CAPITAL CITY BANK GROUP, INC.
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 2020 compares with prior years. Throughout this section, Capital City
Bank Group, Inc. , and subsidiaries, collectively, is referred to as "CCBG,"
"Company," "we," "us," or "our."
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, among
others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties
and are subject to change based on various factors, many of which are beyond our
control. The words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," "target," "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 2019 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 57 full-service offices located in Florida , Georgia , and Alabama . The Bank
offers commercial and retail banking services, as well as trust and asset
management, and retail securities brokerage. We offer residential mortgage
banking services through Capital City Home Loans.
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 credit
losses, noninterest income such as deposit fees, wealth management fees,
mortgage banking fees and bank card fees, and operating expenses such as
salaries and employee benefits, occupancy and other operating expenses,
including income taxes.
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
2019 Form 10-K.
Strategic Alliance . On March 1, 2020 , CCB completed its acquisition of a 51%
membership interest in Brand Mortgage Group, LLC ("Brand") which is now operated
as a Capital City Home Loans ("CCHL"). CCHL was consolidated into CCBG's
financial statements effective March 1, 2020 . See Note 1 - Business Combination
in the Consolidated Financial Statements. The primary purpose of the strategic
alliance with Brand was to gain access to an expanded residential mortgage
product line-up, investor base (including mandatory delivery channel for loan
sales) and to generate other operational synergies and cost savings.
34
--------------------------------------------------------------------------------RESPONSE TO COVID-19 PANDEMIC
InMarch 2020 , the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by theWorld Health Organization . The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation, monetary stimulus, and an expectation thatFederal Reserve policy will maintain a low interest rate environment for the foreseeable future. We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including a strong liquidity position and the build of reserves supported by a strong capital position. Our business and consumer clients are experiencing varying degrees of financial distress, which is expected to increase in coming months. In order to protect the health of our clients and associates and comply with applicable government directives, we have modified our business practices as noted below. We will continue to closely monitor this pandemic and respond with needed changes as this situation evolves. We discuss the potential impacts on our financial performance in more detail throughout parts of the MD&A section.
Clients
† Implemented business continuity plans to help ensure that clients have adequate access to banking services while at the same time working to protect clients through heightened safety procedures † We have chosen to participate in the CARES Act Paycheck Protection Program that provides government guaranteed and forgivable loans to our clients. We have obtainedSmall Business Administration ("SBA") loan approvals of approximately$135 million for the first phase of funding and$50 million for the second phase of funding.
† Implemented a loan extension program to support eligible clients and communities throughout this period of uncertainty
† Announced temporary closure of banking office lobbies (operating drive-thru only) - focused on the enhanced digital banking experience
Associates
† Heightened safety procedures, including social-distancing and work-at-home arrangements for associates with positions/responsibilities enabling them to work remotely
† Increased hourly wage for non-exempt associates for a period of time
† Increased paid time off for affected associates for a period of time
† Enhanced medical benefits in the near short-term
NON-GAAP FINANCIAL MEASURES
We present a tangible common equity ratio and a tangible book value per diluted
share that, in each case, removes the effect of goodwill resulting from merger
and acquisition activity. We believe these measures are useful to investors
because it allows investors to more easily compare our capital adequacy to other
companies in the industry, although the manner in which we calculate non-GAAP
financial measures may differ from that of other companies reporting non-GAAP
measures with similar names. The GAAP to non-GAAP reconciliation for each
quarter presented on page 36 is provided below.
2020 2019 2018(Dollars in Thousands, except per share data) First Fourth
Third Second First Fourth Third
Second
Shareowners' Equity (GAAP) $ 328,507 $ 327,016 $ 321,562 $ 314,595 $ 308,986 $ 302,587 $ 298,016 $ 293,571
Less: Goodwill (GAAP) 89,275 84,811 84,811 84,811 84,811 84,811 84,811 84,811
Tangible Shareowners' Equity (non-GAAP) A 239,232 242,205 236,751 229,784 224,175 217,776 213,205 208,760
Total Assets (GAAP) 3,086,523 3,088,953 2,934,513 3,017,654 3,052,051 2,959,183 2,819,190 2,880,278
Less: Goodwill (GAAP) 89,275 84,811 84,811 84,811 84,811 84,811 84,811 84,811 Tangible Assets (non-GAAP)
B $ 2,997,248 $ 3,004,142 $ 2,849,702 $ 2,932,843 $ 2,967,240 $ 2,874,372 $ 2,734,379 $ 2,795,467
Tangible Common Equity Ratio (non-GAAP) A/B 7.98% 8.06% 8.31% 7.83% 7.56% 7.58% 7.80% 7.47%
Actual Diluted Shares Outstanding (GAAP) C 16,845,462 16,855,161 16,797,241 16,773,449 16,840,496 16,808,542 17,127,846 17,114,380
Diluted Tangible Book Value (non-GAAP) A/C 14.20 14.37 14.09 13.70 13.31 12.96 12.45 12.20
35
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except 2020 2019 2018 Per Share Data) First Fourth Third Second First Fourth Third Second Summary of Operations: Interest Income$ 27,365 $ 28,008 $ 28,441 $ 28,665 $ 27,722 $ 26,370 $ 25,392 $ 24,419 Interest Expense 1,592 1,754 2,244 2,681 2,814 2,022 1,769 1,649 Net Interest Income 25,773 26,254 26,197 25,984 24,908 24,348 23,623 22,770 Provision for Credit Losses 4,990 (162) 776 646 767 457 904 815
Net Interest Income After
Provision for Credit Losses 20,783
26,416 25,421 25,338 24,141 23,891 22,719 21,955
Noninterest Income 15,478 13,828 13,903 12,770 12,552 13,238 13,308 12,542
Noninterest Expense 30,969 29,142 27,873 28,396 28,198 26,505 28,699 28,393
Income Before Income Taxes 5,292 11,102 11,451 9,712 8,495 10,624 7,328 6,104
Income Tax Expense(2) 1,282 2,537 2,970 2,387 2,059 2,166 1,338 101
Net Loss Attributable to NCI 277 - - - - - - -
Net Income Attributable to CCBG 4,287 8,565 8,481 7,325 6,436 8,458 5,990 6,003
Net Interest Income (FTE) $ 25,877 $ 26,378 $ 26,333 $ 26,116 $ 25,042 $ 24,513 $ 23,785 $ 22,917
Per Common Share:
Net Income Basic $ 0.26 $ 0.51 $ 0.51 $ 0.44 $ 0.38 $ 0.50 $ 0.35 $ 0.35
Net Income Diluted 0.25 0.51 0.50 0.44 0.38 0.50 0.35 0.35
Cash Dividends Declared 0.14 0.13 0.13 0.11 0.11 0.09 0.09 0.07
Diluted Book Value 19.50 19.40 19.14 18.76 18.35 18.00 17.40 17.15
Diluted Tangible Book Value(1) 14.20 14.37 14.09 13.70 13.31 12.96 12.45 12.20
Market Price:
High 30.62 30.95 28.00 25.00 25.87 26.95 25.91 25.99
Low 15.61 25.75 23.70 21.57 21.04 19.92 23.19 22.28
Close 20.12 30.50 27.45 24.85 21.78 23.21 23.34 23.63
Selected Average Balances:
Loans, Net $ 1,882,703 $
1,846,190
Earning Assets 2,751,880 2,694,700 2,670,081 2,719,217
2,704,802 2,554,482 2,535,292 2,566,006
Total Assets 3,038,788 2,982,204 2,959,310 3,010,662
2,996,511 2,849,245 2,826,924 2,861,104
Deposits 2,552,690 2,524,951 2,495,755 2,565,431
2,564,715 2,412,375 2,392,272 2,431,956
Shareowners' Equity 331,891 326,904 320,273 313,599
307,262 302,196 297,757 291,806
Common Equivalent Average Shares:
Basic 16,808 16,750 16,747 16,791 16,791 16,989 17,056 17,045
Diluted 16,842 16,834 16,795 16,818 16,819 17,050 17,125 17,104
Performance Ratios:
Return on Average Assets 0.57 % 1.14 % 1.14 % 0.98 % 0.87 % 1.18 % 0.84 % 0.84 %
Return on Average Equity 5.20 10.39 10.51 9.37 8.49 11.10 7.98 8.25
Net Interest Margin (FTE) 3.78 3.89 3.92 3.85 3.75 3.81 3.72 3.58
Noninterest Income as % of
Operating Revenue 37.52 34.50 34.67 32.95 33.51 35.22 36.04 35.52
Efficiency Ratio 74.89 72.48 69.27 73.02 75.01 70.21 77.37 80.07
Asset Quality:
Allowance for Credit Losses$ 21,083 $
13,905
14,120
Allowance for Credit Losses to Loans 1.13 % 0.75 % 0.78 % 0.79 %
0.78 % 0.80 % 0.80 % 0.78 %
Nonperforming Assets ("NPAs") 6,337 5,425 5,454 6,632 6,949 9,101 9,587 9,114
NPAs to Total Assets 0.21 0.18 0.19 0.22 0.23 0.31 0.34 0.32
NPAs to Loans plus OREO 0.34 0.29 0.30 0.36 0.39 0.51 0.54 0.52
Allowance to Non-Performing Loans 432.61 310.99 290.55 259.55 279.77 206.79 207.06 236.25
Net Charge-Offs to Average Loans 0.23 0.05 0.23 0.04 0.20 0.10 0.06 0.12 Capital Ratios: Tier 1 Capital 16.12 % 17.16 % 16.83 % 16.36 % 16.34 % 16.36 % 16.17 % 16.25 % Total Capital 17.19 17.90 17.59 17.13 17.09 17.13 16.94 17.00 Common Equity Tier 1 13.55 14.47 14.13 13.67 13.62 13.58 13.43 13.46 Leverage 10.81 11.25 11.09 10.64 10.53 10.89 10.99 10.69 Tangible Common Equity(1) 7.98 8.06 8.31 7.83 7.56 7.58 7.80 7.47 (1)Non-GAAP financial measure. See non-GAAP reconciliation on page 35.
(2)Includes
36
--------------------------------------------------------------------------------FINANCIAL OVERVIEW Results of Operations Performance Summary. Net income of$4.3 million , or$0.25 per diluted share, for the first quarter of 2020 compared to net income of$8.6 million , or$0.51 per diluted share, for the fourth quarter of 2019 and net income of$6.4 million , or$0.38 per diluted share, for the first quarter of 2019. Compared to the prior periods, the decline in net income for the first quarter of 2020 reflected a build in credit loss reserves in response to the potential effects of the COVID-19 pandemic (discussed further below). Net Interest Income. Taxable equivalent net interest income for the first quarter of 2020 was$25.9 million compared to$26.4 million for the fourth quarter of 2019 and$25.0 million for the first quarter of 2019. The decrease compared to the fourth quarter of 2019 reflected lower rates earned on overnight funds, investment securities and variable rate loans driven by the aggregate 150bp FED rate reduction during the first quarter of 2020. The increase compared to the first quarter of 2019 reflected loan growth and a reduction in the cost of our negotiated rate deposits, partially offset by lower rates on our earning assets. Provision and Allowance for Credit Losses. The provision for credit losses for the first quarter of 2020 was$5.0 million , which exceeded net loan charge-offs of$1.1 million . The increase in the provision reflected a build in reserves due to deteriorating economic conditions related to COVID-19. AtMarch 31, 2020 , the allowance for credit losses of$21.1 million represented 1.13% of outstanding loans (excluding HFS loans) and provided coverage of 433% of nonperforming loans. The adoption of ASC 326 ("CECL") onJanuary 1, 2020 resulted in a$3.3 million increase in the allowance for credit losses. Noninterest Income. Noninterest income for the first quarter of 2020 totaled$15.5 million , an increase of$1.7 million , or 11.9%, over the fourth quarter of 2019 and a$2.9 million , or 23.3%, increase over the first quarter of 2019.
The
increase over both prior periods was primarily attributable to higher mortgage banking revenues, which reflected the strategic alliance with Brand onMarch 1, 2020 (discussed further below). Higher deposit fees also contributed to the increase in both periods and bank card fees contributed to the increase over the first quarter of 2019. Noninterest Expense. Noninterest expense for the first quarter of 2020 totaled$31.0 million , an increase of$1.8 million , or 6.3%, over the fourth quarter of 2019 and$2.8 million , or 9.8%, over the first quarter of 2019. The increase over the fourth quarter of 2019 was primarily attributable to higher compensation expense and occupancy expense, partially offset by lower other real estate owned ("ORE0") expense. The increase in compensation and occupancy expense was primarily due to the aforementioned integration of Brand. The reduction in ORE expense reflected a$1.0 million gain on the sale of a banking office. The same aforementioned factors were the primary drivers in the variance compared to the first quarter of 2019. Impact of Capital City Home Loans (CCHL). For the month of March, CCHL's mortgage banking operations impacted our noninterest income and noninterest expense, and thus, the period over period comparison due to the late quarter closing. Overall, CCHL operations for the month of March had a nominal negative impact on our net income for the first quarter of 2020. Excluding CCHL, our noninterest income totaled$13.3 million and noninterest expense totaled$28.0 million for the first quarter of 2020. We provide further detail below on the impact of CCHL's operations on select noninterest income and expense categories as well as a discussion of trends realized by CCB. Financial Condition Earning Assets. Average earning assets were$2.752 billion for the first quarter of 2020, an increase of$57.2 million , or 2.1%, over the fourth quarter of 2020, and an increase of$47.1 million , or 1.7%, over the first quarter of 2019. The increase over the fourth quarter of 2019 was primarily driven by higher deposit balances which funded growth in the loan and investment portfolios. The change in the earning asset mix compared to the first quarter of 2019 reflected higher loan balances that were funded with overnight funds and investment balances. The Brand acquisition onMarch 1st increased average earning assets by$29 million for the first quarter of 2020. Loans. Average loans (excluding held for sale ("HFS") loans) increased$13.7 million , or 0.8%, compared to the fourth quarter of 2019 and$74.8 million , or 4.2% compared to the first quarter of 2019. Period end loan balances increased$26.5 million , or 1.4% over the fourth quarter of 2019 and$65.3 million , or 3.6% over the first quarter of 2019. Deposits. Average total deposits increased$27.7 million , or 1.1%, over the fourth quarter of 2019, and decreased$12.0 million , or 0.5%, from the first quarter of 2019. The increase compared to the fourth quarter of 2019 reflected increases in negotiated NOW public fund deposits and savings accounts. The decrease compared to the first quarter of 2019 was primarily due to declines in certificates of deposit, money market accounts, and one large, non-public negotiated account, which were partially offset by increases in noninterest bearing accounts and savings accounts. 37
-------------------------------------------------------------------------------- Credit Quality. Nonperforming assets totaled$6.3 million atMarch 31, 2020 , an increase of$0.9 million , or 16.8%, overDecember 31, 2019 and a decrease of$0.6 million , or 8.8%, fromMarch 31, 2019 . Nonperforming assets represented 0.21% of total assets atMarch 31, 2020 compared to 0.18% atDecember 31, 2019 and 0.23% atMarch 31, 2019 . Capital. AtMarch 31, 2020 , we were well-capitalized with a total risk-based capital ratio of 17.19% and a tangible common equity ratio (a non-GAAP financial measure) of 7.98% compared to 17.90% and 8.06%, respectively, atDecember 31, 2019 and 17.09% and 7.56%, respectively, atMarch 31, 2019 . AtMarch 31, 2020 , all of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards. RESULTS OF OPERATIONS Net Income For the first quarter of 2020, we realized net income of$4.3 million , or$0.25 per diluted share, compared to net income of$8.6 million , or$0.51 per diluted share, for the fourth quarter of 2019, and$6.4 million , or$0.38 per diluted share, for the first quarter of 2019. Net income for the first quarter of 2020 included a$5.0 million provision for credit losses, which exceeded net loan charge-offs of$1.1 million . The higher provision reflected a build in reserves due to deteriorating economic conditions related to the COVID-19 pandemic. Compared to the fourth quarter of 2019, the$5.8 million decrease in operating profit was attributable to a$5.2 million increase in the provision for credit losses, higher noninterest expense of$1.8 million , and lower net interest income of$0.5 million , partially offset by higher noninterest income of$1.7 million . Compared to the first quarter of 2019, the$3.2 million decrease in operating profit reflected a$4.2 million increase in the provision for credit losses and higher noninterest expense of$2.8 million , partially offset by higher noninterest income of$2.9 million and net interest income of$0.9 million .
A condensed earnings summary of each major component of our financial performance is provided below:
Three Months Ended
(Dollars in Thousands, except per share data) March 31, 2020 December 31, 2019 March 31, 2019
Interest Income $ 27,365 $ 28,008 $ 27,722
Taxable Equivalent Adjustments 104 124 134
Total Interest Income (FTE) 27,469 28,132 27,856
Interest Expense 1,592 1,754 2,814
Net Interest Income (FTE) 25,877 26,378 25,042
Provision for Credit Losses 4,990 (162) 767
Taxable Equivalent Adjustments 104 124 134
Net Interest Income After Provision for Credit Losses 20,783 26,416 24,141
Noninterest Income 15,478 13,828 12,552
Noninterest Expense 30,969 29,142 28,198
Income Before Income Taxes 5,292 11,102 8,495
Income Tax Expense 1,282 2,537 2,059
Net Loss Attributable to Noncontrolling Interests 277 - -
Net Income Attributable to Common Shareowners $ 4,287 $ 8,565 $ 6,436
Basic Net Income Per Share $ 0.26 $ 0.51 $ 0.38
Diluted Net Income Per Share $ 0.25 $ 0.51 $ 0.38
Net Interest Income
Net interest income represents our single largest source of earnings and is
equal to interest income and fees generated by earning assets less interest
expense paid on interest bearing liabilities. This information is provided on a
"taxable equivalent" basis to reflect the tax-exempt status of income earned on
certain loans and state and local government debt obligations. We provide an
analysis of our net interest income including average yields and rates in Table
I on page 50.
38
-------------------------------------------------------------------------------- Tax-equivalent net interest income for the first quarter of 2020 was$25.9 million compared to$26.4 million for the fourth quarter of 2019 and$25.0 million for the first quarter of 2019. The decrease in tax-equivalent net interest income compared to the fourth quarter of 2019 reflected lower rates earned on overnight funds, investment securities and variable rate loans, partially offset by a lower cost on our negotiated rate deposits. The increase in tax-equivalent net interest income compared to the first quarter of 2019 was primarily due to loan growth and a reduction in the cost of our negotiated rate deposits, partially offset by lower rates on our earning assets. Our net interest margin for the first quarter of 2020 was 3.78%, a decrease of 11 basis points compared to the fourth quarter of 2019 and an increase of three basis points over the first quarter of 2019. The decrease in margin compared to the fourth quarter of 2019 was attributable to lower rates on our variable and adjustable rate earning assets. The increase in the margin compared to the first quarter of 2019 was due to a 19 basis point reduction in our cost of funds, partially offset by a 16 basis point reduction in yield on earning assets. The federal funds target rate ended the first quarter of 2020 at a range of 0.00%-0.25%, after two unscheduled FED cuts during the quarter totaling 150 basis points. These rate decreases have resulted in lower repricing of our variable and adjustable rate earning assets and will put pressure on our net interest margin. We continue to prudently manage our deposit mix and overall cost of funds, which were 23 basis points for the first quarter of 2020 compared to 26 basis points for the fourth quarter of 2019. In response to the FED rate cuts in the first quarter of 2020, we lowered our rates for our negotiable rate deposit accounts to buffer the effect. We expect the significant decline in rates late in the first quarter of 2020 related to the FEDs emergency actions will put pressure on net interest income until rates normalize. Interest and fee income related to the SBA Payment Protection Program (See Loans below) will partially offset the effect of lower rates. Further, we will adjust deposit rates as needed to partially offset the effect. Due to highly competitive fixed-rate loan pricing in our markets, we continue to review our loan pricing and make adjustments where we believe appropriate and prudent.
Provision for Credit Losses
The provision for credit loss expense for the first quarter of 2020 was$5.0 million compared to negative provision of$0.2 million for the fourth quarter of 2019 and provision expense of$0.8 million for the first quarter of 2019. The increase in the provision over prior periods reflected a build in reserves due to deteriorating economic conditions related to the COVID-19 pandemic. We further discuss the various factors that impacted our provision expense for the first quarter of 2020 in the Note 3 - Loans Held for Investment and Allowance for Credit Losses in the Consolidated Financial Statements. 39 --------------------------------------------------------------------------------
Charge-off activity for the respective periods is set forth below:
Three Months Ended
(Dollars in Thousands, except per share data)
$ 362 $ 149 $ 95
Real Estate - Construction - 58 -
Real Estate - Commercial Mortgage 11 33 155
Real Estate - Residential 110 27 264
Real Estate - Home Equity 31 - 52
Consumer(1) 1,566 819 795
Total Charge-offs $ 2,080 $ 1,086 $ 1,361
RECOVERIES
Commercial, Financial and Agricultural $ 40 $ 127 $ 74
Real Estate - Construction - - -
Real Estate - Commercial Mortgage 191 266 70
Real Estate - Residential 40 116 44
Real Estate - Home Equity 33 25 32
Consumer(1) 695 300 284
Total Recoveries $ 999 $ 834 $ 504
Net Charge-offs $ 1,081 $ 252 $ 857
Net Charge-offs (Annualized) as a percent of Average Loans 0.23 % 0.05 % 0.20 %
Outstanding, Net of Unearned Income
(1)Includes overdrafts. Prior to the first quarter 2020, overdraft losses were reflected in noninterest income (deposit fees)
Noninterest Income Noninterest income for the first quarter of 2020 totaled$15.5 million compared to$13.8 million for the fourth quarter of 2019 and$12.6 million for the first quarter of 2019. CCHL's mortgage banking operations impacted our noninterest income (mortgage banking fees) for the first quarter of 2020, and thus, the period over comparison due to the late quarter closing. Excluding CCHL, our noninterest income totaled$13.3 million for the first quarter of 2020. Wealth management and bank card fees were negatively affected in the first quarter of 2020 by the COVID-19 pandemic. Market volatility atMarch 31st had an unfavorable impact on wealth management fees and slower consumer spending negatively impacted our bank card fees. Compared to fourth quarter of 2019, wealth management fees decreased by$0.2 million , or 5.7%, and bank card fees declined by$0.1 million , or 2.6%. Compared to the first quarter of 2019, we realized solid improvement in deposit fees of$0.2 million , or 5.0%, bank card fees of$0.2 million , or 6.7%, and wealth management fees of$0.3 million , or 12.1%. Noninterest income represented 37.5% of operating revenues (net interest income plus noninterest income) for the first quarter of 2020 compared to 34.5% for the fourth quarter of 2019 and 33.5% for the first quarter of 2019.
The table below reflects the major components of noninterest income.
Three Months Ended
(Dollars in Thousands) March 31, 2020 December 31, 2019 March 31, 2019
Deposit Fees $ 5,015 $ 4,980 $ 4,775
Bank Card Fees 3,051 3,131 2,855
Wealth Management Fees 2,604 2,761 2,323
Mortgage Banking Revenues 3,030 1,542 993
Other 1,778 1,414 1,606
Total Noninterest Income $ 15,478 $ 13,828 $ 12,552
40
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Significant components of noninterest income are discussed in more detail below.
Deposit Fees. Deposit fees for the first quarter of 2020 totaled$5.0 million , comparable to the fourth quarter of 2019 and an increase of$0.2 million , or 5.0%, over the first quarter of 2019. The increase over the first quarter of 2019 reflected higher overdraft fees.Bank Card Fees . Bank card fees for the first quarter of 2020 totaled$3.1 million , comparable to the fourth quarter of 2019 and an increase of$0.2 million , or 6.9%, over the first quarter of 2019. The increase over the first quarter of 2019 reflected various initiatives aimed at growing our bank card revenues, including a checking account acquisition initiative that began in early 2019 and periodic debit and credit card promotions. Wealth Management Fees. Wealth management fees, which include both trust fees (i.e., managed accounts and trusts/estates) and retail brokerage fees (i.e., investment, insurance products, and retirement accounts), totaled$2.6 million for the first quarter of 2020, a decrease of$0.2 million , or 5.7%, from the fourth quarter of 2019 and an increase of$0.3 million , or 12.1%, over the first quarter of 2019. The decrease compared to the fourth quarter of 2019 reflected lower trust fees attributable to a decrease in assets under management driven by market volatility atMarch 31st on which quarterly client fees are based. The increase over the first quarter of 2019 reflected higher retail brokerage fees which was attributable to account acquisition and higher trading activity in existing accounts. AtMarch 31, 2020 , total assets under management were approximately$1.561 billion compared to$1.774 billion atDecember 31, 2019 and$1.675 billion atMarch 31, 2019 . The reduction in assets under management from both prior periods reflected the decline in stock market values due primarily to COVID-19 and its anticipated impact on the economy going forward. Mortgage Banking Revenues. Mortgage banking revenues totaled$3.0 million for the first quarter of 2020, an increase of$1.5 million , or 96.5%, over the fourth quarter of 2019 and$2.0 million , or 205.1% over the first quarter of 2019. The increase over both prior periods was primarily attributable to aforementioned strategic alliance with CCHL that began onMarch 1, 2020 . Noninterest Expense Noninterest expense for the first quarter of 2020 totaled$31.0 million compared to$29.1 million for the fourth quarter of 2019 and$28.2 million for the first quarter of 2019. CCHL's mortgage banking operations impacted our noninterest expense for the first quarter of 2020, and thus, the period over comparison due to the late quarter closing. Excluding CCHL, our noninterest expense totaled$28.0 million for the first quarter of 2020. In the first quarter of 2020, we realized lower OREO expense attributable to a$1.0 million gain from the sale of a banking office. Expense variances versus prior periods including the impact of CCHL's operations on select expense categories for the first quarter of 2020 are discussed in further detail below. 41
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The table below reflects the major components of noninterest expense.
Three Months Ended
(Dollars in Thousands) March 31, 2020 December 31, 2019 March 31, 2019
Salaries $ 15,730 $ 13,374 $ 12,285
Associate Benefits 4,006 3,989 4,064
Total Compensation 19,736 17,363 16,349
Premises 2,383 2,228 2,061
Equipment 2,596 2,452 2,448
Total Occupancy 4,979 4,680 4,509
Legal Fees 468 546 376
Professional Fees 1,121 1,229 972
Processing Services 1,582 1,245 1,478
Advertising 584 386 497
Travel and Entertainment 317 282 204
Printing and Supplies 200 166 173
Telephone 610 693 680
Postage 186 173 169
Insurance - Other 296 205 391
Other Real Estate Owned, net (798) 102 363
Miscellaneous 1,688 2,072 2,037
Total Other 6,254 7,099 7,340
Total Noninterest Expense $ 30,969 $ 29,142 $ 28,198
Significant components of noninterest expense are discussed in more detail
below.
Compensation. Compensation expense totaled $19.7 million for the first quarter
of 2020, an increase of $2.4 million , or 13.7%, over the fourth quarter of 2019
and $3.4 million , or 20.7%, over the first quarter of 2019. The increases were
due to the aforementioned integration of CCHL which drove $2.3 million of the
increase over both prior periods, primarily reflective of commissions paid to
mortgage loan officers and to a lesser extent base salary and benefit expense
for CCHL operational personnel. Higher base salary expense (primarily related to
merit raises) and cash incentive expense at CCB contributed to the increase over
the first quarter of 2019.
Occupancy. Occupancy expense (including premises and equipment) totaled $5.0
million for the first quarter of 2020, an increase of $0.3 million , or 6.4%,
over the fourth quarter of 2019 and $0.5 million , or 10.4%, over the first
quarter of 2019. The increases were influenced by the aforementioned
integration of CCHL which drove $0.2 million of the increase over both prior
periods, primarily related to lease expense for loan production offices. Higher
maintenance and repairs expense at CCB contributed to the increase over the
first quarter of 2019.
Other. Other noninterest expense totaled $6.3 million for the first quarter of
2020, a decrease of $0.8 million , or 11.9%, from the fourth quarter of 2019 and
$1.1 million , or 14.8%, from the first quarter of 2019. The decrease from both
prior periods was primarily due to lower OREO expense driven by a $1.0 million
gain from the sale of a banking office in the first quarter of 2020.
Our operating efficiency ratio (expressed as noninterest expense as a percent of
the sum of taxable-equivalent net interest income plus noninterest income) was
74.89% for the first quarter of 2020 compared to 72.48% for the fourth quarter
of 2019 and 75.01% for the first quarter of 2019. The increase compared to the
fourth quarter of 2019 reflected the increase in noninterest expense related to
the aforementioned integration of CCHL in March of 2020. As this entity begins
to scale its operations, we expect our efficiency ratio to improve.
Income Taxes
We realized income tax expense of
42
--------------------------------------------------------------------------------FINANCIAL CONDITION Average earning assets were$2.752 billion for the first quarter of 2020, an increase of$57.2 million , or 2.1%, over the fourth quarter of 2019, and an increase of$47.1 million , or 1.7%, over the first quarter of 2019. The increase in average earning assets over the fourth quarter of 2019 was primarily driven by higher deposit balances which funded growth in the loan and investment portfolios. The change in the earning asset mix compared to the first quarter 2019 reflected higher loan balances that were funded with overnight funds and investment balances. The Brand acquisition on March 1stincreased average earning assets by$29 million for the first quarter of 2020.Investment Securities In the first quarter of 2020, our average investment portfolio increased$14.4 million , or 2.3%, over the fourth quarter of 2019 and decreased$23.9 million , or 3.6%, from the first quarter of 2019. Securities in our investment portfolio represented 23.1% of our average earning assets for the first quarter of 2020 compared to 23.0% for the fourth quarter of 2019, and 24.4% for the first quarter of 2019. For the remainder of 2020, we will continue to closely monitor liquidity levels and the interest rate environment to determine the extent to which investment cash flow may be reinvested into securities. The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management. Two types of classifications are approved for investment securities which are Available-for-Sale ("AFS") and Held-to-Maturity ("HTM"). During the first quarter of 2020, we purchased securities under both the AFS and HTM designations. AtMarch 31, 2020 ,$377.7 million , or 60.0%, of our investment portfolio was classified as AFS, and$251.8 million , or 40.0%, classified as HTM. The average maturity of our total portfolio atMarch 31, 2020 was 2.20 years compared to 2.11 years and 2.10 years atDecember 31, 2019 andMarch 31, 2019 , respectively. We determine the classification of a security at the time of acquisition based on how the purchase will affect our asset/liability strategy and future business plans and opportunities. We consider multiple factors in determining classification, including regulatory capital requirements, volatility in earnings or other comprehensive income, and liquidity needs. Securities in the AFS portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income component of shareowners' equity. HTM securities are acquired or owned with the intent of holding them to maturity. HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio. AtMarch 31, 2020 there were 42 positions (combined AFS and HTM) with unrealized losses totaling$0.1 million . GNMA mortgage-backed securities,U.S. treasury securities, and SBA investments carry the full faith and credit guarantee of theU.S. government and are 0% risk-weighted assets for regulatory capital purposes. Further, we consider the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if theU.S. government were to technically default. Loans Average loans (excluding held for sale ("HFS") loans) increased$13.7 million , or 0.8% compared to the fourth quarter of 2019 and$74.8 million , or 4.2%, compared to the first quarter of 2019. Average HFS loans increased$22.8 million and$27.5 million over the same respective periods and reflected the integration of CCHL. The increase (excluding HFS loans) reflected growth in all loan types except commercial, institutional, and HELOCs. The increase compared to the first quarter of 2019 reflected growth in all loan types, except institutional and HELOCs. Loan demand from the SBA Paycheck Protection Program ("PPP") has been extremely strong, and as ofMay 5, 2020 , the Company has obtained approximately 1,100 SBA loan approvals totaling$135 million for the first phase of funding and 1,000 loan approvals totaling$50 million for the second phase of funding. The majority, if not all of these loans are expected to be funded from our current on balance sheet liquidity. Without compromising our credit standards, changing our underwriting standards, or taking on inordinate interest rate risk, we continue to closely monitor our markets and make minor rate adjustments as necessary. 43 --------------------------------------------------------------------------------
Credit Quality Nonperforming assets (nonaccrual loans and OREO) totaled$6.3 million atMarch 31, 2020 , a$0.9 million increase overDecember 31, 2019 and a$0.6 million decrease fromMarch 31, 2019 . Nonaccrual loans totaled$4.9 million atMarch 31, 2020 , a$0.4 million increase overDecember 31, 2019 and a$0.2 million decrease fromMarch 31, 2019 . Gross additions to nonaccrual status totaled$3.6 million for the first quarter of 2020 compared to$3.0 million for the fourth quarter of 2019 and$2.5 million for the first quarter of 2019. The balance of OREO totaled$1.5 million atMarch 31, 2020 , an increase of$0.5 million overDecember 31, 2019 and a decrease of$0.4 million fromMarch 31, 2019 . For the first quarter of 2020, we added properties totaling$0.7 million , sold properties totaling$0.2 million , and recorded valuation adjustments totaling$0.1 million . Nonperforming assets represented 0.21% of total assets atMarch 31, 2020 compared to 0.18% atDecember 31, 2019 and 0.23% atMarch 31, 2019 . COVID-19 Exposure We continue to analyze our loan portfolio for segments that might be directly affected by the stressed economic and business conditions caused by the pandemic. Certain at-risk segments total 11% of our loan balances atMarch 31, 2020 , including hotel (3%), restaurant (1%), retail and shopping centers (5%), stock secured (1%), and other (1%). The other segment includes churches, non-profits, education, and recreational. To assist our clients, we have allowed short term 60 to 90 day loan extensions for affected borrowers with a majority being 60 day extensions. ThroughMay 5, 2020 , we have extended 2,100 loans totaling$310 million (17% of loan portfolio). Approximately 81% of these loans were for commercial borrowers and 19% for consumer borrowers. (Dollars in Thousands) March 31, 2020 December 31, 2019 March 31, 2019 Nonaccruing Loans:
Commercial, Financial and Agricultural $ 358 $ 446 $ 223
Real Estate - Construction - - 323
Real Estate - Commercial Mortgage 1,332 1,434 1,976
Real Estate - Residential 2,213 1,392 1,341
Real Estate - Home Equity 692 797 1,033
Consumer 279 403 151
Total Nonaccruing Loans ("NALs")(1)
1,463 953 1,902
Total Nonperforming Assets ("NPAs")
Past Due Loans 30 - 89 Days$ 5,077 $
4,871
Nonaccruing Loans/Loans 0.26 % 0.24 % 0.28 % Nonperforming Assets/Total Assets 0.21 0.18 0.23 Nonperforming Assets/Loans Plus OREO 0.34 0.29 0.39 Allowance/Nonaccruing Loans 432.61 310.99 279.77
(1) Nonaccrual TDRs totaling
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the
loans' amortized cost basis to present the net amount expected to be collected
on the loans. The allowance for credit losses is adjusted by a credit loss
provision which is reported in earnings, and reduced by the charge-off of loan
amounts, net of recoveries. Loans are charged off against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off. Expected credit loss inherent in
non-cancellable off-balance sheet credit exposures is provided through the
credit loss provision, but recorded as a separate liability included in other
liabilities.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical loan default and loss
experience provides the basis for the estimation of expected credit losses.
Adjustments to historical loss information incorporate management's view of
current conditions and forecasts.
Detailed information regarding the methodology for estimating the amount
reported in the allowance for credit losses is provided in Note 1 - Business and
Basis of Presentation/Allowance for Credit Losses in the Consolidated Financial
Statements.
44
-------------------------------------------------------------------------------- AtMarch 31, 2020 , the allowance for credit losses of$21.1 million represented 1.13% of outstanding loans (excluding HFS loans) and provided coverage of 433% of nonperforming loans compared to$13.9 million , or 0.75% and 311% of loans atDecember 31, 2019 . The adoption of ASC 326 ("CECL") onJanuary 1, 2020 had an impact of$4.0 million ($3.3 million increase in the allowance for credit losses and$0.7 million increase in the allowance for unfunded loan commitments (liability account)). The$3.9 million build in the allowance for credit losses for the first quarter of 2020 reflected a forecasted decline in economic conditions, primarily a higher rate of unemployment due to the impact of the COVID-19 pandemic. AtMarch 31, 2020 , we had not realized significant deterioration in our credit quality metrics primarily due to actions taken under a loan extension program. We will continue to adjust our allowance as the effects of the pandemic on our borrowers becomes more clear and in consideration of our ongoing risk mitigation efforts as well as the effectiveness of the government's stimulus actions, including the SBA Paycheck Protection Program and the Economic Impact Payments. Deposits Average total deposits were$2.553 billion for the first quarter of 2020, an increase of$27.7 million , or 1.1%, over the fourth quarter of 2019, and a decrease of$12.0 million , or 0.5%, over the first quarter of 2019. The increase in average deposits compared to the fourth quarter of 2019 reflected increases in negotiated NOW public fund deposits and savings accounts. The seasonal influx of negotiated public NOW accounts has most likely peaked for this cycle, and is expected to gradually decline through the fourth quarter of 2020. The decrease in average deposits compared to the first quarter of 2019 was primarily due to declines in certificates of deposit, money market accounts, and one large, non-public negotiated account, which were partially offset by increases in noninterest bearing accounts and savings accounts. Deposit levels remain strong, and average core deposits grew over last quarter. As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and our participation in the Paycheck Participation Program (PPP) to support small businesses, the potential exists for our deposit levels to be volatile over the coming quarters due to the government's distribution of economic impact payments and the funding of PPP loans. We closely monitor and manage deposit levels as part of our overall liquidity position and believe prudent pricing discipline remains the key to managing our mix of deposits.
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 interest rate risk and do not participate in
activities that give rise to significant market risk involving exchange rates,
commodity prices, or equity prices. Our risk management policies are primarily
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 risk limits, 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 is designed to capture optionality
factors such as call features and interest rate caps and floors imbedded in
investment and loan portfolio contracts. As with any method of analyzing
interest rate risk, there are certain shortcomings inherent in the interest rate
modeling methodology that we use. 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 the assumptions that we use in our modeling. Finally,
the methodology does not measure or reflect the impact that higher rates may
have on variable and adjustable-rate loan clients' ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
45
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We prepare a current base case and several alternative simulations at least once
per quarter and present the analysis to ALCO, with the risk metrics also
reported 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 maintain expected changes in our
net interest income and capital levels due to fluctuations in market interest
rates within acceptable limits. Management attempts to achieve this goal by
balancing, within policy limits, the volume of variable-rate liabilities with a
similar volume of variable-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 rates to market conditions on a continuing basis.
We test our balance sheet using varying interest rate shock scenarios to analyze
our interest rate risk. Average interest rates are shocked by plus or minus 100,
200, 300, and 400 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 12-month and 24-month periods, and the economic
value of equity at risk, do not exceed policy guidelines at the various interest
rate shock levels.
We 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 and do not necessarily indicate the long-term prospects or economic value of the institution.
ESTIMATED CHANGES IN NET INTEREST INCOME (1)
Percentage Change (12-month shock) +400 bp +300 bp +200 bp +100 bp -100 bp
Policy Limit -15.0% -12.5% -10.0% -7.5% -7.5%
March 31, 2020 13.6% 9.7% 5.9% 2.7% -2.1%
December 31, 2019 13.8% 10.3% 6.8% 3.4% -6.2%Percentage Change (24-month shock) +400 bp +300 bp +200 bp +100 bp -100 bp
Policy Limit -17.5% -15.0% -12.5% -10.0% -10.0%
March 31, 2020 31.6% 21.8% 12.2% 3.3% -8.4%
December 31, 2019 35.5% 26.4% 17.2% 8.2% -13.4%
The Net Interest Income at Risk position indicates that in the short-term, all
rising rate environments will positively impact the net interest margin of the
Company, while a declining rate environment of 100 bp will have a negative
impact on the net interest margin. Compared to the prior quarter-end, the
12-month and 24-month periods of Net Interest Income at Risk positions became
less favorable in the rising rate scenarios, and more favorable in the falling
rate scenario. The Net Interest Income position became more favorable in the
down 100 bp scenario as index rates were so low, that they can't adjust to the
full 100 bp reduction in rates. The Net Interest Income position became less
favorable in rising rate scenarios due to the increased level of loans below
their floors that will lag as rates rise until floors are pierced.
All measures of Net Interest Income at Risk are within our prescribed policy limits over the next 12-month and 24-month periods.
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 the aggregated discounted values of the
assets and liabilities is the economic value of equity, which, in theory,
approximates the fair value of our net assets.
46
--------------------------------------------------------------------------------ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1)
Changes in Interest Rates +400 bp +300 bp +200 bp +100 bp -100 bp
Policy Limit -30.0% -25.0% -20.0% -15.0% -15.0%
March 31, 2020 (Base Scenario) 56.1% 45.3% 32.5% 18.1% -41.3%
December 31, 2019 (Base 37.5% 30.2% 21.7% 12.2% -22.0%
Scenario)
March 31, 2020 (Alternate 38.0% 28.5% 17.2% 4.5% 7.7%
Scenario)(2)
Scenario)
(1) Down 200, 300, and 400 bp scenarios have been excluded due to the low interest rate environment.
(2) The calculation of EVE results in a negative value in the rates down 100 bp scenario in the base case, as it assigns a negative value to our nonmaturity deposits. Since we believe our nonmaturity deposits are highly valued core franchise deposits, we run an alternate EVE calculation which caps the value of our nonmaturity deposits at their book value, and results in an EVE of 7.7% in the down 100 bp scenario, which is within policy guidelines. AtMarch 31, 2020 , the economic value of equity results are favorable in all rising rate environments and are within prescribed tolerance levels with the exception of the rates down 100 bp scenario, as we have limited ability to lower our deposit rates relative to the decline in market rates. If we were to cap the value of our nonmaturity deposits at their book value in the down 100 bp scenario, EVE would be within the policy limit parameters for that scenario.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our ALCO and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, 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. AtMarch 31, 2020 , we had the ability to generate$1.362 billion in additional liquidity through all of our available resources (this excludes$197 million in overnight funds sold). In addition to the 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 Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases that certain credit facilities may no longer be available. We conduct a liquidity stress test on a quarterly basis based on events that could potentially occur at the Bank and report results to ALCO, ourMarket Risk Oversight Committee ,Risk Oversight Committee , and the Board of Directors. AtMarch 31, 2020 , we believe the liquidity available to us was sufficient to meet our on-going needs and execute our business strategy. 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 theU.S. Treasury ,U.S. governmental and federal agencies, and municipal governments. The weighted average life of the portfolio was approximately 2.20 years atMarch 31, 2020 , and the available for sale portfolio had a net unrealized pre-tax gain of$4.8 million . Our average overnight funds position (defined deposits with banks plus FED funds sold less FED funds purchased) was$234.4 million in the first quarter of 2020 compared to$228.1 million in the fourth quarter of 2019 and$265.7 million in the first quarter of 2019. The increase in the average net overnight funds compared to the fourth quarter of 2019 was driven by higher deposit balances, primarily seasonally higher public fund balances. The decrease in overnight funds compared to the first quarter of 2019 was driven by loan growth. It is anticipated that current on balance sheet liquidity levels will remain adequate to fund loans under the SBA PPP program in the coming months due to our strong overnight funds sold position, in addition to cash flow generated from the investment portfolio. However, if necessary, short-term advances from the FHLB or FRB could be considered. 47
-------------------------------------------------------------------------------- We expect our capital expenditures will be approximately$7.0 million over the next 12 months, which will primarily consist of office remodeling, office equipment/furniture, and technology purchases. Management expects that these capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations. Borrowings AtMarch 31, 2020 , short term borrowings totaled$76.5 million compared to$6.4 million atDecember 31, 2019 . The increase reflected the addition of residential mortgage warehouse borrowings related to the Brand acquisition. Amounts available under warehouse lines to fund the timing difference between residential real estate loan closings and investor funding totaled$125 million and had a balance of$73 million atMarch 31, 2020 . Additional detail on these borrowings is provided in Note 4 - Mortgage Banking Activities in the Consolidated Financial Statements. AtMarch 31, 2020 , fixed rate credit advances from the FHLB totaled$4.7 million in outstanding debt consisting of eight notes. During the first three months of 2020, the Bank made FHLB advance payments totaling approximately$0.7 million , which included an advance of$0.3 million that matured. No advances paid off, and we did not obtain any new FHLB advances during this period. 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 ownedDelaware statutory trusts. The first note for$30.9 million was issued to CCBG Capital Trust I inNovember 2004 , of which$10 million was retired inApril 2016 . The second note for$32.0 million was issued to CCBG Capital Trust II inMay 2005 . The interest payment for the CCBG Capital Trust I borrowing is due quarterly and adjusts quarterly to a variable rate of three-month LIBOR plus a margin of 1.90%. This note matures onDecember 31, 2034 . The interest payment for the CCBG Capital Trust II borrowing is due quarterly and adjusts quarterly to a variable rate of three-month LIBOR plus a margin of 1.80%. This note matures onJune 15, 2035 . The proceeds from these borrowings were used to partially fund acquisitions. Under the terms of each junior subordinated deferrable interest note, in the event of default or if we elect to defer interest on the note, we may not, with certain exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock. We are in the process of evaluating the impact of the expected discontinuation of LIBOR in 2021 on our two junior subordinated deferrable interest notes. CAPITAL Our capital ratios are presented below. AtMarch 31, 2020 , our regulatory capital ratios exceeded the threshold to be designated as "well-capitalized" under the Basel III capital standards. March 31, December 31, March 31, (Dollars in Thousands) 2020 2019 2019 Shareowner's Equity $ 328,507 $ 327,016$ 308,986 Leverage Ratio 10.81 % 11.25 % 10.53 % Tier 1 Capital Ratio 16.12 17.16 16.34 Total Risk Based Capital Ratio 17.19 17.90 17.09 Common Equity Tier 1 Capital Ratio 13.55 14.47 13.62 Tangible Common Equity Ratio(1) 7.98 % 8.06 % 7.56 %
(1) Non-GAAP financial measure. See non-GAAP reconciliation on page 35.
Shareowners' equity was$328.5 million atMarch 31, 2020 compared to$327.0 million atDecember 31, 2019 and$309.0 million atMarch 31, 2019 . For the first three months of 2020, shareowners' equity was positively impacted by net income of$4.3 million , a$2.6 million increase in the unrealized gain on investment securities, net adjustments totaling$0.5 million related to transactions under our stock compensation plans, and stock compensation accretion of$0.3 million . Shareowners' equity was reduced by a$3.1 million (net of tax) adjustment to retained earnings for the adoption of ASC 326 ("CECL"), common stock dividend of$2.4 million ($0.14 per share) and shares repurchases of$0.7 million (33,074 shares). AtMarch 31, 2020 , our common stock had a book value of$19.46 per diluted share compared to$19.40 atDecember 31, 2019 and$18.35 atMarch 31, 2019 . Book value is impacted by the net after-tax unrealized gains and losses on investment securities. AtMarch 31, 2020 , the net gain was$3.5 million compared to a$0.9 million net gain atDecember 31, 2019 and a$1.1 million net loss atMarch 31, 2019 . Book value is also impacted by the recording of our unfunded pension liability through other comprehensive income in accordance with Accounting Standards Codification Topic 715. AtMarch 31, 2020 , the net pension liability reflected in other comprehensive loss was$29.0 million compared to$29.0 million atDecember 31, 2019 and$26.8 million atMarch 31, 2019 . 48 -------------------------------------------------------------------------------- InJanuary 2019 , our Board of Directors authorized the repurchase of up to 750,000 shares of our outstanding common stock throughFebruary 2024 , which replaced our prior repurchase program that was set to expire inFebruary 2019 . 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. For the first three months of 2020, we repurchased 33,074 shares at an average price of$21.36 per share under the plan. During 2019, we purchased 77,000 shares at an average price of$23.40 .
OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.
AtMarch 31, 2020 , we had$583.9 million in commitments to extend credit and$6.4 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. If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet our on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, advances available from the FHLB and theFederal Reserve , and investment security maturities provide a sufficient source of funds to meet these commitments. Certain agreements provide that the commitments are unconditionally cancellable by the bank and for those agreements no allowance for credit losses has been recorded. We have recorded an allowance for credit losses on loan commitments that are not unconditionally cancellable by the bank, included in other liabilities on the consolidated statements of financial condition of$1.0 million atMarch 31, 2020 . CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2019 Form 10-K. The preparation of our Consolidated Financial Statements in accordance with GAAP and reporting practices applicable to the banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for (i) the allowance for credit losses, (ii) valuation of goodwill, (iii) pension benefits, and (iv) income taxes as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K. As discussed in Note 1 - Business and Basis of Presentation/Significant Accounting Policies, our policies related to the allowance for credit losses changed onJanuary 1, 2020 in connection with the adoption of ASC 326. The amount of the allowance for credit losses represents management's best estimate of current expected credit losses considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. 49
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TABLE I
AVERAGE BALANCES & INTEREST RATES
Three Months Ended
March 31, 2020 December 31, 2019 March 31, 2019
Average Average Average Average Average Average
(Dollars in Thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate
Assets:
Loans, Net of Unearned Income(1)(2)
5.06 %$ 1,846,190 $ 23,958 5.15 %$ 1,780,406 $ 22,718 5.18 % Taxable Securities(2) 629,512 2,995 1.91 610,046 3,186 2.08 618,127 3,387 2.20 Tax-Exempt Securities 5,293 25 1.86 10,327 43 1.67 40,575 158 1.56 Funds Sold 234,372 757 1.30 228,137 945 1.64 265,694 1,593 2.43 Total Earning Assets 2,751,880 27,469 4.01 % 2,694,700 28,132 4.14 % 2,704,802 27,856 4.17 % Cash & Due From Banks 56,958 53,174 53,848 Allowance For Loan Losses (14,389) (14,759) (14,347) Other Assets 244,339 249,089 252,208 TOTAL ASSETS$ 3,038,788 $ 2,982,204 $ 2,996,511 Liabilities: NOW Accounts$ 808,811 $ 725 0.36 %$ 755,625 $ 889 0.47 %$ 884,277 $ 1,755 0.80 % Money Market Accounts 212,211 117 0.22 227,479 170 0.30 239,516 247 0.42 Savings Accounts 379,237 46 0.05 372,518 46 0.05 364,783 44 0.05 Other Time Deposits 105,542 51 0.19 108,407 52 0.19 118,839 53 0.18 Total Interest Bearing Deposits 1,505,801 939 0.25 1,464,029 1,157 0.31 1,607,415 2,099 0.53 Short-Term Borrowings 32,915 132 1.61 7,448 16 0.87 11,378 35 1.26 Subordinated Notes Payable 52,887 471 3.52 52,887 525 3.88 52,887 608 4.60 Other Long-Term Borrowings 6,312 50 3.21 6,723 56 3.33 8,199 72 3.55 Total Interest Bearing Liabilities 1,597,915 1,592
0.40 % 1,531,087 1,754 0.45 % 1,679,879 2,814
0.68 %
Noninterest Bearing Deposits 1,046,889 1,060,922 957,300
Other Liabilities 59,587 63,291 52,070
TOTAL LIABILITIES 2,704,391 2,655,300 2,689,249
Temporary Equity 2,506 - -
TOTAL SHAREOWNERS' EQUITY 331,891 326,904 307,262
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $ 3,038,788 $ 2,982,204 $ 2,996,511
Interest Rate Spread 3.61 % 3.69 % 3.49 %
Net Interest Income $ 25,877 $ 26,378 $ 25,042
Net Interest Margin(3) 3.78 % 3.89 % 3.75 %
(1)Average Balances include nonaccrual loans.
(2)Interest income includes the effects of taxable equivalent adjustments using a 21% tax rate.
(3)Taxable equivalent net interest income divided by average earnings assets.
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