease in market activity for an asset when the market for that asset is not
active. FSP SFAS 157-4 requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the
evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair
Value Measurements,” to expand certain disclosure requirements. The
Company adopted the provisions of FSP 157-4 during the second quarter of
2009 and it did not significantly impact the Company’s financial
statements.
FSP SFAS 115-2 and
SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments.” FSP SFAS 115-2 and SFAS 124-2
(i) changes existing guidance for determining whether an impairment is
other than temporary to debt securities and (ii) replaces the existing
requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security
before recovery of its cost basis. Under FSP SFAS 115-2 and
SFAS 124-2, declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of the impairment
related to other factors is recognized in other comprehensive
income. The Company adopted the provisions of
FSP SFAS 115-2 and SFAS 124-2 during the second
quarter of 2009 and it did not significantly impact the Company’s financial
statements.
-13-
FSP SFAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial
Instruments.” FSP SFAS 107-1 and APB 28-1 amends
SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to
require an entity to provide disclosures about fair value of financial
instruments in interim financial information and amends Accounting Principles
Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to
require those disclosures in summarized financial information at interim
reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly
traded company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, entities must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by SFAS 107. The new interim disclosures
required by FSP SFAS 107-1 and APB 28-1 are included in the Company’s
interim financial statements for the second quarter of 2009.
FSP SFAS 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from
Contingencies.” FSP SFAS 141R-1 amends the guidance
in SFAS 141R to require that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized at fair value
if fair value can be reasonably estimated. If fair value of such an
asset or liability cannot be reasonably estimated, the asset or liability would
generally be recognized in accordance with SFAS 5, “Accounting for
Contingencies,” and FASB Interpretation (“FIN”) No. 14, “Reasonable
Estimation of the Amount of a Loss.” FSP SFAS 141R-1 removes
subsequent accounting guidance for assets and liabilities arising from
contingencies from SFAS 141R and requires entities to develop a systematic
and rational basis for subsequently measuring and accounting for assets and
liabilities arising from contingencies. FSP SFAS 141R-1 eliminates
the requirement to disclose an estimate of the range of outcomes of recognized
contingencies at the acquisition date. For unrecognized
contingencies, entities are required to include only the disclosures required by
SFAS 5. FSP SFAS 141R-1 also requires that contingent
consideration arrangements of an acquiree assumed by the acquirer in a business
combination be treated as contingent consideration of the acquirer and should be
initially and subsequently measured at fair value in accordance with
SFAS 141R. FSP SFAS 141R-1 is effective for assets or
liabilities arising from contingencies the Company acquires in business
combinations occurring after January 1, 2009.
-14-
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||
|
(Dollars
in Thousands, Except Per Share Data)
|
Second
|
First
|
Fourth
|
Third(1)
|
Second
|
First
|
Fourth
|
Third
|
||||||||||||||||||||||||
|
Summary
of Operations:
|
||||||||||||||||||||||||||||||||
|
Interest
Income
|
$ | 31,180 | $ | 31,053 | $ | 33,229 | $ | 34,654 | $ | 36,260 | $ | 38,723 | $ | 40,786 | $ | 41,299 | ||||||||||||||||
|
Interest
Expense
|
4,085 | 4,058 | 5,482 | 7,469 | 8,785 | 12,264 | 13,241 | 13,389 | ||||||||||||||||||||||||
|
Net
Interest Income
|
27,095 | 26,995 | 27,747 | 27,185 | 27,475 | 26,459 | 27,545 | 27,910 | ||||||||||||||||||||||||
|
Provision
for Loan Losses
|
8,426 | 8,410 | 12,497 | 10,425 | 5,432 | 4,142 | 1,699 | 1,552 | ||||||||||||||||||||||||
|
Net
Interest Income After
Provision
for Loan Losses
|
18,669 | 18,585 | 15,250 | 16,760 | 22,043 | 22,317 | 25,846 | 26,358 | ||||||||||||||||||||||||
|
Noninterest
Income
|
14,634 | 14,042 | 13,311 | 20,212 | 15,718 | 17,799 | 15,823 | 14,431 | ||||||||||||||||||||||||
|
Noninterest
Expense
|
32,930 | 32,257 | 31,002 | 29,916 | 30,756 | 29,798 | 31,614 | 29,919 | ||||||||||||||||||||||||
|
Income
Before Provision for Income Taxes
|
373 | 370 | (2,441 | ) | 7,056 | 7,005 | 10,318 | 10,055 | 10,870 | |||||||||||||||||||||||
|
Provision
for Income Taxes
|
(401 | ) | (280 | ) | (738 | ) | 2,218 | 2,195 | 3,038 | 2,391 | 3,699 | |||||||||||||||||||||
|
Net
Income
|
$ | 774 | $ | 650 | $ | (1,703 | ) | $ | 4,838 | $ | 4,810 | $ | 7,280 | $ | 7,664 | $ | 7,171 | |||||||||||||||
|
Net
Interest Income (FTE)
|
$ | 27,679 | $ | 27,578 | $ | 28,387 | $ | 27,802 | $ | 28,081 | $ | 27,078 | $ | 28,196 | $ | 28,517 | ||||||||||||||||
|
Per
Common Share:
|
||||||||||||||||||||||||||||||||
|
Net
Income Basic
|
$ | 0.04 | $ | 0.04 | $ | (0.10 | ) | $ | 0.29 | $ | 0.28 | $ | 0.42 | $ | 0.44 | $ | 0.41 | |||||||||||||||
|
Net
Income Diluted
|
0.04 | 0.04 | (0.10 | ) | 0.29 | 0.28 | 0.42 | 0.44 | 0.41 | |||||||||||||||||||||||
|
Dividends
Declared
|
0.190 | 0.190 | 0.190 | 0.185 | 0.185 | 0.185 | 0.185 | 0.175 | ||||||||||||||||||||||||
|
Diluted
Book Value
|
16.03 | 16.18 | 16.27 | 17.45 | 17.33 | 17.33 | 17.03 | 16.95 | ||||||||||||||||||||||||
|
Market
Price:
|
||||||||||||||||||||||||||||||||
|
High
|
17.35 | 27.31 | 33.32 | 34.50 | 30.19 | 29.99 | 34.00 | 36.40 | ||||||||||||||||||||||||
|
Low
|
11.01 | 9.50 | 21.06 | 19.20 | 21.76 | 24.76 | 24.60 | 27.69 | ||||||||||||||||||||||||
|
Close
|
16.85 | 11.46 | 27.24 | 31.35 | 21.76 | 29.00 | 28.22 | 31.20 | ||||||||||||||||||||||||
|
Selected
Average
|
||||||||||||||||||||||||||||||||
|
Balances:
|
||||||||||||||||||||||||||||||||
|
Loans
|
$ | 1,974,197 | $ | 1,964,086 | $ | 1,940,083 | $ | 1,915,008 | $ | 1,908,802 | $ | 1,909,574 | $ | 1,908,069 | $ | 1,907,235 | ||||||||||||||||
|
Earning
Assets
|
2,175,281 | 2,166,237 | 2,150,841 | 2,207,670 | 2,303,971 | 2,301,463 | 2,191,230 | 2,144,737 | ||||||||||||||||||||||||
|
Assets
|
2,506,352 | 2,486,925 | 2,463,318 | 2,528,638 | 2,634,771 | 2,646,474 | 2,519,682 | 2,467,703 | ||||||||||||||||||||||||
|
Deposits
|
1,971,190 | 1,957,354 | 1,945,866 | 2,030,684 | 2,140,545 | 2,148,874 | 2,016,736 | 1,954,160 | ||||||||||||||||||||||||
|
Shareowners’
Equity
|
277,114 | 281,634 | 302,227 | 303,595 | 300,890 | 296,804 | 299,342 | 301,536 | ||||||||||||||||||||||||
|
Common
Equivalent Shares:
|
||||||||||||||||||||||||||||||||
|
Basic
|
17,010 | 17,109 | 17,125 | 17,124 | 17,146 | 17,170 | 17,444 | 17,709 | ||||||||||||||||||||||||
|
Diluted
|
17,010 | 17,131 | 17,135 | 17,128 | 17,147 | 17,178 | 17,445 | 17,719 | ||||||||||||||||||||||||
|
Ratios:
|
||||||||||||||||||||||||||||||||
|
ROA
|
0.12 | % | 0.11 | % | (0.28 | )% | 0.76 | % | 0.73 | % | 1.11 | % | 1.21 | % | 1.15 | % | ||||||||||||||||
|
ROE
|
1.12 | % | 0.94 | % | (2.24 | )% | 6.34 | % | 6.43 | % | 9.87 | % | 10.16 | % | 9.44 | % | ||||||||||||||||
|
Net
Interest Margin (FTE)
|
5.11 | % | 5.16 | % | 5.26 | % | 5.01 | % | 4.90 | % | 4.73 | % | 5.10 | % | 5.27 | % | ||||||||||||||||
|
Efficiency
Ratio
|
75.44 | % | 75.07 | % | 71.21 | % | 59.27 | % | 66.89 | % | 63.15 | % | 68.51 | % | 66.27 | % | ||||||||||||||||
|
(1)
|
Includes
$6.25 million ($3.8 million after-tax) one-time gain on sale of a portion
of merchant services portfolio.
|
-15-
Although
we believe the above-mentioned non-GAAP financial measures enhance investors’
understanding of our business and performance, these non-GAAP financial measures
should not be considered an alternative to GAAP. In addition, there
are material limitations associated with the use of these non-GAAP financial
measures such as the risks that readers of our financial statements may disagree
as to the appropriateness of items included or excluded in these measures and
that our measures may not be directly comparable to other companies that
calculate these measures differently. Our management compensates for
these limitations by providing detailed reconciliations between GAAP information
and the non-GAAP financial measure as detailed below.
Reconciliation
of operating efficiency ratio to efficiency ratio:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
June
30,
|
March
31,
|
June
30,
|
June
30,
|
June
30,
|
||||||||||||||||
|
2009
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||
|
Efficiency
ratio
|
77.83
|
%
|
77.50
|
%
|
70.22
|
%
|
77.67
|
%
|
68.29
|
%
|
||||||||||
|
Effect
of intangible amortization expense
|
(2.39
|
)%
|
(2.43
|
)%
|
(3.33
|
)%
|
(2.41
|
)%
|
(3.29
|
)%
|
||||||||||
|
Operating
efficiency ratio
|
75.44
|
%
|
75.07
|
%
|
66.89
|
%
|
75.26
|
%
|
65.00
|
%
|
||||||||||
|
Reconciliation
of operating net noninterest expense ratio:
|
||||||||||||||||||||
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
June
30,
|
March
31,
|
June
30,
|
June
30,
|
June
30,
|
||||||||||||||||
|
2009
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||
|
Net
noninterest expense as a percent of average assets
|
2.93
|
%
|
2.97
|
%
|
2.30
|
%
|
2.95
|
%
|
2.06
|
%
|
||||||||||
|
Effect
of intangible amortization expense
|
(0.16
|
)%
|
(0.16
|
)%
|
(0.23
|
)%
|
(0.16
|
)%
|
(0.22
|
)%
|
||||||||||
|
Operating
net noninterest expense as a percent of average assets
|
2.77
|
%
|
2.81
|
%
|
2.07
|
%
|
2.79
|
%
|
1.84
|
%
|
||||||||||
-16-
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q, including this MD&A section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
include, among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks and
uncertainties and are subject to change based on various factors, many of which
are beyond our control. The words "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and
similar expressions are intended to identify forward-looking
statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from
those set forth in our forward-looking statements. Please see the
Introductory Note and Item 1A.
Risk Factors of our 2008 Report on Form 10-K, as updated
in our subsequent quarterly reports filed on Form 10-Q, and in our other filings
made from time to time with the SEC after the date of this report.
However,
other factors besides those listed in our Quarterly Report or in our Annual
Report also could adversely affect our results, and you should not consider any
such list of factors to be a complete set of all potential risks or
uncertainties. Any forward-looking statements made by us or on our
behalf speak only as of the date they are made. We do not undertake
to update any forward-looking statement, except as required by applicable
law.
BUSINESS
OVERVIEW
We are a
financial holding company headquartered in Tallahassee, Florida and we are the
parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or
"CCB"). The Bank offers a broad array of products and services
through a total of 68 full-service offices located in Florida, Georgia, and
Alabama. The Bank offers commercial and retail banking services, as
well as trust and asset management, retail securities brokerage and data
processing services.
Our
profitability, like most financial institutions, is dependent to a large extent
upon net interest income, which is the difference between the interest received
on earning assets, such as loans and securities, and the interest paid on
interest-bearing liabilities, principally deposits and
borrowings. Results of operations are also affected by the provision
for loan losses, operating expenses such as salaries and employee benefits,
occupancy and other operating expenses including income taxes, and noninterest
income such as service charges on deposit accounts, asset management and trust
fees, retail securities brokerage fees, mortgage banking revenues, bank card
fees, and data processing revenues.
Our
philosophy is to grow and prosper, building long-term relationships based on
quality service, high ethical standards, and safe and sound banking
practices. We maintain a locally oriented, community-based focus,
which is augmented by experienced, centralized support in select specialized
areas. Our local market orientation is reflected in our network of
banking office locations, experienced community executives with a dedicated
President for each market, and community boards which support our focus on
responding to local banking needs. We strive to offer a broad array
of sophisticated products and to provide quality service by empowering
associates to make decisions in their local markets.
Our
long-term vision is to continue our expansion, emphasizing a combination of
growth in existing markets and acquisitions. Acquisitions will
continue to be focused on a three state area including Florida, Georgia, and
Alabama with a particular focus on financial institutions, which are $100
million to $400 million in asset size and generally located on the outskirts of
major metropolitan areas. Five markets have been identified, four in
Florida and one in Georgia, in which management will proactively pursue
expansion opportunities. These markets include Alachua, Marion, and
Hernando and Pasco counties in Florida and the western panhandle in Florida and
Bibb and surrounding counties in central Georgia. We continue to
evaluate de novo expansion opportunities in attractive new markets in the event
that acquisition opportunities are not feasible. Other expansion
opportunities that will be evaluated include asset management and mortgage
banking.
Recent
Industry Developments
The
global and U.S. economies are experiencing significantly reduced business
activity as a result of, among other factors, disruptions in the financial
system in the past year. In fact, the National Bureau of Economic
Research announced that the U.S. entered into a recession in December
2007. Dramatic declines in the housing market during the past year,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but spreading
to credit default swaps and other derivative securities, as well as other areas
of the credit market, including investment grade and non-investment grade
corporate debt, convertible securities, emerging market debt and equity, and
leveraged loans, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to
fail.
The
magnitude of these declines led to a crisis of confidence in the financial
sector as a result of concerns about the capital base and viability of certain
financial institutions. During this period, interbank lending and commercial
paper borrowing fell sharply, precipitating a credit freeze for both
institutional and individual borrowers. This market turmoil and
tightening of credit have led to an increased level of consumer and commercial
delinquencies, lack of consumer confidence, increased market volatility and
widespread reduction of business activity generally. The resulting
economic pressure on consumers and lack of confidence in the financial markets
has, in some cases, adversely affected the financial services
industry.
Since
2007, the landscape of the U.S. financial services industry has changed
dramatically, especially during the fourth quarter of 2008. Lehman
Brothers Holdings Inc. declared bankruptcy and many major U.S. financial
institutions consolidated or were forced to merge or were put into
conservatorship by the U.S. Federal Government, including The Bear Stearns
Companies, Inc., Wachovia Corporation, Washington Mutual, Inc., Federal Home
Loan Mortgage Corporation and Federal National Mortgage
Association. In addition, the U.S. Federal Government provided a
sizable loan to American International Group Inc. (“AIG”) in exchange for an
equity interest in AIG.
Much of
our lending operations are in the State of Florida, which has been particularly
hard hit in the current U.S. recession. Evidence of the economic
downturn in Florida is reflected in current unemployment
statistics. The Florida unemployment rate at June 2009 increased to
10.6% from 8.1% at the end of 2008 and 4.7% at the end of 2007. A
worsening of the economic condition in Florida would likely exacerbate the
adverse effects of these difficult market conditions on our clients, which may
have a negative impact on our financial results.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the
U.S. Treasury was given the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
On
October 14, 2008, the Secretary of the Department of the Treasury announced
that the Department of the Treasury would purchase equity stakes in a wide
variety of banks and thrifts. Under the program, known as the Troubled Asset
Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”),
from the $700 billion authorized by the EESA, the Treasury made
$250 billion of capital available to U.S. financial institutions in the
form of preferred stock. In conjunction with the purchase of
preferred stock, the Treasury received, from participating financial
institutions, warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred investment. Participating financial
institutions were required to adopt the Treasury’s standards for executive
compensation and corporate governance for the period during which the Treasury
holds equity issued under the TARP Capital Purchase Program. On
November 13, 2008, we announced that we would not apply for funds available
through the TARP Capital Purchase Program. In March 2009, the U.S.
Treasury announced a public-private investment program (commonly known as
P-PIP), which is designed to (1) remedy the illiquidity in the secondary markets
for certain mortgage-backed securities and (2) create a market for troubled
loans on the balance sheets of U.S. banks and thrifts. At this time,
we have no plans to participate in the P-PIP.
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (“TLG
Program”). The TLG Program was announced by the FDIC on
October 14, 2008 as an initiative to counter the system-wide crisis in the
nation’s financial sector. Under the TLG Program the FDIC will
(i) guarantee, through the earlier of maturity or June 30, 2012,
certain newly issued senior unsecured debt issued by participating institutions
on or after October 14, 2008, and before June 30, 2009 and
(ii) provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust
Accounts held at participating FDIC insured institutions through
December 31, 2009. Coverage under the TLG Program was
available for the first 30 days without charge. The fee
assessment for coverage of senior unsecured debt ranges from 50 basis
points to 100 basis points per annum, depending on the initial maturity of
the debt. The fee for deposit insurance coverage is an annualized
10 basis points assessed on a per quarter basis on amounts in covered
accounts exceeding $250,000. The FDIC has extended the debt guarantee
program until October 31, 2009; however, the FDIC has imposed an additional 10
basis points surcharge for guaranteed debt issued on or after April 1,
2009. On December 12, 2008, we announced that we would
participate in both guarantee programs; however, since we did not issue any
guaranteed debt under the program, we will be required to submit an application
and obtain approval to participate in the extension of the debt guarantee
program.
-17-
As an
FDIC-insured institution, the Bank is required to pay deposit insurance premiums
to the FDIC. Because the FDIC’s deposit insurance fund fell below
prescribed levels in 2008, the FDIC has announced increased premiums for all
insured depository institutions in order to begin recapitalizing the
fund. Effective April 1, 2009, insurance assessments were increased
to a range from 0.07% to 0.78%, depending on an institution's risk
classification and other factors.
In
addition, the FDIC has imposed a 5 basis point special assessment on insured
depository institutions to be paid on September 30, 2009, based on assets minus
Tier 1 capital at June 30, 2009. We expect the assessment to be
approximately $1.2 million. In addition, the FDIC has indicated that
an additional assessment of up to five basis points later in 2009 is
probable.
-18-
FINANCIAL
OVERVIEW
A summary
overview of our financial performance is provided below.
Financial
Performance Highlights –
|
·
|
Net
income for the second quarter of 2009 totaled $0.8 million ($0.04 per
diluted share) compared to net income of $0.6 million ($0.04 per diluted
share) for the first quarter of 2009 and $4.8 million ($0.28 per diluted
share) for the second quarter of 2008. Net income for the first
six months of 2009 totaled $1.4 million ($0.08 per diluted share) compared
to $12.1 million ($0.70 per diluted share) for the comparable period of
2008.
|
|
·
|
Net
income for the second quarter and first half of 2009 reflects loan loss
provisions of $8.4 million ($0.30 per diluted share) and $16.8 million
($0.61 per diluted share), respectively, and a one-time special FDIC
assessment of approximately $1.2 million ($0.04 per diluted share)
recorded in the second quarter.
|
|
·
|
Tax
equivalent net interest income for the second quarter of 2009 was $27.7
million compared to $27.6 million for the first quarter of 2009 and $28.1
million for the second quarter of 2008. For the first half of
2009, tax equivalent net interest income totaled $55.3 million compared to
$55.2 million in 2008.
|
|
·
|
Noninterest
income increased $0.6 million, or 4.2%, from the prior linked quarter due
to higher deposit fees and mortgage banking fees. Year over
year, noninterest income declined $1.1 million, or 6.9%, and $4.8 million,
or 14.4%, for the three and six-month periods, respectively, due to lower
merchant fees reflective of the sale of a major portion of our merchant
services portfolio in July 2008. A $2.4 million pre-tax gain
from the redemption of Visa shares realized in the first quarter of 2008
also impacted the unfavorable variance for the six month
period.
|
|
·
|
Noninterest
expense increased $0.7 million, or 2.1%, from the prior linked quarter due
primarily to the one-time FDIC special assessment ($1.2
million). Year over year, noninterest expense increased $2.2
million, or 7.1%, and $4.6 million, or 7.7%, for the three and six-month
periods, respectively, primarily due to an increase in pension expense,
higher expense for other real estate properties, and higher FDIC insurance
premiums, including the one-time special assessment. A one-time
entry of $1.1 million in the first quarter of 2008 to reverse a portion of
our Visa litigation accrual also contributed to the increase for the six
month period.
|
|
·
|
Loan
loss provision for the quarter was $8.4 million, comparable to the prior
linked quarter. Year over year, the loan loss provision
increased $3.0 million and $7.3 million for the three and six-month
periods, respectively, generally reflective of current depressed economic
conditions, and stress within our real estate markets, including property
devaluation. As of June 30, 2009, the allowance for loan losses
was 2.12% of total loans compared to 1.18% for the same period in
2008.
|
|
·
|
Average
earnings assets have increased $9.0 million, or 0.4%, from the prior
linked quarter and $24.4 million, or 1.1%, from the prior year-end
primarily reflective of loan growth. Average loans grew $10.1
million, or .51%, and $34.1 million, or 1.8%, from the same comparable
periods. Average deposits grew by $13.8 million, or 0.7%, and
$25.3 million, or 1.3%, from the prior linked quarter and prior year-end,
respectively. Growth in both loans and deposits reflects the
efforts of our bankers to reach clients who are interested in moving or
expanding their banking
relationships.
|
|
·
|
As
of June 30, 2009, we are well-capitalized with a risk based capital ratio
of 14.20% and a tangible capital ratio of 7.47% compared to 14.69% and
7.76%, respectively, at year-end 2008 and 14.35% and 7.87%, respectively,
at June 30, 2008.
|
-19-
RESULTS
OF OPERATIONS
Net
Income
Net
income for the second quarter of 2009 totaled $0.8 million ($0.04 per diluted
share) compared to $0.6 million or ($0.04 per diluted share) for the first
quarter of 2009 and $4.8 million ($0.28 per diluted share) for the second
quarter of 2008. For the first six months of 2009, net income
totaled $1.4 million ($0.08 per diluted share) compared to $12.1 million ($0.70
per diluted share), for the same period of 2008.
Earnings
for the three and six month periods of 2009 reflect loan loss provisions of $8.4
million ($0.30 per diluted share) and $16.8 million ($0.61 per diluted share),
respectively, and a one-time special FDIC assessment of approximately $1.2
million ($0.04 per diluted share) recorded in the second quarter of
2009. An increase in noninterest income of $0.6 million, or 4.2%,
driven by higher deposit fees and mortgage banking fees as well as a reduction
in our incentive plan expense of approximately $0.8 million drove the
improvement in net income over the linked first quarter.
Year over
year, the $4.0 million decline in net income for the three month period is
primarily attributable to an increase in our loan loss provision ($3.0 million),
lower noninterest income ($1.1 million), higher noninterest expense ($2.2
million), partially offset by lower income tax expense ($2.6
million). A slight reduction in net interest income of $0.4 million
also contributed to the unfavorable variance. The unfavorable
variance in noninterest income was driven primarily by lower merchant fees ($1.4
million) due to a July 2008 sale of a major portion of our merchant services
portfolio, partially offset by higher mortgage banking fees ($0.4
million). The increase in noninterest expense primarily reflects
higher pension expense ($1.0 million), higher FDIC insurance premiums ($2.0
million), an increase in other real estate owned expenses ($1.2 million),
partially offset by lower interchange fees ($1.3 million) related to the lower
costs for processing our merchant services portfolio, a reduction in intangible
amortization ($0.4 million), and lower incentive plan expense ($0.3
million).
For the
six month period, the decline in net income of $10.7 million is attributable to
a higher loan loss provision ($7.3 million), lower noninterest income ($4.8
million), higher noninterest expense ($4.6 million), partially offset by lower
income tax expense ($5.9 million). A slight reduction in net interest income of
$0.2 million also contributed to the unfavorable variance. The
unfavorable variance in noninterest income reflects a one-time pre-tax gain of
$2.4 million from the redemption of Visa shares in the first quarter of 2008 as
well as lower merchant fees ($2.7 million) attributable to the aforementioned
sale of a major portion of our merchant services portfolio, partially offset by
higher mortgage banking fees ($0.5 million). The increase in
noninterest expense was primarily attributable to higher pension expense ($2.1
million), higher FDIC insurance premiums ($2.7 million), an increase in other
real estate owned expenses ($1.8 million), partially offset by lower interchange
fees ($2.4 million) related to the lower costs for processing our merchant
services portfolio, and a reduction in intangible amortization ($0.9
million). A one-time entry of $1.1 million in the first quarter of
2008 to reverse a portion of our Visa litigation accrual also contributed to the
unfavorable variance for the six month period.
A
condensed earnings summary of each major component of our financial performance
is provided below:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
(Dollars
in Thousands, except per share data)
|
June
30, 2009
|
March
31, 2009
|
June
30, 2008
|
June
30, 2009
|
June
30, 2008
|
|||||||||||||||
|
Interest
Income
|
$
|
31,180
|
$
|
31,053
|
$
|
36,260
|
$
|
62,233
|
$
|
74,983
|
||||||||||
|
Taxable
equivalent Adjustments
|
584
|
583
|
606
|
1,167
|
1,225
|
|||||||||||||||
|
Total
Interest Income (FTE)
|
31,764
|
31,636
|
36,866
|
63,400
|
76,208
|
|||||||||||||||
|
Interest
Expense
|
4,085
|
4,058
|
8,785
|
8,143
|
21,049
|
|||||||||||||||
|
Net
Interest Income (FTE)
|
27,679
|
27,578
|
28,081
|
55,257
|
55,159
|
|||||||||||||||
|
Provision
for Loan Losses
|
8,426
|
8,410
|
5,432
|
16,836
|
9,574
|
|||||||||||||||
|
Taxable
Equivalent Adjustments
|
584
|
583
|
606
|
1,167
|
1,225
|
|||||||||||||||
|
Net
Interest Income After provision for Loan Losses
|
18,669
|
18,585
|
22,043
|
37,254
|
44,360
|
|||||||||||||||
|
Noninterest
Income
|
14,634
|
14,042
|
15,718
|
28,676
|
33,517
|
|||||||||||||||
|
Noninterest
Expense
|
32,930
|
32,257
|
30,756
|
65,187
|
60,554
|
|||||||||||||||
|
Income
Before Income Taxes
|
373
|
370
|
7,005
|
743
|
17,323
|
|||||||||||||||
|
Income
Taxes
|
(401
|
)
|
(280
|
)
|
2,195
|
(681
|
)
|
5,233
|
||||||||||||
|
Net
Income
|
$
|
774
|
$
|
650
|
$
|
4,810
|
$
|
1,424
|
$
|
12,090
|
||||||||||
|
Basic
Net Income Per Share
|
$
|
0.04
|
$
|
0.04
|
$
|
0.28
|
$
|
0.08
|
$
|
0.70
|
||||||||||
|
Diluted
Net Income Per Share
|
$
|
0.04
|
$
|
0.04
|
$
|
0.28
|
$
|
0.08
|
$
|
0.70
|
||||||||||
|
Return
on Average Equity
|
1.12
|
%
|
0.94
|
%
|
6.43
|
%
|
1.03
|
%
|
8.14
|
%
|
||||||||||
|
Return
on Average Assets
|
0.12
|
%
|
0.11
|
%
|
0.73
|
%
|
0.12
|
%
|
0.92
|
%
|
||||||||||
Net
Interest Income
Tax
equivalent net interest income for the second quarter of 2009 was $27.7 million
compared to $27.6 million for the first quarter of 2009 and $28.1 million for
the second quarter of 2008. For the first half of 2009, tax
equivalent net interest income totaled $55.3 million compared to $55.2 million
in 2008.
The
increase in the net interest income on a linked quarter basis was partially due
to one additional calendar day in the second quarter and was favorably impacted
by the recovery of interest on several larger loans, which were resolved during
the quarter. Higher foregone interest on nonaccrual loans and a
decline in loan fees partially offset the improvement in net interest
income. The decline in loan fees resulted from a write-off of
uncollectable late fees totaling $175,000. Additionally, the loan and
investment portfolios continued to reprice lower without the offsetting benefit
in funding costs.
The
decline from the second quarter of 2008 reflects the downward repricing of
earning assets, higher foregone interest on nonaccrual loans, and lower loan
fees, partially offset by a lower cost of funds. The federal
funds rate reductions that began in September 2007 have significantly affected
both earning assets yields and funding costs. We have responded
aggressively to the federal funds rate reductions. This, coupled with
a favorable shift in mix of deposits, has resulted in a significantly lower cost
of funds year over year.
The net
interest margin of 5.11% declined five basis points over the linked quarter,
attributable to lower earning assets yields. As compared to the second quarter
of 2008 the margin improved 21 basis points reflecting the favorable shift in
the mix of deposits and aggressive deposit repricing.
The
slight increase in net interest income for the first half of 2009 as compared to
the same period in 2008 resulted from lower costs of funds discussed above;
mostly offset by lower earning assets yields, higher foregone interest and lower
loan fees.
Over the
next couple of quarters, we anticipate some continued reduction in our asset
yields without the opportunity to significantly reduce our cost of funds, which
during the first half of 2009 has averaged 76 basis
points. Therefore, we expect to experience some slight margin
compression during the second half of 2009.
-20-
Provision
for Loan Losses
The
provision for loan losses was $8.4 million for both the second and first
quarters of 2009 compared to $5.4 million for the second quarter of
2008. For the first half of 2009, the provision for loan losses was
$16.8 million compared to $9.6 million for the comparable period in
2008. Year over year, the increase in the loan loss provision was
primarily driven by an increased level of non-accrual loans and net loan
charge-offs, and higher loss ratios associated with real estate loans, primarily
loans to builders/investors secured by residential houses and vacant
land. Specific reserves held for our impaired loans have also
increased due to both a higher level of nonaccrual loans, and real estate
collateral devaluation. Compared to the linked first quarter, we
resolved some larger problem loans and there was a slowing of loans migrating to
nonaccrual status, thus we realized a more modest increase in nonaccrual loans
and related impaired loan reserves.
Net
charge-offs in the second quarter totaled $6.8 million, or 1.39%, of average
loans compared to $5.2 million, or 1.08% in the linked first quarter of 2009 and
$3.2 million, or 0.67% in the second quarter of 2008. For the first
half of the 2009, net charge-offs totaled $12.1 million, or 1.23%, compared to
$5.1 million, or 0.54%, for the same period of 2008. During the
second quarter of 2009, the increase in our construction loan charge-offs
primarily reflects the partial write-down of two large nonaccrual loan
relationships that are now reflected in the other real estate owned
category. At quarter-end, the allowance for loan losses was 2.12% of
outstanding loans (net of overdrafts) and provided coverage of 34% of
nonperforming loans.
Charge-off
activity for the respective periods is set forth below:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
(Dollars
in Thousands, except per share data)
|
June
30, 2009
|
March
31, 2009
|
June
30, 2008
|
June
30,
2009
|
June
30,
2008
|
|||||||||||||||
|
CHARGE-OFFS
|
||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$
|
388
|
$
|
857
|
$
|
407
|
$
|
1,245
|
$
|
1,043
|
||||||||||
|
Real
Estate – Construction
|
3,356
|
320
|
158
|
3,676
|
730
|
|||||||||||||||
|
Real
Estate - Commercial Mortgage
|
123
|
1,002
|
1,115
|
1,125
|
1,241
|
|||||||||||||||
|
Real
Estate – Residential
|
2,379
|
1,975
|
817
|
4,354
|
993
|
|||||||||||||||
|
Consumer
|
1,145
|
2,117
|
1,232
|
3,262
|
2,402
|
|||||||||||||||
|
Total
Charge-offs
|
7,391
|
6,271
|
3,729
|
13,662
|
6,409
|
|||||||||||||||
|
RECOVERIES
|
||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
84
|
74
|
55
|
158
|
195
|
|||||||||||||||
|
Real
Estate – Construction
|
-
|
385
|
-
|
385
|
-
|
|||||||||||||||
|
Real
Estate - Commercial Mortgage
|
1
|
-
|
13
|
1
|
14
|
|||||||||||||||
|
Real
Estate – Residential
|
51
|
58
|
24
|
109
|
28
|
|||||||||||||||
|
Consumer
|
439
|
512
|
446
|
951
|
1,051
|
|||||||||||||||
|
Total
Recoveries
|
575
|
1,029
|
538
|
1,604
|
1,288
|
|||||||||||||||
|
Net
Charge-offs
|
$
|
6,816
|
$
|
5,242
|
$
|
3,191
|
$
|
12,058
|
$
|
5,121
|
||||||||||
|
Net
Charge - Off's ( Annualized)
|
1.39
|
%
|
1.08
|
%
|
0.67
|
%
|
1.23
|
%
|
0.54
|
%
|
||||||||||
|
as
a percent of Average
|
||||||||||||||||||||
|
Loans
Outstanding, Net of
|
||||||||||||||||||||
|
Unearned
Interest
|
||||||||||||||||||||
Noninterest
Income
Noninterest
income increased $592,000, or 4.2%, over the linked first quarter and declined
$1.1 million, or 6.9% from the second quarter of 2008. Compared to
the prior quarter, higher deposit fees ($464,000) and mortgage banking fees
($317,000), partially offset by lower merchant fees ($295,000), drove the
improvement for the quarter. Compared to the second quarter of 2008,
the decrease reflects lower merchant fees ($1.4 million) due to a July 2008 sale
of a portion of our merchant services portfolio, partially offset by higher
mortgage banking fees ($395,000).
For the
first half of 2009, noninterest income decreased $4.8 million, or 14.4%,
compared to same period in 2008 due to the aforementioned impact on merchant
fees ($2.7 million) of the portfolio sale as well as the impact of a $2.4
million pre-tax gain realized from the redemption of Visa shares in the first
quarter of 2008. Higher mortgage banking fees ($400,000) partially
offset these unfavorable variances.
Noninterest
income represented 35.1% and 34.7% of operating revenues, respectively, for the
three and six month periods of 2009 compared to 34.2% and 38.3%, respectively,
for the same three and six month periods of 2008. The higher ratio
for 2008 reflects the impact of the $2.4 million pre-tax gain from the
redemption of Visa shares.
The table
below reflects the major components of noninterest income.
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
June
30,
2009
|
March
31,
2009
|
June
30, 2008
|
June
30,
2009
|
June
30,
2008
|
|||||||||||||||
|
Noninterest
Income:
|
||||||||||||||||||||
|
Service
Charges on Deposit Accounts
|
$
|
7,162
|
$
|
6,698
|
$
|
7,060
|
$
|
13,860
|
$
|
13,825
|
||||||||||
|
Data
Processing Fees
|
896
|
870
|
812
|
1,766
|
1,625
|
|||||||||||||||
|
Asset
Management Fees
|
930
|
970
|
1,125
|
1,900
|
2,275
|
|||||||||||||||
|
Retail
Brokerage Fees
|
625
|
493
|
735
|
1,118
|
1,204
|
|||||||||||||||
|
Investment
Security Gains
|
6
|
-
|
30
|
6
|
95
|
|||||||||||||||
|
Mortgage
Banking Fees
|
902
|
584
|
506
|
1,486
|
1,000
|
|||||||||||||||
|
Merchant
Service Fees (1)
|
663
|
958
|
2,074
|
1,621
|
4,282
|
|||||||||||||||
|
Interchange
Fees (1)
|
1,118
|
1,056
|
1,076
|
2,174
|
2,085
|
|||||||||||||||
|
ATM/Debit
Card Fees (1)
|
884
|
863
|
758
|
1,747
|
1,502
|
|||||||||||||||
|
Other
|
1,448
|
1,550
|
1,542
|
2,998
|
5,624
|
|||||||||||||||
|
Total
Noninterest Income
|
$
|
14,634
|
$
|
14,042
|
$
|
15,718
|
$
|
28,676
|
$
|
33,517
|
||||||||||
(1)
Together called “Bank Card Fees”
-21-
Various
significant components of noninterest income are discussed in more detail
below.
Service Charges on Deposit
Accounts. Deposit service charge fees increased $464,000, or
6.9%, over the linked first quarter of 2009 and $102,000, or 1.4%, over the
second quarter of 2008. The increase is due to an increase in our
insufficient funds/overdraft fee midway through the first quarter of
2009. For the first half of 2009, deposit service charge fees
increased $34,000, or .25%, over the same period of 2008, reflective of the
aforementioned fee increase which was substantially offset by a lower level of
insufficient fund/overdraft activity.
Asset Management
Fees. Fees from asset management activities decreased $40,000,
or 4.1%, from the linked first quarter of 2009 and $195,000, or 17.3%, from the
second quarter of 2008. The decrease for both periods reflects lower
asset management fees due to asset devaluation which directly impacts our fee
revenue. For the first half of 2009, fees decreased $375,000, or
16.5%, due also to the impact of asset devaluation. At June 30, 2009,
assets under management totaled $651.6 million compared to $664.7 million for
the linked first quarter of 2009 and $719.3 million at the end of the second
quarter of 2008.
Mortgage Banking
Fees. Mortgage banking fees increased $317,000, or 54.3%, over
the linked first quarter of 2009 and $396,000, or 78.3%, over the second quarter
of 2008 due to higher secondary market production which picked up momentum in
the first quarter primarily due an increase in homeowner refinancing activity
driven by the lower interest rate environment. For the first half of
the 2009, fees increased $486,000, or 48.6%, driven also by the increase in
homeowner refinance activity. During the second quarter of 2009,
there was an increase in the percentage of purchase money mortgages versus
refinanced mortgages, perhaps suggesting some modest improvement in the
condition of the residential housing market.
Bank Card
Fees. Bank card fees (including merchant services fees,
interchange fees, and ATM/debit card fees) declined by $212,000, or 7.4%, from
the linked first quarter of 2009 due to a $295,000 reduction in merchant fees
which was due to an expected seasonal variance in processing volume for our lone
remaining merchant. Compared to the second quarter of 2008, bank card
fees realized a $1.2 million or 31.8% decline due to lower merchant, fees which
reflects the sale in July 2008 sale of a major portion of our merchant services
portfolio. For the first half of 2009, bank card fees declined $2.3
million, or 29.6%, due to aforementioned impact of the merchant services
portfolio sale. Fee revenue for our other card products (debit and
ATM cards) continues to improve as evidenced by a $334,000, or 9.3% increase for
the first half of 2009 compared to the same period of 2008. During
the third quarter, it is anticipated that processing for our remaining merchant
will be discontinued and, while we anticipate it will not have a significant
impact on our operating profit due to the offsetting expense, it will result in
the elimination of our merchant services revenues going forward.
Other. Other
income decreased $102,000, or 6.6%, from the linked first quarter of 2009 and
$94,000, or 6.1% from the same period of 2008 primarily due to lower fees for
our working capital financing business. For the first half of 2009,
other income decreased $2.6 million, or 46.7%, from the same period in 2008 due
also to lower fees for our working capital financing business, but more
significantly, the impact of the $2.4 million pre-tax gain from the redemption
of Visa shares recognized in the first quarter of 2008.
-22-
Noninterest
Expense
Noninterest
expense increased $676,000, or 2.1%, from the linked first quarter of 2009 and
$2.2 million, or 7.1%, from the second quarter of 2008. Compared to
the linked first quarter, the increase was due to the one-time special FDIC
insurance assessment ($1.2 million) which was partially offset by lower cash and
stock incentive plan expense. Compared to the same period in 2008,
the increase reflects higher pension expense ($1.0 million), higher FDIC
insurance premiums ($2.0 million), an increase in other real estate owned
expenses ($1.2 million), partially offset by lower interchange fees ($1.3
million) related to the lower costs for processing our merchant services
portfolio, a reduction in intangible amortization ($0.4 million), and lower
incentive plan expense ($0.4 million).
For the
first half of 2009, noninterest expense increased $4.6 million, or 7.7% due to
higher pension expense ($2.1 million), higher FDIC insurance premiums ($2.7
million), an increase in other real estate owned expenses ($1.8 million),
partially offset by lower interchange fees ($2.4 million) related to the lower
costs for processing our merchant services portfolio, and a reduction in
intangible amortization ($0.9 million). A one-time entry of $1.1
million in the first quarter of 2008 to reverse a portion of our Visa litigation
accrual also contributed to the increase for the six month period.
The table
below reflects the major components of noninterest expense.
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||||
|
(Dollars
in Thousands, except per share data)
|
June
30, 2009
|
March
31, 2009
|
June
30, 2008
|
June
30, 2009
|
June
30, 2008
|
|||||||||||||||
|
Noninterest
Expense:
|
||||||||||||||||||||
|
Salaries
|
$
|
12,337
|
$
|
13,141
|
$
|
12,627
|
$
|
25,478
|
$
|
25,631
|
||||||||||
|
Associate
Benefits
|
3,712
|
4,096
|
2,691
|
7,808
|
5,291
|
|||||||||||||||
|
Total
Compensation
|
16,049
|
17,237
|
15,318
|
33,286
|
30,922
|
|||||||||||||||
|
Premises
|
2,540
|
2,345
|
2,491
|
4,885
|
4,853
|
|||||||||||||||
|
Equipment
|
2,304
|
2,338
|
2,583
|
4,641
|
5,165
|
|||||||||||||||
|
Total
Occupancy
|
4,844
|
4,683
|
5,074
|
9,526
|
10,018
|
|||||||||||||||
|
Legal
Fees
|
827
|
839
|
474
|
1,665
|
976
|
|||||||||||||||
|
Professional
Fees
|
931
|
960
|
948
|
1,891
|
1,819
|
|||||||||||||||
|
Processing
Services
|
880
|
908
|
877
|
1,788
|
1,740
|
|||||||||||||||
|
Advertising
|
752
|
856
|
895
|
1,607
|
1,673
|
|||||||||||||||
|
Travel
and Entertainment
|
234
|
295
|
341
|
528
|
674
|
|||||||||||||||
|
Printing
and Supplies
|
464
|
477
|
522
|
941
|
1,037
|
|||||||||||||||
|
Telephone
|
547
|
569
|
701
|
1,116
|
1,294
|
|||||||||||||||
|
Postage
|
452
|
418
|
435
|
870
|
864
|
|||||||||||||||
|
Insurance
- Other
|
2,192
|
866
|
230
|
3,058
|
396
|
|||||||||||||||
|
Intangible
Amortization
|
1,010
|
1,011
|
1,459
|
2,021
|
2,917
|
|||||||||||||||
|
Interchange
Fees
|
483
|
737
|
1,738
|
1,220
|
3,587
|
|||||||||||||||
|
Courier
Service
|
111
|
138
|
117
|
249
|
244
|
|||||||||||||||
|
Other
Real Estate Owned
|
1,296
|
747
|
65
|
2,043
|
220
|
|||||||||||||||
|
Miscellaneous
|
1,858
|
1,516
|
1,562
|
3,378
|
2,173
|
|||||||||||||||
|
Total
Other
|
12,037
|
10,337
|
10,364
|
22,375
|
19,614
|
|||||||||||||||
|
Total
Noninterest Expense
|
$
|
32,930
|
$
|
32,257
|
$
|
30,756
|
$
|
65,187
|
$
|
60,554
|
||||||||||
Various
significant components of noninterest expense are discussed in more detail
below.
Compensation. Salaries
and associate benefit expense decreased $1.2 million, or 6.9%, from the linked
first quarter of 2009 due to lower cash and stock incentive plan
expense. Compared to the same quarter of 2008, compensation expense
increased $731,000, or 4.8% due primarily to higher pension expense ($1.0
million), partially offset by lower cash incentive plan expense
($300,000). For the first half of 2009, compensation expense
increased $2.4 million, or 7.7%, over the same period in 2008 due to higher
pension expense ($2.1 million) and an increase in associate insurance benefits
($212,000). The increase in pension cost is primarily driven by a
decline in the market value of pension assets during 2008.
Occupancy. Occupancy
expense (including premises and equipment) increased $161,000, or 3.4%, over the
linked first quarter of 2009 and decreased $230,000, or 4.5%, from the same
quarter in 2008. Compared to the linked first quarter, higher
maintenance and repair expense drove the increase which reflects an increased
level of maintenance activity for facilities as well as a seasonal spike in
banking office maintenance. The decline in this expense compared to
the prior year reflects closer supervision and management of maintenance
expenses by management as well as renewal of some maintenance agreements at
lower rates. For the first half of 2009, occupancy expense decreased
$491,000, or 4.9%, due to the same factors as well as the full depreciation of
some larger components of our core processing system.
Other. Other
noninterest expense increased $1.7 million, or 16.4%, from the linked first
quarter of 2009 primarily due to the one-time special FDIC assessment ($1.2
million) as well as higher expense for other real estate owned properties
($550,000), including write-downs due to valuation declines. Compared
to the same quarter of 2008, other noninterest expense increased $1.7 million,
or 16.2%, due to higher FDIC insurance premiums ($2.0 million) and an increase
in expense for other real estate owned properties ($1.2 million), partially
offset by lower interchange fees ($1.3 million) due to lower costs for
processing our merchant services portfolio and a reduction in intangible
amortization expense ($400,000). For the first half of the year,
other noninterest expense increased $2.8 million, or 14.1%, over the prior year
due to the same aforementioned factors, including the impact of the reversal of
a portion ($1.1 million) of our Visa litigation reserve.
The
operating net noninterest expense ratio (expressed as noninterest income minus
noninterest expense, excluding intangible amortization expense and merger
expenses, as a percent of average assets) was 2.77% for the second quarter of
2009 compared to 2.81% for the linked first quarter of 2009 and 2.07% for the
second quarter of 2008. Our operating efficiency ratio (expressed as
noninterest expense, excluding intangible amortization expense and merger
expenses, as a percent of the sum of taxable-equivalent net interest income plus
noninterest income) was 75.44% for the second quarter of 2009 compared to 75.07%
for the linked first quarter of 2009 and 66.89% for the second quarter of
2008. For the first half of 2009, these metrics were 2.79% and
75.26%, compared to 1.84% and 65.00%, respectively, for the same period of
2008. The variance in these metrics compared to prior year is due to
the impact of the aforementioned Visa related entries during the first quarter
of 2008, as well as a higher level of operating expenses, reflecting the
aforementioned increase in our pension expense and FDIC insurance
premiums.
Income
Taxes
We
realized a tax benefit of $401,000 for the second quarter of 2009 compared to a
tax benefit of $280,000 for the linked first quarter of 2009 which reflects the
impact of a higher level of permanent book/tax differences (primarily tax exempt
income) in relation to our book operating profit as well as a favorable
permanent tax difference for a land donation. For the three and six
months of 2008, we realized a more normalized income tax expense due to higher
book operating profit resulting in effective tax rates of 31.3% and
30.2%, respectively. The effective tax rate for the first
half of 2008 was affected by the resolution of a tax contingency that occurred
during the first quarter of 2008.
-23-
FINANCIAL
CONDITION
Average earning assets were $2.175 billion for the second quarter of 2009, an increase of $24.4 million, or 1.1%, from the fourth quarter of 2008, primarily due to growth in the loan portfolio partially offset by a reduction in short-term investments.
Funds
Sold
The Bank
maintained an average net overnight funds (deposits with banks plus fed funds
sold less fed funds purchased) purchased position of $49.8 million during the
second quarter of 2009 as compared to an average net overnight funds purchased
position of $3.2 million in the fourth quarter. The increase in the
net funds purchased position is attributable to an increase in our loan and
investment portfolios, higher non-earning assets and lower
equity. Deposit growth partially offset the unfavorable variance in
the funds position.
Investment
Securities
Our
investment portfolio is a significant component of our liquidity and
asset/liability management efforts. As of June 30, 2009, the average
investment portfolio increased $2.3 million, or 1.2%, from the fourth quarter of
2008. We will continue to evaluate the need to purchase securities
for the investment portfolio for the remainder of 2009, taking into
consideration the Bank’s overall liquidity position and pledging
requirements.
Securities
classified as available-for-sale are recorded at fair value and unrealized gains
and losses associated with these securities are recorded, net of tax, as a
separate component of shareowners’ equity. At June 30, 2009 and
December 31, 2008, the investment portfolio maintained a net unrealized gain of
$2.4 million and $2.3 million, respectively. Investment securities
totaling $7.2 million have an unrealized loss totaling $84,000 and have been in
a loss position for less than 12 months. Two million dollars of our
investment securities have an unrealized loss totaling $2,000 and have been in a
loss position for more than 12 months. These securities are primarily
mortgage-backed securities that are in a loss position because they were
acquired when the general level of interest rates was lower than that on June
30, 2009. We believe that these securities are only temporarily
impaired and that the full principal will be collected as anticipated; therefore
we do not consider these securities to be other-than-temporarily impaired at
June 30, 2009.
Loans
Average
loans increased $34.3 million, or 1.8%, from the fourth quarter of 2008 due to
the efforts of our bankers to reach clients who are interested in moving or
expanding their banking relationships. We have now experienced loan
growth for four consecutive quarters driven primarily by both higher levels of
loan production for commercial real estate, home equity, and indirect auto
loans, and the impact of a slowdown in loan principal pay-downs and
pay-offs. We believe this loan growth also reflects the diversity of
our loan products and the variety of quality lending opportunities that our
banking relationships and markets continue to offer. While we strive
to identify opportunities to increase loans outstanding and enhance the
portfolio's overall contribution to earnings, we will only do so by adhering to
sound lending principles applied in a prudent and consistent
manner. Thus, we will not relax our underwriting standards in order
to achieve designated growth goals and, where appropriate, have adjusted our
standards to reflect risks inherent in the current economic
environment.
Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities which cause them to
be similarly impacted by economic or other conditions and such amount exceeds
10% of total loans. Due to the lack of diversified industry within
the markets served by the Bank and the relatively close proximity of the
markets, we have both geographic concentrations as well as concentrations in the
types of loans funded. Specifically, due to the nature of our
markets, a significant portion of the portfolio has historically been secured
with real estate.
While we
have a majority of our loans (77.0%) secured by real estate, the primary types
of real estate collateral are commercial properties and 1-4 family residential
properties. At June 30, 2009, commercial real estate mortgage loans
and residential real estate mortgage loans accounted for 34.7% and 34.9%,
respectively, of the loan portfolio. Furthermore, approximately 13.8%
of our loan portfolio is secured by vacant commercial and residential land
loans. These loans include both improved and unimproved land and are
comprised of loans to individuals as well as
developers.
Nonperforming
Assets
At June
30, 2009, nonperforming assets (including nonaccrual loans, restructured loans,
and other real estate owned) totaled $143.6 million, an increase of $16.8
million, or 13%, from the linked first quarter of 2009 and $35.8 million, or
33%, from the fourth quarter of 2008. The increase from the prior
linked quarter reflects an increase of $7.8 million in restructured loans and an
increase of $8.2 million in other real estate owned
properties. Nonaccrual loans totaled $111.0 million at the end of the
second quarter, a net increase of $0.8 million from the prior linked
quarter. Vacant residential land loans represented approximately 43%
of our nonaccrual balance at quarter-end. In aggregate, a reserve
equal to approximately 29% has been allocated to these land
loans. The level of gross additions to non-accruing loans has
declined by $15.2 million and $6.8 million, respectively, for the last two
quarters and the volume of problem loan resolutions has improved including the
resolutions of several larger credits during the second
quarter. Nonperforming assets represented 7.19% of loans and other
real estate at the end of the second quarter compared to 6.39% at the prior
quarter-end and 5.48% at year-end 2008.
Allowance
for Loan Losses
We
maintain an allowance for loan losses at a level sufficient to provide for the
estimated credit losses inherent in the loan portfolio as of the balance sheet
date. Credit losses arise from borrowers’ inability or unwillingness
to repay, and from other risks inherent in the lending process, including
collateral risk, operations risk, concentration risk and economic
risk. All related risks of lending are considered when assessing the
adequacy of the loan loss reserve. The allowance for loan losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes collection of the principal is
unlikely. The allowance for loan losses is based on management's
judgment of overall loan quality. This is a significant estimate
based on a detailed analysis of the loan portfolio. The balance can
and will change based on changes in the assessment of the portfolio's overall
credit quality. We evaluate the
adequacy of the allowance for loan losses on a quarterly basis.
The
allowance for loan losses was $41.7 million at June 30, 2009 compared to $37.0
million at December 31, 2008. The allowance for loan losses was 2.12%
of outstanding loans (net of overdrafts) and provided coverage of 34% of
nonperforming loans at June 30, 2009 compared to 1.89% and 38%, respectively, at
year-end 2008. The increase in our allowance since year-end 2008 is
due to a higher level of impaired loan reserves, primarily driven by a higher
level of loan defaults, and real estate collateral
devaluation. Higher loan loss factors and an increase in the level of
problem loans also increased our level of required general
reserves. It is management’s opinion that the allowance at June 30,
2009 is adequate to absorb losses inherent in the loan portfolio at
quarter-end.
Deposits
Average
total deposits were $1.971 billion for the second quarter of 2009, an increase
of $25.3 million, or 1.3%, from the fourth quarter of 2008 reflective of growth
in core deposits (demand deposits ($19.5 million) and NOW accounts ($24.8
million)) and certificates of deposit ($38.3 million). These
increases were partially offset by a reduction in public funds balances which
realized a spike late in the first quarter of 2009, but we have seen an easing
in these balances since early in the second quarter. Money market
balances ($62.9 million) have experienced a steady decline during the first half
of 2009 partially offsetting the aforementioned increases. We
continue to pursue prudent pricing discipline and to manage the mix of our
deposits. Therefore, we are not attempting to compete with higher
rate paying competitors for these deposits.
-24-
MARKET
RISK AND INTEREST RATE SENSITIVITY
Overview
Overview. Market
risk management arises from changes in interest rates, exchange rates, commodity
prices, and equity prices. We have risk management policies to
monitor and limit exposure to market risk and 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, policies are in place that 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
interest rates could result in a decrease in net interest income. Net
interest income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by other
sources of funds, such as noninterest-bearing deposits and shareowners’
equity.
We have
established a comprehensive interest rate risk management policy, which is
administered by management’s Asset/Liability Management Committee
(“ALCO”). The policy establishes 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.
We
prepare a current base case and four alternative simulations, at least once a
quarter, and report the analysis to the Board of Directors. In
addition, more frequent forecasts may be produced when interest rates are
particularly uncertain or when other business conditions so
dictate.
Our
interest rate risk management goal is to avoid unacceptable variations in net
interest income and capital levels due to fluctuations in market
rates. Management attempts 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 maintaining a pool of
administered core deposits, and by adjusting pricing rates to market conditions
on a continuing basis.
The
balance sheet is subject to testing for interest rate shock possibilities to
indicate the inherent interest rate risk. Average interest rates are
shocked by plus or minus 100, 200, and 300 basis points (“bp”), although we may
elect not to use particular scenarios that we determined are impractical in a
current rate environment. It is management’s goal to structure the
balance sheet so that net interest earnings at risk over a 12-month period and
the economic value of equity at risk do not exceed policy guidelines at the
various interest rate shock levels.
We
augment our quarterly interest rate shock analysis with alternative external
interest rate scenarios on a monthly basis. These alternative
interest rate scenarios may include non-parallel rate ramps.
Analysis. Measures
of net interest income at risk produced by simulation analysis are indicators of
an institution’s short-term performance in alternative rate
environments. These measures are typically based upon a relatively
brief period, usually one year. They do not necessarily indicate the
long-term prospects or economic value of the institution.
ESTIMATED
CHANGES IN NET INTEREST INCOME(1)
|
Changes
in Interest Rates
|
+300
bp
|
+200
bp
|
+100
bp
|
-100
bp
|
|
Policy
Limit (±)
|
10.0%
|
7.5%
|
5.0%
|
5.0%
|
|
June
30, 2009
|
2.6%
|
2.6%
|
1.6%
|
-0.0%
|
|
March
31, 2009
|
2.3%
|
1.9%
|
1.7%
|
-0.0%
|
The Net
Interest Income at Risk position decreased slightly in the “up 100 rate
scenario”, while improving in the “up 200 and up 300 rate scenarios”, when
compared to the linked quarter. The “down rate” scenario remained
unchanged from prior quarter. All of the above measures of net
interest income at risk remained well within prescribed policy
limits.
ESTIMATED
CHANGES IN ECONOMIC VALUE OF EQUITY(1)
|
Changes
in Interest Rates
|
+300
bp
|
+200
bp
|
+100
bp
|
-100
bp
|
|
Policy
Limit (±)
|
12.5%
|
10.0%
|
7.5%
|
7.5%
|
|
June
30, 2009
|
0.3%
|
2.3%
|
2.4%
|
-3.7%
|
|
March
31, 2009
|
0.4%
|
2.4%
|
2.5%
|
-3.4%
|
Our risk
profile, as measured by EVE, decreased slightly, when compared to the linked
quarter for both the “down rate” and “up rate” scenarios. Although
assumed to be unlikely, our largest exposure is at the -100 bp level, with a
measure of -3.7%. All of the above measures of economic value of
equity are well within prescribed policy limits.
|
(1)
|
Down
200 and 300 rate scenarios have been excluded due to the current
historically low interest rate
environment.
|
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
General. 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, which are
formulated and monitored by our ALCO and senior management, and which take into
account the marketability of assets, the sources and stability of funding and
the level of unfunded commitments. We regularly evaluate all of our
various funding sources with an emphasis on accessibility, stability,
reliability and cost-effectiveness. 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 and
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 liquidity needs.
Overall,
we have the ability to generate $621 million in additional liquidity through all
of our available resources. In addition to primary borrowing outlets
mentioned above, we also have the ability to generate liquidity by borrowing
from the Federal Reserve Discount Window and through brokered
deposits. The Bank has the ability to declare and pay up to $40
million in dividends to the parent for the remainder of 2009, more than meeting
our ongoing financial obligations. Management recognizes the
importance of maintaining liquidity and has 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. The liquidity currently available to us is considered
sufficient to meet the ongoing needs.
-25-
We view
our investment portfolio as a liquidity source and have the option to pledge the
portfolio as collateral for borrowings or deposits, and/or sell selected
securities. The portfolio consists of debt issued by the U.S.
Treasury, U.S. governmental agencies, and municipal governments. The
weighted average life of the portfolio is 1.33 years and as of quarter-end had a
net unrealized pre-tax gain of $2.4 million.
We
maintained an average net overnight funds (deposits with banks plus Fed funds
sold less Fed funds purchased) purchased position of $49.8
million during the second quarter of 2009 compared to an average net overnight
funds purchased
position of $33.9 million in the first quarter and an average overnight funds
purchased position of
$3.2 million at year-end 2008. The unfavorable variance in funds
purchased position during both periods is attributable to an increase in the
investment and loan portfolios, higher non-earning assets and lower
equity. Deposit growth partially offset this unfavorable
variance.
Capital
expenditures are expected to approximate $12.0 million over the next six months,
which consist primarily of new banking office construction, office equipment and
furniture, and technology purchases. Management believes that these
capital expenditures will be funded with existing resources without impairing
our ability to meet our on-going obligations.
Borrowings. At
June 30, 2009, advances from the FHLB consisted of $52.1 million in outstanding
debt and 44 notes. For the first six months of the year, the Bank made
FHLB advance payments totaling approximately $16.9 million and obtained three
new FHLB advances totaling $17.7 million. The FHLB notes are
collateralized by a blanket floating lien on all of our 1-4 family residential
mortgage loans, commercial real estate mortgage loans, and home equity mortgage
loans.
We have
issued two junior subordinated, deferrable interest notes to two wholly-owned
Delaware statutory trusts. The first note for $30.9 million was
issued to CCBG Capital Trust I in November 2004. The second note for
$32.0 million was issued to CCBG Capital Trust II in May 2005. The
interest payments for the CCBG Capital Trust I borrowing are due quarterly at a
fixed rate of 5.71% for five years, then adjustable annually to LIBOR plus a
margin of 1.90%. This note matures on December 31,
2034. The proceeds of this borrowing were used to partially fund the
acquisition of Farmers and Merchants Bank of Dublin. The interest
payments for the CCBG Capital Trust II borrowing are due quarterly at a fixed
rate of 6.07% for five years, then adjustable quarterly to LIBOR plus a margin
of 1.80%. This note matures on June 15, 2035. The proceeds
of this borrowing were used to partially fund the First Alachua Banking
Corporation acquisition.
Capital
Equity
capital was $272.7 million as of June 30, 2009, compared to $278.8 million as of
December 31, 2008. Our leverage ratio was 11.07% and 11.51%,
respectively, for the same periods. Further, our risk-adjusted
capital ratio of 14.20% at June 30, 2009 exceeds the 8.0% minimum requirement
and the 10% threshold to be designated as “well-capitalized” under the
risk-based regulatory guidelines.
Adequate
capital and financial strength is paramount to the stability of CCBG and the
Bank. Cash dividends declared and paid should not place unnecessary
strain on our capital levels. Although a consistent dividend payment
is believed to be favorably viewed by the financial markets and shareowners, the
Board of Directors will declare dividends only if we are considered to have
adequate capital. Future capital requirements and corporate plans are
considered when the Board considers a dividend payment. Our strong
capital position has allowed us to continue paying a quarterly dividend to our
shareowners despite lower earnings performance. We will continue to
monitor our capital and liquidity position to ensure that continuation of our
dividend does not place unnecessary strain on our capital
levels. Dividends declared and paid during the first six months of
2009 totaled $.380 per share compared to $.370 per share for same period of
2008, an increase of 2.7%. The dividend payout ratios for the first
six months of 2009 and 2008 were 471.1% and 52.6%, respectively.
State and
federal regulations place certain restrictions on the payment of dividends by
both CCBG and the Bank. During 2009, the Bank may declare and pay
dividends to the parent company in an amount which approximates the Bank’s
current year earnings and, in addition, the Bank has received authorization from
the Office of Financial Regulation to declare and pay dividends totaling up to
$60 million on or before December 31, 2009. If necessary, we may
request a continuation of this authorization from the Office of Financial
Regulation in 2010. While authorization has been granted in 2008 and
2009, and while we have no reason to believe this authorization would be denied
if requested in 2010, there is no assurance that it will be
granted. In addition, as a general matter, we should inform the
Federal Reserve and should eliminate, defer or significantly reduce our
dividends if our net income available to shareowners for the past four quarters,
net of dividends previously paid during that period is not sufficient to fully
fund the dividends. As of June 30, 2009, our net income available for
the past four quarters, net of dividends paid during the period has not been
sufficient to fully fund the dividends. In accordance with this
guidance, we plan to consult with the Federal Reserve regarding our overall
dividend policy.
During
the first six months of 2009, shareowners’ equity decreased $6.1 million, or
4.4%, on an annualized basis. During this same period, shareowners’
equity was positively impacted by net income of $1.4 million, and the issuance
of common stock of $.6 million. Equity was reduced by dividends paid
during the first six months by $6.5 million, or $.380 per share, and the
repurchase/retirement of common stock of $1.6 million. At June 30,
2009, our common stock had a book value of $16.03 per diluted share compared to
$16.27 at December 31, 2008.
Our Board
of Directors has authorized the repurchase of up to 2,671,875 shares of our
outstanding common stock. The purchases are made in the open market
or in privately negotiated transactions. To date, we have repurchased
a total of 2,520,130 shares at an average purchase price of $25.19 per
share. We repurchased 145,888 shares of our common stock during the
first quarter of 2009 at a weighted average purchase price of $10.65; no shares
were repurchased during the second quarter.
OFF-BALANCE
SHEET ARRANGEMENTS
We do not
currently engage in the use of derivative instruments to hedge interest rate
risks. However, we are a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the financing
needs of our clients.
At June
30, 2009, we had $392.7 million in commitments to extend credit and $17.3
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 its ability to meet on-going obligations. In the
event these commitments require funding in excess of historical levels,
management believes current liquidity, available advances from the FHLB and
Federal Reserve Bank, and investment security maturities provide a sufficient
source of funds to meet these commitments.
-26-
ACCOUNTING
POLICIES
Critical
Accounting Policies
The
consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make
various estimates and assumptions (see Note 1 in the Notes to Consolidated
Financial Statements). We believe that, of our significant accounting
policies, the following may involve a higher degree of judgment and
complexity.
Allowance for Loan
Losses. The allowance for loan losses is established through a
charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan
losses is a significant estimate and is evaluated quarterly by us for
adequacy. The use of different estimates or assumptions could produce
a different required allowance, and thereby a larger or smaller provision
recognized as expense in any given reporting period. A further
discussion of the allowance for loan losses can be found in the section entitled
"Allowance for Loan Losses" and Note 1 in the Notes to Consolidated Financial
Statements in our 2008 Form 10-K.
Intangible
Assets. Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles that were recognized in
connection with various acquisitions. Goodwill represents the excess
of the cost of acquired businesses over the fair market value of their
identifiable net assets. We perform an impairment review on an annual
basis during the fourth quarter or more frequently if events or changes in
circumstances indicate that the carrying value may not be
recoverable. Impairment testing requires management to make
significant judgments and estimates relating to the fair value of its reporting
unit. Significant changes to our estimates, when and if they occur,
could result in a non-cash impairment charge and thus have a material impact on
our operating results for any particular reporting period. A goodwill
impairment charge would not adversely affect the calculation of our risk based
and tangible capital ratios. Our annual review for impairment
determined that no impairment existed at December 31,
2008. Additionally, for the first and second quarters of 2009, we
considered the guidelines set forth in SFAS No. 142 to discern whether further
review for impairment was needed. Based on this assessment, we
concluded that no further review or testing for impairment was needed as of June
30, 2009 and March 31, 2009.
Core
deposit assets represent the premium we paid for core deposits. Core
deposit intangibles are amortized on the straight-line method over various
periods ranging from 5-10 years. Generally, core deposits refer to
nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW,
money market and savings. We make certain estimates relating to the
useful life of these assets, and rate of run-off based on the nature of the
specific assets and the client bases acquired. If there is a reason
to believe there has been a permanent loss in value, management will assess
these assets for impairment. Any changes in the original estimates
may materially affect our operating results.
Pension Assumptions. We have a defined
benefit pension plan for the benefit of substantially all of our
associates. Our funding policy with respect to the pension plan is to
contribute amounts to the plan sufficient to meet minimum funding requirements
as set by law. Pension expense, reflected in the Consolidated
Statements of Income in noninterest expense as "Salaries and Associate
Benefits," is determined by an external actuarial valuation based on assumptions
that are evaluated annually as of December 31, the measurement date for the
pension obligation. The Consolidated Statements of Financial
Condition reflect an accrued pension benefit cost due to funding levels and
unrecognized actuarial amounts. The most significant assumptions used
in calculating the pension obligation are the weighted-average discount rate
used to determine the present value of the pension obligation, the
weighted-average expected long-term rate of return on plan assets, and the
assumed rate of annual compensation increases. These assumptions are
re-evaluated annually with the external actuaries, taking into consideration
both current market conditions and anticipated long-term market
conditions.
The
weighted-average discount rate is determined by matching the anticipated
Retirement Plan cash flows to a long-term corporate Aa-rated bond index and
solving for the underlying rate of return, which investing in such securities
would generate. This methodology is applied consistently from
year-to-year. We anticipate using a 6.00% discount rate in
2009.
The
weighted-average expected long-term rate of return on plan assets is determined
based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S.
Government and Government Agency debt securities, and other securities
(typically temporary liquid funds awaiting investment). We anticipate
using a rate of return on plan assets of 8.0% for 2009.
The
assumed rate of annual compensation increases is based on expected trends in
salaries and the employee base. We used a rate of 5.50% in 2008 and
do not expect this assumption to change materially in 2009.
Information
on components of our net periodic benefit cost is provided in Note 8 of the
Notes to Consolidated Financial Statements included herein and Note 12 of the
Notes to Consolidated Financial Statements in our 2008 Form
10-K.
-27-
TABLE
I
AVERAGE
BALANCES & INTEREST RATES
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||||||||||||||||||
|
(Taxable
Equivalent Basis - Dollars in Thousands)
|
Balances
|
Interest
|
Rate
|
Balances
|
Interest
|
Rate
|
Balances
|
Interest
|
Rate
|
Balances
|
Interest
|
Rate
|
||||||||||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Loans,
Net of Unearned Interest(1)(2)
|
$
|
1,974,197
|
$
|
29,954
|
6.09
|
%
|
$
|
1,908,802
|
$
|
33,610
|
7.08
|
%
|
$
|
1,969,169
|
$
|
59,678
|
6.11
|
%
|
$
|
1,909,187
|
$
|
69,063
|
7.27
|
%
|
||||||||||||||||||||||||
|
Taxable
Investment Securities(2)
|
89,574
|
742
|
3.31
|
%
|
93,814
|
1,028
|
4.38
|
%
|
90,248
|
1,518
|
3.37
|
%
|
94,300
|
2,136
|
4.52
|
%
|
||||||||||||||||||||||||||||||||
|
Tax-Exempt
Investment Securities
|
106,869
|
1,067
|
4.00
|
%
|
94,371
|
1,200
|
5.09
|
%
|
104,005
|
2,200
|
4.23
|
%
|
92,581
|
2,407
|
5.20
|
%
|
||||||||||||||||||||||||||||||||
|
Funds
Sold
|
4,641
|
1
|
0.10
|
%
|
206,984
|
1,028
|
1.96
|
%
|
7,363
|
4
|
0.12
|
%
|
206,649
|
2,602
|
2.49
|
%
|
||||||||||||||||||||||||||||||||
|
Total
Earning Assets
|
2,175,281
|
31,764
|
5.86
|
%
|
2,303,971
|
36,866
|
6.43
|
%
|
2,170,785
|
63,400
|
5.89
|
%
|
2,302,717
|
76,208
|
6.65
|
%
|
||||||||||||||||||||||||||||||||
|
Cash
& Due From Banks
|
81,368
|
82,182
|
79,109
|
88,214
|
||||||||||||||||||||||||||||||||||||||||||||
|
Allowance
For Loan Losses
|
(41,978
|
)
|
(20,558
|
)
|
(40,003
|
)
|
(19,392
|
)
|
||||||||||||||||||||||||||||||||||||||||
|
Other
Assets
|
291,681
|
269,176
|
286,801
|
269,083
|
||||||||||||||||||||||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
2,506,352
|
$
|
2,634,771
|
$
|
2,496,692
|
$
|
2,640,622
|
||||||||||||||||||||||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
NOW
Accounts
|
$
|
709,039
|
$
|
249
|
0.14
|
%
|
$
|
788,237
|
$
|
1,935
|
0.99
|
%
|
$
|
714,123
|
$
|
474
|
0.13
|
%
|
$
|
781,064
|
$
|
5,375
|
1.38
|
%
|
||||||||||||||||||||||||
|
Money
Market Accounts
|
298,007
|
192
|
0.26
|
%
|
376,996
|
1,210
|
1.29
|
%
|
309,719
|
382
|
0.25
|
%
|
383,412
|
3,408
|
1.79
|
%
|
||||||||||||||||||||||||||||||||
|
Savings
Accounts
|
123,034
|
15
|
0.05
|
%
|
117,182
|
29
|
0.10
|
%
|
120,601
|
29
|
0.05
|
%
|
115,172
|
63
|
0.11
|
%
|
||||||||||||||||||||||||||||||||
|
Other
Time Deposits
|
417,545
|
2,044
|
1.96
|
%
|
443,006
|
3,988
|
3.62
|
%
|
404,847
|
4,110
|
2.05
|
%
|
455,143
|
8,797
|
3.89
|
%
|
||||||||||||||||||||||||||||||||
|
Total
Interest Bearing Deposits
|
1,547,625
|
2,500
|
0.65
|
%
|
1,725,421
|
7,162
|
1.67
|
%
|
1,549,290
|
4,995
|
0.65
|
%
|
1,734,791
|
17,643
|
2.05
|
%
|
||||||||||||||||||||||||||||||||
|
Short-Term
Borrowings
|
87,768
|
88
|
0.40
|
%
|
55,830
|
296
|
2.13
|
%
|
86,550
|
156
|
0.36
|
%
|
61,963
|
817
|
2.64
|
%
|
||||||||||||||||||||||||||||||||
|
Subordinated
Note Payable
|
62,887
|
931
|
5.86
|
%
|
62,887
|
931
|
5.86
|
%
|
62,887
|
1,858
|
5.88
|
%
|
62,887
|
1,862
|
5.86
|
%
|
||||||||||||||||||||||||||||||||
|
Other
Long-Term Borrowings
|
52,775
|
566
|
4.30
|
%
|
34,612
|
396
|
4.60
|
%
|
52,997
|
1,134
|
4.31
|
%
|
31,128
|
727
|
4.70
|
%
|
||||||||||||||||||||||||||||||||
|
Total
Interest Bearing Liabilities
|
1,751,055
|
4,085
|
0.94
|
%
|
1,878,750
|
8,785
|
1.88
|
%
|
1.751,724
|
8,143
|
0.94
|
%
|
1,890,769
|
21,049
|
2.24
|
%
|
||||||||||||||||||||||||||||||||
|
Noninterest
Bearing Deposits
|
423,566
|
415,125
|
415,020
|
409,918
|
||||||||||||||||||||||||||||||||||||||||||||
|
Other
Liabilities
|
54,617
|
40,006
|
50,585
|
41,088
|
||||||||||||||||||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES
|
2,229,238
|
2,333,881
|
2,217,330
|
2,341,775
|
||||||||||||||||||||||||||||||||||||||||||||
|
SHAREOWNER’S
EQUITY
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
TOTAL
SHAREOWNER’S EQUITY
|
277,114
|
300,890
|
279,362
|
298,847
|
||||||||||||||||||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES AND
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
SHAREOWNER
EQUITY
|
$
|
2,506,352
|
$
|
2,634,771
|
$
|
2,496,692
|
$
|
2,640,622
|
||||||||||||||||||||||||||||||||||||||||
|
Interest
Rate Spread
|
4.92
|
%
|
4.55
|
%
|
4.95
|
%
|
4.41
|
%
|
||||||||||||||||||||||||||||||||||||||||
|
Net
Interest Income
|
$
|
27,679
|
$
|
28,081
|
$
|
55,257
|
$
|
55,159
|
||||||||||||||||||||||||||||||||||||||||
|
Net
Interest Margin(3)
|
5.11
|
%
|
4.90
|
%
|
5.13
|
%
|
4.81
|
%
|
||||||||||||||||||||||||||||||||||||||||
|
(1)
|
Average balances include
nonaccrual loans. Interest income includes fees on loans of
$366,000 and $847,000, for the three and six
months ended June
30, 2009 versus $682,000 and $1.4
million for the comparable periods ended June 30, 2008.
|
|
(2)
|
Interest income includes the
effects of taxable equivalent adjustments using a 35% tax
rate.
|
|
(3)
|
Taxable equivalent net
interest income divided by average earning
assets.
|
-28-
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
Item
4.
|
Evaluation
of Disclosure Controls and Procedures
As of
June 30, 2009, 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, our Chief Executive Officer and Chief Financial Officer each
concluded that as of June 30, 2009, the end of the period covered by this Form
10-Q, we maintained effective disclosure controls and procedures.
Changes
in Internal Control over Financial Reporting
Our
management, including the Chief Executive Officer and Chief Financial Officer,
has reviewed our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934). There have been
no significant changes in our internal control over financial reporting during
our most recently completed fiscal quarter that could significantly affect our
internal control over financial reporting.
|
PART
II.
|
OTHER
INFORMATION
|
|
Item
1.
|
We are
party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims
or litigation, the outcome of which would, individually or in the aggregate,
have a material effect on our consolidated results of operations, financial
position, or cash flows.
|
Item
1A.
|
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 2008 Form 10-K, as updated in our subsequent quarterly reports. The risks
described in the our 2008 Form 10-K 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. There have been no material changes in our
risk factors from those disclosed in our 2008 Form 10-K, except for the
following.
Banking
regulations and state law may limit our ability to declare and pay
dividends.
Under
applicable statutes and regulations, the Bank’s board of directors, after
charging off bad debts, depreciation and other worthless assets, if any, and
making provisions for reasonably anticipated future losses on loans and other
assets, may declare dividends of up to the aggregate net profits of that period
combined with the Bank’s retained net profits for the preceding two years and,
with the approval of the Florida Office of Financial Regulation, declare a
dividend from retained net profits which accrued prior to the preceding two
years. If the Bank does not earn an amount approximately equal to
CCBG’s anticipated 2009 dividend, CCBG may be unable to declare and pay a
dividend to its shareowners.
In
addition, as a general matter, we are expected to inform the Federal Reserve and
should eliminate, defer, or significantly reduce the payment of our dividends if
our net income available to shareowners for the past four quarters, net of
dividends paid during that period, is not sufficient to fully fund the
dividends. As of June 30, 2009, we did not have sufficient net
income, and therefore will be consulting with the Federal Reserve concerning our
dividend policy. See section entitled “Liquidity and Capital
Resources – Capital” in Management’s Discussion and Analysis for further
discussion.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
There
were no purchases made by or on behalf of the Corporation or any “affiliated
purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act of 1934), of
the Corporation common stock or other units of any class of our equity
securities that is registered pursuant to Section 12 of the Exchange
Act.
|
Item
3.
|
None.
The
Annual Meeting of Shareowners of Capital City Bank Group, Inc. was held on April
21, 2009. Proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management’s solicitations. The
following summarizes all matters voted upon at this meeting.
|
1.
|
The
following directors were elected for terms expiring as
noted. These individuals served on the Board of Directors prior
to the Annual Meeting. The number of votes cast were as
follows:
|
|
For
terms to expire at the 2012 annual meeting:
|
For
|
Against/Withheld
|
|
Dubose
Ausley
|
13,349,320
|
446,224
|
|
Frederick
Carroll, III
|
13,727,269
|
68,275
|
|
John
K. Humphress
|
13,721,089
|
74,455
|
|
Henry
Lewis, III
|
13,713,156
|
82,388
|
|
2.
|
The
shareowners ratified the selection of Ernst & Young as the Company's
independent auditors for the fiscal year ending December 31,
2009. The number of votes cast were as
follows:
|
|
Against/
|
||
|
For
|
Withheld
|
Abstention
|
|
13,748,985
|
25,025
|
21,534
|
|
Item
5.
|
None.
-29-
|
Item
6.
|
|
(A)
|
Exhibits
|
|
10.1
|
Form
of Participant Agreement for 2009 Stock Based Incentive Plan –
incorporated by reference to Exhibit 10.1 of the registrants current
report on form 8K (filed 6/30/09) (No.
0-13358)
|
|
31.1
|
Certification
of William G. Smith, Jr., Chairman, President and Chief Executive Officer
of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
|
|
31.2
|
Certification
of J. Kimbrough Davis, Executive Vice President and Chief Financial
Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of
the Securities Exchange Act of
1934.
|
|
32.1
|
Certification
of William G. Smith, Jr., Chairman, President and Chief Executive Officer
of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section
1350.
|
|
32.2
|
Certification
of J. Kimbrough Davis, Executive Vice President and Chief Financial
Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section
1350.
|
-30-
(Registrant)
|
By: /s/ J. Kimbrough Davis
|
|
|
J.
Kimbrough Davis
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(Mr.
Davis is the Principal Financial Officer and has been duly authorized to
sign on behalf of the Registrant)
|
|
|
Date:
August 10, 2009
|
-31-
Exhibit
Number Description
|
31.1
|
Certification
of William G. Smith, Jr., Chairman, President and Chief Executive Officer
of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
|
|
31.2
|
Certification
of J. Kimbrough Davis, Executive Vice President and Chief Financial
Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of
the Securities Exchange Act of
1934.
|
|
32.1
|
Certification
of William G. Smith, Jr., Chairman, President and Chief Executive Officer
of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section
1350.
|
|
32.3
|
Certification
of J. Kimbrough Davis, Executive Vice President and Chief Financial
Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section
1350.
|
-32-