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 March 31, 2015

 

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 April 30, 2015, 17,532,659 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 MARCH 31, 2015

TABLE OF CONTENTS

 

PART I – Financial Information Page
     
Item 1. Consolidated Financial Statements (Unaudited)  
  Consolidated Statements of Financial Condition – March 31, 2015 and December 31, 2014 4
  Consolidated Statements of Operations – Three Months Ended March 31, 2015 and 2014 5
  Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2015 and 2014 6
  Consolidated Statements of Changes in Shareowners’ Equity – Three Months Ended March 31, 2015 and 2014 7
  Consolidated Statements of Cash Flows – Three Months Ended March 31, 2015 and 2014 8
  Notes to Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 39
     
Item 4. Controls and Procedures 39
     
PART II – Other Information  
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosure 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 40
     
Signatures   41
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, 2014 (the “2014 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, Basel III, and the ability to repay and qualified mortgage standards;
  § 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 or fraud related to debit card products;
  § the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision and deferred tax asset valuation allowance;
  § 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;
  § 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 of 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)
March 31,
   December 31, 
(Dollars in Thousands)  2015   2014 
ASSETS          
Cash and Due From Banks  $51,948   $55,467 
Federal Funds Sold and Interest Bearing Deposits   296,888    329,589 
Total Cash and Cash Equivalents   348,836    385,056 
           
Investment Securities, Available for Sale, at fair value   404,887    341,548 
Investment Securities, Held to Maturity, at amortized cost (fair value of $183,923 and $163,412)   183,489    163,581 
Total Investment Securities   588,376    505,129 
           
 Loans Held For Sale   13,334    10,688 
           
 Loans, Net of Unearned Income   1,451,454    1,431,374 
Allowance for Loan Losses   (16,090)   (17,539)
Loans, Net   1,435,364    1,413,835 
           
Premises and Equipment, Net   100,038    101,899 
Goodwill   84,811    84,811 
Other Real Estate Owned   33,835    35,680 
Other Assets   89,121    90,071 
Total Assets  $2,693,715   $2,627,169 
           
LIABILITIES          
Deposits:          
Noninterest Bearing Deposits  $707,470   $659,115 
Interest Bearing Deposits   1,502,544    1,487,679 
Total Deposits   2,210,014    2,146,794 
           
Short-Term Borrowings   49,488    49,425 
Subordinated Notes Payable   62,887    62,887 
Other Long-Term Borrowings   30,418    31,097 
Other Liabilities   66,821    64,426 
Total Liabilities   2,419,628    2,354,629 
           
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; 17,532,631 and 17,447,223 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively   175    174 
Additional Paid-In Capital   42,941    42,569 
Retained Earnings   251,765    251,306 
Accumulated Other Comprehensive Loss, Net of Tax   (20,794)   (21,509)
Total Shareowners’ Equity   274,087    272,540 
Total Liabilities and Shareowners’ Equity  $2,693,715   $2,627,169 

 

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 March 31, 
(Dollars in Thousands, Except Per Share Data)  2015   2014 
INTEREST INCOME          
Loans, including Fees  $17,863   $18,098 
Investment Securities:          
Taxable   1,198    709 
Tax Exempt   96    138 
Funds Sold   189    291 
Total Interest Income   19,346    19,236 
           
INTEREST EXPENSE          
Deposits   246    308 
Short-Term Borrowings   21    20 
Subordinated Notes Payable   332    331 
Other Long-Term Borrowings   240    291 
Total Interest Expense   839    950 
           
NET INTEREST INCOME   18,507    18,286 
Provision for Loan Losses   293    359 
Net Interest Income After Provision for Loan Losses   18,214    17,927 
           
NONINTEREST INCOME          
Deposit Fees   5,541    5,869 
Bank Card Fees   2,742    2,707 
Wealth Management Fees   2,046    1,918 
Mortgage Banking Fees   987    625 
Data Processing Fees   373    541 
Other   1,159    1,125 
Total Noninterest Income   12,848    12,785 
           
NONINTEREST EXPENSE          
Compensation   16,524    15,781 
Occupancy, Net   4,396    4,298 
Intangible Amortization       32 
Other Real Estate Owned, Net   1,497    1,399 
Other   6,973    6,856 
Total Noninterest Expense   29,390    28,366 
           
INCOME BEFORE INCOME TAXES   1,672    2,346 
Income Tax Expense (Benefit)   686    (1,405)
           
NET INCOME  $986   $3,751 
           
BASIC NET INCOME PER SHARE  $0.06   $0.22 
DILUTED NET INCOME PER SHARE  $0.06   $0.22 
           
Average Basic Common Shares Outstanding   17,508    17,399 
Average Diluted Common Shares Outstanding   17,555    17,439 

 

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 March 31, 
(Dollars in Thousands)  2015   2014 
NET INCOME  $986   $3,751 
Other comprehensive income, before tax:          
Investment Securities:          
Change in net unrealized gain/loss on securities available for sale   1,146    (5)
Amortization of unrealized losses on securities transferred from available for sale to held to maturity   17    20 
Total Investment Securities   1,163    15 
Other comprehensive income, before tax   1,163    15 
Deferred tax expense related to other comprehensive income   (448)   (6)
Other comprehensive income, net of tax   715    9 
TOTAL COMPREHENSIVE INCOME  $1,701   $3,760 
           

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, 2014   17,360,960   $174   $41,152   $243,614   $(8,540)  $276,400 
Net Income                3,751        3,751 
Other Comprehensive Income, Net of Tax                    9    9 
Cash Dividends ($0.0200 per share)                (348)       (348)
Stock Compensation Expense            317            317 
Impact of Transactions Under Compensation Plans, net   65,691        (249)           (249)
Balance, March 31, 2014   17,426,651   $174   $41,220   $247,017   $(8,531)  $279,880 
                               
Balance, January 1, 2015   17,447,223   $174   $42,569   $251,306   $(21,509)  $272,540 
Net Income                986        986 
Other Comprehensive Income, Net of Tax                    715    715 
Cash Dividends ($0.0300 per share)                (527)       (527)
Stock Compensation Expense            261            261 
Impact of Transactions Under Compensation Plans, net   85,408    1    111            112 
Balance, March 31, 2015   17,532,631   $175   $42,941   $251,765   $(20,794)  $274,087 
                               

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)

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income  $986   $3,751 
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:          
Provision for Loan Losses   293    359 
Depreciation   1,633    1,589 
Amortization of Premiums, Discounts, and Fees (net)   1,045    1,315 
Amortization of Intangible Assets       32 
Gain on Securities Transactions   (2)    
Net Increase in Loans Held-for-Sale   (2,646)   (1,248)
Stock Compensation   261    317 
Deferred Income Taxes   (1,349)   1,497 
Loss on Sales and Write-Downs of Other Real Estate Owned   989    840 
Loss on Sale or Disposal of Premises and Equipment   20     
Net Decrease in Other Assets   3,021    783 
Net Increase (Decrease) in Other Liabilities   2,445    (3,448)
Net Cash Provided By Operating Activities   6,696    5,787 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Securities Held to Maturity:          
Purchases   (33,204)   (51,311)
Payments, Maturities, and Calls   12,993    7,479 
Securities Available for Sale:          
Purchases   (92,106)   (9,980)
Payments, Maturities, and Calls   29,045    30,751 
Net Increase in Loans   (23,436)   (8,695)
Proceeds From Sales of Other Real Estate Owned   2,598    4,485 
Purchases of Premises and Equipment, net   (945)   (859)
Net Cash Used In Investing Activities   (105,055)   (28,130)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net Increase in Deposits   63,220    27,465 
Net Increase (Decrease) in Short-Term Borrowings   63    (3,828)
Repayment of Other Long-Term Borrowings   (679)   (2,832)
Dividends Paid   (527)   (348)
Issuance of Common Stock Under Compensation Plans   62    51 
Net Cash Provided By Financing Activities   62,139    20,508 
           
NET DECREASE IN CASH AND CASH EQUIVALENTS   (36,220)   (1,835)
           
Cash and Cash Equivalents at Beginning of Period   385,056    529,928 
Cash and Cash Equivalents at End of Period  $348,836   $528,093 
           
Supplemental Cash Flow Disclosures:          
Interest Paid  $844   $914 
Income Taxes Paid  $8   $1,030 
           
Noncash Investing and Financing Activities:          
Loans Transferred to Other Real Estate Owned  $1,742   $1,290 
Transfer of Current Portion of Long-Term Borrowings  $   $1,240 

 

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 subsidiary, Capital City Bank, with banking offices located in Florida, Georgia, and Alabama. The Company is subject to competition from other financial institutions, is subject to regulation by certain government agencies and undergoes periodic examinations by those regulatory authorities.

 

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of CCBG and its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank” and together with the Company). 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. Operating results for the three-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

 

The consolidated statement of financial condition at December 31, 2014 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, 2014.

 

NOTE 2 – INVESTMENT SECURITIES

 

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

 

   March 31, 2015   December 31, 2014 
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Market
Value
   Amortized
Cost
   Unrealized
Gain
   Unrealized
Losses
   Market
Value
 
Available for Sale                                        
U.S. Government Treasury  $239,708   $1,238   $2   $240,944   $185,830   $220   $19   $186,031 
U.S. Government Agency   108,202    380    130    108,452    95,950    289    142    96,097 
States and Political Subdivisions   44,481    64    77    44,468    48,405    65    82    48,388 
Mortgage-Backed Securities   2,041    197        2,238    2,094    193        2,287 
Equity Securities(1)   8,785            8,785    8,745            8,745 
Total  $403,217   $1,879   $209   404,887   $341,024   $767   $243   $  341,548 
                                         
Held to Maturity                                        
U.S. Government Treasury  $109,325   $567   $1   $109,891   $76,179   $144   $6   $76,317 
U.S. Government Agency   15,092    45        15,137    19,807    29    19    19,817 
States and Political Subdivisions   21,379    32    2    21,409    26,717    36    6    26,747 
Mortgage-Backed Securities   37,693    32    239    37,486    40,878    33    380    40,531 
Total  $183,489   $676   $242   $183,923   $163,581   $242   $411   $163,412 
                                         
Total Investment Securities  $586,706   $2,555   $451   $588,810   $504,605   $1,009   $654   $504,960 
                                         
(1)Includes Federal Home Loan Bank, Federal Reserve Bank, and Bankers Bank stock recorded at cost of $3.7 million, $4.8 million, and $0.3 million, respectively, at March 31, 2015 and $3.9 million, $4.8 million, and $0.1million, respectively, at December 31, 2014.

 

Securities with an amortized cost of $339.2 million and $337.9 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes.

9
 

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.

 

Maturity Distribution. As of March 31, 2015, the Company’s investment securities had the following maturity distribution based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Mortgage-backed securities and certain amortizing U.S. government agency securities are shown separately because they are not due at a certain maturity date.

 

   Available for Sale   Held to Maturity 
(Dollars in Thousands)  Amortized
Cost
   Market
Value
   Amortized
Cost
   Market
Value
 
Due in one year or less  $45,960   $46,025   $15,854   $15,873 
Due after one through five years   270,816    272,048    129,942    130,564 
Mortgage-Backed Securities   2,041    2,238    37,693    37,486 
U.S. Government Agency   75,615    75,791         
Equity Securities   8,785    8,785         
Total  $403,217   $404,887   $183,489   $183,923 

 

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
 
March 31, 2015                        
Available for Sale                              
U.S. Government Treasury  $16,911   $2   $   $   $16,911   $2 
U.S. Government Agency   16,554    50    17,559    80    34,113    130 
States and Political Subdivisions   19,882    75    503    2    20,385    77 
Mortgage-Backed Securities   36                36     
Total   53,383    127    18,062    82    71,445    209 
                               
Held to Maturity                              
U.S. Government Treasury   4,975    1            4,975    1 
States and Political Subdivisions   1,393    2    155        1,548    2 
Mortgage-Backed Securities   13,456    97    16,777    142    30,233    239 
Total  $19,824   $100   $16,932   $142   $36,756   $242 
                               
December 31, 2014                              
Available for Sale                              
U.S. Government Treasury  $35,838   $19   $   $   $35,838   $19 
U.S. Government Agency   18,160    54    18,468    88    36,628    142 
States and Political Subdivisions   16,497    77    505    5    17,002    82 
Total   70,495    150    18,973    93    89,468    243 
                               
Held to Maturity                              
U.S. Government Treasury   15,046    6            15,046    6 
U.S. Government Agency   10,002    19            10,002    19 
States and Political Subdivisions   3,788    6            3,788    6 
Mortgage-Backed Securities   15,066    149    18,155    231    33,221    380 
Total  $43,902   $180   $18,155   $231   $62,057   $411 
10
 

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.

 

Approximately $18.1 million of investment securities, with an unrealized loss of approximately $82,000, have been in a loss position for greater than 12 months. These debt securities are in a loss position because they were acquired when the general level of interest rates was lower than that on March 31, 2015. 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 March 31, 2015.

 

NOTE 3 – LOANS, NET

 

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

 

(Dollars in Thousands)  March 31, 2015      December 31, 2014 
Commercial, Financial and Agricultural  $143,951   $136,925 
Real Estate – Construction   41,595    41,596 
Real Estate – Commercial Mortgage   507,681    510,120 
Real Estate – Residential(1)    296,724    295,969 
Real Estate – Home Equity   228,171    229,572 
Consumer   233,332    217,192 
Loans, Net of Unearned Income  $1,451,454   $1,431,374 

 

(1)Includes loans in process with outstanding balances of $10.2 million and $7.4 million at March 31, 2015 and December 31, 2014, respectively.

 

Net deferred fees included in loans were $1.5 million at March 31, 2015 and December 31, 2014.

 

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.

 

   March 31, 2015   December 31, 2014 
(Dollars in Thousands)  Nonaccrual   90 + Days   Nonaccrual   90 + Days 
Commercial, Financial and Agricultural  $626       $507     
Real Estate – Construction   423        424     
Real Estate – Commercial Mortgage   6,909        5,806     
Real Estate – Residential   6,123        6,737     
Real Estate – Home Equity   2,254        2,544     
Consumer   455        751     
Total Nonaccrual Loans  $16,790       $16,769     
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
 
March 31, 2015                              
Commercial, Financial and Agricultural  $285   $   $   $285   $143,040   $143,951 
Real Estate – Construction   595            595    40,577    41,595 
Real Estate – Commercial Mortgage   497            497    500,275    507,681 
Real Estate – Residential   1,277    235        1,512    289,089    296,724 
Real Estate – Home Equity   226            226    225,691    228,171 
Consumer   522    52        574    232,303    233,332 
Total Past Due Loans  $3,402   $287   $   $3,689   $  1,430,975   $  1,451,454 
                               
December 31, 2014                              
Commercial, Financial and Agricultural  $352   $155   $   $507   $135,911   $136,925 
Real Estate – Construction   690            690    40,482    41,596 
Real Estate – Commercial Mortgage   1,701    569        2,270    502,044    510,120 
Real Estate – Residential   682    1,147        1,829    287,403    295,969 
Real Estate – Home Equity   689    85        774    226,254    229,572 
Consumer   625    97        722    215,719    217,192 
Total Past Due Loans  $4,739   $2,053   $   $6,792   $1,407,813   $1,431,374 
                               

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 losses are deemed to be probable and 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   Total 
Three Months Ended                                   
March  31, 2015                                   
Beginning Balance  $784   $843   $5,287   $6,520   $2,882   $1,223   $17,539 
Provision for Loan Losses   354    (269)   88    (68)   (177)   365    293 
Charge-Offs   (290)       (904)   (305)   (182)   (576)   (2,257)
Recoveries   55        30    48    24    358    515 
Net Charge-Offs   (235)       (874)   (257)   (158)   (218)   (1,742)
Ending Balance  $903   $574   $4,501   $6,195   $2,547   $1,370   $16,090 
                                    
Three Months Ended                                   
March 31, 2014                                   
Beginning Balance  $699   $1,580   $7,710   $9,073   $3,051   $982   $23,095 
Provision for Loan Losses   (130)   258    (63)   105    194    (5)   359 
Charge-Offs   (11)       (594)   (731)   (403)   (405)   (2,144)
Recoveries   75    4    27    395    11    288    800 
Net Charge-Offs   64    4    (567)   (336)   (392)   (117)   (1,344)
Ending Balance  $633   $1,842   $7,080   $8,842   $2,853   $860   $22,110 
12
 

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   Total 
March 31, 2015                                    
Period-end amount Allocated to:                                   
Loans Individually Evaluated for Impairment  $334   $   $2,349   $2,294   $557   $15   $5,549 
Loans Collectively Evaluated for Impairment   569    574    2,152    3,901    1,990    1,355    10,541 
Ending Balance  $903   $574   $4,501   $6,195   $2,547   $1,370   $16,090 
                                    
December 31, 2014                                    
Period-end amount Allocated to:                                   
Loans Individually Evaluated for Impairment  $293   $   $2,733   $2,113   $638   $5   $5,782 
Loans Collectively Evaluated for Impairment   491    843    2,554    4,407    2,244    1,218    11,757 
Ending Balance  $784   $843   $5,287   $6,520   $2,882   $1,223   $17,539 
                                    
March 31, 2014                                    
Period-end amount Allocated to:                                   
Loans Individually Evaluated for Impairment  $102   $89   $4,205   $2,281   $508   $32   $7,217 
Loans Collectively Evaluated for Impairment   531    1,753    2,875    6,561    2,345    828    14,893 
Ending Balance  $633   $1,842   $7,080   $8,842   $2,853   $860   $22,110 
                                    

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   Total 
March 31, 2015                                   
Individually Evaluated for Impairment  $1,252   $401   $31,213   $19,840   $3,123   $197   $56,026 
Collectively Evaluated for Impairment   142,699    41,194    476,468    276,884    225,048    233,135    1,395,428 
Total  $143,951   $41,595   $507,681   $296,724   $228,171   $233,332   $1,451,454 
                                    
December 31, 2014                                   
Individually Evaluated for Impairment  $1,040   $401   $32,242   $20,120   $3,074   $216   $57,093 
Collectively Evaluated for Impairment   135,885    41,195    477,878    275,849    226,498    216,976    1,374,281 
Total  $136,925   $41,596   $510,120   $295,969   $229,572   $217,192   $1,431,374 
                                    
March 31, 2014                                   
Individually Evaluated for Impairment  $1,585   $556   $49,914   $20,844   $2,973   $361   $76,233 
Collectively Evaluated for Impairment   137,079    35,898    472,105    284,268    223,438    165,756    1,318,544 
Total  $138,664   $36,454   $522,019   $305,112   $226,411   $166,117   $1,394,777 
13
 

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
 
March 31, 2015                    
Commercial, Financial and Agricultural  $1,252   $182   $1,070   $334 
Real Estate – Construction   401    401         
Real Estate – Commercial Mortgage   31,213    13,012    18,201    2,349 
Real Estate – Residential   19,840    4,841    14,999    2,294 
Real Estate – Home Equity   3,123    799    2,324    557 
Consumer   196    2    194    15 
Total  $56,025   $19,237   $36,788   $5,549 
                     
December 31, 2014                    
Commercial, Financial and Agricultural  $1,040   $189   $851   $293 
Real Estate – Construction   401    401         
Real Estate – Commercial Mortgage   32,242    11,984    20,258    2,733 
Real Estate – Residential   20,120    5,492    14,628    2,113 
Real Estate – Home Equity   3,074    758    2,316    638 
Consumer   216    3    213    5 
Total  $57,093   $18,827   $38,266   $5,782 

 

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

 

   For Three Months Ended March 31, 
   2015   2014 
(Dollars in Thousands)  Average
Recorded
Investment
   Total
Interest
Income
   Average
Recorded
Investment
   Total
Interest
Income
 
Commercial, Financial and Agricultural  $1,252   $11   $1,582   $19 
Real Estate - Construction   401        557    1 
Real Estate - Commercial Mortgage   31,213    261    49,943    529 
Real Estate - Residential   19,840    197    20,656    209 
Real Estate - Home Equity   3,123    21    3,166    17 
Consumer   196    2    360    2 
Total  $56,025   $492   $76,264   $777 

 

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.

14
 

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.

15
 

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

 

(Dollars in Thousands)  Commercial,
 Financial,
 Agriculture
   Real Estate   Consumer   Total Criticized
Loans
 
March 31, 2015                    
Special Mention  $10,454   $48,027   $124   $58,605 
Substandard   2,101    71,305    841    74,247 
Doubtful                
Total Criticized Loans  $12,555   $119,332   $965   $132,852 
                     
December 31, 2014                    
Special Mention  $8,059   $51,060   $114   $59,233 
Substandard   2,817    79,167    1,153    83,137 
Doubtful                
Total Criticized Loans  $10,876   $130,227   $1,267   $142,370 
                     

Troubled Debt Restructurings (“TDRs”). TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower that it would not otherwise consider. In these instances, as part of a work-out alternative, the Company will make concessions including the extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. The impact of the TDR modifications and defaults are factored into the allowance for loan losses on a loan-by-loan basis as all TDRs are, by definition, impaired loans.  Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to also remove it from the impaired loan category, but to continue to individually evaluate loan impairment based on the contractual terms specified by the loan agreement.

The following table presents loans classified as TDRs.

 

   March 31, 2015   December 31, 2014 
(Dollars in Thousands)  Accruing   Nonaccruing   Accruing   Nonaccruing 
Commercial, Financial and Agricultural  $803   $261   $838   $266 
Real Estate – Construction                
Real Estate – Commercial Mortgage   24,062    457    26,565     
Real Estate – Residential   15,537    1,235    14,940    1,622 
Real Estate – Home Equity   1,993    150    1,856    356 
Consumer   195        211     
Total TDRs  $42,590   $2,103   $44,410   $2,244 

 

Loans classified as TDRs during the periods indicated are presented in the table below. The modifications made during the reporting period involved either an extension of the loan term or a principal moratorium and the financial impact of these modifications was not material.

 

   Three Months Ended March 31,
2015
   Three Months Ended March 31,
2014
 
(Dollars in Thousands)  Number
of
Contracts
   Pre-Modified
Recorded
Investment
   Post-Modified
Recorded
Investment
   Number
of Contracts
   Pre-Modified
Recorded
Investment
   Post-Modified
Recorded
Investment
 
Commercial, Financial and Agricultural      $   $    1   $52   $54 
Real Estate - Construction                        
Real Estate - Commercial Mortgage   1    457    457    1    584    584 
Real Estate - Residential   4    464    437    3    836    890 
Real Estate - Home Equity               3    248    248 
Consumer               1    34    34 
Total TDRs   5   $921   $894    9   $1,754   $1,810 
16
 

For the three months ended March 31, 2015 and March 31, 2014, there were no TDR defaults for loans that had been modified within the previous 12 months.

 

The following table provides information on how TDRs were modified during the periods indicated.

 

   Three Months Ended March 31,
2015
   Three Months Ended March 31,
2014
 
(Dollars in Thousands)  Number of
Contracts
   Recorded
Investment(1)
   Number of
Contracts
   Recorded
Investment(1)
 
Extended amortization   1   $118    3   $1,262 
Interest rate adjustment   1    156    1    156 
Extended amortization and interest rate adjustment   3    620    2    197 
Other           3    195 
Total TDRs   5   $894    9   $1,810 

 

(1)Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

 

NOTE 4 – OTHER REAL ESTATE OWNED

 

The following table presents other real estate owned activity for the periods indicated.

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
Beginning Balance  $35,680   $48,071 
Additions   1,742    1,290 
Valuation Write-downs   (801)   (730)
Sales   (2,737)   (4,595)
Other   (49)    
Ending Balance  $33,835   $44,036 
           

Net expenses applicable to other real estate owned include the following:

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
Gains from the Sale of Properties  $(121)  $(246)
Losses from the Sale of Properties   310    356 
Rental Income from Properties   (188)   (213)
Property Carrying Costs   695    772 
Valuation Adjustments   801    730 
Total  $1,497   $1,399 

 

As of March 31, 2015, the Company had $3.1 million of loans secured by residential real estate in the process of foreclosure.

 

NOTE 5 - 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 March 31, 
(Dollars in Thousands)  2015   2014 
Service Cost  $1,675   $1,500 
Interest Cost   1,425    1,400 
Expected Return on Plan Assets   (1,950)   (1,875)
Prior Service Cost Amortization   75    75 
Net Loss Amortization   800    325 
Net Periodic Benefit Cost  $2,025   $1,425 
           
Discount Rate   4.15%   5.00%
Long-Term Rate of Return on Assets   7.50%   7.50%

17
 

The components of the net periodic benefit costs for the Company’s SERP were as follows:

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
Interest Cost  $28   $28 
Prior Service Cost Amortization   2    40 
Net Gain Amortization   (90)   (183)
Net Periodic Benefit Income  $(60)  $(115)
           
Discount Rate   4.15%   5.00%
           

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

Lending Commitments.  The Company is a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its clients.  These financial instruments consist of commitments to extend credit and standby letters of credit.

 

The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments.  The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments.  The amounts associated with the Company’s off-balance sheet obligations were as follows:

 

   March 31, 2015   December 31, 2014 
(Dollars in Thousands)  Fixed   Variable   Total   Fixed   Variable   Total 
Commitments to Extend Credit (1)  $48,334   $271,280   $319,614   $33,633   $278,438   $312,071 
Standby Letters of Credit   7,384        7,384    8,307        8,307 
  Total  $55,718   $271,280   $326,998   $41,940   $278,438   $320,378 

 

(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.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In general, management does not anticipate any material losses as a result of participating in these types of transactions.  However, any potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit facilities.

 

For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is deemed necessary.  The Company evaluates each client’s creditworthiness on a case-by-case basis.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; real estate; accounts receivable; property, plant and equipment; and inventory.

 

Contingencies.  The Company is a party to lawsuits and claims arising out of the normal course of business.  In management’s opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on the consolidated results of operations, financial position, or cash flows of the Company.

 

Indemnification Obligation. The Company is a member of the Visa U.S.A. network. Visa U.S.A believes that its member banks are required to indemnify it for potential future settlement of certain litigation (the “Covered Litigation”) that relates to several antitrust lawsuits challenging the practices of Visa and MasterCard International. In 2008, the Company, as a member of the Visa U.S.A. network, obtained Class B shares of Visa, Inc. upon its initial public offering. Since its initial public offering, Visa, Inc. has funded a litigation reserve for the Covered Litigation resulting in a reduction in the Class B shares held by the Company. During the first quarter of 2011, the Company sold its remaining Class B shares resulting in a $3.2 million pre-tax gain. Associated with this sale, the Company entered into a swap contract with the purchaser of the shares that requires a payment to the counterparty in the event that Visa, Inc. makes subsequent revisions to the conversion ratio for its Class B shares.

18
 

In December 2013, a settlement agreement was approved by the court in resolution of the aforementioned Covered Litigation matter. Visa’s share of the settlement is to be paid from the litigation reserve account, which was further funded during the third quarter of 2014 resulting in a payment of $161,000 to the counterparty. Fixed charges included in the liability are payable quarterly until the litigation reserve is fully liquidated and at which time the aforementioned swap contract will be terminated. Quarterly fixed payments approximate $50,000. Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.

 

NOTE 7 – FAIR VALUE MEASUREMENTS

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

  § Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
     
  § Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from, or corroborated, by market data by correlation or other means.
     
  § Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Securities Available for Sale. U.S. Treasury securities and certain U.S. Government Agency securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the bond’s terms and conditions, among other things.

 

In general, the Company does not purchase securities that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds. Pricing for such instruments is easily obtained. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

 

Fair Value Swap. The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares. The valuation represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and related carrying cost obligations required under the contract.

19
 

A summary of fair values for assets and liabilities consisted of the following:

 

(Dollars in Thousands)  Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
   Total Fair
Value
 
March 31, 2015                    
Securities Available for Sale:                    
U.S. Government Treasury  $240,944   $   $   $240,944 
U.S. Government Agency       108,452        108,452 
States and Political Subdivisions       44,468        44,468 
Mortgage-Backed Securities       2,238        2,238 
Equity Securities       8,785        8,785 
                     
December 31, 2014                    
Securities Available for Sale:                    
U.S. Government Treasury  $186,031   $   $   $186,031 
U.S. Government Agency       96,097        96,097 
State and Political Subdivisions       48,388        48,388 
Mortgage-Backed Securities       2,287        2,287 
Equity Securities       8,745        8,745 
                     

Assets Measured at Fair Value on a Non-Recurring Basis

 

Certain assets are measured at fair value on a non-recurring basis (i.e., the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances). An example would be assets exhibiting evidence of impairment. The following is a description of valuation methodologies used for assets measured on a non-recurring basis.

 

Impaired Loans. Impairment for collateral dependent loans is measured using the fair value of the collateral less selling costs. The fair value of collateral is determined by an independent valuation or professional appraisal in conformance with banking regulations. Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market, and the judgment and estimation involved in the real estate appraisal process. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. Valuation techniques are consistent with those techniques applied in prior periods. Impaired collateral dependent loans had a carrying value of $19.6 million with a valuation allowance of $1.9 million at March 31, 2015 and $13.6 million and $2.0 million, respectively, at December 31, 2014.

 

Loans Held for Sale. These loans are carried at the lower of cost or fair value and are adjusted to fair value on a non-recurring 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 three months of 2014, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset less estimated cost to sell. The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations. On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation adjustments as necessary. The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment and estimation involved in the real estate valuation process.

 

Assets and Liabilities Disclosed at Fair Value

 

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities, for which it is practical to estimate fair value and the following is a description of valuation methodologies used for those assets and liabilities.

 

Cash and Short-Term Investments. The carrying amount of cash and short-term investments is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns.

 

Securities Held to Maturity. Securities held to maturity are valued in accordance with the methodology previously noted in this footnote under the caption “Assets and Liabilities Measured at Fair Value on a Recurring Basis – Securities Available for Sale”.

 

Loans. The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows and estimated discount rates that reflect the credit, interest rate, and liquidity risks inherent in each loan category. The calculated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category.

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Deposits. The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities.

 

Subordinated Notes Payable. The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obligations.

 

Short-Term and Long-Term Borrowings. The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar debt.

 

A summary of estimated fair values of significant financial instruments consisted of the following:

 

   March 31, 2015 

(Dollars in Thousands)

  Carrying
Value
   Level 1
Inputs
   Level 2
Inputs
  Level 3
Inputs
 
ASSETS:                   
Cash  $51,948   $51,948   $  $ 
Short-Term Investments   296,888    296,888          
Investment Securities, Available for Sale   404,887    240,944    163,943     
Investment Securities, Held to Maturity   183,923    109,891    74,032     
Loans Held for Sale   13,334         13,334     
Loans, Net of Allowance for Loan Losses   1,435,364             1,446,236 
                    
LIABILITIES:                   
Deposits  $  2,210,014   $    $  2,169,563 $ 
Short-Term Borrowings   49,488         49,517     
Subordinated Notes Payable   62,887         42,740     
Long-Term Borrowings   30,418         31,574     

 

   December 31, 2014 
(Dollars in Thousands)  Carrying
Value
   Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
 
ASSETS:                    
Cash  $55,467   $55,467   $   $ 
Short-Term Investments   329,589    329,589         
Investment Securities, Available for Sale   341,548    186,031    155,517     
Investment Securities, Held to Maturity   163,581    76,317    87,095     
Loans Held for Sale   10,688        10,688      
Loans, Net of Allowance for Loan Losses   1,413,835            1,369,314 
                     
LIABILITIES:                    
Deposits  $2,146,794   $   $2,146,510   $ 
Short-Term Borrowings   49,425        48,760     
Subordinated Notes Payable   62,887        62,887     
Long-Term Borrowings   31,097        32,313     

 

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.

21
 

NOTE 8 – OTHER COMPREHENSIVE INCOME

 

The amounts allocated to other comprehensive income are presented in the table below. Reclassification adjustments related to securities held for sale are included in net gain (loss) on securities transactions in the accompanying consolidated statements of comprehensive income. For the periods presented, reclassifications adjustments related to securities held for sale was not material.

 

 (Dollars in Thousands)  Before
Tax
Amount
   Tax
Expense
   Net of
Tax
Amount
 
March 31, 2015               
Investment Securities:               
Change in net unrealized gain/loss on securities available for sale  $1,146   $(441)  $705 
      Amortization of losses on securities transferred from available for sale to held to maturity   17    (7)   10 
      Total Other Comprehensive Income  $1,163   $(448)  $715 
                
March 31, 2014               
Investment Securities:               
Change in net unrealized gain/loss on securities available for sale  $(5)  $2   $(3)
       Amortization of losses on securities transferred from available for sale to held to maturity   20    (8)   12 
                Total Other Comprehensive Income  $15   $(6)  $9 
                

Accumulated other comprehensive loss was comprised of the following components:

             
 (Dollars in Thousands)  Securities Available for Sale   Retirement Plans   Accumulated Other Comprehensive Loss 
Balance as of January 1, 2015  $59   $(21,568)  $(21,509)
Other comprehensive income during the period   715        715 
Balance as of March 31, 2015  $774   $(21,568)  $(20,794)
                
Balance as of January 1, 2014  $(132)  $(8,408)  $(8,540)
Other comprehensive income during the period   9        9 
Balance as of March 31, 2014  $(123)  $(8,408)  $(8,531)

 

NOTE 9 – ACCOUNTING STANDARDS UPDATES

 

ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” ASU 2015-03 requires companies to present debt issuance costs the same way they currently present debt discounts, as a direct deduction from the carrying value of that debt liability. ASU 2015-03 is effective for the Company beginning December 15, 2015, though early adoption is permitted. ASU 2015-03 is not expected to have a significant impact on the Company’s financial statements. 

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during the first quarter of 2015 compares with prior periods. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as “CCBG,” “Company,” “we,” “us,” or “our.”

 

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 2014 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 63 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 and fees 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 deposit fees, wealth management fees, mortgage banking fees, bank card fees, and data processing fees.

 

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2014 Form 10-K.

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

   2015   2014   2013 
(Dollars in Thousands, Except Per Share Data)  First   Fourth   Third   Second   First   Fourth   Third   Second 
Summary of Operations:                                
Interest Income  $19,346   $19,871   $19,766   $19,348   $19,236   $20,076   $20,250   $20,698 
Interest Expense   839    852    868    910    950    1,080    1,050    1,103 
Net Interest Income   18,507    19,019    18,898    18,438    18,286    18,996    19,200    19,595 
Provision for Loan Losses   293    623    424    499    359    397    555    1,450 
Net Interest Income After
Provision for Loan Losses
   18,214    18,396    18,474    17,939    17,927    18,599    18,645    18,145 
Noninterest Income   12,848    13,053    13,351    13,347    12,785    13,825    14,026    13,731 
Noninterest Expense   29,390    28,309    28,607    29,076    28,366    29,647    30,153    30,464 
Income Before Income Taxes   1,672    3,140    3,218    2,210    2,346    2,777    2,518    1.412 
Income Tax Expense (Benefit)   686    1,219    1,103    737    (1,405)   5    927    569 
Net Income   986    1,921    2,115    1,473    3,751    2,772    1,591    843 
Net Interest Income (FTE)   18,611    19,124    19,020    18,567    18,424    19,141    19,355    19,744 
                                         
Per Common Share:                                        
Net Income Basic  $0.06   $0.11   $0.12   $0.08   $0.22   $0.16   $0.09   $0.05 
Net Income Diluted   0.06    0.11    0.12    0.08    0.22    0.16    0.09    0.05 
Cash Dividends Declared   0.03    0.03    0.02    0.02    0.02    0.00    0.00    0.00 
Diluted Book Value   15.59    15.53    16.18    16.08    16.02    15.85    14.44    14.36 
Market Price:                                        
High   16.33    16.00    14.98    14.71    14.59    12.69    13.08    12.64 
Low   13.16    13.00    13.26    12.60    11.56    11.33    11.06    10.12 
Close   16.25    15.54    13.54    14.53    13.28    11.77    11.78    11.53 
                                         
Selected Average Balances:                                        
Loans, Net  1,448,617   $ 1,426,756   1,421,327   1,411,988   1,395,506   1,414,909   1,436,039   1,456,904 
Earning Assets   2,306,485    2,212,781    2,209,429    2,260,885    2,268,320    2,206,286    2,201,390    2,206,694 
Total Assets   2,648,551    2,549,736    2,530,571    2,578,993    2,598,307    2,553,653    2,558,395    2,564,528 
Deposits   2,163,376    2,077,365    2,062,881    2,109,563    2,124,960    2,050,870    2,059,498    2,067,647 
Shareowners’ Equity   275,304    286,029    284,130    282,346    279,729    253,999    251,617    250,485 
Common Equivalent Average Shares:                                        
Basic   17,508    17,433    17,440    17,427    17,399    17,341    17,336    17,319 
Diluted   17,555    17,530    17,519    17,488    17,439    17,423    17,396    17,355 
                                         
Performance Ratios:                                        
Return on Average Assets   0.15%   0.30%   0.33%   0.23%   0.59%   0.43%   0.25%   0.13%
Return on Average Equity   1.45    2.66    2.95    2.09    5.44    4.33    2.51    1.35 
Net Interest Margin (FTE)   3.27    3.43    3.42    3.29    3.29    3.45    3.49    3.59 
Noninterest Income as % of Operating Revenue   40.98    40.70    41.40    41.99    41.15    42.12    42.21    41.20 
Efficiency Ratio   93.49    88.16    88.44    91.15    91.02    90.22    90.42    91.07 
                                         
Asset Quality:                                        
Allowance for Loan Losses  $16,090   $17,539   $19,093   $20,543   $22,110   $23,095   $25,010   $27,294 
Allowance for Loan Losses to Loans   1.10%   1.22%   1.34%   1.45%   1.57%   1.65%   1.75%   1.89%
Nonperforming Assets (“NPAs”)   50,625    52,449    65,208    68,249    78,594    85,035    94,700    96,653 
NPAs to Total Assets   1.88    2.00    2.61    2.66    2.98    3.26    3.77    3.77 
NPAs to Loans plus ORE   3.38    3.55    4.45    4.67    5.42    5.87    6.38    6.44 
Allowance to Non-Performing Loans   95.83    104.60    81.31    80.03    63.98    62.48    60.00    65.66 
Net Charge-Offs to Average Loans   0.49    0.61    0.52    0.59    0.39    0.65    0.78    0.54 
                                         
Capital Ratios:                                        
Tier I Capital   16.16%   16.67%   16.88%   16.85%   16.85%   16.56%   15.60%   15.36%
Total Capital   17.11    17.76    18.08    18.10    18.10    17.94    16.97    16.73 
Common Equity Tier 1(1)   12.57    NA    NA    NA    NA    NA    NA    NA 
Tangible Capital   7.26    7.38    8.22    7.93    7.66    7.58    6.84    6.64 
Leverage   10.73    10.99    10.97    10.70    10.47    10.46    10.16    10.07 

 

(1)Not applicable prior to January 1, 2015.
24
 

FINANCIAL OVERVIEW

 

A summary overview of our financial performance is provided below.

 

Results of Operations

 

  § Net income of $1.0 million, or $0.06 per diluted share, for the first quarter of 2015 compared to net income of $1.9 million, or $0.11 per diluted share, in the fourth quarter of 2014, and net income of $3.8 million, or $0.22 per diluted share, for the first quarter of 2014.  First quarter 2014 earnings were favorably impacted by a tax benefit of $2.2 million, or $0.13 per share, related to an adjustment to our reserve for uncertain tax positions.
     
  § Tax equivalent net interest income for the first quarter of 2015 totaled $18.6 million, a $0.5 million, or 2.7%, decrease from the fourth quarter of 2014 and a $0.2 million, or 1.0%, increase over the first quarter of 2014.  The decrease from the fourth quarter of 2014 was primarily attributable to two less calendar days and interest recoveries realized during the fourth quarter, partially offset by a favorable shift in our earning asset mix due to growth in the loan and investment portfolios.  The increase over the comparable prior year quarter also reflects a favorable shift in earning asset mix due to growth in the loan and investment portfolios as well as a slight reduction in interest expense.
     
  § Total credit costs (loan loss provision plus other real estate owned (“OREO”) expenses) were $1.8 million, $2.0 million, and $1.8 million for the quarters ended March 31, 2015, December 31, 2014, and March 31, 2014, respectively. While OREO expenses are still elevated, slower problem loan migration, lower loan losses, and improved credit metrics have resulted in a normalized loan loss provision.
     
  § Noninterest income for the first quarter of 2015 totaled $12.8 million, a decrease of $0.2 million, or 1.6%, from the fourth quarter of 2014 primarily attributable to an expected lower level of deposit fees reflective of lower utilization of our overdraft service due to client receipt of tax refunds.  Compared to the same prior year period, noninterest income increased $0.1 million, or 0.5%, driven by higher mortgage banking fees.
     
  § Noninterest expense (excluding OREO expense) for the first quarter of 2015 totaled $27.9 million, an increase of $0.9 million, or 3.5%, over the fourth quarter of 2014 and $0.9 million, or 3.5%, over the first quarter of 2014.  The increase compared to both periods was driven by higher compensation expense, primarily pension plan expense reflective of an unfavorable adjustment to the discount rate that determines plan liability costs.  

Financial Condition

 

  § Average earning assets totaled $2.306 billion for the first quarter of 2015, an increase of $93.7 million, or 4.2%, over the fourth quarter of 2014 and $38.2 million, or 1.7%, over the first quarter of 2014.  The increase over the fourth quarter of 2014 reflects an expected seasonal increase in our public funds balances.  The increase over the comparable prior year quarter reflects a higher level of noninterest bearing deposits.  Additionally, growth in both the loan and investment portfolios led to a more favorable earning asset mix compared to both prior periods.
     
  § Average loans increased $21.9 million, or 1.5%, over the fourth quarter of 2014 and $53.1 million, or 3.8%, over the first quarter of 2014.  The improvement over both prior periods was primarily driven by growth in the consumer (indirect auto) loan portfolio, and to a lesser extent, the commercial and industrial loan portfolio.  
     
  § Average total deposits were $2.163 billion for the first quarter of 2015, an increase of $86.0 million, or 4.1%, over the fourth quarter of 2014 and $38.4 million, or 1.8%, over the first quarter of 2014.  Higher public funds deposit balances drove the increase over both prior periods.  
     
  § Nonperforming assets totaled $50.6 million at March 31, 2015, a decrease of $1.8 million from December 31, 2014 and $28.0 million from March 31, 2014.  Nonperforming assets represented 1.88% of total assets at March 31, 2015 compared to 2.00% at December 31, 2014 and 2.98% at March 31, 2014.  
     
  § As of March 31, 2015, we were well-capitalized with a risk based capital ratio of 17.11% and a tangible common equity ratio of 7.26% compared to 17.76% and 7.38%, respectively, at December 31, 2014, and 18.10% and 7.66%, respectively, at March 31, 2014.  Basel III capital standards became effective for the first quarter of 2015 and under these new requirements, we are publishing a new regulatory capital ratio, common equity tier 1 capital, which was 12.57% at March 31, 2015, significantly exceeding the current regulatory “well capitalized” threshold of 6.50%.  
25
 

RESULTS OF OPERATIONS

 

Net Income

 

For the first quarter of 2015, we realized net income of $1.0 million, or $0.06 per diluted share, compared to net income of $1.9 million, or $0.11 per diluted share, for the fourth quarter of 2014, and net income of $3.8 million, or $0.22 per diluted share, for the first quarter of 2014.

 

Compared to the fourth quarter of 2014, performance reflected lower net interest income of $0.5 million, noninterest income of $0.2 million, and higher noninterest expense of $1.1 million, partially offset by a lower loan loss provision of $0.3 million and income taxes of $0.5 million.

 

Compared to the first quarter of 2014, the decrease in earnings was due to higher noninterest expense of $1.0 million and higher income taxes of $2.1 million, partially offset by higher net interest income of $0.2 million, noninterest income of $0.1 million, and a $0.1 million decrease in the loan loss provision.

 

A condensed earnings summary of each major component of our financial performance is provided below:

 

   Three Months Ended 
   March 31,   December 31,   March 31, 
(Dollars in Thousands, except per share data)  2015   2014   2014 
Interest Income  $19,346   $19,871   $19,236 
Taxable Equivalent Adjustments   104    105    138 
Total Interest Income (FTE)   19,450    19,976    19,374 
Interest Expense   839    852    950 
Net Interest Income (FTE)   18,611    19,124    18,424 
Provision for Loan Losses   293    623    359 
Taxable Equivalent Adjustments   104    105    138 
Net Interest Income After Provision for Loan Losses   18,214    18,396    17,927 
Noninterest Income   12,848    13,053    12,785 
Noninterest Expense   29,390    28,309    28,366 
Income Before Income Taxes   1,672    3,140    2,346 
Income Tax Expense (Benefit)   686    1,219    (1,405)
Net Income  $986   $1,921   $3,751 
                
Basic Net Income Per Share  $0.06   $0.11   $0.22 
Diluted Net Income Per Share  $0.06   $0.11   $0.22 

 

Net Interest Income

 

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets less interest expense paid on interest-bearing liabilities.  This information is provided on a “taxable equivalent” basis to reflect the tax-exempt status of income earned on certain loans and investments, the majority of which are state and local government debt obligations. We provide an analysis of our net interest income including average yields and rates in Table I on page 38.

 

Tax equivalent net interest income for the first quarter of 2015 was $18.6 million compared to $19.1 million for the fourth quarter of 2014 and $18.4 million for the first quarter of 2014.  The decrease in tax equivalent net interest income compared to the fourth quarter of 2014 was primarily attributable to two less calendar days and interest recoveries realized during the fourth quarter, partially offset by a favorable shift in our earning asset mix due to growth in the loan and investment portfolios. The increase in tax equivalent net interest income compared to the first quarter of 2014 also reflects a favorable shift in earning asset mix due to growth in the loan and investment portfolios as well as a slight reduction in interest expense. The lower interest expense is attributable to maturing FHLB advances and favorable repricing on most deposit products.

 

Pressure on net interest income continues primarily as a result of the low rate environment.  Despite favorable volume variances in both the loan and investment portfolios, the low rate environment continues to negatively impact the loan yields and, going forward, will have minimal to no impact on our cost of funds. Increased lending competition in all markets has also unfavorably impacted the pricing for loans.

26
 

The net interest margin for the first quarter of 2015 was 3.27%, a decrease of 16 basis points over the fourth quarter of 2014 and a decline of two basis points from the first quarter of 2014.  Compared to the fourth quarter of 2014, the decrease in the margin was primarily attributable to a higher level of earning assets reflective of the expected seasonal increase in public funds balances, which accounted for 14 of the 16 basis point reduction in the margin. The lower margin compared to the first quarter of 2014 was also due to a higher level of earning assets.

 

Historically low interest rates (essentially setting a floor on deposit repricing), foregone interest, unfavorable asset repricing without the flexibility to significantly adjust deposit rates and core deposit growth (which has strengthened our liquidity position, but contributed to an unfavorable shift in our earning asset mix), have all placed pressure on our net interest margin.  Our current strategy, which remains consistent with our historical strategy, is to not accept greater interest rate risk by reaching further out on the curve for yield, particularly given the fact that short term rates are at historical lows.  We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions.  Over time, this strategy has historically produced fairly consistent outcomes and a net interest margin that is significantly above peer comparisons.

 

Provision for Loan Losses

 

The provision for loan losses for the first quarter of 2015 was $0.3 million compared to $0.6 million for the fourth quarter of 2014 and $0.4 million for the first quarter of 2014. The reduction in the provision from both prior periods reflects favorable problem loan migration, lower loss content, and continued improvement in key credit metrics. Net charge-offs for the first quarter of 2015 totaled $1.7 million, or 0.49% (annualized), of average loans compared to $2.2 million, or 0.61% (annualized), for the fourth quarter of 2014 and $1.3 million, or 0.39% (annualized), for the first quarter of 2014. At March 31, 2015, the allowance for loan losses was $16.1 million, or 1.10% of outstanding loans (net of overdrafts) and provided coverage of 96% of nonperforming loans compared to 1.22% and 105%, respectively, at December 31, 2014, and 1.57% and 64%, respectively, at March 31, 2014.

 

Charge-off activity for the respective periods is set forth below:

 

   Three Months Ended 
(Dollars in Thousands, except per share data)  March 31,
2015
   December 31,
2014
   March 31,
2014
 
CHARGE-OFFS               
Commercial, Financial and Agricultural  $290   $688   $11 
Real Estate – Construction       28     
Real Estate – Commercial Mortgage   904    957    594 
Real Estate – Residential   305    522    731 
Real Estate – Home Equity   182    (20)   403 
Consumer   576    608    405 
Total Charge-offs   2,257    2,783    2,144 
                
RECOVERIES               
Commercial, Financial and Agricultural   55    66    75 
Real Estate – Construction       2    4 
Real Estate – Commercial Mortgage   30    76    27 
Real Estate – Residential   48    212    395 
Real Estate – Home Equity   24    28    11 
Consumer   358    222    288 
Total Recoveries   515    606    800 
                
Net Charge-offs  $1,742   $2,177   $1,344 
                
Net Charge-offs (Annualized) as a   0.49%   0.61%   0.39%
Percent of Average Loans Outstanding,               
Net of Overdrafts               
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Noninterest Income

 

Noninterest income for the first quarter of 2015 totaled $12.8 million, a decrease of $0.2 million, or 1.6%, from the fourth quarter of 2014 attributable to lower deposit fees of $0.5 million that was partially offset by higher mortgage banking fees of $0.2 million and bank card fees of $0.1 million. Compared to the first quarter of 2014, noninterest income increased $0.1 million, or 0.5%, reflective of a $0.4 million increase in mortgage banking fees and a $0.1 million increase in wealth management fees, partially offset by lower deposit fees of $0.3 million and data processing fees of $0.1 million. Noninterest income represented 40.98% of operating revenues in the first quarter of 2015 compared to 40.70% in the fourth quarter of 2014 and 41.15% in the first quarter of 2014. The decrease over the first quarter of 2014 reflects higher net interest income. Due to the death of one of our officers, we expect tax free proceeds from the bank owned life insurance policy in the net amount of approximately $1.7 million to be received during the second quarter of 2015.

 

The table below reflects the major components of noninterest income.

 

   Three Months Ended 
   March 31,   December 31,   March 31, 
(Dollars in Thousands)  2015   2014   2014 
Deposit Fees  $5,541   $6,027   $5,869 
Bank Card Fees   2,742    2,658    2,707 
Wealth Management Fees   2,046    1,988    1,918 
Mortgage Banking Fees   987    808    625 
Data Processing Fees   373    278    541 
Securities Transactions   2    1     
Other   1,157    1,293    1,125 
Total Noninterest Income  $12,848   $13,053   $12,785 

 

Significant components of noninterest income are discussed in more detail below.

 

Deposit Fees. Deposit fees decreased $486,000, or 8.1%, from the fourth quarter of 2014 and $328,000, or 5.6%, from the first quarter of 2014. The decline from the fourth quarter of 2014 was primarily due to an expected lower utilization of our overdraft protection service during the first quarter as clients receive tax refunds, and to a lesser extent, two fewer processing days in the first quarter of 2014. Compared to the first quarter of 2014, the decline was due to a lower level of overdraft fees generally reflective of improved financial management by our clients.

 

Bank Card Fees. Bank card fees (including interchange fees and ATM/debit card fees) increased $84,000, or 3.2%, over the fourth quarter of 2014, and $35,000, or 1.3%. over the first quarter of 2014. The increase compared to both prior periods was attributable to higher card activity and spend volume by our clients.

 

Wealth Management Fees. Wealth management fees include both trust fees (i.e., managed accounts, trusts/estates, and retirement plans) and retail brokerage fees (i.e., investment and insurance products) and totaled $2.0 million for the first quarter of 2015, an increase of $58,000, or 2.9%, over the fourth quarter of 2014 and $128,000 or 6.7%, over the first quarter of 2014. The increase over the fourth quarter of 2014 reflects higher retail brokerage fees of $76,000 partially offset by an $18,000 decrease in trust fees. The increase in retail brokerage fees was attributable to a higher level of account activity by our clients. The slight reduction in trust fees reflects lower account valuations at quarter-end on which fees are based. Compared to the first quarter of 2014, the increase in fees reflects higher retail brokerage fees of $25,000 and trust fees of $103,000. The favorable variance in retail brokerage fees was driven by higher account activity by our clients and growth in new business drove the increase in trust fees. At March 31, 2015, total assets under management were approximately $1.226 billion compared to $1.278 billion at December 31, 2014 and $1.238 billion at March 31, 2014.

 

Mortgage Banking Fees. Mortgage banking fees increased $179,000, or 22.2%, over the fourth quarter of 2014 and $362,000, or 57.9%, over the first quarter of 2014. Compared to both prior periods, the increase was driven by a pick-up in new home purchase origination and refinancing as well as a higher margin realized on sold loans. The mix of new loan production between home purchase and refinance for the first quarter of 2015 was 79%/21% compared to 81%/19% for the first quarter of 2014.

 

Data Processing Fees. Data processing fees increased by $95,000, or 34.2%, over the fourth quarter of 2014 and decreased $168,000, or 31.1%, from the first quarter of 2014. The favorable variance compared to the sequential quarter was due to an unfavorable adjustment in the fourth quarter of 2014 related to a government contract for which processing was discontinued. Compared to the first quarter of 2014, the reduction also reflects the loss of the aforementioned government processing contract.

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Noninterest Expense

 

Noninterest expense for the first quarter of 2015 totaled $29.4 million, an increase of $1.1 million, or 3.8%, over the fourth quarter of 2014 and $1.0 million, or 3.6%, over the first quarter of 2014. Compared to the fourth quarter of 2014, the increase reflects higher compensation expense of $0.7 million, other real estate expense of $0.1 million, and other expense (excluding OREO expenses) of $0.3 million. Compared to the first quarter of 2014, the increase was attributable to higher compensation expense of $0.7 million, occupancy expense of $0.1 million, other real estate expense of $0.1 million and other expense (excluding OREO expenses) of $0.1 million. Expense management is an important part of our culture and strategic focus and we will continue to review and evaluate opportunities to optimize our operations, reduce operating costs and manage our discretionary expenses. Higher pension plan expense was the primary reason for the increase in compensation expense compared to both prior periods and is discussed in further detail below.

 

The table below reflects the major components of noninterest expense.

 

   Three Months Ended 
   March 31,   December 31,   March 31, 
(Dollars in Thousands)  2015   2014   2014 
Salaries  $12,515   $12,306   $12,531 
Associate Benefits   4,009    3,544    3,250 
Total Compensation   16,524    15,580    15,781 
                
Premises   2,276    2,360    2,132 
Equipment   2,120    2,080    2,166 
Total Occupancy   4,396    4,440    4,298 
                
Legal Fees   705    603    781 
Professional Fees   1,045    856    1,066 
Processing Services   1,778    1,595    1,472 
Advertising   340    294    318 
Travel and Entertainment   211    230    173 
Printing and Supplies   204    153    274 
Telephone   535    482    480 
Postage   281    261    305 
Insurance – Other   705    734    731 
Intangible Amortization           32 
Other Real Estate Owned, Net   1,497    1,353    1,399 
Miscellaneous   1,169    1,458    1,256 
Total Other   8,470    8,019    8,287 
                
Total Noninterest Expense  $29,390   $28,309   $28,366 

 

Significant components of noninterest expense are discussed in more detail below.

 

Compensation. Compensation expense totaled $16.5 million for the first quarter of 2015, an increase of $674,000, or 4.3%, over the fourth quarter of 2014 due to higher associate benefit expense of $465,000 and higher salary expense of $209,000. The increase in associate benefit expense reflects a $1.0 million increase in pension plan expense partially offset by a $491,000 reduction in stock compensation expense. The increase in our pension plan expense is primarily attributable to the utilization of a lower discount rate in 2015 for determining plan liabilities reflective of a decrease in long-term bond interest rates. Revision to the mortality tables used to calculate pension liabilities also contributed to the increase, but to a lesser extent. The decrease in stock compensation expense was due to the scaled up earn-out achieved in the prior quarter related to 2014 performance that exceeded stock compensation plan goals. The expense for the first quarter of 2015 reflects the reset of our stock performance plans for the new-year. The increase in salary expense was due to higher payroll taxes of $272,000 and unemployment taxes of $116,000, partially offset by lower cash incentive expense of $185,000. The increase in payroll taxes reflects the reset of social security taxes and the increase in unemployment taxes is attributable to timing as a large portion of the annual premium is paid in the first quarter. Compared to the first quarter of 2014, total compensation expense increased $743,000, or 4.7%, primarily attributable to higher pension plan expense reflective of the same unfavorable factors previously noted. Pension plan expense is determined by an external actuarial valuation based on assumptions that are evaluated annually, taking into consideration both current market conditions and anticipated long-term market conditions. A discussion of the sensitivity to these assumptions is detailed in the Critical Accounting Policy section of our 2014 10-K report.

29
 

Occupancy. Occupancy expense (including premises and equipment) totaled $4.4 million for the first quarter of 2015, a decrease of $44,000, or 1.0%, from the fourth quarter of 2014 driven by lower expense for furniture/equipment repairs and maintenance. Compared to the first quarter of 2014, occupancy expense increased $98,000, or 2.3%, attributable to higher premises expense, primarily higher building maintenance costs.

 

Other. Other noninterest expense totaled $8.5 million for the first quarter of 2015, an increase of $451,000, or 5.6%, over the fourth quarter of 2014 and $183,000, or 2.2%, over the first quarter of 2014. The increase compared to the fourth quarter of 2014 was primarily due to higher professional fees of $189,000, processing services of $183,000, OREO expense of $144,000 and legal fees of $102,000, partially offset by lower miscellaneous expense of $289,000. The increase in professional fees was attributable to higher audit and consulting fees. The increase in processing services was attributable to the implementation of a new online and mobile banking platform. The increase in OREO expense was attributable to higher property carrying costs. The increase in legal fees reflects higher fees to support loan workouts. The decrease in miscellaneous expense was due to lower debit card losses and to a lesser extent a reduction in losses from the disposal of fixed assets. The increase compared to the first quarter of 2014 was attributable to higher processing services of $306,000 and OREO expense of $98,000, partially offset by lower legal fees of $76,000, printing and supplies of $70,000, and miscellaneous expense of $87,000. The higher level of processing fees reflects the implementation of the new online and mobile banking platform mentioned previously. The increase in OREO expense was attributable to a higher level of valuation adjustments for properties. A lower level of legal support needed for problem loan collection drove the reduction in legal fees. The decrease in printing and supplies and miscellaneous expense reflects our continued efforts to control operating costs.

 

Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 93.49% for the first quarter of 2015 compared to 88.16% for the fourth quarter of 2014 and 91.02% for the first quarter of 2014. The unfavorable variance in this metric compared to both prior periods was driven by an increase in operating expenses, primarily pension plan expense, which outpaced the increase in operating revenues (net interest income plus noninterest income).

 

Income Taxes

 

We realized income tax expense of $0.7 million for the first quarter of 2015 compared to $1.2 million for the fourth quarter of 2014 and an income tax benefit of $1.4 million for the first quarter of 2014. Income taxes for the first quarter of 2014 were favorably impacted by a $2.2 million state tax benefit attributable to an adjustment in our reserve for uncertain tax positions associated with prior year matters.

 

FINANCIAL CONDITION

 

Average assets totaled approximately $2.649 billion for the first quarter of 2015, an increase of $98.8 million, or 3.9%, from the fourth quarter of 2014, and an increase of $50.2 million, or 1.9%, from the first quarter of 2014. Average earning assets were $2.306 billion for the first quarter of 2015, an increase of $93.7 million, or 4.2%, over the fourth quarter of 2014 and $38.2 million, or 1.7%, over the first quarter of 2014.  The increase in earning assets over the fourth quarter of 2014 reflects a higher level of public funds. The increase in earning assets over the first quarter 2014 primarily reflected a higher level of noninterest bearing deposits. Additionally, growth in both the loan and investment portfolios led to a more favorable earning asset mix compared to both prior periods.

 

Investment Securities

 

In the first quarter of 2015, our average investment portfolio increased $58.1 million, or 11.7%, from the fourth quarter of 2014 and increased $150.0 million, or 37.0%, from the first quarter of 2014. As a percentage of average earning assets, the investment portfolio represented 24.1% in the first quarter of 2015, compared to 22.5% in the fourth quarter of 2014 and 17.9% in the first quarter of 2014. The increase in the average balance of the investment portfolio compared to prior periods was primarily attributable to increases in U.S. Treasury purchases, partially offset by declines in municipal securities. These purchases were part of a strategy implemented in the first quarter of 2015 to deploy some of our liquidity. The supply of high quality municipal bonds with attractive spreads over U.S. Treasuries continues to be limited. For the remainder of 2015, we will continue to closely monitor liquidity levels and pledging requirements to assess the need to purchase additional investments, as well as look for new investment products that are prudent relative to our risk profile and the Bank’s overall investment strategy.

 

The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management. Two types of classifications are approved for investment securities which are Available-for-Sale (“AFS”) and Held-for-Maturity (“HTM”). During the first quarter of 2015, securities were purchased under both the AFS and HTM designations. As of March 31, 2015, $404.9 million, or 68.8% of the investment portfolio was classified as AFS, with the remaining $183.9 million classified as HTM.

30
 

At acquisition, the classification of the security will be determined based on how the purchase will affect our asset/liability strategy and future business plans and opportunities. Such decisions will be weighed against multiple factors, including regulatory capital requirements, volatility in earnings or other comprehensive income, and liquidity needs. Securities in the AFS portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income (loss) component of shareowners’ equity. Securities that are HTM will be acquired or owned with the intent of holding them to maturity (final payment date). HTM investments are measured at amortized cost. It is neither management’s current intent nor practice to participate in the trading of investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

 

At March 31, 2015, the investment portfolio contained a net pre-tax unrealized gain in the AFS portfolio of $1.7 million compared to $0.5 million at December 31, 2014 and $0.3 million March 31, 2014. At March 31, 2015 there were 148 positions with unrealized losses totaling $451,000. For purposes of this analysis, both AFS and HTM securitizes have been combined. Of the 148 positions, 85 were Ginnie Mae mortgage-backed securities (GNMA), U.S. Treasuries, or SBA securities, all of which carry the full faith and credit guarantee of the U.S. Government. SBA securities float monthly or quarterly to the prime rate and are uncapped. There were 24 SBA positions and 24 GMNA positions in an unrealized loss position for longer than 12 months, and have unrealized losses of $142,000 and $80,000, respectively. There were 61 municipal bonds in an unrealized loss position that were pre-refunded, or rated “AA-“or better. Two of these positions were in an unrealized loss position for longer than 12 months, and had unrealized loss of $3,000. The remaining two securities are Federal Home Loan Bank agency bonds, neither of which has been in an unrealized loss position for longer than 12 months. All positions with unrealized losses are not considered impaired, and are expected to mature at par or better.

 

The average maturity of the total portfolio at March 31, 2015 was 2.14 years compared to 2.17 years and 2.08 years at December 31, 2014 and March 31, 2014, respectively. The average life of the total portfolio in the first quarter of 2015 was nearly unchanged compared to the previous quarter, and extended compared to the prior year as slightly longer U.S. Treasury and high quality municipal bonds were purchased.

 

Loans

 

Average loans increased $21.9 million, or 1.5%, over the fourth quarter of 2014 and $53.1 million, or 3.8%, over the first quarter of 2014. The improvement over both prior periods was primarily driven by growth in the consumer (indirect auto) loan portfolio, and to a lesser extent, the commercial and industrial loan portfolio.

 

The resolution of problem loans, which includes loan charge-offs and loans transferred to OREO, totaled $4.0 million for the first quarter of 2015, compared to $5.9 million from the fourth quarter of 2014, and $3.4 million from the first quarter of 2014. The problem loan resolutions are based on “as of” balances, not averages.

 

Without compromising our credit standards or taking on inordinate interest rate risk, we have modified several lending programs in our business, commercial real estate, and consumer portfolios to try to mitigate the significant impact that consumer and business deleveraging is having on our portfolio. These programs have helped to increase overall production.

 

Nonperforming Assets

 

Nonperforming assets (nonaccrual loans and OREO) totaled $50.6 million at the end of the first quarter of 2015, a decrease of $1.8 million (3.5%) from the fourth quarter of 2014 and $28.0 million (35.6%) from the first quarter of 2014. Nonaccrual loans totaled $16.8 million at the end of the first quarter of 2015, comparable to the fourth quarter of 2014 and a decrease of $17.8 million from the first quarter of 2014. Nonaccrual loan additions in the first quarter of 2015 totaled $5.8 million compared to $5.8 million and $7.5 million for the fourth and first quarters of 2014, respectively. The balance of OREO totaled $33.8 million at the end of the first quarter of 2015, a decrease of $1.8 million and $10.2 million, respectively, from the fourth and first quarters of 2014. For the first quarter of 2015, we added properties totaling $1.7 million, sold properties totaling $2.8 million, and recorded valuation adjustments totaling $0.7 million. Nonperforming assets represented 1.88% of total assets at March 31, 2015 compared to 2.00% at December 31, 2014 and 2.98% at March 31, 2014.

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(Dollars in Thousands)  March 31, 2015      December 31, 2014      March 31, 2014 
Nonaccruing Loans:               
Commercial, Financial and Agricultural  $626   $507   $151 
Real Estate - Construction   424    424    581 
Real Estate - Commercial Mortgage   6,909    5,806    23,013 
Real Estate - Residential   6,123    6,737    6,892 
Real Estate - Home Equity   2,253    2,544    3,373 
Consumer   455    751    548 
Total Nonperforming Loans (“NPLs”)(1)  $16,790   $16,769   $34,558 
Other Real Estate Owned   33,835    35,680    44,036 
Total Nonperforming Assets (“NPAs”)  $50,625   $52,449   $78,594 
                
Past Due Loans 30 – 89 Days  $3,689   $6,792   $4,902 
Past Due Loans 90 Days or More (accruing)            
Performing Troubled Debt Restructurings   42,590    44,410    46,249 
Nonperforming Loans/Loans   1.15%   1.16%   2.46%
Nonperforming Assets/Total Assets   1.88    2.00    2.98 
Nonperforming Assets/Loans Plus OREO   3.38    3.55    5.42 
Allowance/Nonperforming Loans   95.83%   104.60%   63.98%

 

(1)      Nonperforming TDRs are included in the Nonaccrual/NPL totals

 

Activity within our nonperforming asset portfolio is provided in the table below.

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
NPA Beginning Balance:  $52,449   $85,035 
Change in Nonaccrual Loans:          
Beginning Balance   16,769    36,964 
Additions   5,767    7,498 
Charge-Offs   (1,620)   (1,862)
Transferred to OREO   (617)   (1,276)
Paid Off/Payments   (944)   (2,627)
Restored to Accrual   (2,565)   (4,139)
Ending Balance   16,790    34,558 
           
Change in OREO:          
Beginning Balance   35,680    48,071 
Additions   1,742    1,290 
Valuation Write-downs   (801)   (730)
Sales   (2,737)   (4,595)
Other   (49)    
Ending Balance   33,835    44,036 
           
NPA Net Change   (1,824)   (6,441)
NPA Ending Balance  $50,625   $78,594 
32
 

Activity within our TDR portfolio is provided in the table below.

 

   Three Months Ended March 31, 
(Dollars in Thousands)  2015   2014 
TDR Beginning Balance:  $46,654   $55,770 
Additions   894    1,810 
Charge-Offs   (1)   (98)
Paid Off/Payments   (438)   (513)
Removal Due to Change in TDR Status   (202)    
Defaults   (2,214)      (4,431)
TDR Ending Balance  $44,693   $52,538 

 

Allowance for Loan Losses

 

We maintain an allowance for loan losses at a level that management believes to be sufficient to provide for probable 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. As such, all related risks of lending are considered when assessing the adequacy of the allowance. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when losses are probable and reasonably quantifiable. The allowance for loan losses is based on management’s judgment of overall credit 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 loan portfolio’s overall credit quality and other risk factors both internal and external to us. We evaluate the adequacy of the allowance for loan losses on a quarterly basis.

 

The allowance for loan losses was $16.1 million at March 31, 2015 compared to $17.5 million at December 31, 2014 and $22.1 million at March 31, 2014. The allowance for loan losses was 1.10% of outstanding loans and provided coverage of 96% of nonperforming loans at March 31, 2015 compared to 1.22% and 105%, respectively, at December 31, 2014 and 1.57% and 64%, respectively, at March 31, 2014. The reduction in the allowance for loan losses from the same prior year period was primarily attributable to a decline in general reserves reflective of slower problem loan migration, lower loan loss experience, as well as continued improvement in credit quality metrics. A decrease in our impaired loan balance and related reserves contributed to a lesser extent and reflects slower inflow and successful resolutions, as well as lower loss content. It is management’s opinion that the allowance at March 31, 2015 is adequate to absorb losses inherent in the loan portfolio at quarter-end.

 

Deposits

 

Average total deposits were $2.163 billion for the first quarter of 2015, an increase of $86.0 million, or 4.1%, over the fourth quarter of 2014 and $38.4 million, or 1.8%, over the first quarter of 2014.  The increase in deposits when compared to the fourth quarter of 2014 reflects higher public funds deposits and savings accounts, partially offset by declines in money markets and noninterest bearing deposits. The higher level of deposits when compared to the first quarter of 2014 is primarily attributable to increased balances of noninterest bearing, public NOW and savings accounts, partially offset by a decline in money market accounts and certificates of deposit. The seasonal inflows of public funds started in the fourth quarter of 2014 and are expected to be at or near their peak for this cycle, with balances declining into the fourth quarter of 2015.

 

Deposit levels remain strong and our mix of deposits continues to improve as higher cost certificates of deposit are replaced with lower rate non-maturity deposits and noninterest-bearing demand accounts.  Prudent pricing discipline will continue to be the key to managing our mix of deposits.  Therefore, we do not attempt to compete with higher rate paying competitors for deposits.

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MARKET RISK AND INTEREST RATE SENSITIVITY

 

Market Risk and Interest Rate Sensitivity

 

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, our policies are designed to minimize structural interest rate risk.

 

Interest Rate Risk Management. Our net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price 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 re-price 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 three alternative simulations, at least once per 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 our core deposits as a significant component of our total funding sources, 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 interest rate shock analysis with alternative external interest rate scenarios on a quarterly 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%
March 31, 2015 4.5% 2.2% 1.1% -4.3%
December 31, 2014 2.7% 4.0% -1.1% -2.9%
34
 

The Net Interest Income at Risk position was slightly more favorable at the end of the first quarter of 2015, when compared to the prior quarter-end when rates rise by 100 and 300 basis points. The favorable change from the prior quarter end reflects higher levels of repricing assets, primarily loans and investments and adjustments to our deposit betas based on a recent core deposit study.. Our largest exposure is when rates decline 100 basis points, with a measure of -4.3%. All measures of net interest income at risk are within our prescribed policy limits.

 

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our cash flows, and discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of our net assets.

 

ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1)

 

Changes in Interest Rates +300 bp +200 bp +100 bp -100 bp
Policy Limit -12.5% -10.0% -7.5%   -7.5%
March 31, 2015 15.6% 9.0% 5.4%  -5.7%
December 31, 2014 -2.1% 1.0% -3.3% -8.3%

 

(1)Down 200 and 300 basis point scenarios have been excluded due to the current historically low interest rate environment.

 

As of March 31, 2015, the economic value of equity in all rate scenarios versus the base case was more favorable than it was as of December 31, 2014. The current economic value of equity sensitivity measures reflects a more asset sensitive bias than last quarter’s results due to the completion and incorporation of a statistical study of the price sensitivity and decay rate of our core deposit base into the interest rate risk model. In addition, current valuations shown for loans reflect a change in the discount benchmarks used to estimate the economic value of these assets, resulting in higher asset values.  All measures of economic value of equity were within our prescribed policy limits.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to fund loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our ALCO and senior management, which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.

 

As of March 31, 2015, we have the ability to generate $991.4 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. We recognize the importance of maintaining liquidity and have developed a Contingency 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. A liquidity stress test is completed on a quarterly basis based on events that could potentially occur at the Bank with results reported to ALCO, our Market Risk and Oversight Committee, and the Board of Directors. The liquidity available to us is considered sufficient to meet our ongoing needs.

 

We view our investment portfolio primarily as a source of liquidity and have the option to pledge the portfolio as collateral for borrowings or deposits, and/or sell selected securities. The portfolio consists of debt issued by the U.S. Treasury, U.S. governmental and federal agencies, and municipal governments. The weighted average life of the portfolio is approximately 2.14 years, and as of March 31, 2015 had a net unrealized pre-tax gain of $1.7 million in the available-for-sale portfolio.

 

Our average liquidity (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $302.4 million during the first quarter of 2015 compared to an average net overnight funds sold position of $288.6 million in the fourth quarter of 2014 and an average overnight funds sold position of $467.3 million in the first quarter of 2014. The increase in overnight funds compared to the fourth quarter of 2014 reflects higher public funds balances. The decrease relative to the first quarter of 2014 is primarily attributable to growth in both the loan and investment portfolios.

35
 

Capital expenditures are estimated to approximate $5.0 million over the next 12 months, which will consist primarily of office remodeling, office equipment/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 March 31, 2015, advances from the FHLB consisted of $31.2 million in outstanding debt representing 31 notes. During the first quarter of 2015, the Bank made FHLB advance payments totaling approximately $1.9 million, which included two maturing advances totaling $1.2 million. No additional FHLB advances were obtained. 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 our 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 payment for the CCBG Capital Trust I borrowing is due quarterly and adjusts quarterly to a variable rate of LIBOR plus a margin of 1.90%. This note matures on December 31, 2034. The interest payment for the CCBG Capital Trust II borrowing is due quarterly and adjusts annually to a variable rate of LIBOR plus a margin of 1.80%. This note matures on June 15, 2035. The proceeds of these borrowings were used to partially fund acquisitions. Under the terms of each junior subordinated deferrable interest note, in the event of default or if we elect to defer interest on the note, we may not, with certain exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock.

 

Capital

 

Equity capital was $274.1 million as of March 31, 2015, compared to $272.5 million as of December 31, 2014 and $279.9 million as of March 31, 2014. Our leverage ratio was 10.73%, 10.99%, and 10.47%, respectively, and our tangible capital ratio was 7.26%, 7.38%, and 7.66%, respectively, for the same periods. Our risk-adjusted capital ratio of 17.11% at March 31, 2015, exceeds the 10% threshold to be designated as “well-capitalized” under the risk-based regulatory guidelines. The seasonal inflow of public funds deposits drove assets higher for the first quarter of 2015 and had an unfavorable impact on our leverage and tangible common equity ratios. Basel III capital standards became effective for the first quarter of 2015 reporting period and as such the risk weighting of assets and the treatment of certain capital elements have been revised in our capital ratios. Under these new requirements, we will begin publishing a new regulatory capital ratio, common equity tier 1 capital, which was 12.57% at March 31, 2015, significantly exceeding the current regulatory “well capitalized” threshold of 6.50%. During the first three months of 2015, shareowners’ equity increased $1.5 million, or 2.3%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of $1.0 million, stock compensation accretion of $0.2 million, a $0.7 million net increase in the unrealized gain on investment securities, and net adjustments totaling $0.1 million related to transactions under our stock compensation plans. Shareowners’ equity was reduced by a common stock cash dividend of $0.5 million.

 

At March 31, 2015, our common stock had a book value of $15.59 per diluted share compared to $15.53 at December 31, 2014 and $16.02 at March 31, 2014. Book value is impacted by changes in the amount of our net unrealized gain or loss on investment securities available-for-sale and changes to the amount of our unfunded pension liability both of which are recorded through other comprehensive income. At March 31, 2015, the net unrealized gain on investment securities available for sale was $0.8 million and the amount of our unfunded pension liability was $21.6 million.

 

In February 2014, our Board of Directors authorized the repurchase of up to 1,500,000 shares of our outstanding common stock. Repurchases may be made in the open market or in privately negotiated transactions; however, we are not obligated to repurchase any specified number of shares. During 2014, we repurchased 19,600 shares of our outstanding common stock at an average price of $13.69 per share under the plan. We did not repurchase any shares during the first quarter of 2015.

 

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 March 31, 2015, we had $319.6 million in commitments to extend credit and $7.4 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.

36
 

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, advances available from the FHLB and the Federal Reserve, and investment security maturities provide a sufficient source of funds to meet these commitments.

 

CRITICAL ACCOUNTING POLICIES

 

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2014 Form 10-K. The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and reporting practices applicable to the banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

 

We have identified accounting for (i) the allowance for loan and lease losses, (ii) valuation of goodwill and other intangible assets, and (iii) pension benefits as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2014 Form 10-K.

37
 

TABLE I

AVERAGE BALANCES & INTEREST RATES

 

   Three Months Ended 
   March 31, 2015   December 31, 2014   March 31, 2014 
(Taxable Equivalent Basis - Dollars in Thousands)  Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
ASSETS                                             
Loans, Net of Unearned Income(1)(2)  1,448,617   $17,909    5.01%  1,426,756   $18,670    5.19%  1,395,506   $18,161    5.28%
Taxable Investment Securities   491,637    1,198    0.98    423,136    964    0.90    290,942    709    0.88 
Tax-Exempt Investment Securities(2)   63,826    154    0.96    74,276    161    0.87    114,542    213    0.74 
Funds Sold   302,405    189    0.25    288,613    181    0.25    467,330    291    0.25 
Total Earning Assets   2,306,485    19,450    3.42%   2,212,781    19,976    3.58%   2,268,320    19,374    3.46%
Cash & Due From Banks   48,615              45,173              48,084           
Allowance for Loan Losses   (17,340)             (19,031)             (23,210)          
Other Assets   310,791              310,813              305,113           
TOTAL ASSETS  $2,648,551             $2,549,736             $2,598,307           
                                              
LIABILITIES                                             
NOW Accounts  $794,308   $68    0.03%  $689,572   $57    0.03%  $770,302   $104    0.05%
Money Market Accounts   254,483    41    0.07    267,703    46    0.07    274,015    48    0.07 
Savings Accounts   242,256    30    0.05    233,161    29    0.05    218,825    26    0.05 
Other Time Deposits   194,655    107    0.22    197,129    111    0.22    215,291    130    0.24 
Total Interest Bearing Deposits   1,485,702    246    0.07%   1,387,565    243    0.07%   1,478,433    308    0.08%
Short-Term Borrowings   49,809    21    0.17    46,055    24    0.21    46,343    20    0.18 
Subordinated Notes Payable   62,887    332    2.11    62,887    333    2.07    62,887    331    2.10 
Other Long-Term Borrowings   30,751    240    3.16    31,513    252    3.17    37,055    291    3.18 
Total Interest Bearing Liabilities   1,629,149    839    0.21%   1,528,020    852    0.22%   1,624,718    950    0.24%
Noninterest Bearing Deposits   677,674              689,800              646,527           
Other Liabilities   66,424              45,887              47,333           
TOTAL LIABILITIES   2,373,247              2,263,707              2,318,578           
                                              
SHAREOWNERS’ EQUITY                                             
TOTAL SHAREOWNERS’ EQUITY   275,304              286,029              279,729           
                                              
TOTAL LIABILITIES & EQUITY  $2,648,551             $2,549,736             $2,598,307           
                                              
Interest Rate Spread             3.21%             3.36%             3.23%
Net Interest Income       $18,611             $19,124             $18,424      
Net Interest Margin(3)             3.27%             3.43%             3.29%

 

(1)Average balances include nonaccrual loans.  Interest income for the periods in this table includes loan fees of $394,000, $432,000, and $410,000.
(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.
38
 
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2014.

 

Item 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2015, 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 March 31, 2015, 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are party to lawsuits arising out of the normal course of business. In management’s opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.

 

Item 1A.Risk Factors

 

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2014 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2014 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.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.Defaults Upon Senior Securities

None.

 

Item 4.Mine Safety Disclosure

None.

 

Item 5.Other Information

None.

39
 
Item 6.Exhibits

 

(A)Exhibits

 

10.1Participant Agreement, dated February 25, 2015, by and between Thomas A. Barron and Capital City Bank Group, Inc. – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 2/25/15) (No. 000-13358).

 

31.1Certification 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.

 

31.2Certification 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.

 

32.1Certification 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.

 

32.2Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

 

101.INSXBRL Instance Document

 

101.SCHXBRL Taxonomy Extension Schema Document

 

101.CALXBRL Taxonomy Extension Calculation Linkbase Document

 

101.LABXBRL Taxonomy Extension Label Linkbase Document

 

101.PREXBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEFXBRL Taxonomy Extension Definition Linkbase Document
40
 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.

 

CAPITAL CITY BANK GROUP, INC.

(Registrant)

 

/s/ J. Kimbrough Davis  
J. Kimbrough Davis  
Executive Vice President and Chief Financial Officer  
(Mr. Davis is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)  
   
Date: May 8, 2015  
41
 

Exhibit Index

 

ExhibitDescription

 

10.1Participant Agreement, dated February 25, 2015, by and between Thomas A. Barron and Capital City Bank Group, Inc. – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 2/25/15) (No. 000-13358).

 

31.1Certification 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.

 

31.2Certification of J. Kimbrough Davis, Executive Vice President an