CAPITAL CITY BANK GROUP, INC. 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 2021 compares with prior
years.
Throughout this section,
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 2020 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 theSEC 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
The Bank offers a broad array of products and
services through a total of 57 full-service offices located inFlorida ,Georgia ,
and
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 2020 Form 10-K.
Strategic Alliance .
On
interest inBrand Mortgage Group, LLC ("Brand") which is now operated as aCapital City Home Loans
("CCHL").
CCHL was consolidated into CCBG's
financial
statements effective
See Note 1 - Business Combination in the 2020 Form 10-K
in the Consolidated Financial Statements. 30
RESPONSE TO COVID-19 PANDEMIC
The global and local responses to the COVID-19 pandemic
have shown significant progress, and our clients and
associates continue
to
adjust to the changing conditions presented by the
pandemic. However, the pandemic
has adversely impacted a broad range of industries in which the Company's
customers operate and could still impair their ability to
fulfill their financial obligations to the Company.
In addition, although our associates have generally been
available and working during the pandemic, COVID-19 has the potential to create widespread business continuity issues for
the Company.
taken several actions designed to cushion the economic fallout.
The
Coronavirus Aid, Relief and Economic Security ("CARES") Act
was signed into law at the end of
The goal of the CARES Act was to curb the economic downturn
through various measures, including direct financial aid to American families and economic
stimulus to significantly impacted industry sectors through programs
like the
Paycheck Protection Program ("PPP") and Main Street Lending
Program ("MSLP").
DuringDecember 2020 , many provisions of the CARES Act were extended through the end of 2021.
In addition to the general impact of COVID-19, certain provisions
of the CARES Act as well as other recent legislative and regulatory
relief efforts have had a material impact on
the Company's 2020 and 2021 operations and could continue to impact operations going
forward.
The Company's business is dependent
upon the willingness and ability of its associates and clients to
conduct banking and other financial transactions.
While it appears that epidemiological and macroeconomic
conditions are trending in a positive direction at
markets,
the Company could experience further adverse effects
on its business, financial condition, results of operations and cash
flows.
While it is not possible to know the full universe or extent that the impact
of
COVID-19, and any potential resulting measures to curtail its spread,
will have on the Company's
future operations, we discuss potential impacts on our financial performance in
more detail throughout parts of the MD&A section.
To protect the
health of our clients and associates and comply with applicable government
directives, we have modified our business practices as noted
below. COVID-19 Update ? We continue
to closely follow COVID-19 case count trends in our markets and adjust
our operations as needed to respond to the changing conditions presented by the COVID-19 pandemic. ?
All of our banking offices are open for business, but
continue to be subject to national guidelines
and local safety ordinances that are designed to protect our clients and associates. ? To limit building capacity, we continue
to utilize flexible in-office and remote working arrangements
for non-retail associates. ?
In support of social distancing measures, we encourage
clients to use our enhanced digital access options for banking products and access to sales associates.
NON-GAAP FINANCIAL MEASURES We present a
tangible common equity ratio and a tangible book value per
diluted share that, in each case, reduces shareowners' equity and total assets by the amount 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 31 is provided below.
2021
2020
2019
(Dollars in Thousands, except per share data) First Fourth Third Second First Fourth Third Second Shareowners' Equity (GAAP)$ 324,426 $ 320,837 $ 339,425 $ 335,057 $ 328,507 $ 327,016 $ 321,562 $ 314,595 Less:Goodwill (GAAP) 89,095 89,095 89,095 89,095 89,275 84,811 84,811 84,811 Tangible Shareowners' Equity (non -GAAP) A 235,331 231,742 250,330 245,962 239,232 242,205 236,751 229,784 Total Assets (GAAP) 3,929,884 3,798,071 3,587,041 3,499,524 3,086,523 3,088,953 2,934,513 3,017,654 Less:Goodwill (GAAP) 89,095 89,095 89,095 89,095 89,275 84,811 84,811 84,811 Tangible Assets (non-GAAP) B$ 3,840,789 $ 3,708,976 $ 3,497,946 $ 3,410,429 $ 2,997,248 $ 3,004,142 $ 2,849,702 $ 2,932,843 Tangible Common Equity Ratio (non-GAAP) A/B 6.13% 6.25% 7.16% 7.21% 7.98% 8.06% 8.31% 7.83% Actual Diluted Shares Outstanding (GAAP) C 16,875,719 16,844,997 16,800,563 16,821,743 16,845,462 16,855,161 16,797,241 16,773,449 Diluted Tangible Book Value (non-GAAP) A/C 13.94 13.76 14.90 14.62 14.20 14.37 14.09 13.70 31 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, Except 2021 2020 2019 Per Share Data) First Fourth Third Second First Fourth Third Second Summary of Operations : Interest Income$ 25,446 $ 26,154 $ 26,166 $ 26,512 $ 27,365 $ 28,008 $ 28,441 $ 28,665 Interest Expense 948 1,181 1,044 1,054 1,592 1,754 2,244 2,681 Net Interest Income 24,498 24,973 25,122 25,458 25,773 26,254 26,197 25,984 Provision for Credit Losses (982) 1,342 1,308 2,005 4,990 (162) 776 646 Net Interest Income After Provision for Credit Losses 25,480 23,631 23,814 23,453 20,783 26,416 25,421 25,338 Noninterest Income 29,826 30,523 34,965 30,199 15,478 13,828 13,903 12,770 Noninterest Expense 40,476 41,348 40,342 37,303 30,969 29,142 27,873 28,396 Income Before Income Taxes 14,830 12,806 18,437 16,349 5,292 11,102 11,451 9,712 Income Tax Expense 2,787 2,833 3,165 2,950 1,282 2,537 2,970 2,387 (Income) Loss Attributable to NCI (2,537) (2,227) (4,875) (4,253) 277 - - - Net Income Attributable to CCBG 9,506 7,746 10,397 9,146 4,287 8,565 8,481 7,325 Net Interest Income (FTE)$ 24,607 $ 25,082 $ 25,233 $ 25,564 $ 25,877 $ 26,378 $ 26,333 $ 26,116 Per Common Share : Net Income Basic$ 0.56 $ 0.46 $ 0.62 $ 0.55 $ 0.25 $ 0.51 $ 0.51 $ 0.44 Net Income Diluted 0.56 0.46 0.62 0.55 0.25 0.51 0.50 0.44 Cash Dividends Declared 0.15 0.15 0.14 0.14 0.14 0.13 0.13 0.11 Diluted Book Value 19.22 19.05 20.20 19.92 19.50 19.40 19.14 18.76 Diluted Tangible Book Value (1) 13.94 13.76 14.90 14.62 14.20 14.37 14.09 13.70 Market Price: High 28.98 26.35 21.71 23.99 30.62 30.95 28.00 25.00 Low 21.42 18.14 17.55 16.16 15.61 25.75 23.70 21.57 Close 26.02 24.58 18.79 20.95 20.12 30.50 27.45 24.85 Selected Average Balances : Loans Held for Investment$ 2,044,363 $ 1,993,470 $ 2,005,178 $ 1,982,960 $ 1,847,780 $ 1,834,085 $ 1,824,685 $ 1,814,401 Earning Assets 3,497,929 3,337,409 3,223,838 3,016,772 2,751,880 2,694,700 2,670,081 2,719,217 Total Assets 3,821,521 3,652,436 3,539,332 3,329,226 3,038,788 2,982,204 2,959,310 3,010,662 Deposits 3,239,508 3,066,136 2,971,277 2,783,453 2,552,690 2,524,951 2,495,755 2,565,431 Shareowners' Equity 326,330 343,674 340,073 333,515 331,891 326,904 320,273 313,599 Common Equivalent Average Shares: Basic 16,838 16,763 16,771 16,797 16,808 16,750 16,747 16,791 Diluted 16,862 16,817 16,810 16,839 16,842 16,834 16,795 16,818 Performance Ratios: Return on Average Assets 1.01 % 0.84 % 1.17 % 1.10 % 0.57 % 1.14 % 1.14 % 0.98 % Return on Average Equity 11.81 8.97 12.16 11.03 5.20 10.39 10.51 9.37 Net Interest Margin (FTE) 2.85 3.00 3.12 3.41 3.78 3.89 3.92 3.85 Noninterest Income as % of Operating Revenue 54.90 55.00 58.19 54.26 37.52 34.50 34.67 32.95 Efficiency Ratio 74.36 74.36 67.01 66.90 74.89 72.48 69.27 73.02 Asset Quality: Allowance for Credit Losses ("ACL")$ 22,026 $ 23,816 $ 23,137 $ 22,457 $ 21,083 $ 13,905 $ 14,319 $ 14,593 ACL to Loans HFI 1.07 % 1.19 % 1.16 % 1.11 % 1.13 % 0.75 % 0.78 % 0.79 % Nonperforming Assets ("NPAs") 5,472 6,679 6,732 8,025 6,337 5,425 5,454 6,632 NPAs to Total Assets 0.14 0.18 0.19 0.23 0.21 0.18 0.19 0.22 NPAs to Loans HFI plus OREO 0.27 0.33 0.34 0.40 0.34 0.29 0.30 0.36 ACL to Non-Performing Loans 410.78 405.66 420.30 322.37 432.61 310.99 290.55 259.55 Net Charge-Offs to Average Loans HFI (0.10) 0.09 0.11 0.05 0.23 0.05 0.23 0.04 Capital Ratios: Tier 1 Capital 16.08 % 16.19 % 16.77 % 16.59 % 16.12 % 17.16 % 16.83 % 16.36 % Total Capital 17.20 17.30 17.88 17.60 17.19 17.90 17.59 17.13 Common Equity Tier 1 13.63 13.71 14.20 14.01 13.55 14.47 14.13 13.67 Leverage 8.97 9.33 9.64 10.12 10.81 11.25 11.09 10.64 Tangible Common Equity (1) 6.13 6.25 7.16 7.21 7.98 8.06 8.31 7.83 (1)
Non-GAAP financial measure.
See non-GAAP reconciliation on page 30.
32 FINANCIAL OVERVIEW Results of Operations Performance Summary .
Net income was
for the first quarter of 2021 compared to net income
of
quarter of 2020 and net income of
or$0.25 per diluted share, for the first quarter of 2020. Net Interest Income . Taxable equivalent
net interest income for the first quarter of 2021 was
million compared to$25.1 million for the fourth quarter of 2020 and$25.9 million for the
first quarter of 2020.
The decrease compared to both prior periods reflected lower rates earned
on investment securities and variable/adjustable rate loans.
The year-over-year decline also reflected lower rates on overnight funds.
Partially offsetting these declines were higher volumes
of earning assets, including lower yielding loans from
the
SBA Paycheck Protection Program ("SBA PPP") and overnight
funds.
Provision and Allowance for Credit
Losses.
For the first quarter of 2021, we recorded a negative provision
of$1.0 million compared to provision expense of$1.3 million for the fourth
quarter of 2020 and
2020.
The negative provision for the first quarter of 2021 generally reflected
improving economic conditions and a lower level of expected
losses related to COVID-19.
Further, we recognized net loan recoveries
of
Noninterest Income .
Noninterest income for the first quarter of 2021 totaled
million, a decrease of
increase over the first quarter of 2020.
The decrease from the fourth quarter of 2020 was due to a seasonal decline in mortgage
banking revenues.
The increase over the first quarter of 2020 was also attributable to higher mortgage banking revenues due to the strategic
alliance with CCHL. Noninterest Expense .
Noninterest expense for the first quarter of 2021 totaled
million, a decrease of
increase over the first quarter of 2020.
The decrease from the fourth quarter of 2020 was primarily attributable to lower compensation
expense and other real estate owned ("OREO") expense.
The increase compared to the first quarter of 2020 reflected expenses added
by the CCHL acquisition as Core CCBG's
expenses remained flat. Financial Condition Earning Assets . Average
earning assets were
an increase of
over
the fourth quarter of 2020, and an increase of
or 27.1% over the first quarter of 2020.
The increase over both prior periods was primarily driven by higher deposit balances,
which funded growth in both overnight funds sold and SBA PPP loans.
Deposit balances increased as a result of strong core deposit
growth, in addition to funding retained at the bank from
SBA PPP loans, and various other stimulus programs. Loans . Average loans held
for investment ("HFI") increased
2.6%, over the fourth quarter of 2020 and$196.6 million , or 10.6%, over the first quarter of 2020.
Period end balances increased
quarter of 2020 and$195.3 million , or 10.5%, over the first quarter
of 2020.
In the first quarter of 2021, we originated an additional round
of
SBA PPP loans totaling
Excluding SBA PPP loans, average and period end loans increased
$23 million and$36 million , respectively,
over the fourth quarter of 2020.
Credit Quality .
Nonaccrual loans totaled
at
compared to
of
HFI loans) at
of HFI loans) at
Classified loans totaled$20.6 million ,$17.6
million, and
We continue
to closely monitor borrowers and loan portfolio segments impacted by the pandemic.
Approximately
COVID-19 loan extension have resumed making regularly scheduled payments
and we have experienced nominal problem loan migration
within that pool of loans. Deposits . Average total
deposits increased
quarter of 2020,
and$686.8 million , or 26.9%, over the first quarter of 2020.
Period end deposit balances grew
respectively, indicating
strong growth in core deposit balances.
Over the past twelve months, multiple government stimulus programs have been implemented,
including the CARES Act and the American Rescue Plan Act, which
are
responsible for a portion of this growth.
Capital
.
At
capital ratio of 17.20%
and a tangible common equity ratio (a non-GAAP financial measure) of 6.13% compared
to 17.30% and 6.25%, respectively,
atDecember 31, 2020 and 17.19% and 7.98%, respectively,
at
At
the threshold to be well- capitalized under the Basel III capital standards. 33 RESULTS OF OPERATIONSNet Income
For the first quarter of 2021, we realized net income of
net income of$7.7 million , or$0.46 per diluted share, for the fourth quarter
of 2020, and
of 2020.
Compared to the fourth quarter of 2020, the
increase in operating profit was attributable to a
million decrease in the provision for credit losses and lower noninterest expense
of
decrease in noninterest income and lower net interest income of$0.5 million .
Compared to the first quarter of 2020, the
increase in operating profit was attributable to a
increase in noninterest income and a lower provision for credit losses of
expense of$9.5 million and lower net interest income of$1.3 million .
This comparison reflects the acquisition of a 51% membership
interest in, and consolidation of, CCHL onMarch 1, 2020 .
A condensed earnings summary of each major component
of our financial performance is provided below:
Three Months Ended (Dollars in Thousands, except per share data)March 31, 2021 December 31, 2020 March 31, 2020 Interest Income$ 25,446 $ 26,154 $ 27,365 Taxable Equivalent Adjustments 109 109 104 Total Interest Income (FTE) 25,555 26,263 27,469 Interest Expense 948 1,181 1,592 Net Interest Income (FTE) 24,607 25,082 25,877 Provision for Credit Losses (982) 1,342 4,990 Taxable Equivalent Adjustments 109 109 104 Net Interest Income After Provision for Credit Losses 25,480 23,631 20,783 Noninterest Income 29,826 30,523 15,478 Noninterest Expense 40,476 41,348 30,969 Income Before Income Taxes 14,830 12,806 5,292 Income Tax Expense 2,787 2,833 1,282 Pre-Tax (Income) Loss Attributable to Noncontrolling Interests (2,537) (2,227) 277 Net Income Attributable to Common Shareowners$ 9,506 $ 7,746 $ 4,287 Basic Net Income Per Share$ 0.56 $ 0.46 $ 0.25 Diluted Net Income Per Share$ 0.56 $ 0.46 $ 0.25 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 44.
Tax-equivalent
net interest income for the first quarter of 2021 was
compared to
The decrease compared to both prior periods reflected lower
rates earned on investment securities and variable/adjustable rate loans.
The year-over-year decline also reflected lower rates on overnight
funds.
Partially offsetting these declines were higher volumes
of earning assets, including lower yielding SBA PPP loans and
overnight
funds.
Our net interest margin for the first quarter
of 2021 was 2.85%, a decrease of 15 basis points from
the fourth quarter of 2020 and a decline of 93 basis points from the first quarter of 2020.
The decreases were primarily attributable to significant growth in
overnight
funds which reduced our margin.
Our net interest margin for the first quarter of 2021
, excluding the impact of overnight funds in excess of$200 million , was 3.45%.
We anticipate
margin improvement from these levels as a portion
of our overnight funds are deployed into various strategies under consideration. 34
The federal funds target rate has remained
in the range of 0.00%-0.25% since
reduced its overnight rate by 150 basis points, and as a result we continue to experience
lower repricing of our variable/adjustable rate earning assets and investment securities. Interest and fee income related
to the SBA PPP (See Loans below) will partially offset
the effect of lower rates.
Our overall cost of funds remained low during
the first quarter of 2021 at 0.11%, a decrease
of three basis points compared to the fourth quarter of 2020, primarily due to a reduction in
short-term borrowings.
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 We recorded
a negative provision for credit losses of
of a negative
for the first quarter of 2021 compared to provision expense
of$1.3 million for the fourth quarter of 2020 and$5.0 million for the
first quarter of 2020.
The negative provision for the first quarter of 2021 generally reflected improving economic conditions and
a lower level of expected losses related to COVID-19.
Further, we recognized net loan recoveries of$0.5 million in the first quarter
of 2021.
We discuss the allowance
for credit losses and COVID-19 exposure further below.
Charge-off activity for the respective
periods is set forth below:
Three Months Ended (Dollars in Thousands, except per share data)March 31, 2021 December 31, 2020 March 31, 2020 CHARGE-OFFS Commercial, Financial and Agricultural$ 69 $ 104 $ 362 Real Estate - Construction - - - Real Estate - Commercial Mortgage - - 11 Real Estate - Residential 6 38 110 Real Estate - Home Equity 5 10 31 Consumer (1) 1,056 1,232 1,566 Total Charge -offs$ 1,136 $ 1,384 $ 2,080 RECOVERIES Commercial, Financial and Agricultural$ 136 $ 64 $ 40 Real Estate - Construction - 50 - Real Estate - Commercial Mortgage 645 27 191 Real Estate - Residential 75 153 40 Real Estate - Home Equity 124 40 33 Consumer (1) 678 564 695 Total Recoveries$ 1,658 $ 898 $ 999 Net Charge-offs (Recoveries)$ (522) $ 486 $ 1,081
Net Charge-offs (Recoveries) (Annualized)
to Average Loans HFI (0.10) % 0.09 % 0.23 % (1) Includes overdrafts. Noninterest Income
Noninterest income for the first quarter of 2021 totaled
quarter of 2020 and$15.5 million for the first quarter of 2020.
The decrease from the fourth quarter of 2020 was due to lower mortgage
banking revenues of$0.6 million and deposit fees of$0.4 million , partially
offset by higher bank card fees of
other income of$0.1 million .
Compared to the first quarter of 2020, the
reflected higher mortgage banking revenues of
and bank card fees of
lower deposit fees of$0.7 million . 35
Noninterest income represented 54.9% of operating revenues
(net interest income plus noninterest income) for the first quarter
of 2021 compared to 55.0% for the fourth quarter of 2020 and
37.5% for the first quarter of 2020.
The 51% ownership acquisition of CCHL and consolidation
into CCBG's financial statements
occurred on
The table below reflects the major components of noninterest income
for both Core CCBG and CCHL to help facilitate a better understanding
of
the period over period comparison.
Three Months EndedMar 31, 2021 Dec 31, 2020 Mar 31, 2020 (Dollars in thousands) Core CCBG CCHL Core CCBG CCHL Core CCBG CCHL Deposit Fees$ 4,271 -$ 4,713 $ -$ 5,015 $ -Bank Card Fees 3,618 - 3,462 - 3,051 - Wealth Management Fees 3,090 - 3,069 - 2,604 - Mortgage Banking Revenues 279 16,846 302 17,409 1,138 2,115 Other 1,296 426 1,205 363 1,459 96 Total Noninterest Income$ 12,554 $ 17,272 $ 12,751 $ 17,772 $ 13,267 $ 2,211
Significant components of noninterest income are
discussed in more detail below.
Deposit Fees .
Deposit fees for the first quarter of 2021 totaled
a decrease of
or 14.8%, from the first quarter of 2020.
The decrease from both prior periods was attributable to lower overdraft fees and reflected lower utilization
of our overdraft services,
which we believe is primarily attributable to government stimulus.
Bank Card Fees .
Bank card fees for the first quarter of 2021 totaled
million, an increase of
million, or 18.6%, over the first quarter of 2020.
Compared to both prior periods, the improvement reflected higher card activity driven by increased consumer spending
,
which we believe is reflective of the economic recovery
and additional government stimulus. 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
first quarter of 2021, comparable to the fourth quarter of 2020 and an increase
of
million, or 18.7%, over the first quarter of 2020.
The increase over the first quarter of 2020 reflected higher assets under management
and higher trading activity.
AtMarch 31, 2021 , total assets under management were approximately$2.088 billion compared
to
31, 2020. Mortgage Banking Revenues .
Mortgage banking revenues totaled
first quarter of 2021, a decrease of$0.6 million , or 3.3%, from the fourth quarter of 2020
and an increase of
of 2020.
The
decrease from the fourth quarter of 2020 reflected
a seasonal decline in production.
The increase over the first quarter of 2020 was attributable to the strategic alliance with CCHL that began
on
Noninterest Expense
Noninterest expense for the first quarter of 2021 totaled
quarter of 2020 and$31.0 million for the first quarter of 2020.
The decrease from the fourth quarter of 2020 was primarily attributable
to lower compensation expense of$0.6 million and other real estate owned
("OREO") expense of
by higher other expense of$0.5 million .
Compared to the first quarter of 2020, the
increase reflected expenses added by the CCHL acquisition as Core CCBG's expenses remained flat. 36
The 51% ownership acquisition of CCHL and consolidation
into CCBG's financial statements
occurred on
The table below reflects the major components of noninterest expense
for both Core CCBG and CCHL to help facilitate a better
understanding
of the year over year comparison.
Three Months EndedMar 31, 2021 Dec 31, 2020 Mar 31, 2020 (Dollars in thousands) Core CCBG CCHL Core CCBG CCHL Core CCBG CCHL Salaries$ 12,171 10,276$ 12,384 $ 10,398 $ 13,488 $ 2,242 Associate Benefits 3,396 221 3,740 200 3,957 49 Total Compensation 15,567 10,497 16,124 10,598 17,445 2,291 Premises 2,372 387 2,340 397 2,249 134 Equipment 2,734 474 2,716 523 2,499 97 Total Occupancy 5,106 861 5,056 920 4,748 231 Legal Fees 553 5 315 31 468 - Professional Fees 1,167 163 1,078 154 1,055 66 Processing Services 1,545 - 1,299 - 1,557 - Advertising 442 307 505 286 461 123 Travel and Entertainment 99 44 110 70 242 75 Printing and Supplies 176 48 172 30 187 13 Telephone 668 87 636 111 577 33 Postage 171 54 173 39 175 11 Insurance - Other 501 - 457 - 296 - Other Real Estate Owned, Net (118) - 570 (4) (798) - Miscellaneous 2,140 393 1,584 1,034 1,577 136 Total Other Expense 7,344 1,101 6,899 1,751 5,797 457 Total Noninterest Expense$ 28,017 $ 12,459 $ 28,079 $ 13,269 $ 27,990 $ 2,979
Significant components of noninterest expense are
discussed in more detail below.
Compensation
.
Compensation expense totaled
of 2021, a decrease of
or 32.1%, over the first quarter of 2020.
The decrease from the fourth quarter of 2020 was due to lower salary expense at Core CCBG (primarily
realized loan cost which is a credit offset to expense)
and lower associate benefit expense (associate insurance).
The increase over the first quarter of 2020 reflects the addition
of expenses for a full quarter from CCHL. Occupancy.
Occupancy expense (including premises and equipment) totaled
or 19.9%, over the first quarter of 2020.
Compared to the first quarter of 2020, the increase reflected expenses added from
the CCHL integration,
primarily lease expense for loan production offices.
Higher
expense for maintenance and repairs at Core CCBG also contributed,
but to a lesser extent. Other .
Other noninterest expense totaled
of 2021, a decrease of
fourth
quarter of 2020 and an increase of
.0%, over the first quarter of 2020.
The increase over the first quarter of 2020 reflected the addition of CCHL expenses and higher
OREO expense at Core CCBG driven by a
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-equivale
nt net interest income plus noninterest income) was 74.36% for the first quarter
of 2021 compared to 74.36%
for the fourth quarter of 2020 and 74.89% for the first quarter of 2020. Income Taxes We realized income
tax expense of
for the first quarter of 2021 compared to
of 2020 and
first quarter of 2020.
Tax
expense for the fourth quarter of 2020 was unfavorably
impacted by a
Compared to the first quarter of 2020, the decrease in our effective tax rate
was attributable to converting CCHL to a partnership for tax
purposes in the second quarter of 2020.
Absent discrete items, we expect our annual effective tax
rate to approximate 18%-19% in 2021.
37 FINANCIAL CONDITION Average earning
assets were
increase of
over the first quarter of 2020.
The increase over both prior periods was primarily driven by higher deposit balances, which funded
growth in both overnight funds sold and SBA PPP loans.
Deposit balances increased as a result of strong core deposit growth,
in addition to funding retained at the bank from SBA PPP loans, and
various other stimulus programs.Investment Securities
In the first quarter of 2021, our average investment
portfolio increased
quarter of 2020 and decreased$102.1 million , or 16.1%, from the
first quarter of 2020.
Securities in our investment portfolio represented 15.2% of our average earning assets for the first quarter of 2021
compared to 15.5% for the fourth quarter of 2020, and 23.1% for the
first quarter of 2020.
For the remainder of 2021, we will continue to monitor the
interest rate environment and look for opportunities to purchase additional investment securities that align with the overall
investment strategy of the Company.
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 2021, we purchased securities under
the AFS designation. AtMarch 31, 2021 ,
and
The average maturity of our total portfolio at March
31, 2021 was 2.78 years compared to 2.09 years and 2.20 years
atDecember 31, 2020
and
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.
At
there were 89 positions (combined AFS and HTM) with unrealized
losses totaling
GNMA mortgage-backed securities, US Treasuries,
and SBA securities carry the full faith and credit
guarantee of theUS Government , and are 0% risk-weighted assets for regulatory
purposes. The municipal bond positions are either pre
-refunded with government securities, or are AAA rated. None of these
positions with unrealized losses are considered impaired, and
all are expected to mature at par.
Further, we believe the long history of
no credit losses on these securities indicates that the expectation
of
nonpayment of the amortized cost basis is zero.
Loans HFI Average loans
HFI increased
and increased$196.6 million , or 10.6%, over the first quarter of 2020.
Compared to the fourth quarter of 2020, average loan balances
increased across all loan types except institutional and consumer, which
declined slightly.
Compared to the first quarter of 2020, average loan balances increased
across all loan types except institutional, consumer,
and HELOCs.
Period-end HFI loans increased
the fourth quarter of 2020 and increased$195.3 million , or 10.5%,
over the first quarter of 2020.
In the first quarter of 2021, we originated an additional
round of SBA PPP loans totaling
commercial
loan category) which averaged
Approximately
since
the inception of this program.
Through the first quarter of 2021, approximately
million in SBA PPP loans have been forgiven and paid-off ($36 million in the first quarter of 2021
and
Forgiveness applications are expected to remain strong over the next three months for SBA PPP loans
funded in 2020, and then over the course of 2021 for the
SBA PPP loans funded in 2021.
SBA PPP loan fee income totaled approximately
for the first quarter of 2021.
AtMarch 31, 2021 we had$5.0 million (net) in deferred SBA PPP loan fees.
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 adjustments as necessary. 38 Credit Quality
Nonperforming assets (nonaccrual loans and OREO) totaled
fromDecember 31, 2020 and a$0.9 million decrease fromMarch 31, 2020 .
Nonaccrual loans totaled
a$0.5 million decrease fromDecember 31, 2020 and a$0.5 million increase
over
The balance of OREO totaled$0.1 million atMarch 31, 2021 , a decrease of$0.7 million and$1.4
million from
respectively. (Dollars in Thousands)March 31, 2021 December 31, 2020 March 31, 2020 Nonaccruing Loans: Commercial, Financial and Agricultural$ 150 $ 161 $ 358 Real Estate - Construction 179 179 -
Real Estate - Commercial Mortgage
1,256
1,412
1,332
Real Estate - Residential
3,150
3,130
2,213
Real Estate - Home Equity
462
695
692
Consumer
165
294
279
Total Nonaccruing
Loans ("NALs")
(1)
$
5,362
$
5,871
$
4,874
Other Real Estate Owned
110
808
1,463
Total Nonperforming
Assets ("NPAs")
$
5,472
$
6,679
$
6,337
Past Due Loans 30 - 89 Days
$
2,622
$
4,594
$
5,077
Performing Troubled Debt Restructurings
13,597
13,887
15,934
Nonaccruing Loans/Loans HFI
0.26
%
0.29
%
0.26
%
Nonperforming Assets/Total
Assets
0.14
0.18
0.21Nonperforming Assets/Loans HFI Plus OREO
0.27 0.33 0.34 Allowance/Nonaccruing Loans 410.78 405.66 432.61 (1)
Nonaccrual TDRs totaling
31, 2021,December 31, 2020 andMarch 31, 2020 , respectively.
COVID-19 Exposure
We continue
to monitor our loan portfolio for segments that continue to be
affected by the pandemic.
To assist our clients, we have extended loans totaling$333 million of which 75% were
for commercial borrowers and 25% were for consumer
borrowers.
Approximately
with these borrowers have resumed making regularly
scheduled
payments of which loan balances totaling
were over 30 days delinquent and an additional
on nonaccrual status atMarch 31, 2021 .
Of the
classified at
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 uncollectability 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. 39
At
loans HFI totaled
atDecember 31, 2020 and$21.1 million atMarch 31, 2020 .
Activity within the allowance is detailed in Note 3 to the consolidated
financial
statements.
The
first quarter of 2021 reflected net loan recoveries totaling
million and the release of
which reflected lower expected loan losses related to COVID-19.
AtMarch 31, 2021 , the allowance represented 1.07% of loans HFI and
provided coverage of 411% of nonperforming
loans compared to 1.19% and 406%, respectively,
at
at
AtMarch 31, 2021 , excluding SBA PPP loans (100% government guaranteed), the
allowance represented 1.19% of loans HFI compared to 1.30%
at
At
unfunded commitments totaled
at
2020.
The allowance for unfunded commitments is recorded in other liabilities.
Deposits
Average total
deposits were
increase of
of 2020.
Over the past twelve months, multiple government stimulus programs have been implemented, including the CARES Act
and the American Rescue Plan Act, which are responsible for
a portion of this growth. Given these large increases, the
potential exists for our deposit levels to be volatile throughout 2021
due to the uncertain timing of the outflows of the stimulus related balances
and the economic recovery.
It is anticipated that current liquidity levels will remain robust due to our strong overnight funds
sold position.
We monitor
deposit rates on an ongoing basis and adjust if necessary,
as a 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.
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. 40
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, 2021 40.6% 30.0% 19.4% 9.3% -4.0%December 31, 2020 39.0% 28.7% 18.7% 9.0% -3.0% 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, 2021 53.0% 37.0% 21.2% 6.2% -14.2%December 31, 2020 54.2% 38.3% 22.6% 7.6% -10.9%
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 100bp will have a
negative impact on the net interest margin. Compared to the prior quarter-end, the 12-month
Net Interest Income at Risk position became more favorable in
all rising rate scenarios, and was slightly less favorable in the falling
rate scenario due to the higher level of nonmaturity deposits, and
our limited ability to lower deposit rates relative to the decline
in the market. Compared to the prior quarter-end, the 24-month
Net Interest Income at Risk position became slightly less favorable
in all rate scenarios primarily due to the lower amount
of SBA PPP loan fees in year two compared to year one.
All measures of Net Interest Income at Risk in rising rate
environments are within our prescribed policy limits over the next 12
-month
and 24-month periods. We
are out of compliance in the down 100bp scenario for the 24-month
period due to our limited ability to lower our deposit rates relative to the decline in market rates.
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. 41 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, 2021 166.7% 132.0% 93.3% 50.0% -54.0%March 31, 2021 (Alternate Scenario) (2) 115.9% 87.8% 56.5% 22.1% -3.1%December 31, 2020 160.9% 127.5% 89.9% 48.4% -90.4%
(1) Down 200, 300, and 400 bp scenarios have been
excluded due to the low interest rate environment. (2)
For the rates down 100 bp scenario,
the high negative percentage change
is due to a negative value assigned 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 projected
value of our nonmaturity deposits at their book value.
At
the economic value of equity results are favorable in all
rising rate environments and are within prescribed tolerance levels, but are out of policy in the down 100
bp EVE scenario. EVE output in the down 100bp scenario is extreme
given the historically low rate environment, in conjunction with
the high overnight funds sold balance.
Management is monitoring the EVE analysis in light of the economic recovery and evaluating
various strategies.
As management believes there is more permanency to recent deposit growth, we are planning to invest an additional
the bank's asset sensitivity.
In an alternate EVE scenario where the value of our nonmaturity
deposits are capped at their book value, we are within policy guidelines.
As the interest rate environment and the dynamics of the
economy continue to change, additional simulations will be analyzed
to
address not only the changing rate environment, but also
the changing balance sheet mix, measured over multiple
years, to help assess the risk to the Company. 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,
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.
At
we had the ability to generate
through all of our available resources (this excludes$852 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,
our
and the Board of Directors. AtMarch 31, 2021 , 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 the
U.S. governmental and federal agencies, and municipal governments.
The weighted average life of the portfolio was approximately 2.78
years atMarch 31, 2021 ,
and the available for sale portfolio had a net unrealized pre
-tax gain of
Our average overnight funds position (defined deposits with banks
plus Fed funds sold less Fed funds purchased) was
million
during the first quarter of 2021 compared to an average
net overnight funds sold position of
of
2020 and
The increase compared to both prior periods was driven by
deposit inflows related to pandemic related stimulus programs and growth in our core deposits (see Deposits ). 42 We expect
our capital expenditures will be approximately
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
At
average short term borrowings totaled
to
2020 and$32.9 million atMarch 31, 2020 .
The variance over both prior periods was attributable to the
fluctuation of residential mortgage warehouse borrowings at CCHL.
Additional detail on these borrowings is provided in Note
4 - Mortgage Banking Activities in the Consolidated Financial Statements.
AtMarch 31, 2021 ,
fixed rate credit advances from the FHLB totaled
million in outstanding debt consisting of five notes. During the first three months of 2021, the Bank made FHLB advance payments
totaling approximately
which included one advance that paid off, and another that matured.
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 owned
The first note for$30.9 million was issued toCCBG Capital Trust
I in
of which
The second note for$32.0 million was issued toCCBG Capital Trust
II in
The interest payment for the
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 on
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 on our two junior
subordinated deferrable interest notes.
During the second quarter of 2020,
we entered into a derivative cash flow hedge of our interest rate risk
related to our subordinated debt.
The notional amount of the derivative is
the CCBG Capital Trust I borrowing and
of the CCBG Capital Trust II borrowing).
The interest rate swap agreement requires CCBG to pay fixed
and receive variable (Libor plus spread) and has an average all-in fixed rate of 2.50% for
10 years.
Additional detail on the interest rate swap agreement is provided
in
Note 5 - Derivatives in the Consolidated Financial Statements.
Capital
Our capital ratios are presented in the Selected Quarterly
Financial Data table on page 31.
AtMarch 31, 2021 , our regulatory capital ratios exceeded the threshold to be designated as "well-capita
lized" under the Basel III capital standards.
Shareowners' equity was
31, 2021 compared to
and$328.5 million atMarch 31, 2020 .
During the first quarter of 2021, shareowners' equity was positively
impacted by net income of$9.5 million , a$1.6 million increase in fair value of the interest rate swap
related to subordinated debt, net adjustments totaling
million related to transactions under our stock compensation plans, stock
compensation accretion of
decrease in the accumulated other comprehensive loss for our pension
plan.
Shareowners' equity was reduced by a common stock dividend
of$2.5 million ($0.15 per share), reclassification of$4.2 million
to temporary equity to increase the redemption value of the
non-controlling
interest in CCHL, and a
unrealized gain on investment
securities.
At
of
December 31, 2020 and$19.50 atMarch 31, 2020 .
Book value is impacted by the net after-tax unrealized gains and losses on
AFS investment securities.
At
to a
net gain atMarch 31, 2020 .
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.
At
31, 2020.
This
liability is re-measured annually onDecember 31 st
based on an actuarial calculation of our pension liability.
Significant assumptions used in calculating the liability are discussed in our
2020 Form 10-K "Critical Accounting Policies" and include the
weighted average discount rate used to measure the present value of
the pension liability, the
weighted average expected long-term rate of return on pension plan assets, and the assumed rate of annual compensation
increases, all of which will vary when re-measured.
The discount rate assumption used to calculate the pension liability is subject to long-term corporate bond rates atDecember 31 st . The estimated impact to the pension liability based on a 25-basis point
increase or decrease in long-term corporate bond rates used
to discount the pension obligation would decrease or increase the pension
liability by approximately
from
the
43
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, 2021 ,
we had
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 no
t
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, which is included
in other liabilities on the consolidated statements of financial condition
and
totaled
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note
1 to the Consolidated Financial Statements included in our
2020 Form 10-K.
The preparation of our Consolidated Financial Statement
s
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 2020 Form 10-K.
44 TABLE I AVERAGE BALANCES & INTEREST RATES Three Months EndedMarch 31, 2021 December 31, 2020 March 31, 2020 Average Average Average Average Average Average (Dollars in Thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate Assets: Loans Held for Sale$ 106,242 $ 970 3.70 %$ 121,052 $ 878 3.85 %$ 34,923 $ 210 2.64 % Loans Held for Investment (1)(2) 2,044,363 22,483 4.46 1,993,470 23,103 4.55 1,847,780 23,482 5.11Taxable Securities 528,842 1,863 1.41 513,277 2,072 1.61 629,512 2,995 1.91Tax-Exempt Securities (2) 3,844 25 2.61 4,485 30 2.71 5,293 25 1.86 Funds Sold 814,638 214 0.11 705,125 180 0.10 234,372 757 1.30 Total Earning Assets 3,497,929 25,555 2.96 % 3,337,409 26,263 3.14 % 2,751,880 27,469 4.01 % Cash & Due From Banks 68,978 73,968 56,958 Allowance For Loan Losses (24,128) (23,725) (14,389) Other Assets 278,742 264,784 244,339 TOTAL ASSETS$ 3,821,521 $ 3,652,436 $ 3,038,788 Liabilities: NOW Accounts$ 985,517 $ 76 0.03 %$ 879,564 $ 66 0.03 %$ 808,811 $ 725 0.36 % Money Market Accounts 269,829 33 0.05 261,543 34 0.05 212,211 117 0.22 Savings Accounts 492,252 60 0.05 466,116 57 0.05 379,237 46 0.05 Other Time Deposits 102,089 39 0.15 102,809 44 0.17 105,542 51 0.19 Total Interest Bearing Deposits 1,849,687 208 0.05 1,710,032 201 0.05 1,505,801 939 0.25 Short-Term Borrowings 67,033 412 2.49 95,280 639 2.67 32,915 132 1.61 Subordinated Notes Payable 52,887 307 2.32 52,887 311 2.30 52,887 471 3.52 Other Long-Term Borrowings 2,736 21 3.18 3,700 30 3.18 6,312 50 3.21 Total Interest Bearing Liabilities 1,972,343 948 0.19 % 1,861,899 1,181 0.25 % 1,597,915 1,592 0.40 % Noninterest Bearing Deposits 1,389,821 1,356,104 1,046,889 Other Liabilities 111,050 74,605 59,587 TOTAL LIABILITIES 3,473,214 3,292,608 2,704,391 Temporary Equity 21,977 16,154 2,506 TOTAL SHAREOWNERS' EQUITY 326,330 343,674 331,891 TOTAL LIABILITIES, TEMPORARY AND SHAREOWNERS' EQUITY$ 3,821,521 $ 3,652,436 $ 3,038,788 Interest Rate Spread 2.77 % 2.88 % 3.61 % Net Interest Income$ 24,607 $ 25,082 $ 25,877 Net Interest Margin (3) 2.85 % 3.00 % 3.78 % (1)
Average Balances include net loan fees, discounts and premiums and nonaccrual loans.
Interest income includes loan fees of
and
the three months ended
March 31, 2020 , respectively. (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.
45 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
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