Capital City Bank Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES

LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES	12 Months Ended
	Dec. 31, 2021
Loans, net [Abstract]
LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES	Note 3 LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES Loan Portfolio Composition . The composition of the HFI loan portfolio at December 31 was as follows: (Dollars in Thousands) 2021 2020 Commercial, Financial and Agricultural (1) $ 223,086 $ 393,930 Real Estate – Construction 174,394 135,831 Real Estate – Commercial Mortgage 663,550 648,393 Real Estate – Residential (2) 360,021 352,543 Real Estate – Home Equity 187,821 205,479 Consumer (3) 322,593 270,250 Loans Held for Investment, Net of Unearned Income $ 1,931,465 $ 2,006,426 (1) Includes SBA PPP loan balance of $ 0.1 million and $ 175.3 million for 2021 and 2020, respectively. (2) Includes loans in process with outstanding balances of $ 13.6 million and $ 10.9 million for 2021 and 2020, respectively. (3) Includes overdraft balances of $ 1.1 million and $ 0.7 million for December 31, 2021 and 2020, respectively. Net deferred costs, which include premiums on purchased loans, included in loans were $ 3.9 million at December 31, 2021 and net deferred fees were $ 0.1 million at December 31, 2020. Net deferred fees at December 31, 2020 included $ 3.2 million in net fees for SBA PPP loans. Accrued interest receivable on loans which is excluded from amortized cost totaled $ 5.3 million at December 31, 2021 and $ 6.9 million at December 31, 2020, and is reported separately in Other Assets. The Company has pledged a floating lien on certain 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta. Loan Purchases . The Company will periodically purchase newly originated 1-4 family real estate secured adjustable rate loans from CCHL, a related party effective on March 1, 2020 (see Note 1 – Significant Accounting Policies). These loan purchases totaled $ 97.5 million and $ 48.4 million for the years ended December 31, 2021 and 2020, respectively, and were not credit impaired. In addition, during 2021, the Company purchased $ 17.4 million of commercial real estate loans from a third party that were not credit impaired. The Company transferred $ 9.4 million of home equity loan from HFI to HFS during 2021. There were no transfers during 2020. Allowance for Credit Losses . The methodology for estimating the amount of credit losses reported in the allowance for credit losses (“ACL”) has two basic components: first, an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and second, a pooled component for expected credit losses for pools of loans that share similar risk characteristics. This methodology is discussed further in Note 1 – Significant Accounting Policies. The following table details the activity in the allowance for credit losses by portfolio segment for the years ended December 31. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Commercial, Real Estate Financial, Real Estate Commercial Real Estate Real Estate (Dollars in Thousands) Agricultural Construction Mortgage Residential Home Equity Consumer Total 2021 Beginning Balance $ 2,204 $ 2,479 $ 7,029 $ 5,440 $ 3,111 $ 3,553 $ 23,816 Provision for Credit Losses (227) 813 (1,679) (1,956) (1,125) 1,332 (2,842) Charge-Offs (239) - (405) (108) (103) (3,972) (4,827) Recoveries 453 10 865 753 413 2,965 5,459 Net (Charge-Offs) Recoveries 214 10 460 645 310 (1,007) 632 Ending Balance $ 2,191 $ 3,302 $ 5,810 $ 4,129 $ 2,296 $ 3,878 $ 21,606 2020 Beginning Balance $ 1,675 $ 370 $ 3,416 $ 3,128 $ 2,224 $ 3,092 $ 13,905 Impact of Adopting ASC 326 488 302 1,458 1,243 374 (596) 3,269 Provision for Credit Losses 578 1,757 1,865 940 486 3,409 9,035 Charge-Offs (789) - (28) (150) (151) (5,042) (6,160) Recoveries 252 50 318 279 178 2,690 3,767 Net (Charge-Offs) Recoveries (537) 50 290 129 27 (2,352) (2,393) Ending Balance $ 2,204 $ 2,479 $ 7,029 $ 5,440 $ 3,111 $ 3,553 $ 23,816 2019 Beginning Balance $ 1,434 $ 280 $ 4,181 $ 3,400 $ 2,301 $ 2,614 $ 14,210 Provision for Credit Losses 664 371 (1,129) (301) 178 2,244 2,027 Charge-Offs (768) (281) (214) (400) (430) (2,878) (4,971) Recoveries 345 - 578 429 175 1,112 2,639 Net (Charge-Offs) Recoveries (423) (281) 364 29 (255) (1,766) (2,332) Ending Balance $ 1,675 $ 370 $ 3,416 $ 3,128 $ 2,224 $ 3,092 $ 13,905 The $ 2.8 million decrease in the allowance for credit losses in 2021 reflected improvements in forecasted economic conditions, favorable loan migration and net loan recoveries totaling $ 0.6 million, partially offset by incremental reserves needed for loan growth (excluding SBA PPP). The $ 9.9 million increase in the allowance for credit losses in 2020 was attributable to the build of reserves attributable to a deterioration in economic conditions, primarily a higher rate of unemployment due to the COVID-19 pandemic and its potential effect on rates of default. Three unemployment rate forecast scenarios continue to be utilized to estimate probability of default and are weighted based on management’s estimate of probability. The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as various government sponsored loan programs, was also considered. See Note 1 – Significant accounting policies for more on the calculation of the provision for credit losses. See Note 21 – Commitments and Contingencies for information on the provision for credit losses related to off-balance sheet commitments. Loan Portfolio Aging. A loan is defined as a past due loan when one full payment is past due or a contractual maturity is over 30 days past due (“DPD”). The following table presents the aging of the amortized cost basis in accruing past due loans by class of loans at December 31, 30-59 60-89 90 + Total Total Nonaccrual Total (Dollars in Thousands) DPD DPD DPD Past Due Current Loans Loans 2021 Commercial, Financial and Agricultural $ 100 $ 23 $ - $ 123 $ 222,873 $ 90 $ 223,086 Real Estate – Construction - - - - 174,394 - 174,394 Real Estate – Commercial Mortgage 151 - - 151 662,795 604 663,550 Real Estate – Residential 365 151 - 516 357,408 2,097 360,021 Real Estate – Home Equity 210 - - 210 186,292 1,319 187,821 Consumer 1,964 636 - 2,600 319,781 212 322,593 Total $ 2,790 $ 810 $ - $ 3,600 $ 1,923,543 $ 4,322 $ 1,931,465 2020 Commercial, Financial and Agricultural $ 194 $ 124 $ - $ 318 $ 393,451 $ 161 $ 393,930 Real Estate – Construction - 717 - 717 134,935 179 135,831 Real Estate – Commercial Mortgage 293 - - 293 646,688 1,412 648,393 Real Estate – Residential 375 530 - 905 348,508 3,130 352,543 Real Estate – Home Equity 325 138 - 463 204,321 695 205,479 Consumer 1,556 342 - 1,898 268,058 294 270,250 Total $ 2,743 $ 1,851 $ - $ 4,594 $ 1,995,961 $ 5,871 $ 2,006,426 Nonaccrual Loans . Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured. The Company did not recognize a significant amount of interest income on nonaccrual loans for the years ended December 31, 2021 and 2020. The following table presents the amortized cost basis of loans in nonaccrual status and loans past due over 90 days and still on accrual by class of loans. 2021 2020 Nonaccrual Nonaccrual 90 + Days Nonaccrual Nonaccrual 90 + Days With No With Still With No With Still (Dollars in Thousands) ACL ACL Accruing ACL ACL Accruing Commercial, Financial and Agricultural $ 67 $ 23 $ - $ - $ 161 $ - Real Estate – Construction - - - - 179 - Real Estate – Commercial Mortgage - 604 - 1,075 337 - Real Estate – Residential 928 1,169 - 1,513 1,617 - Real Estate – Home Equity 463 856 - - 695 - Consumer - 212 - - 294 - Total $ 1,458 $ 2,864 $ - $ 2,588 $ 3,283 $ - Collateral Dependent Loans . The following table presents the amortized cost basis of collateral dependent loans at December 31: 2021 2020 Real Estate Non Real Estate Real Estate Non Real Estate (Dollars in Thousands) Secured Secured Secured Secured Commercial, Financial and Agricultural $ - $ 67 $ - $ - Real Estate – Commercial Mortgage 455 - 3,900 - Real Estate – Residential 1,645 - 3,022 - Real Estate – Home Equity 649 - 219 - Consumer - - - 29 Total $ 2,749 $ 67 $ 7,141 $ 29 A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the sale or operation of the underlying collateral. The Bank’s collateral dependent loan portfolio is comprised primarily of real estate secured loans, collateralized by either residential or commercial collateral types. The loans are carried at fair value based on current values determined by either independent appraisals or internal evaluations, adjusted for selling costs or other amounts to be deducted when estimating expected net sales proceeds. Residential Real Estate Loans In Process of Foreclosure . At December 31, 2021 and 2020, the Company had $ 0.9 million and $ 1.6 million, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process. 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 credit losses on a loan-by-loan basis. Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent. A TDR classification can be removed if the borrower’s financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, and the loan is subsequently refinanced or restructured at market terms and qualifies as a new loan. At December 31, 2021, the Company had $ 8.0 million in TDRs, of which $ 7.6 million were performing in accordance with the modified terms. At December 31, 2020 the Company had $ 14.3 million in TDRs, of which $ 13.9 million were performing in accordance with modified terms. For TDRs, the Company estimated $ 0.3 million and $ 0.6 million of credit loss reserves at December 31, 2021 and 2020, respectively. The modifications made to TDRs involved either an extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. For the year ended December 31, 2021, there were three loans modified with a recorded investment of $ 0.6 million. For the year ended December 31, 2020, there were three loans modified with a recorded investment of $ 0.2 million. For the year ended December 31, 2019, there were seven loans modified with a recorded investment of $ 0.5 million. The financial impact of these modifications was not material. For the years ended December 31, 2021 and 2020, there were no loans classified as TDRs, for which there was a payment default and the loans were modified within the 12 months prior to default. Credit Risk Management . The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk. Management and the Board of Directors review and approve these policies and procedures on a regular basis (at least annually). Reporting systems are used to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. Management and the Credit Risk Oversight Committee periodically review our lines of business to monitor asset quality trends and the appropriateness of credit policies. In addition, total borrower exposure limits are established and concentration risk is monitored. As part of this process, the overall composition of the loan portfolio is reviewed to gauge diversification of risk, client concentrations, industry group, loan type, geographic area, or other relevant classifications of loans. Specific segments of the loan portfolio are monitored and reported to the Board on a quarterly basis and have strategic plans in place to supplement Board approved credit policies governing exposure limits and underwriting standards. Detailed below are the types of loans within the Company’s loan portfolio and risk characteristics unique to each. Commercial, Financial, and Agricultural – Loans in this category are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or other guarantees. Lending policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. The majority of these loans are secured by the assets being financed or other business assets such as accounts receivable, inventory, or equipment. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines. 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 conside ration to underwriting factors such as current income, employment status, current assets, and other financial resources, credit history, and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. Collateral values are determined based upon third party appraisals and evaluations. The Company does not originate sub-prime loans. Real Estate Home Equity – Home equity loans and lines are made to qualified individuals for legitimate purposes generally secured by senior or junior mortgage liens on owner-occupied 1-4 family homes or vacation homes. Borrower qualifications include favorable credit history combined with supportive income and debt ratio requirements and combined loan to value ratios within established policy guidelines. Collateral values are determined based upon third party appraisals and evaluations. Consumer Loans – This loan category includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer loan category consists of indirect and direct automobile loans. Lending policy establishes maximum debt to income ratios, minimum credit scores, and includes guidelines for verification of applicants’ income and receipt of credit reports. Credit Quality Indicators . As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic and market trends, among other factors. Risk ratings are assigned to each loan and revised as needed through established monitoring procedures for individual loan relationships over a predetermined amount and review of smaller balance homogenous loan pools. The Company uses the definitions noted below for categorizing and managing its criticized loans. Loans categorized as “Pass” do not meet the criteria set forth below and are not considered criticized. Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems. Loans in this category may not meet required underwriting criteria and have no mitigating factors. More than the ordinary amount of attention is warranted for these loans. Substandard – Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower. The possibility of loss is much more evident and above average supervision is required for these loans. Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Performing/Nonperforming – Loans within certain homogenous loan pools (home equity and consumer) are not individually reviewed, but are monitored for credit quality via the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table summarizes gross loans held for investment at December 31, 2021 by years of origination and internally assigned credit risk ratings (refer to Credit Risk Management section for detail on risk rating system). Term Loans by Origination Year Revolving (Dollars in Thousands) 2021 2020 2019 2018 2017 Prior Loans Total Commercial, Financial, Agricultural: Pass $ 69,531 $ 31,335 $ 30,084 $ 20,276 $ 9,578 $ 11,836 $ 50,030 $ 222,670 Special Mention - - 3 6 - 25 - 34 Substandard 35 10 67 178 46 46 - 382 Total $ 69,566 $ 31,345 $ 30,154 $ 20,460 $ 9,624 $ 11,907 $ 50,030 $ 223,086 Real Estate - Construction: Pass $ 95,457 $ 56,875 $ 15,770 $ 453 $ 130 $ - $ 5,709 $ 174,394 Total $ 95,457 $ 56,875 $ 15,770 $ 453 $ 130 $ - $ 5,709 $ 174,394 Real Estate - Commercial Mortgage: Pass $ 173,502 $ 134,418 $ 79,969 $ 79,575 $ 55,417 $ 91,938 $ 21,508 $ 636,327 Special Mention 7,004 - 1,760 2,639 426 5,374 1,000 18,203 Substandard 1,483 1,034 4,083 - 1,236 1,111 73 9,020 Total $ 181,989 $ 135,452 $ 85,812 $ 82,214 $ 57,079 $ 98,423 $ 22,581 $ 663,550 Real Estate - Residential: Pass $ 130,424 $ 62,509 $ 38,617 $ 27,332 $ 26,829 $ 60,467 $ 6,600 $ 352,778 Special Mention - 134 20 121 167 412 - 854 Substandard 1,651 - 1,038 806 218 2,676 - 6,389 Total $ 132,075 $ 62,643 $ 39,675 $ 28,259 $ 27,214 $ 63,555 $ 6,600 $ 360,021 Real Estate - Home Equity: Performing $ 137 $ 53 $ 257 $ 130 $ 743 $ 1,510 $ 183,672 $ 186,502 Nonperforming - - 18 - - 78 1,223 1,319 Total $ 137 53 275 130 743 1,588 184,895 187,821 Consumer: Performing $ 173,031 $ 64,805 $ 39,045 $ 26,383 $ 10,759 $ 3,138 $ 5,220 $ 322,381 Nonperforming 58 44 37 66 1 6 - 212 Total $ 173,089 64,849 39,082 26,449 10,760 3,144 5,220 322,593