XNAS:CCBG Capital City Bank Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2012

OR

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

For the transition period from ____________ to ____________

 
Commission File Number: 0-13358
 
CCBG LOGO
 
 
(Exact name of registrant as specified in its charter)

Florida
 
59-2273542
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

217 North Monroe Street, Tallahassee, Florida
 
32301
(Address of principal executive office)
 
(Zip Code)

(850) 402-7000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
   
(Do not check if smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

At April 30, 2012, 17,191,090 shares of the Registrant's Common Stock, $.01 par value, were outstanding.



 
 

 


CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS

PART I – Financial Information
Page
 
Item 1.
Consolidated Financial Statements (Unaudited)
 
 
Consolidated Statements of Financial Condition – March 31, 2012 and December 31, 2011
4
 
Consolidated Statements of Operations and Comprehensive Income – Three Months Ended March 31, 2012 and 2011
5
 
Consolidated Statement of Changes in Shareowners’ Equity – Three Months Ended March 31, 2012
6
 
Consolidated Statements of Cash Flow – Three Months Ended March 31, 2012 and 2011
7
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
40
     
Item 4.
Controls and Procedures
40
     
PART II – Other Information
 
 
Item 1.
Legal Proceedings
40
     
Item 1A.
Risk Factors
40
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
     
Item 3.
Defaults Upon Senior Securities
40
     
Item 4.
Mine Safety Disclosure
40
     
Item 5.
Other Information
40
     
Item 6.
Exhibits
41
     
Signatures
 
42
     
     
     


 
- 2 -

 


INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control.  The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties.  Our actual future results may differ materially from those set forth in our forward-looking statements.

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”; (b) “Risk Factors” in Part I, Item 1A., as updated in our subsequent quarterly reports filed on Form 10-Q, and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7 as well as:
 
§  
our need and our ability to incur additional debt or equity financing;
§  
the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision;
§  
continued depression of the market value of the Company that could result in an impairment of goodwill;
§  
the frequency and magnitude of foreclosure of our loans;
§  
the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
§  
our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;
§  
legislative or regulatory changes, including the Dodd-Frank Act;
§  
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
§  
restrictions on our operations, including the inability to pay dividends without our regulators’ consent;
§  
the effects of the health and soundness of other financial institutions, including the FDIC’s need to increase Deposit Insurance Fund assessments;
§  
our ability to declare and pay dividends;
§  
changes in the securities and real estate markets;
§  
changes in monetary and fiscal policies of the U.S. Government;
§  
inflation, interest rate, market and monetary fluctuations;
§  
the effects of harsh weather conditions, including hurricanes, and man-made disasters;
§  
our ability to comply with the extensive laws and regulations to which we are subject;
§  
the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
§  
increased competition and its effect on pricing;
§  
technological changes;
§  
negative publicity and the impact on our reputation;
§  
the effects of security breaches and computer viruses that may affect our computer systems;
§  
changes in consumer spending and saving habits;
§  
growth and profitability of our noninterest income;
§  
changes in accounting principles, policies, practices or guidelines;
§  
the limited trading activity of our common stock;
§  
the concentration of ownership of our common stock;
§  
anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
§  
other risks described from time to time in our filings with the Securities and Exchange Commission; and
§  
our ability to manage the risks involved in the foregoing.

However, other factors besides those referenced also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.  Any forward-looking statements made by us or on our behalf speak only as of the date they are made.  We do not undertake to update any forward-looking statement, except as required by applicable law.


 
- 3 -

 

PART I.      FINANCIAL INFORMATION
Item 1.        CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

   
Unaudited
       
(Dollars In Thousands, Except Share Data)
 
March 31, 2012
   
December 31, 2011
 
ASSETS
           
Cash and Due From Banks
 
$
50,567
   
$
54,953
 
Federal Funds Sold and Interest Bearing Deposits
   
418,678
     
330,361
 
Total Cash and Cash Equivalents
   
469,245
     
385,314
 
                 
Investment Securities, Available-for-Sale
   
284,490
     
307,149
 
                 
Loans, Net of Unearned Income
   
1,578,884
     
1,628,683
 
Allowance for Loan Losses
   
(31,217
)
   
(31,035
)
Loans, Net
   
1,547,667
     
1,597,648
 
                 
Premises and Equipment, Net
   
111,408
     
110,991
 
Goodwill
   
84,811
     
84,811
 
Other Intangible Assets
   
565
     
673
 
Other Real Estate Owned
   
58,100
     
62,600
 
Other Assets
   
103,992
     
92,126
 
Total Assets
 
$
2,660,278
   
$
2,641,312
 
                 
LIABILITIES
               
Deposits:
               
Noninterest Bearing Deposits
 
$
605,774
   
$
618,317
 
Interest Bearing Deposits
   
1,579,930
     
1,554,202
 
Total Deposits
   
2,185,704
     
2,172,519
 
                 
Short-Term Borrowings
   
42,188
     
43,372
 
Subordinated Notes Payable
   
62,887
     
62,887
 
Other Long-Term Borrowings
   
42,826
     
44,606
 
Other Liabilities
   
75,876
     
65,986
 
Total Liabilities
   
2,409,481
     
2,389,370
 
                 
SHAREOWNERS' EQUITY
               
Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares outstanding
   
-
     
-
 
Common Stock, $.01 par value, 90,000,000 shares authorized; 17,182,090 and 17,160,274 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
   
172
     
172
 
Additional Paid-In Capital
   
38,101
     
37,838
 
Retained Earnings
   
236,299
     
237,461
 
Accumulated Other Comprehensive Loss, Net of Tax
   
(23,775
)
   
(23,529
)
Total Shareowners' Equity
   
250,797
     
251,942
 
Total Liabilities and Shareowners' Equity
 
$
2,660,278
   
$
2,641,312
 

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



 
- 4 -

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Unaudited)

   
Three Months Ended March 31,
 
(Dollars in Thousands, Except Per Share Data)
 
2012
 
2011
 
INTEREST INCOME
         
Interest and Fees on Loans
 
$
22,005
 
$
23,947
 
Taxable Exempt Securities
   
794
   
852
 
Tax Exempt Securities
   
106
   
219
 
Federal Funds Sold
   
225
   
171
 
Total Interest Income
   
23,130
   
25,189
 
INTEREST EXPENSE
             
Deposits
   
643
   
1,258
 
Short-Term Borrowings
   
8
   
111
 
Subordinated Notes Payable
   
382
   
340
 
Other Long-Term Borrowings
   
436
   
494
 
Total Interest Expense
   
1,469
   
2,203
 
NET INTEREST INCOME
   
21,661
   
22,986
 
Provision for Loan Losses
   
4,793
   
4,133
 
Net Interest Income After Provision For Loan Losses
   
16,868
   
18,853
 
NONINTEREST INCOME
             
Service Charges on Deposit Accounts
   
6,309
   
5,983
 
Data Processing
   
675
   
974
 
Asset Management Fees
   
1,015
   
1,080
 
Retail Brokerage Fees
   
758
   
729
 
Mortgage Banking Fees
   
848
   
617
 
Bank Card Fees
   
2,771
   
2,496
 
Gain on Sale of Visa Stock
   
-
   
3,172
 
Other
   
1,210
   
1,283
 
Total Noninterest Income
   
13,586
   
16,334
 
NONINTEREST EXPENSE
             
Salaries and Associate Benefits
   
16,843
   
16,577
 
Occupancy, Net
   
2,266
   
2,396
 
Furniture and Equipment
   
2,201
   
2,226
 
Intangible Amortization
   
108
   
353
 
Other Real Estate
   
3,513
   
3,677
 
Other
   
7,666
   
8,102
 
Total Noninterest Expense
   
32,597
   
33,331
 
               
(LOSS) INCOME BEFORE INCOME TAXES
   
(2,143
)
   
1,856
 
Income Tax (Benefit) Expense
   
(981
)
   
546
 
               
NET (LOSS) INCOME
 
$
(1,162
)
$
1,310
 
               
BASIC NET (LOSS) INCOME PER SHARE
 
$
(0.07
)
$
0.08
 
DILUTED NET (LOSS) INCOME PER SHARE
 
$
(0.07
)
$
0.08
 
               
Average Basic Shares Outstanding
   
17,181,333
   
17,121,602
 
Average Diluted Shares Outstanding
   
17,181,333
   
17,130,118
 
               
Other Comprehensive (Loss) Income:
             
  Change in Net Unrealized Gain On
  Available-For-Sale Securities (net of  tax)
   
(246
)
 
34
 
Total Comprehensive (Loss) Income
 
$
(1,408
)
$
1,344
 
               
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
- 5 -

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY
(Unaudited)

 
 
(Dollars In Thousands, Except Share Data)
 
Shares Outstanding
   
Common Stock
   
Additional
Paid-In Capital
 
Retained Earnings
   
Accumulated Other Comprehensive Loss, Net of Taxes
   
Total
                                   
Balance, January 1, 2012
 
17,160,274
 
$
172
 
$
37,838
 
$
237,461
   
$
(23,529
)
 
$
251,942
 
Comprehensive Income:
                                       
Net Loss
       
-
   
-
   
(1,162
   
-
     
(1,162
Change in Net Unrealized Gain on Available-for-Sale Securities (net of tax benefit of $150)
       
-
   
-
   
-
     
(246
   
(246
Total Comprehensive Loss
       
-
   
-
   
-
     
-
     
(1,408
Stock Performance Plan Compensation
       
-
   
56
   
-
     
-
     
56
 
Issuance of Common Stock
 
21,816
   
-
   
207
   
-
     
-
     
207
 
Balance, March 31, 2012
 
17,182,090
 
$
172
 
$
38,101
 
$
236,299
   
$
(23,775
)
 
$
250,797
 

 
 
(Dollars In Thousands, Except Share Data)
 
Shares Outstanding
   
Common Stock
   
Additional
Paid-In Capital
 
Retained Earnings
   
Accumulated Other Comprehensive Loss, Net of Taxes
   
Total
                                   
Balance, January 1, 2011
 
17,100,081
 
$
171
 
$
36,920
 
$
237,679
   
$
(15,751
)
 
$
259,019
 
Comprehensive Income:
                                       
Net Income
       
-
   
-
   
1,310
     
-
     
1,310
 
Change in Net Unrealized Gain on Available-for-Sale Securities (net of tax expense of $25)
       
-
   
-
   
-
     
34
     
34
 
Total Comprehensive Income
       
-
   
-
   
-
     
-
     
1,344
 
Cash Dividends ($0.10 per share)
       
-
   
-
   
(1,713
)
   
-
     
(1,173
)
Stock Performance Plan Compensation
       
-
   
215
   
-
     
-
     
215
 
Issuance of Common Stock
 
27,155
   
-
   
413
   
-
     
-
     
413
 
Balance, March 31, 2011
 
17,127,236
 
$
171
 
$
37,548
 
$
237,276
   
$
(15,717
)
 
$
259,278
 

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

 
- 6 -

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)

   
Three Months Ended March 31,
 
(Dollars in Thousands)
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (Loss) Income
 
$
(1,162
 
$
1,310
 
Adjustments to Reconcile Net (Loss) Income to
Cash Provided by Operating Activities:
               
Provision for Loan Losses
   
4,793
     
         4,133
 
Depreciation
   
1,669
     
           1,753
 
Amortization of Premiums, Discounts, and Fees (net)
   
827
     
           1,023
 
Amortization of Intangible Assets
   
108
     
          353
 
Net Decrease in Loans Held-for-Sale
   
7,664
     
4,081
 
Stock-Based Compensation
   
56
     
                   215
 
Deferred Income Taxes
   
277
     
          918
 
Loss on Sales and Write-Downs of Other Real Estate Owned
   
2,097
     
2,672
 
Net (Increase) Decrease in Other Assets
   
(11,993
)
   
        745
 
Net Increase in Other Liabilities
   
9,890
     
3,440
 
Net Cash Provided By Operating Activities
   
14,226
     
         20,643
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities Available-for-Sale:
               
Purchases
   
(18,986
)
   
       (24,677
)
Sales
   
805
     
           -
 
Payments, Maturities, and Calls
   
39,586
     
         22,090
 
Net Decrease in Loans
   
33,479
     
       25,020
 
Proceeds From Sales of Other Real Estate Owned
   
6,479
     
8,979
 
Purchases of Premises and Equipment
   
(2,086
)
   
       (315
)
Net Cash Provided By In Investing Activities
   
59,277
     
               31,097
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net Increase in Deposits
   
13,185
     
       43,071
 
Net Decrease in Short-Term Borrowings
   
(2,731
)
   
         (6,278
Increase in Other Long-Term Borrowings
   
560
     
                  790
 
Repayment of Other Long-Term Borrowings
   
(793
)
   
         (841
)
Dividends Paid
   
-
     
         (1,713
)
Issuance of Common Stock
   
207
     
         413
 
Net Cash Provided by Financing Activities
   
10,428
     
              35,442
 
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
83,931
     
87,182
 
                 
Cash and Cash Equivalents at Beginning of Period
   
385,314
     
236,193
 
Cash and Cash Equivalents at End of Period
 
$
469,245
   
$
323,375
 
                 
Supplemental Disclosure:
               
Loans Transferred to Other Real Estate Owned
  $
4,076
    $
9,078
 
Transfer of Current Portion of Long-Term Borrowings
 
$
1,547
   
$
-
 

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

 
- 7 -

 


CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation.  The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of CCBG, and its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank” and together with the Company).  All material inter-company transactions and accounts have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

The consolidated statement of financial condition at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

NOTE 2 - INVESTMENT SECURITIES

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

 
March 31, 2012
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
143,726
   
$
1,093
   
$
-
   
$
144,819
 
U.S. Government Agency
 
22,715
     
45
     
35
     
22,725
 
States and Political Subdivisions
 
58,323
     
164
     
28
     
58,459
 
Mortgage-Backed Securities
 
46,453
     
739
     
62
     
47,130
 
Other Securities(1)
 
11,957
     
-
     
600
     
11,357
 
Total Investment Securities
$
283,174
   
$
2,041
   
$
725
   
$
284,490
 

 
December 31, 2011
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
168,001
   
$
1,463
   
$
-
   
$
169,464
 
U.S. Government Agency
 
14,758
     
27
     
48
     
14,737
 
States and Political Subdivisions
 
58,946
     
186
     
38
     
59,094
 
Mortgage-Backed Securities
 
51,775
     
809
     
87
     
52,497
 
Other Securities(1)
 
11,957
     
-
     
600
     
11,357
 
Total Investment Securities
$
305,437
   
$
2,485
   
$
773
   
$
307,149
 

 (1)
Includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $6.5 million and $4.8 million, respectively, at March 31, 2012 and December 31, 2011.
 
 

 
- 8 -

 

Securities with an amortized cost of $153.8 million and $102.1 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes.

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

Maturity Distribution. As of March 31, 2012, the Company's investment securities had the following maturity distribution based on contractual maturities:

(Dollars in Thousands)
 
Amortized Cost
   
Market Value
 
Due in one year or less
 
$
118,346
   
$
118,646
 
Due after one through five years
   
151,800
     
153,329
 
Due after five through ten years
   
1,071
     
1,158
 
Due over ten years
   
                        -
     
                        -
 
No Maturity
   
11,957
     
11,357
 
Total Investment Securities
 
$
283,174
   
$
284,490
 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Other Than Temporarily Impaired Securities. The following table summarizes the investment securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position:

     
March 31, 2012
     
 
Less Than
12 Months
 
Greater Than
12 Months
 
Total
 
(Dollars in Thousands)
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
U.S. Treasury
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
    U.S. Government Agency
   
9,210
     
35
     
-
     
-
     
9,210
     
35
 
    States and Political Subdivisions
   
12,687
     
28
     
-
     
-
     
12,687
     
28
 
    Mortgage-Backed Securities 
   
7,309
     
55
     
1,412
     
7
     
8,721
     
62
 
    Other Securities
   
-
     
-
     
600
     
600
     
600
     
600
 
    Total Investment Securities
 
$
29,206
   
$
118
   
$
2,012
   
$
607
   
$
31,218
   
$
725
 

     
December 31, 2011
     
 
Less Than
12 Months
 
Greater Than
12 Months
 
Total
 
(Dollars in Thousands)
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
U.U.S. Treasury
 
$
9,698
   
$
48
   
$
-
   
$
-
   
$
9,698
   
$
48
 
    U.S. Government Agency
   
-
     
-
     
-
     
-
     
-
     
-
 
    States and Political Subdivisions
   
14,597
     
38
     
-
     
-
     
14,597
     
38
 
    Mortgage-Backed Securities 
   
11,612
     
87
     
37
     
-
     
11,649
     
87
 
    Other Securities
   
-
     
-
     
600
     
600
     
600
     
600
 
    Total Investment Securities
 
$
35,907
   
$
173
   
$
637
   
$
600
   
$
36,544
   
$
773
 

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

 
- 9 -

 
 
At March 31, 2012, the Company had securities of $283.2 million with net pre-tax unrealized gains of $1.3 million on these securities, of which $31.2 million have unrealized losses totaling $0.7 million.  Approximately $0.1 million of these securities have been in a loss position for less than 12 months.  These securities are primarily in a loss position because they were acquired when the general level of interest rates was lower than that on March 31, 2012.  The Company believes that the losses in these securities are temporary in nature and that the full principal will be collected as anticipated.  Because the declines in the market value of these investments are attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.  One preferred bank stock issue for $0.6 million has been in a loss position for greater than 12 months.  The Company continues to closely monitor the fair value of this security as the subject bank continues to experience negative operating trends.

NOTE 3 – LOANS, NET

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

(Dollars in Thousands)
 
March 31, 2012
   
December 31, 2011
 
Commercial, Financial and Agricultural
 
$
132,119
   
$
130,879
 
Real Estate-Construction
   
30,238
     
18,892
 
Real Estate-Commercial Mortgage
   
624,528
     
639,140
 
Real Estate-Residential(1)
   
361,433
     
385,621
 
Real Estate-Home Equity
   
240,800
     
244,263
 
Real Estate-Loans Held-for-Sale
   
13,561
     
21,225
 
Consumer
   
176,205
     
188,663
 
Loans, Net of Unearned Income
 
$
1,578,884
   
$
1,628,683
 

(1)  
Includes loans in process with outstanding balances of $6.6 million and $12.5 million for March 31, 2012 and December 31, 2011, respectively.

Net deferred fees included in loans were $1.6 million at March 31, 2012 and December 31, 2011, respectively.

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

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

 
(Dollars in Thousands)
 
30-59
DPD
   
60-89
DPD
   
Over 90
DPD
   
Total
Past Due
   
Total
Current
   
Total
Loans
 
March 31, 2012
                                   
Commercial, Financial and Agricultural
  $ 596     $ 32     $ -     $ 628     $ 130,683     $ 132,119  
Real Estate - Construction
    310       -       -       310       33,302       34,554  
Real Estate - Commercial Mortgage
    1,640       13       -       1,653       580,594       624,528  
Real Estate -  Residential
    3,238       471       12       3,721       334,957       364,123  
Real Estate - Home Equity
    879       245       13       1,137       235,565       240,800  
Consumer
    1,459       310       -       1,769       180,445       182,760  
Total Past Due Loans
  $ 8,122     $ 1,071     $ 25     $ 9,218     $ 1,495,546     $ 1,578,884  

 
(Dollars in Thousands)
 
30-59
DPD
   
60-89
DPD
   
Over 90
DPD
   
Total
Past Due
   
Total
Current
   
Total
Loans
 
December 31, 2011
                                   
Commercial, Financial and Agricultural
  $ 307     $ 49     $ 46     $ 402     $ 129,722     $ 130,879  
Real Estate - Construction
    -       -       -       -       26,034       26,367  
Real Estate - Commercial Mortgage
    3,070       646       -       3,716       592,604       639,140  
Real Estate -  Residential
    7,983       3,031       58       11,072       350,133       386,877  
Real Estate - Home Equity
    1,139       500       95       1,734       238,246       244,263  
Consumer
    2,355       345       25       2,725       197,272       201,157  
Total Past Due Loans
  $ 14,854     $ 4,571     $ 224     $ 19,649     $ 1,534,011     $ 1,628,683  



 
- 10 -

 

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

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

 
March 31, 2012
 
December 31, 2011
(Dollars in Thousands)
Nonaccrual
 
Over 90 Days
 
Nonaccrual
 
Over 90 Days
Commercial, Financial and Agricultural
$
808
 
$
-
 
$
755
 
$
46
Real Estate - Construction
 
943
   
-
   
334
   
-
Real Estate - Commercial Mortgage
 
46,886
   
-
   
42,820
   
-
Real Estate -  Residential
 
25,445
   
12
   
25,671
   
58
Real Estate - Home Equity
 
4,098
   
13
   
4,283
   
95
Consumer
 
546
   
-
   
1,160
   
25
Total Nonaccrual Loans
$
78,726
 
$
25
 
$
75,023
 
$
224

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

The following table presents loans individually evaluated for impairment by class of loans:
 
(Dollars in Thousands)
 
Unpaid Principal Balance
   
Recorded Investment With No Allowance
   
 
Recorded Investment With Allowance
   
 
 
Related Allowance
 
March 31, 2012:
                       
Commercial, Financial and Agricultural
 
$
1,809
   
$
1,000
   
$
809
   
$
241
 
Real Estate - Construction
   
1,266
     
82
     
1,184
     
123
 
Real Estate - Commercial Mortgage
   
69,898
     
33,982
     
35,916
     
5,543
 
Real Estate -  Residential
   
33,826
     
5,868
     
27,958
     
4,789
 
Real Estate - Home Equity
   
3,355
     
652
     
2,703
     
580
 
Consumer
   
46
     
15
     
31
     
26
 
Total 
 
$
110,200 
   
$
41,599
   
$
68,601 
   
$
11,302 
 
                                 
December 31, 2011:
                               
Commercial, Financial and Agricultural
 
$
1,653
   
$
671
   
$
982
   
$
311
 
Real Estate - Construction
   
511
     
-
     
511
     
68
 
Real Estate - Commercial Mortgage
   
65,624
     
19,987
     
45,637
     
5,828
 
Real Estate -  Residential
   
36,324
     
6,897
     
29,427
     
4,702
 
Real Estate - Home Equity
   
3,527
     
645
     
2,882
     
239
 
Consumer
   
143
     
90
     
53
     
26
 
Total
 
$
107,782 
   
$
28,290 
   
$
79,492 
   
$
11,174 
 

 
 
- 11 -

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

   
Three Months Ended March 31,
 
   
2012
   
2011
 
 
(Dollars in Thousands)
 
Average Recorded Investment
   
Total
Interest Income
   
Average Recorded Investment
   
 Total
Interest Income
 
                         
Commercial, Financial and Agricultural
 
$
1,731
   
$
20
   
$
1,540
   
$
34
 
Real Estate - Construction
   
889
     
4
     
2,561
     
8
 
Real Estate - Commercial Mortgage
   
67,761
     
481
     
46,064
     
315
 
Real Estate -  Residential
   
35,075
     
235
     
34,757
     
288
 
Real Estate - Home Equity
   
3,441
     
25
     
3,308
     
26
 
Consumer
   
95
     
4
     
141
     
14
 
Total
 
$
108,992
   
$
769
   
$
88,371
   
$
685
 

Troubled Debt Restructurings (“TDRs”).  TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower that it would not otherwise consider.  In these instances, as part of a work-out alternative, the Company will defer cash payments required as part of the loan agreement through either a principal moratorium or extension of the loan term.  The impact of the TDR modifications and defaults are factored into the allowance for loan losses on a loan-by-loan basis as all TDRs are, by definition, impaired loans.  Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent. 

The following table presents loans classified as TDRs:

   
March 31, 2012
   
December 31, 2011
(Dollars in Thousands)
 
Accruing
   
Nonaccruing
   
Accruing
    Nonaccruing
 
Commercial, Financial and Agricultural
  $ 956     $ 200     $ 694     $ -
Real Estate - Construction
    323       -       178       -
Real Estate - Commercial Mortgage
    21,199       11,382       20,062       12,029
Real Estate -  Residential
    13,977       1,192       15,553       947
Real Estate - Home Equity
    897       -       1,161       -
Consumer
    21       -       27       -
Total TDRs
  $ 37,373     $ 12,774     $ 37,675     $ 12,976

Loans classified as TDRs during the three months ended March 31, 2012 are presented in the table below.  The modifications made during the reporting period involved either an extension of the loan term or a principal moratorium and the financial impact of these modifications was not material.
       
(Dollars in Thousands)
 
Number of Contracts
   
Pre-Modified
Recorded
Investment
   
Post-Modified
Recorded
Investment
 
Commercial, Financial and Agricultural
   
4
   
$
656
   
$
660
 
Real Estate - Construction
   
-
     
-
     
 -
 
Real Estate – Commercial Mortgage
   
13
     
 4,565
     
 4,695
 
Real Estate - Residential
   
8
     
 859
     
 909
 
Real Estate - Home Equity
   
-
     
-
     
 -
 
Consumer
   
-
     
-
     
 -
 
Total TDRs
   
25
   
$
6,080
   
$
6,264
 
 
 
 
- 12 -

 

 
Loans modified as TDRs within the previous 12 months that have subsequently defaulted during the three months ended March 31, 2012 are presented in the table below.

(Dollars in Thousands)
 
Number of
Contracts
 
Post-Modified
Recorded
Investment
 
Commercial, Financial and Agricultural
-
 
$
-
 
Real Estate - Construction
-
   
-
 
Real Estate – Commercial Mortgage
3
   
1,562
 
Real Estate - Residential
7
   
1,038
 
Real Estate - Home Equity
1
   
157
 
Consumer
-
   
-
 
Total TDRs
11
 
$
2,757
 

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

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

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

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

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

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

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

 
 
- 13 -

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

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

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

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

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

The following table presents the risk category of loans by segment:
 
 
 
(Dollars in Thousands)
 
Commercial, Financial, Agriculture
   
 
Real Estate
   
 
Consumer
   
 
Total
 
March 31, 2012
                       
Special Mention
  $ 9,835     $ 48,931     $ 54     $ 58,820  
Substandard
    10,300       207,959       1,037       219,296  
Doubtful
    37       6,221       -       6,258  
Total Criticized Loans
  $ 20,172     $ 263,111     $ 1,091     $ 284,374  

 (Dollars in Thousands)
 
Commercial, Financial, Agriculture
   
 
Real Estate
   
 
Consumer
   
 
Total
 
December 31, 2011
                       
Special Mention
  $ 4,883     $ 43,787     $ 79     $ 48,749  
Substandard
    9,804       202,734       1,699       214,237  
Doubtful
    111       7,763       -       7,874  
Total Criticized Loans
  $ 14,798     $ 254,284     $ 1,778     $ 270,860  



 
- 14 -

 
 
Allowance for Loan Losses.  The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans.  Loans are charged-off to the allowance when losses are deemed to be probable and reasonably quantifiable.

The following table details the activity in the allowance for loan losses by portfolio class for the three months ended March 31, 2012 and 2011.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 
(Dollars in Thousands)
Commercial,
 Financial, Agricultural
 
Real Estate Construction
Real Estate
 Commercial Mortgage
Real Estate Residential
Real Estate
Home Equity
 
 
Consumer
 
 
Unallocated
 
 
Total
March 31, 2012
                                                 
Beginning Balance
 
$
1,534
 
$
1,133
 
$
10,660
 
$
12,518
 
$
2,392
 
$
1,887
 
$
911
 
$
31,035
 
Provision for Loan Losses
   
158
   
628
   
1,166
   
1,511
   
1,207
   
41
   
82
   
4,793
 
Charge-Offs
   
(268
)
 
-
   
(1,532
)
 
(1,967
)
 
(892
)
 
(732
)
 
-
   
(5,391
)
Recoveries
   
69
   
-
   
138
   
163
   
18
   
392
   
-
   
780
 
Net Charge-Offs
   
(199
)
 
-
   
(1,394
)
 
(1,804
)
 
(874
)
 
(340
)
       
(4,611
)
Ending Balance
 
$
1,493
 
$
1,761
 
$
10,432
 
$
12,225
 
$
2,725
 
$
1,588
 
$
993
 
$
31,217
 
                                                   
Period-end amount allocated to:
                                                 
Loans Individually Evaluated for Impairment
 
$
241
 
$
123
 
$
5,543
 
$
4,789
 
$
580
 
$
26
 
$
-
 
$
11,302
 
Loans Collectively Evaluated for Impairment
   
1,252
   
1,638
   
4,889
   
7,436
   
2,145
   
1,562
   
993
   
19,915
 
Ending Balance
 
$
1,493
 
$
1,761
 
$
10,432
 
$
12,225
 
$
2,725
 
$
1,588
 
$
993
 
$
31,217
 
                                                   
March 31, 2011
                                                 
Beginning Balance
 
$
1,544
 
$
2,060
 
$
8,645
 
$
17,046
 
$
2,522
 
$
2,612
 
$
1,007
 
$
35,436
 
Provision for Loan Losses
   
553
   
(566
)
 
1,810
   
1,887
   
1,065
   
(554)
   
(62
)
 
4,133
 
Charge-Offs
   
(721
)
 
-
   
(430
)
 
(3,456
)
 
(989
)
 
(620
)
 
-
   
(6,216
)
Recoveries
   
63
   
9
   
12
   
60
   
36
   
340
   
-
   
520
 
Net Charge-Offs
   
(658
)
 
9
   
(418
)
 
(3,396
)
 
(953
)
 
(280
)
 
-
   
(5,696
)
Ending Balance
 
$
1,439
 
$
1,503
 
$
10,037
 
$
15,537
 
$
2,634
 
$
1,778
 
$
945
 
$
33,873
 
                                                   
Period-end amount allocated to:
                                                 
Loans Individually Evaluated for Impairment
 
$
174
 
$
481
 
$
5,508
 
$
7,165
 
$
1,212
 
$
58
 
$
-
 
$
14,598
 
Loans Collectively Evaluated for Impairment
   
1,265
   
1,022
   
4,529
   
8,372
   
1,422
   
1,720
   
945
   
19,275
 
Ending Balance
 
$
1,439
 
$
1,503
 
$
10,037
 
$
15,537
 
$
2,634
 
$
1,778
 
$
945
 
$
33,873
 
                                                   

 
 
- 15 -

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

(Dollars in Thousands)
     
Commercial,
 Financial,
Agricultural
     
 
Real Estate Construction
     
Real Estate
  Commercial Mortgage
     
 
Real Estate
 Residential
     
 
Real Estate
 Home Equity
     
 
 
Consumer
     
 
 
Unallocated
     
 
 
Total
 
March 31, 2012
                                                 
Individually Evaluated for Impairment
 
$
1,809
 
$
1,266
 
$
69,898
 
$
33,826
 
$
3,355
 
$
46
 
$
-
 
$
110,200
 
Collectively Evaluated for Impairment
   
130,310
   
33,288
   
554,630
   
330,298
   
237,445
   
182,713
   
-
   
1,468,684
 
Total
 
$
132,119
 
$
34,554
 
$
624,528
 
$
364,124
 
$
240,800
 
$
182,759
 
$
-
 
$
1,578,884
 
                                                   
March 31, 2011
                                                 
Individually Evaluated for Impairment
 
$
1,397
 
$
2,589
 
$
49,758
 
$
31,734
 
$
3,338
 
$
138
 
$
-
 
$
88,954
 
Collectively Evaluated for Impairment
   
152,563
   
33,025
   
618,825
   
377,568
  &