UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2014

 

OR

 

oTRANSITION 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

 

(LOGO)
(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 x 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 October 31, 2014, 17,432,887 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 SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

PART I – Financial Information  Page
 
Item 1. Consolidated Financial Statements (Unaudited)  
  Consolidated Statements of Financial Condition – September 30, 2014 and December 31, 2013 4
  Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2014 and 2013 5
  Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2014 and 2013 6
  Consolidated Statements of Changes in Shareowners’ Equity – Nine Months Ended September 30, 2014 and 2013 7
  Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013 8
  Notes to Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 44
     
Item 4. Controls and Procedures 44
     
PART II – Other Information   
 
Item 1. Legal Proceedings 44
     
Item 1A.   Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults Upon Senior Securities 45
     
Item 4. Mine Safety Disclosure 45
     
Item 5. Other Information 45
     
Item 6. Exhibits 45
     
Signatures 46
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 and the following sections of our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 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:

§legislative or regulatory changes, including the Dodd-Frank Act and Basel III;
§our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;
§the effects of security breaches and computer viruses that may affect our computer systems;
§the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision, deferred tax asset valuation allowance, and pension plan;
§the frequency and magnitude of foreclosure of our loans;
§the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
§the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
§our need and our ability to incur additional debt or equity financing;
§our ability to declare and pay dividends and repurchase shares of the Company’s common stock under our repurchase plan;
§changes in the securities and real estate markets;
§changes in monetary and fiscal policies of the U.S. Government;
§inflation, interest rate, market and monetary fluctuations;
§the effects of harsh weather conditions, including hurricanes, and man-made disasters;
§our ability to comply with the extensive laws and regulations to which we are subject;
§our ability to comply with the laws for each jurisdiction where we operate;
§the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
§increased competition and its effect on pricing;
§technological changes;
§negative publicity and the impact on our reputation;
§changes in consumer spending and saving habits;
§growth and profitability of our noninterest income;
§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 listed in Item 1A Risk Factors or discussed in this Form 10-Q also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

3
 

PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

   (Unaudited)
September 30,
   December 31, 
(Dollars in Thousands)  2014   2013 
ASSETS          
Cash and Due From Banks  $50,049   $55,209 
Federal Funds Sold and Interest Bearing Deposits   253,974    474,719 
Total Cash and Cash Equivalents   304,023    529,928 
           
Investment Securities, Available for Sale, at fair value   322,297    251,420 
Investment Securities, Held to Maturity, at amortized cost (fair value of $172,717 and $146,961)   173,188    148,211 
Total Investment Securities   495,485    399,631 
           
Loans Held For Sale   8,700    11,065 
           
Loans, Net of Unearned Income   1,414,375    1,388,604 
Allowance for Loan Losses   (19,093)   (23,095)
Loans, Net   1,395,282    1,365,509 
           
Premises and Equipment, Net   102,546    103,385 
Goodwill   84,811    84,811 
Other Intangible Assets       32 
Other Real Estate Owned   41,726    48,071 
Other Assets   67,044    69,471 
Total Assets  $2,499,617   $2,611,903 
           
LIABILITIES          
Deposits:          
Noninterest Bearing Deposits  $667,616   $641,463 
Interest Bearing Deposits   1,365,962    1,494,785 
Total Deposits   2,033,578    2,136,248 
           
Short-Term Borrowings   42,586    51,321 
Subordinated Notes Payable   62,887    62,887 
Other Long-Term Borrowings   32,305    38,043 
Other Liabilities   45,008    47,004 
Total Liabilities   2,216,364    2,335,503 
           
SHAREOWNERS’ EQUITY          
Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding        
Common Stock, $.01 par value; 90,000,000 shares authorized; 17,432,884 and 17,360,960 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively   174    174 
Additional Paid-In Capital   41,637    41,152 
Retained Earnings   249,907    243,614 
Accumulated Other Comprehensive Loss, Net of Tax   (8,465)   (8,540)
Total Shareowners’ Equity   283,253    276,400 
Total Liabilities and Shareowners’ Equity  $2,499,617   $2,611,903 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4
 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
(Dollars in Thousands, Except Per Share Data)  2014   2013   2014   2013 
INTEREST INCOME                    
Loans, including Fees  $18,528   $19,264   $54,778   $59,127 
Investment Securities:                    
Taxable   921    571    2,440    1,739 
Tax Exempt   113    146    380    392 
Funds Sold   204    269    752    818 
Total Interest Income   19,766    20,250    58,350    62,076 
INTEREST EXPENSE                    
Deposits   255    335    856    1,117 
Short-Term Borrowings   17    46    54    189 
Subordinated Notes Payable   333    339    995    1,020 
Other Long-Term Borrowings   263    330    823    1,010 
Total Interest Expense   868    1,050    2,728    3,336 
                     
NET INTEREST INCOME   18,898    19,200    55,622    58,740 
Provision for Loan Losses   424    555    1,282    3,075 
Net Interest Income After Provision For Loan Losses   18,474    18,645    54,340    55,665 
                     
NONINTEREST INCOME                    
Deposit Fees   6,211    6,474    18,293    18,856 
Bank Card Fees   2,707    2,715    8,234    8,130 
Wealth Management Fees   2,050    2,130    5,820    5,946 
Mortgage Banking Fees   911    869    2,274    2,880 
Data Processing Fees   336    662    1,265    1,985 
Other   1,136    1,176    3,597    3,487 
Total Noninterest Income   13,351    14,026    39,483    41,284 
                     
NONINTEREST EXPENSE                    
Compensation   15,378    16,158    46,365    49,544 
Occupancy, Net   4,575    4,403    13,378    12,982 
Intangible Amortization       46    32    162 
Other Real Estate   1,783    1,868    5,458    6,981 
Other   6,871    7,678    20,816    22,087 
Total Noninterest Expense   28,607    30,153    86,049    91,756 
                     
INCOME BEFORE INCOME TAXES   3,218    2,518    7,774    5,193 
Income Tax Expense   1,103    927    435    1,920 
                     
NET INCOME  $2,115   $1,591   $7,339   $3,273 
                     
BASIC NET INCOME PER SHARE  $0.12   $0.09   $0.42   $0.19 
DILUTED NET INCOME PER SHARE  $0.12   $0.09   $0.42   $0.19 
                     
Average Basic Shares Outstanding   17,440    17,336    17,422    17,319 
Average Diluted Shares Outstanding   17,519    17,396    17,482    17,381 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5
 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(Dollars in Thousands)  2014   2013   2014   2013 
NET INCOME  $2,115   $1,591   $7,339   $3,273 
Other comprehensive income, before tax:                    
Change in net unrealized gain (loss) on securities available for sale   (173)   459    78    (1,149)
Unrealized losses on securities transferred from available for sale to held to maturity       (523)       (523)
Amortization of unrealized losses on securities transferred from available for sale to held to maturity   17    7    53    7 
Reclassification adjustment for impairment loss realized in net income       210        410 
Other comprehensive income (loss), before tax   (156)   153    131    (1,255)
Deferred tax (benefit) expense related to other comprehensive income   (54)   136    56    (486)
Other comprehensive income (loss), net of tax   (102)   17    75    (769)
TOTAL COMPREHENSIVE INCOME  $2,013   $1,608   $7,414   $2,504 
                     

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6
 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(Unaudited)

 

(Dollars In Thousands, Except Share Data)

  Shares
Outstanding
   Common
Stock
   Additional
Paid-In Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss, Net of
Taxes
   Total 
Balance, January 1, 2013   17,232,380   $172   $38,707   $237,569   $(29,559)  $246,889 
Net Income                3,273        3,273 
Other Comprehensive Income, Net of Tax                    (769)   (769)
Stock Based Compensation            914            914 
Impact of Transactions Under Compensation Plans, net   103,898    1    860            861 
Balance, September 30, 2013   17,336,278   $173   $40,481   $240,842   $(30,328)  $251,168 
                               
Balance, January 1, 2014   17,360,960   $174   $41,152   $243,614   $(8,540)  $276,400 
Net Income                7,339        7,339 
Other Comprehensive Income, Net of Tax                    75    75 
Cash Dividends ($0.0600 per share)                (1,046)       (1,046)
Repurchase of Common Stock   (19,600)       (269)           (269)
Stock Based Compensation            635            635 
Impact of Transactions Under Compensation Plans, net   91,524        119            119 
Balance, September 30, 2014   17,432,884   $174   $41,637   $249,907   $(8,465)  $283,253 
                               

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7
 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended September 30, 
(Dollars in Thousands  2014   2013 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income  $7,339   $3,273 
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
          
Provision for Loan Losses   1,282    3,075 
Depreciation   4,869    4,830 
Amortization of Premiums, Discounts, and Fees (net)   3,619    3,422 
Amortization of Intangible Assets   32    162 
Impairment Loss on Security       410 
Net Decrease in Loans Held-for-Sale   2,365    367 
Stock Based Compensation   635    914 
Deferred Income Taxes   1,280    1,802 
Loss on Disposal of Fixed Assets   12    18 
Loss on Sales and Write-Downs of Other Real Estate Owned   3,423    4,042 
Net Decrease in Other Assets   1,144    1,197 
Net (Decrease) Increase in Other Liabilities   (2,248)   6,470 
Net Cash Provided By Operating Activities   23,752    29,982 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Securities Held to Maturity:          
Purchases   (56,249)   (39,115)
Payments, Maturities, and Calls   30,078    4,141 
Securities Available for Sale:          
Purchases   (159,741)   (142,336)
Payments, Maturities, and Calls   86,149    99,708 
Net (Increase) Decrease in Loans   (42,808)   61,354 
Proceeds From Sales of Other Real Estate Owned   15,043    17,397 
Purchases of Premises and Equipment   (4,042)   (1,458)
Net Cash Used In Investing Activities   (131,570)   (309)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net Decrease in Deposits   (102,670)   (128,110)
Net (Decrease) Increase in Short-Term Borrowings   (10,263)   55 
Increase in Other Long-Term Borrowings       1,303 
Repayment of Other Long-Term Borrowings   (4,210)   (3,490)
Dividends Paid   (1,046)    
Payments to Repurchase Common Stock   (269)    
Issuance of Common Stock Under Compensation Plans   371    842 
Net Cash Used In Financing Activities   (118,087)   (129,400)
           
NET DECREASE IN CASH AND CASH EQUIVALENTS   (225,905)   (99,727)
           
Cash and Cash Equivalents at Beginning of Period   529,928    509,732 
Cash and Cash Equivalents at End of Period  $304,023   $410,005 
           
Supplemental Cash Flow Disclosures:          
Interest Paid  $2,678   $2,364 
Income Taxes Paid (Refunded)  $2,660   $(2,201)
           
Noncash Investing and Financing Activities:          
Transfer of Securities Available for Sale to Held to Maturity  $   $62,488 
Loans Transferred to Other Real Estate Owned  $12,121   $21,030 
Transfer of Current Portion of Long-Term Borrowings  $1,528   $4,428 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

8
 

CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations. Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of banking and banking-related services to individual and corporate clients through its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank” and together with the Company), with banking offices located in Florida, Georgia, and Alabama. The Company is subject to competition from other financial institutions, is subject to regulation by certain government agencies and undergoes periodic examinations by those regulatory authorities.

 

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of CCBG and CCB. All material inter-company transactions and accounts have been eliminated.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The consolidated statement of financial condition at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

NOTE 2 – INVESTMENT SECURITIES

 

Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale were as follows:

 

   September 30, 2014   December 31, 2013 
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Market
Value
   Amortized
Cost
   Unrealized
Gain
   Unrealized
Losses
   Market
Value
 
Available for Sale                                        
U.S. Treasury  $165,055   $97   $95   $165,057   $71,791   $82   $40   $71,833 
U.S. Government Agency   94,925    259    190    94,994    75,275    127    256    75,146 
States and Political Subdivisions   51,052    99    11    51,140    91,605    167    19    91,753 
Mortgage-Backed Securities   2,167    194        2,361    2,583    212        2,795 
Equity Securities(1)   8,745            8,745    9,893            9,893 
Total   321,944   $649   $296   $322,297   $251,147   $588   $315   $251,420 
                                         
Held to Maturity                                        
U.S. Treasury  $76,235   $108   $63   $76,280   $43,533   $84   $38   $43,579 
U.S. Government Agency   22,322    28    37    22,313    15,794    38    22    15,810 
States and Political Subdivisions   30,244    63    5    30,302    33,216    53    4    33,265 
Mortgage-Backed Securities   44,387    14    579    43,822    55,668    12    1,373    54,307 
Total  $173,188   $213   $684   $172,717   $148,211   $187   $1,437   $146,961 
                                         
(1)Includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $3.9 million and $4.8 million, respectively, at September 30, 2014 and $5.0 million and $4.8 million, respectively, at December 31, 2013.

 

Securities with an amortized cost of $225.5 million and $258.5 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes.

 

The Bank, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), is required to own capital stock in the FHLB based generally upon the balances of residential and commercial real estate loans, and FHLB advances.  FHLB stock which is included in other securities is pledged to secure FHLB advances.  No ready market exists for this stock, and it has no quoted market value; however, redemption of this stock has historically been at par value.

9
 

Maturity Distribution. As of September 30, 2014, the Company’s investment securities are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities, certain amortizing U.S. government agency securities, and equity securities are shown separately since they are not due at a single maturity date.

 

   Available for Sale   Held to Maturity 
(Dollars in Thousands)  Amortized
Cost
   Market
Value
   Amortized
Cost
   Market
Value
 
Due in one year or less  $67,038   $67,110   $17,588   $17,616 
Due after one through five years   173,739    173,766    111,213    111,279 
Mortgage-Backed Securities   2,167    2,361    44,387    43,822 
U.S. Government Agency   70,255    70,315         
Equity Securities   8,745    8,745         
Total  $321,944   $322,297   $173,188   $172,717 

 

Unrealized Losses on Investment Securities. The following table summarizes the investment securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position:

 

   Less Than
12 Months
   Greater Than
12 Months
   Total 
(Dollars in Thousands)  Market
Value
   Unrealized
Losses
   Market
Value
   Unrealized
Losses
   Market
Value
   Unrealized
Losses
 
September 30, 2014                        
Available for Sale                              
U.S. Government Treasury  $95,417   $95   $   $   $95,417   $95 
U.S. Government Agency   21,896    71    21,702    119    43,598    190 
States and Political Subdivisions   3,549    6    507    5    4,056    11 
Total  $120,862   $172   $22,209   $124   $143,071   $296 
                               
Held to Maturity                              
U.S. Government Treasury  $47,915   $63   $   $   $47,915   $63 
U.S. Government Agency   13,486    37            13,486    37 
States and Political Subdivisions   3,717    5            3,717    5 
Mortgage-Backed Securities   33,309    508    3,935    71    37,244    579 
Total  $98,427   $613   $3,935   $71   $102,362   $684 
                               
December 31, 2013                              
Available for Sale                              
U.S. Government Treasury  $24,924   $40   $   $   $24,924   $40 
U.S. Government Agency   40,944    235    4,842    21    45,786    256 
States and Political Subdivisions   4,101    7    511    12    4,612    19 
Total  $69,969   $282   $5,353   $33   $75,322   $315 
                               
Held to Maturity                              
U.S. Government Treasury  $10,054   $38   $   $   $10,054   $38 
U.S. Government Agency   5,676    22            5,676    22 
States and Political Subdivisions   3,316    4            3,316    4 
Mortgage-Backed Securities   44,031    1,373            44,031    1,373 
Total  $63,077   $1,437   $   $   $63,077   $1,437 
                               

Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: 1) the length of time and the extent to which the fair value has been less than amortized cost, 2) the financial condition and near-term prospects of the issuer, and 3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by rating agencies have occurred, regulatory issues, and analysts’ reports.

10
 

Approximately $22.2 million of investment securities comprised of 26 Small Business Administration securities and one municipal bond, with an unrealized loss of approximately $124,000, have been in a loss position for greater than 12 months. Approximately $3.9 million of held to maturity investment securities, comprised of 7 collateralized mortgage obligations, with an unrealized loss of approximately $71,000 have been in a loss position for greater than 12 months. All of these debt securities are in a loss position because they were acquired when the general level of interest rates was lower than that on September 30, 2014. The Company believes that the unrealized losses in these debt securities are temporary in nature and that the full principal will be collected as anticipated. Because the declines in the market value of these investments are attributable to changes in interest rates and not credit quality and because the Company has the present ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

 

NOTE 3 – LOANS, NET

 

Loan Portfolio Composition. The composition of the loan portfolio was as follows:

 

(Dollars in Thousands)  September 30, 2014   December 31, 2013 
Commercial, Financial and Agricultural  $133,756   $126,607 
Real Estate – Construction   38,121       31,012 
Real Estate – Commercial Mortgage   501,863    533,871 
Real Estate – Residential(1)    308,295    309,692 
Real Estate – Home Equity   228,968    227,922 
Consumer   203,372    159,500 
Loans, Net of Unearned Income  $1,414,375   $1,388,604 

 

(1)Includes loans in process with outstanding balances of $5.5 million and $6.8 million at September 30, 2014 and December 31, 2013, respectively.

 

Net deferred fees included in loans were $1.5 million at September 30, 2014 and December 31, 2013.

 

The Company has pledged a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta.

 

Nonaccrual Loans. Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans.

 

   September 30, 2014   December 31, 2013 
(Dollars in Thousands)  Nonaccrual   90 + Days   Nonaccrual   90 + Days 
Commercial, Financial and Agricultural  $933   $   $188   $ 
Real Estate – Construction   860        426     
Real Estate – Commercial Mortgage   11,920        25,227     
Real Estate – Residential   7,416        6,440     
Real Estate – Home Equity   2,018        4,084     
Consumer   335    62    599     
Total  $23,482   $62   $36,964   $ 
11
 

Loan Portfolio Aging. A loan is defined as a past due loan when one full payment is past due or a contractual maturity is over 30 days past due (“DPD”).

 

The following table presents the aging of the recorded investment in past due loans by class of loans.

 

 

(Dollars in Thousands)

  30-59
DPD
   60-89
DPD
   90 +
DPD
   Total
Past Due
   Total
Current
   Total
Loans
 
September 30, 2014                              
Commercial, Financial and Agricultural  $296   $59   $   $355   $132,468   $133,756 
Real Estate – Construction                   37,261    38,121 
Real Estate – Commercial Mortgage   711    26        737    489,206    501,863 
Real Estate – Residential   1,193    1,094        2,287    298,592    308,295 
Real Estate – Home Equity   255    119        374    226,576    228,968 
Consumer   795    178    62    1,035    202,002    203,372 
Total  $3,250   $1,476   $62   $4,788   $1,386,105   $1,414,375 
                               
December 31, 2013                              
Commercial, Financial and Agricultural  $258   $100   $   $358   $126,062   $126,607 
Real Estate – Construction                   30,587    31,012 
Real Estate – Commercial Mortgage   1,548    672        2,220    506,424    533,871 
Real Estate – Residential   1,647    1,090        2,737    300,514    309,692 
Real Estate – Home Equity   848    212        1,060    222,778    227,922 
Consumer   1,127    244        1,371    157,529    159,500 
Total  $5,428   $2,318   $   $7,746   $1,343,894   $1,388,604 
12
 

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans.  Loans are charged-off to the allowance when facts and circumstances of the individual loan confirm the loan is not fully collectible and the loss is reasonably quantifiable.

 

The following table details the activity in the allowance for loan losses by portfolio class. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

 

(Dollars in Thousands)

  Commercial,
Financial,
Agricultural
   Real Estate
Construction
   Real Estate
Commercial
Mortgage
   Real Estate
Residential
   Real Estate
Home
Equity
   Consumer   Unallocated   Total 
Three Months Ended September 30, 2014                                        
Beginning Balance  $706   $1,267   $6,147   $8,214   $3,066   $1,143   $   $20,543 
Provision for Loan Losses   387    (280)   386    (505)   331    105        424 
Charge-Offs   (86)       (1,208)   (212)   (621)   (386)       (2,513)
Recoveries   28    2    213    93    37    266        639 
Net Charge-Offs   (58)   2    (955)   (119)   (584)   (120)       (1,874)
Ending Balance  $1,035   $989   $5,538   $7,590   $2,813   $1,128   $   $19,093 
                                         
Nine Months Ended
September 30, 2014
                                        
Beginning Balance  $699   $1,580   $7,710   $9,073   $3,051   $982   $   $23,095 
Provision for Loan Losses   371    (598)   267    (385)   1,048    579        1,282 
Charge-Offs   (183)       (2,831)   (1,638)   (1,399)   (1,212)       (7,263)
Recoveries   148    7    392    540    113    779        1,979 
Net Charge-Offs   (35)   7    (2,439)   (1,098)   (1,286)   (433)       (5,284)
Ending Balance  $1,035   $989   $5,538   $7,590   $2,813   $1,128   $   $19,093 
                                         
Three Months Ended September 30, 2013                                        
Beginning Balance  $895   $2,243   $9,951   $9,258   $2,879   $1,042   $1,026   $27,294 
Provision for Loan Losses   (171)   (237)   (630)   1,044    277    297    (25)   555 
Charge-Offs   (138)   (278)   (882)   (1,178)   (362)   (674)       (3,512)
Recoveries   87    1    167    167    13    238        673 
Net Charge-Offs   (51)   (277)   (715)   (1,011)   (349)   (436)       (2,839)
Ending Balance  $673   $1,729   $8,606   $9,291   $2,807   $903   $1,001   $25,010 
                                         
Nine Months Ended
September 30, 2013
                                        
Beginning Balance  $1,253   $2,856   $11,081   $8,678   $2,945   $1,327   $1,027   $29,167 
Provision for Loan Losses   (345)   (130)   151    2,868    404    153    (26)   3,075 
Charge-Offs   (411)   (998)   (2,975)   (2,914)   (797)   (1,321)       (9,416)
Recoveries   176    1    349    659    255    744        2,184 
Net Charge-Offs   (235)   (997)   (2,626)   (2,255)   (542)   (577)       (7,232)
Ending Balance  $673   $1,729   $8,606   $9,291   $2,807   $903   $1,001   $25,010 
13
 

The following table details the amount of the allowance for loan losses by portfolio class disaggregated on the basis of the Company’s impairment methodology.

 

 

(Dollars in Thousands)

  Commercial,
Financial,
Agricultural
   Real Estate
Construction
   Real Estate
Commercial
Mortgage
   Real Estate
Residential
   Real Estate
Home
Equity
   Consumer   Unallocated   Total 
September 30, 2014                                        
Period-end amount Allocated to:                                        
Loans Individually Evaluated for Impairment  $576   $94   $3,359   $2,526   $471   $12   $   $7,038 
Loans Collectively Evaluated for Impairment   459    895    2,179    5,064    2,342    1,116        12,055 
Ending Balance  $1,035   $989   $5,538   $7,590   $2,813   $1,128   $   $19,093 
                                         
December 31, 2013                                        
Period-end amount Allocated to:                                        
Loans Individually Evaluated for Impairment  $75   $66   $4,336   $2,047   $682   $23   $   $7,229 
Loans Collectively Evaluated for Impairment   624    1,514    3,374    7,026    2,369    959        15,866 
Ending Balance  $699   $1,580   $7,710   $9,073   $3,051   $982   $   $23,095 
                                         
September 30, 2013                                        
Period-end amount Allocated to:                                        
Loans Individually Evaluated for Impairment  $218   $124   $5,045   $2,184   $508   $31   $   $8,110 
Loans Collectively Evaluated for Impairment   455    1,605    3,561    7,107    2,299    872    1,001    16,900 
Ending Balance  $673   $1,729   $8,606   $9,291   $2,807   $903   $1,001   $25,010 
                                         

The Company’s recorded investment in loans related to each balance in the allowance for loan losses by portfolio class and disaggregated on the basis of the Company’s impairment methodology was as follows:

 

 

(Dollars in Thousands)

  Commercial,
Financial,
Agricultural
   Real Estate
Construction
   Real Estate
  Commercial
Mortgage
   Real Estate
Residential
   Real Estate
Home
Equity
   Consumer     Unallocated   Total 
September 30, 2014                                
Individually Evaluated for Impairment  $1,489   $835   $37,524   $22,087   $2,796   $271   $   $65,002 
Collectively Evaluated for Impairment   132,267    37,286    464,339    286,208    226,172    203,101        1,349,373 
Total  $133,756   $38,121   $501,863   $308,295   $228,968   $203,372   $   $1,414,375 
                                         
December 31, 2013                                        
Individually Evaluated for Impairment  $1,580   $557   $49,973   $20,470   $3,359   $355   $   $76,294 
Collectively Evaluated for Impairment   125,027    30,455    483,898    289,222    224,563    159,145        1,312,310 
Total  $126,607   $31,012   $533,871   $309,692   $227,922   $159,500   $   $  1,388,604 
                                         
September 30, 2013                                        
Individually Evaluated for Impairment  $3,546   $773   $57,820   $20,894   $3,977   $416   $   $87,426 
Collectively Evaluated for Impairment   119,707    30,681    512,916    290,137    226,235    150,740        1,330,416 
Total  $123,253   $31,454   $570,736   $311,031   $230,212   $151,156   $   $1,417,842 

14
 

Impaired Loans. Loans are deemed to be impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due (principal and interest payments), according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

 

The following table presents loans individually evaluated for impairment by class of loans.

 

 

(Dollars in Thousands)

  Unpaid Principal Balance   Recorded Investment With No Allowance   Recorded
Investment
With Allowance
   Related Allowance 
September 30, 2014                    
Commercial, Financial and Agricultural  $1,489   $195   $1,294   $576 
Real Estate – Construction   835        835    94 
Real Estate – Commercial Mortgage   37,524    11,062    26,462    3,359 
Real Estate – Residential   22,087    5,265    16,822    2,526 
Real Estate – Home Equity   2,796    792    2,004    471 
Consumer   271    20    251    12 
Total  $65,002   $17,334   $47,668   $7,038 
                     
December 31, 2013                    
Commercial, Financial and Agricultural  $1,580   $443   $1,137   $75 
Real Estate – Construction   557        557    66 
Real Estate – Commercial Mortgage   49,973    19,860    30,113    4,336 
Real Estate – Residential   20,470    4,330    16,140    2,047 
Real Estate – Home Equity   3,359    646    2,713    682 
Consumer   355    90    265    23 
Total  $76,294   $25,369   $50,925   $7,229 

 

The following table summarizes the average recorded investment and interest income recognized by class of impaired loans.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2014   2013   2014   2013 
(Dollars in Thousands)  Average Recorded Investment   Total Interest Income   Average Recorded Investment   Total Interest Income   Average Recorded Investment   Total Interest Income   Average Recorded Investment   Total Interest Income 
Commercial, Financial and Agricultural  $1,433    15   $2,750    34   $1,482    50   $2,633    110 
Real Estate - Construction   828    1    935    2    738    4    1,317    5 
Real Estate - Commercial Mortgage   39,020    381    59,657    510    42,671    1,298    60,785    1,575 
Real Estate - Residential   22,180    284    20,992    217    21,610    800    21,353    637 
Real Estate - Home Equity   2,680    18    4,050    19    2,906    52    4,056    54 
Consumer   293    2    472    3    314    7    529    7 
Total  $66,434    701   $88,856    785   $69,721    2,211   $90,673    2,388 

 

Credit Risk Management. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk. Management and the Board of Directors review and approve these policies and procedures on a regular basis (at least annually).

 

Reporting systems have been implemented to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. Management and the Credit Risk Oversight Committee periodically review our lines of business to monitor asset quality trends and the appropriateness of credit policies. In addition, total borrower exposure limits are established and concentration risk is monitored. As part of this process, the overall composition of the portfolio is reviewed to gauge diversification of risk, client concentrations, industry group, loan type, geographic area, or other relevant classifications of loans. Specific segments of the loan portfolio are monitored and reported to the Board on a quarterly basis and have strategic plans in place to supplement Board approved credit policies governing exposure limits and underwriting standards. Detailed below are the types of loans within the Company’s loan portfolio and risk characteristics unique to each.

15
 

Commercial, Financial, and Agricultural – Loans in this category are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or other guarantees. Lending policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. The majority of these loans are secured by the assets being financed or other business assets such as accounts receivable, inventory, or equipment. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines.

 

Real Estate Construction – Loans in this category consist of short-term construction loans, revolving and non-revolving credit lines and construction/permanent loans made to individuals and investors to finance the acquisition, development, construction or rehabilitation of real property. These loans are primarily made based on identified cash flows of the borrower or project and generally secured by the property being financed, including 1-4 family residential properties and commercial properties that are either owner-occupied or investment in nature. These properties may include either vacant or improved property. Construction loans are generally based upon estimates of costs and value associated with the completed project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines. The disbursement of funds for construction loans is made in relation to the progress of the project and as such these loans are closely monitored by on-site inspections.

 

Real Estate Commercial Mortgage – Loans in this category consists of commercial mortgage loans secured by property that is either owner-occupied or investment in nature. These loans are primarily made based on identified cash flows of the borrower or project with consideration given to underlying real estate collateral and personal guarantees. Lending policy establishes debt service coverage ratios and loan to value ratios specific to the property type. Collateral values are determined based upon third party appraisals and evaluations.

 

Real Estate Residential – Residential mortgage loans held in the Company’s loan portfolio are made to borrowers that demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current income, employment status, current assets, and other financial resources, credit history, and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. Collateral values are determined based upon third party appraisals and evaluations. The Company does not originate sub-prime loans.

 

Real Estate Home Equity – Home equity loans and lines are made to qualified individuals and are generally secured by senior or junior mortgage liens on owner-occupied 1-4 family homes or vacation homes. Borrower qualifications include favorable credit history combined with supportive income and debt ratio requirements and combined loan to value ratios within established policy guidelines. Collateral values are determined based upon third party appraisals and evaluations.

 

Consumer Loans – This loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer loan portfolio consists of indirect and direct automobile loans. Lending policy establishes maximum debt to income ratios, minimum credit scores, and includes guidelines for verification of applicants’ income and receipt of credit reports.

 

Credit Quality Indicators. As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic/market trends, among other factors.  Risk ratings are assigned to each loan and revised as needed through established monitoring procedures for individual loan relationships over a predetermined amount and review of smaller balance homogenous loan pools.  The Company uses the definitions noted below for categorizing and managing its criticized loans.  Loans categorized as “Pass” do not meet the criteria set forth for the Special Mention, Substandard, or Doubtful categories and are not considered criticized.

 

Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems.  Loans in this category may not meet required underwriting criteria and have no mitigating factors.  More than the ordinary amount of attention is warranted for these loans.

 

Substandard – Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower.  The possibility of loss is much more evident and above average supervision is required for these loans.

 

Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

16
 

The following table presents the risk category of loans by segment.

                 
(Dollars in Thousands)  Commercial,
Financial,
Agriculture
   Real Estate   Consumer   Total
Criticized
Loans
 
September 30, 2014                    
Special Mention  $4,225   $43,372   $179   $47,776 
Substandard   3,994    84,526    910    89,430 
Doubtful   420