XNAS:CCBG Capital City Bank Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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

 

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 July 31, 2012, 17,199,913 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 JUNE 30, 2012
TABLE OF CONTENTS

 

 

 

 

 

PART I – Financial Information

 

Page

 

 

 

 

Item 1.

 

Consolidated Financial Statements (Unaudited)

 

 

 

 

Consolidated Statements of Financial Condition – June 30, 2012 and December 31, 2011

 

4

 

 

Consolidated Statements of Operations and Comprehensive Income – Three and Six Months Ended June 30, 2012 and 2011

 

5

 

 

Consolidated Statement of Changes in Shareowners’ Equity – Six Months Ended June 30, 2012 and 2011

 

6

 

 

Consolidated Statements of Cash Flow – Six Months Ended June 30, 2012 and 2011

 

7

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure About Market Risk

 

43

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

PART II – Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

Item 1A.

 

Risk Factors

 

43

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

43

 

 

 

 

 

Item 4.

 

Mine Safety Disclosure

 

43

 

 

 

 

 

Item 5.

 

Other Information

 

43

 

 

 

 

 

Item 6.

 

Exhibits

 

44

 

 

 

 

 

Signatures

 

 

 

45

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 estimates used for our loan loss provision and deferred tax asset valuation allowance;

 

 

 

 

§

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 and Basel III;

 

 

 

 

§

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;

 

 

 

 

§

our ability to comply with the laws of each jurisdiction where we operate;

 

 

 

 

§

the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

 

 

 

 

§

increased competition and its effect on pricing;

 

 

 

 

§

technological changes;

 

 

 

 

§

negative publicity and the impact on our reputation;

 

 

 

 

§

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

 

 

 

 

 

 

 

 

(Dollars in Thousands, Except Share Data)

 

Unaudited
June 30, 2012

 

December 31, 2011

 

 

ASSETS

 

 

 

 

 

 

 

Cash and Due From Banks

 

$

57,477

 

$

54,953

 

Federal Funds Sold and Interest Bearing Deposits

 

 

434,814

 

 

330,361

 

Total Cash and Cash Equivalents

 

 

492,291

 

 

385,314

 

 

 

 

 

 

 

 

 

Investment Securities, Available-for-Sale

 

 

280,753

 

 

307,149

 

 

 

 

 

 

 

 

 

Loans Held For Sale

 

 

16,969

 

 

21,225

 

Loans, Net of Unearned Income

 

 

1,539,267

 

 

1,607,458

 

Allowance for Loan Losses

 

 

(29,929

)

 

(31,035

)

Loans, Net

 

 

1,526,307

 

 

1,597,648

 

 

 

 

 

 

 

 

 

Premises and Equipment, Net

 

 

110,302

 

 

110,991

 

Goodwill

 

 

84,811

 

 

84,811

 

Other Intangible Assets

 

 

458

 

 

673

 

Other Real Estate Owned

 

 

58,059

 

 

62,600

 

Other Assets

 

 

92,869

 

 

92,126

 

Total Assets

 

$

2,645,850

 

$

2,641,312

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest Bearing Deposits

 

$

623,130

 

$

618,317

 

Interest Bearing Deposits

 

 

1,527,256

 

 

1,554,202

 

Total Deposits

 

 

2,150,386

 

 

2,172,519

 

 

 

 

 

 

 

 

 

Short-Term Borrowings

 

 

69,449

 

 

43,372

 

Subordinated Notes Payable

 

 

62,887

 

 

62,887

 

Other Long-Term Borrowings

 

 

38,846

 

 

44,606

 

Other Liabilities

 

 

75,260

 

 

65,986

 

Total Liabilities

 

 

2,396,828

 

 

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; 17,197,879 and 17,160,274 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

 

172

 

 

172

 

Additional Paid-In Capital

 

 

38,260

 

 

37,838

 

Retained Earnings

 

 

234,573

 

 

237,461

 

Accumulated Other Comprehensive Loss, Net of Tax

 

 

(23,983

)

 

(23,529

)

Total Shareowners’ Equity

 

 

249,022

 

 

251,942

 

Total Liabilities and Shareowners’ Equity

 

$

2,645,850

 

$

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
June 30,

 

Six Months Ended
June 30,

 

(Dollars in Thousands, Except Per Share Data)

 

2012

 

2011

 

2012

 

2011

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans

 

$

21,359

 

$

24,305

 

$

43,364

 

$

48,252

 

Taxable Securities

 

 

729

 

 

824

 

 

1,524

 

 

1,676

 

Tax Exempt Securities

 

 

105

 

 

193

 

 

210

 

 

412

 

Federal Funds Sold

 

 

244

 

 

145

 

 

469

 

 

316

 

Total Interest Income

 

 

22,437

 

 

25,467

 

 

45,567

 

 

50,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

556

 

 

1,083

 

 

1,199

 

 

2,341

 

Short-Term Borrowings

 

 

48

 

 

110

 

 

56

 

 

221

 

Subordinated Notes Payable

 

 

372

 

 

343

 

 

754

 

 

683

 

Other Long-Term Borrowings

 

 

396

 

 

492

 

 

832

 

 

986

 

Total Interest Expense

 

 

1,372

 

 

2,028

 

 

2,841

 

 

4,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

21,065

 

 

23,439

 

 

42,726

 

 

46,425

 

Provision for Loan Losses

 

 

5,743

 

 

3,545

 

 

10,536

 

 

7,678

 

Net Interest Income After Provision For Loan Losses

 

 

15,322

 

 

19,894

 

 

32,190

 

 

38,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Charges on Deposit Accounts

 

 

6,313

 

 

6,309

 

 

12,622

 

 

12,292

 

Data Processing

 

 

680

 

 

764

 

 

1,355

 

 

1,738

 

Asset Management Fees

 

 

1,020

 

 

1,080

 

 

2,035

 

 

2,160

 

Retail Brokerage Fees

 

 

884

 

 

939

 

 

1,642

 

 

1,668

 

Mortgage Banking Fees

 

 

864

 

 

568

 

 

1,712

 

 

1,185

 

Bank Card Fees

 

 

2,784

 

 

2,558

 

 

5,555

 

 

5,054

 

Other

 

 

1,361

 

 

2,230

 

 

2,571

 

 

6,685

 

Total Noninterest Income

 

 

13,906

 

 

14,448

 

 

27,492

 

 

30,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and Associate Benefits

 

 

16,117

 

 

16,000

 

 

32,960

 

 

32,577

 

Occupancy, Net

 

 

2,276

 

 

2,447

 

 

4,542

 

 

4,843

 

Furniture and Equipment

 

 

2,245

 

 

2,117

 

 

4,446

 

 

4,343

 

Intangible Amortization

 

 

107

 

 

107

 

 

215

 

 

460

 

Other Real Estate

 

 

3,460

 

 

3,033

 

 

6,973

 

 

6,710

 

Other

 

 

8,088

 

 

7,463

 

 

15,754

 

 

15,565

 

Total Noninterest Expense

 

 

32,293

 

 

31,167

 

 

64,890

 

 

64,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

 

 

(3,065

)

 

3,175

 

 

(5,208

)

 

5,031

 

Income Tax (Benefit) Expense

 

 

(1,339

)

 

1,030

 

 

(2,320

)

 

1,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(1,726

)

$

2,145

 

$

(2,888

)

$

3,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC NET (LOSS) INCOME PER SHARE

 

$

(0.10

)

$

0.12

 

$

(0.17

)

$

0.20

 

DILUTED NET (LOSS) INCOME PER SHARE

 

$

(0.10

)

$

0.12

 

$

(0.17

)

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Basic Shares Outstanding

 

 

17,191,739

 

 

17,127,302

 

 

17,186,536

 

 

17,124,468

 

Average Diluted Shares Outstanding

 

 

17,191,739

 

 

17,139,234

 

 

17,186,536

 

 

17,134,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Net Unrealized Gain On
Available-For-Sale Securities (net of tax)

 

 

(207

)

 

657

 

 

(454

)

 

691

 

Total Comprehensive (Loss) Income

 

$

(1,933

)

$

2,802

 

$

(3,342

)

$

4,146

 

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

5


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands, Except Share Data)

 

Shares
Outstanding

 

Common Stock

 

Additional
Paid-In Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss, Net of
Taxes

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

 

17,160,274

 

$

172

 

$

37,838

 

$

237,461

 

$

(23,529

)

$

251,942

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

 

 

 

 

 

 

 

(2,888

)

 

 

 

(2,888

)

Change in Net Unrealized Gain on Available-for-Sale Securities (net of tax benefit of $276)

 

 

 

 

 

 

 

 

 

 

 

(454

)

 

(454

)

Total Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,342

)

Stock Performance Plan Compensation

 

 

 

 

 

 

 

87

 

 

 

 

 

 

87

 

Issuance of Common Stock

 

 

37,605

 

 

 

 

335

 

 

 

 

 

 

335

 

Balance, June 30, 2012

 

 

17,197,879

 

$

172

 

$

38,260

 

$

234,573

 

$

(23,983

)

$

249,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

3,455

 

 

 

 

3,455

 

Change in Net Unrealized Gain on Available-for-Sale Securities (net of tax expense of $267)

 

 

 

 

 

 

 

 

 

 

 

691

 

 

691

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

4,146

 

Cash Dividends ($0.20 per share)

 

 

 

 

 

 

 

 

 

(3,425

)

 

 

 

(3,425

)

Stock Performance Plan Compensation

 

 

 

 

 

 

 

391

 

 

 

 

 

 

391

 

Issuance of Common Stock

 

 

27,239

 

 

 

 

413

 

 

 

 

 

 

413

 

Balance, June 30, 2011

 

 

17,127,320

 

$

171

 

$

37,724

 

$

237,709

 

$

(15,060

)

$

260,544

 

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)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

(Dollars in Thousands)

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net (Loss) Income

 

$

(2,888

)

$

3,455

 

Adjustments to Reconcile Net (Loss) Income to
Cash Provided by Operating Activities:

 

 

 

 

 

 

 

Provision for Loan Losses

 

 

10,536

 

 

7,678

 

Depreciation

 

 

3,388

 

 

3,464

 

Amortization of Premiums, Discounts, and Fees (net)

 

 

1,614

 

 

1,896

 

Amortization of Intangible Assets

 

 

215

 

 

460

 

Net Decrease (Increase) in Loans Held-for-Sale

 

 

4,256

 

 

(13

)

Stock-Based Compensation

 

 

87

 

 

391

 

Deferred Income Taxes

 

 

(1,577

)

 

417

 

Loss on Sales and Write-Downs of Other Real Estate Owned

 

 

4,408

 

 

4,533

 

Net Decrease in Other Assets

 

 

1,110

 

 

8,204

 

Net Increase in Other Liabilities

 

 

9,274

 

 

7,241

 

Net Cash Provided By Operating Activities

 

 

30,423

 

 

37,726

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Securities Available-for-Sale:

 

 

 

 

 

 

 

Purchases

 

 

(59,735

)

 

(42,238

)

Sales

 

 

805

 

 

 

Payments, Maturities, and Calls

 

 

82,883

 

 

46,824

 

Net Decrease in Loans

 

 

45,439

 

 

36,176

 

Proceeds From Sales of Other Real Estate Owned

 

 

11,342

 

 

15,314

 

Purchases of Premises and Equipment

 

 

(2,699

)

 

(685

)

Net Cash Provided By In Investing Activities

 

 

78,035

 

 

55,391

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net Decrease in Deposits

 

 

(22,133

)

 

(2,965

)

Net Increase (Decrease) in Short-Term Borrowings

 

 

18,893

 

 

(27,691

)

Increase in Other Long-Term Borrowings

 

 

3,070

 

 

789

 

Repayment of Other Long-Term Borrowings

 

 

(1,646

)

 

(1,694

)

Dividends Paid

 

 

 

 

(3,425

)

Issuance of Common Stock

 

 

335

 

 

413

 

Net Cash Used In Financing Activities

 

 

(1,481

)

 

(34,573

)

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

106,977

 

 

58,544

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

 

385,314

 

 

236,193

 

Cash and Cash Equivalents at End of Period

 

$

492,291

 

$

294,737

 

 

 

 

 

 

 

 

 

Supplemental Disclosure:

 

 

 

 

 

 

 

Loans Transferred to Other Real Estate Owned

 

$

11,209

 

$

22,926

 

Transfer of Current Portion of Long-Term Borrowings

 

$

7,184

 

$

 

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 and six-month periods ended June 30, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

(Dollars in Thousands)

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Market
Value

 

U.S. Treasury

 

$

122,153

 

$

849

 

$

 

$

123,002

 

U.S. Government Agency

 

 

31,465

 

 

85

 

 

42

 

 

31,508

 

States and Political Subdivisions

 

 

65,466

 

 

161

 

 

54

 

 

65,573

 

Mortgage-Backed Securities

 

 

49,116

 

 

657

 

 

74

 

 

49,699

 

Other Securities(1)

 

 

11,571

 

 

 

 

600

 

 

10,971

 

Total Investment Securities

 

$

279,771

 

$

1,752

 

$

770

 

$

280,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $6.1 million and $4.8 million, respectively, at June 30, 2012 and $6.5 million and $4.8 million, respectively, at December 31, 2011.

8


Securities with an amortized cost of $149.9 million and $102.1 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes.

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

Maturity Distribution. As of June 30, 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

 

$

105,935

 

$

106,277

 

Due after one through five years

 

 

162,148

 

 

163,381

 

Due after five through ten years

 

 

117

 

 

124

 

Due over ten years

 

 

 

 

 

No Maturity

 

 

11,571

 

 

10,971

 

Total Investment Securities

 

$

279,771

 

$

280,753

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

 

10,480

 

 

33

 

 

3,122

 

 

9

 

 

13,602

 

 

42

 

States and Political Subdivisions

 

 

22,807

 

 

53

 

 

549

 

 

1

 

 

23,356

 

 

54

 

Mortgage-Backed Securities

 

 

7,930

 

 

59

 

 

3,391

 

 

15

 

 

11,321

 

 

74

 

Other Securities

 

 

 

 

 

 

600

 

 

600

 

 

600

 

 

600

 

Total Investment Securities

 

$

41,217

 

$

145

 

$

7,662

 

$

625

 

$

48,879

 

$

770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.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 June 30, 2012, the Company had securities of $280.8 million with net pre-tax unrealized gains of $1.0 million on these securities, of which $48.9 million have unrealized losses totaling $0.8 million. Approximately $41.2 million of these securities, with an unrealized loss of $0.1 million, have been in a loss position for less than 12 months. Approximately $7.1 million of these securities, with an unrealized loss of approximately $25,000 have been in a loss position for greater 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 June 30, 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 June 30, 2012. One preferred bank stock issue for $0.6 million has also 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)

 

June 30, 2012

 

December 31, 2011

 

Commercial, Financial and Agricultural

 

$

136,736

 

$

130,879

 

Real Estate - Construction

 

 

42,616

 

 

18,892

 

Real Estate - Commercial Mortgage

 

 

605,819

 

 

639,140

 

Real Estate - Residential(1)

 

 

346,054

 

 

385,621

 

Real Estate - Home Equity

 

 

242,929

 

 

244,263

 

Real Estate - Loans Held-for-Sale

 

 

16,969

 

 

21,225

 

Consumer

 

 

165,113

 

 

188,663

 

Loans, Net of Unearned Income

 

$

1,556,236

 

$

1,628,683

 


 

 

(1)

Includes loans in process with outstanding balances of $5.8 million and $12.5 million for June 30, 2012 and December 31, 2011, respectively.

Net deferred fees included in loans were $1.6 million at June 30, 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

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

521

 

$

175

 

$

 

$

696

 

$

135,225

 

$

136,736

 

Real Estate - Construction

 

 

 

 

 

 

 

 

 

 

40,421

 

 

46,803

 

Real Estate - Commercial Mortgage

 

 

7,240

 

 

288

 

 

 

 

7,528

 

 

558,590

 

 

605,819

 

Real Estate - Residential

 

 

3,966

 

 

1,254

 

 

 

 

5,220

 

 

325,173

 

 

353,199

 

Real Estate - Home Equity

 

 

1,681

 

 

182

 

 

 

 

1,863

 

 

236,874

 

 

242,929

 

Consumer

 

 

1,174

 

 

214

 

 

 

 

1,388

 

 

168,486

 

 

170,750

 

Total Past Due Loans

 

$

14,582

 

$

2,113

 

$

 

$

16,695

 

$

1,464,769

 

$

1,556,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

(Dollars in Thousands)

 

Nonaccrual

 

Over 90 Days

 

Nonaccrual

 

Over 90 Days

 

Commercial, Financial and Agricultural

 

$

815

 

$

 

$

755

 

$

46

 

Real Estate - Construction

 

 

6,382

 

 

 

 

334

 

 

 

Real Estate - Commercial Mortgage

 

 

39,701

 

 

 

 

42,820

 

 

 

Real Estate - Residential

 

 

22,805

 

 

 

 

25,671

 

 

58

 

Real Estate - Home Equity

 

 

4,192

 

 

 

 

4,283

 

 

95

 

Consumer

 

 

875

 

 

 

 

1,160

 

 

25

 

Total Nonaccrual Loans

 

$

74,770

 

$

 

$

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

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

1,560

 

$

1,018

 

$

542

 

$

86

 

Real Estate - Construction

 

 

6,559

 

 

2,768

 

 

3,791

 

 

395

 

Real Estate - Commercial Mortgage

 

 

62,383

 

 

28,193

 

 

34,190

 

 

4,032

 

Real Estate - Residential

 

 

29,434

 

 

5,181

 

 

24,253

 

 

4,046

 

Real Estate - Home Equity

 

 

3,569

 

 

653

 

 

2,916

 

 

1,033

 

Consumer

 

 

70

 

 

14

 

 

56

 

 

11

 

Total

 

$

103,575

 

$

37,827

 

$

65,748

 

$

9,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

(Dollars in Thousands)

 


Average
Recorded
Investment

 

Total
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Average
Recorded
Investment

 

Total
Interest
Income

 

Commercial, Financial and Agricultural

 

$

1,684

 

 

22

 

$

1,563

 

 

13

 

$

1,606

 

 

42

 

$

1,707

 

 

47

 

Real Estate - Construction

 

 

3,913

 

 

67

 

 

1,950

 

 

2

 

 

3,535

 

 

71

 

 

1,922

 

 

10

 

Real Estate - Commercial Mortgage

 

 

66,140

 

 

689

 

 

46,145

 

 

316

 

 

64,003

 

 

1,170

 

 

42,450

 

 

631

 

Real Estate - Residential

 

 

31,630

 

 

261

 

 

30,782

 

 

147

 

 

32,880

 

 

496

 

 

33,804

 

 

435

 

Real Estate - Home Equity

 

 

3,462

 

 

37

 

 

2,844

 

 

9

 

 

3,548

 

 

62

 

 

2,815

 

 

34

 

Consumer

 

 

58

 

 

19

 

 

108

 

 

7

 

 

107

 

 

23

 

 

112

 

 

21

 

Total

 

$

106,887

 

 

1,095

 

$

83,392

 

 

494

 

$

105,679

 

 

1,864

 

$

82,810

 

 

1,178

 

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. In the limited circumstances that a loan is removed from TDR classification, it is the Company’s policy to also remove it from the impaired loan category, but to continue to individually evaluate loan impairment based on the contractual terms specified by the loan agreement.

The following table presents loans classified as TDRs:

 

 

June 30, 2012

 

December 31, 2011

 

(Dollars in Thousands)

 

Accruing

 

Nonaccruing

 

Accruing

 

Nonaccruing

 

Commercial, Financial and Agricultural

 

$

943

 

$

200

 

$

694

 

$

 

Real Estate - Construction

 

 

177

 

 

813

 

 

178

 

 

 

Real Estate - Commercial Mortgage

 

 

24,626

 

 

9,932

 

 

20,062

 

 

12,029

 

Real Estate - Residential

 

 

12,052

 

 

2,625

 

 

15,553

 

 

947

 

Real Estate - Home Equity

 

 

874

 

 

 

 

1,161

 

 

 

Consumer

 

 

62

 

 

 

 

27

 

 

 

Total TDRs

 

$

38,734

 

$

13,570

 

$

37,675

 

$

12,976

 

Loans classified as TDRs during the three and six months ended June 30, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2012

 

(Dollars in Thousands)

 

Number
of
Contracts

 


Pre-
Modified
Recorded
Investment

 

Post-
Modified
Recorded
Investment

 

Number
of
Contracts

 

Pre-
Modified
Recorded
Investment

 

Post-
Modified
Recorded
Investment

 

Commercial, Financial and Agricultural

 

 

$

 

$

 

4

 

$

656

 

$

660

 

Real Estate - Construction

 

4

 

 

807

 

 

814

 

4

 

 

807

 

 

814

 

Real Estate - Commercial Mortgage

 

14

 

 

3,979

 

 

4,049

 

27

 

 

8,545

 

 

8,745

 

Real Estate - Residential

 

12

 

 

1,635

 

 

1,649

 

20

 

 

2,493

 

 

2,557

 

Real Estate - Home Equity

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

2

 

 

19

 

 

44

 

2

 

 

19

 

 

44

 

Total TDRs

 

32

 

$

6,440

 

$

6,556

 

57

 

$

12,520

 

$

12,820

 

12



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2011

 

(Dollars in Thousands)

 

Number
of
Contracts

 


Pre-
Modified
Recorded
Investment

 

Post-
Modified
Recorded
Investment

 

Number of
Contracts

 

Pre-
Modified
Recorded
Investment

 

Post-
Modified
Recorded
Investment

 

Commercial, Financial and Agricultural

 

 

2

 

$

134

 

$

134

 

 

4

 

$

229

 

$

229

 

Real Estate - Construction

 

 

1

 

 

177

 

 

155

 

 

1

 

 

177

 

 

155

 

Real Estate - Commercial Mortgage

 

 

10

 

 

2,973

 

 

3,032

 

 

23

 

 

8,565

 

 

8,421

 

Real Estate - Residential

 

 

27

 

 

2,268

 

 

2,390

 

 

48

 

 

5,185

 

 

5,499

 

Real Estate - Home Equity

 

 

2

 

 

52

 

 

52

 

 

4

 

 

177

 

 

189

 

Consumer

 

 

1

 

 

4

 

 

4

 

 

2

 

 

23

 

 

22

 

Total TDRs

 

 

43

 

$

5,608

 

$

5,767

 

 

82

 

$

14,356

 

$

14,515

 

Loans modified as TDRs within the previous 12 months that have subsequently defaulted during the three and six months ended June 30, 2012 are presented in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2012

 

(Dollars in Thousands)

 

Number of
Contracts

 


Post-Modified
Recorded
Investment

 

Number of
Contracts

 

Post-Modified
Recorded
Investment

 

Commercial, Financial and Agricultural

 

 

 

$

 

 

 

$

 

Real Estate - Construction

 

 

 

 

 

 

 

 

 

Real Estate - Commercial Mortgage

 

 

1

 

 

910

 

 

5

 

 

2,800

 

Real Estate - Residential

 

 

2

 

 

699

 

 

8

 

 

1,409

 

Real Estate - Home Equity

 

 

1

 

 

21

 

 

2

 

 

178

 

Consumer

 

 

 

 

 

 

 

 

 

Total TDRs

 

 

4

 

$

1,630

 

 

15

 

$

4,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2011

 

(Dollars in Thousands)

 

Number of
Contracts

 


Post-Modified
Recorded
Investment

 

Number of
Contracts

 

Post-Modified
Recorded
Investment

 

Commercial, Financial and Agricultural

 

 

2

 

$

161

 

 

2

 

$

161

 

Real Estate - Construction

 

 

 

 

 

 

 

 

 

Real Estate - Commercial Mortgage

 

 

3

 

 

976

 

 

4

 

 

1,472

 

Real Estate - Residential

 

 

3

 

 

978

 

 

3

 

 

978

 

Real Estate - Home Equity

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total TDRs

 

 

8

 

$

2,115

 

 

9

 

$

2,611

 

13


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

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

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.

14


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

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

$

3,560

 

$

45,787

 

$

258

 

$

49,605

 

Substandard

 

 

13,033

 

 

209,337

 

 

1,319

 

 

223,689

 

Doubtful

 

 

 

 

5,378

 

 

 

 

5,378

 

Total Criticized Loans

 

$

16,593

 

$

260,502

 

$

1,577

 

$

278,672

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

15


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 and six months ended June 30, 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

 

Three Months Ended
June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,493

 

$

1,761

 

$

10,432

 

$

12,225

 

$

2,725

 

$

1,589

 

$

992

 

$

31,217

 

Provision for Loan Losses

 

 

(198

)

 

1,190

 

 

1,595

 

 

2,785

 

 

414

 

 

(51

)

 

8

 

 

5,743

 

Charge-Offs

 

 

(57

)

 

(275

)

 

(3,519

)

 

(3,894

)

 

(425

)

 

(550

)

 

 

 

(8,720

)

Recoveries

 

 

82

 

 

27

 

 

42

 

 

969

 

 

116

 

 

453

 

 

 

 

1,689

 

Net Charge-Offs

 

 

25

 

 

(248

)

 

(3,477

)

 

(2,925

)

 

(309

)

 

(97

)

 

 

 

 

(7,031

)

Ending Balance

 

$

1,320

 

$

2,703

 

$

8,550

 

$

12,085

 

$

2,830

 

$

1,441

 

$

1,000

 

$

29,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,534

 

$

1,133

 

$

10,660

 

$

12,518

 

$

2,392

 

$

1,887

 

$

911

 

$

31,035

 

Provision for Loan Losses

 

 

(39

)

 

1,818

 

 

2,761

 

 

4,296

 

 

1,621

 

 

(10

)

 

89

 

 

10,536

 

Charge-Offs

 

 

(325

)

 

(275

)

 

(5,051

)

 

(5,861

)

 

(1,317

)

 

(1,282

)

 

 

 

(14,111

)

Recoveries

 

 

150

 

 

27

 

 

180

 

 

1,132

 

 

134

 

 

846

 

 

 

 

2,469

 

Net Charge-Offs

 

 

(175

)

 

(248

)

 

(4,871

)

 

(4,729

)

 

(1,183

)

 

(436

)

 

 

 

(11,642

)

Ending Balance

 

$

1,320

 

$

2,703

 

$

8,550

 

$

12,085

 

$

2,830

 

$

1,441

 

$

1,000

 

$

29,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,439

 

$

1,504

 

$

10,037

 

$

15,537

 

$

2,634

 

$

1,777

 

$

945

 

$

33,873

 

Provision for Loan Losses

 

 

603

 

 

250

 

 

1,217

 

 

668

 

 

501

 

 

251

 

 

55

 

 

3,545

 

Charge-Offs

 

 

(301

)

 

(14

)

 

(2,808

)

 

(2,371

)

 

(944

)

 

(606

)

 

 

 

(7,044

)

Recoveries

 

 

43

 

 

5

 

 

115

 

 

113

 

 

57

 

 

373

 

 

 

 

706

 

Net Charge-Offs

 

 

(258

)

 

(9

)

 

(2,693

)

 

(2,258

)

 

(887

)

 

(233

)

 

 

 

(6,338

)

Ending Balance

 

$

1,784

 

$

1,745

 

$

8,561

 

$

13,947

 

$

2,248

 

$

1,795

 

$

1,000

 

$

31,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,544

 

$

2,060

 

$

8,645

 

$

17,046

 

$

2,522

 

$

2,612

 

$

1,007

 

$

35,436

 

Provision for Loan Losses

 

 

1,156

 

 

(315

)

 

3,027

 

 

2,556

 

 

1,565

 

 

(304

)

 

(7

)

 

7,678

 

Charge-Offs

 

 

(1,022

)

 

(14

)

 

(3,238

)

 

(5,828

)

 

(1,932

)

 

(1,226

)

 

 

 

(13,260

)

Recoveries

 

 

106

 

 

14

 

 

127

 

 

173

 

 

93

 

 

713

 

 

 

 

1,226

 

Net Charge-Offs

 

 

(916

)

 

 

 

(3,111

)

 

(5,655

)

 

(1,839

)

 

(513

)

 

 

 

(12,034

)

Ending Balance

 

$

1,784

 

$

1,745

 

$

8,561

 

$

13,947

 

$

2,248

 

$

1,795

 

$

1,000

 

$

31,080

 

16


The following table details the amount of the allowance for loan losses by portfolio class disaggregated on the basis of the Company’s impairment methodology

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

Commercial,
Financial,
Agricultural

 

Real Estate
Construction

 

Real Estate
Commercial
Mortgage

 

Real Estate
Residential

 

Real Estate
Home
Equity

 

Consumer

 

Unallocated

 

Total

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount
allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually
Evaluated for Impairment

 

$

86

 

$

395

 

$

4,227

 

$

4,046

 

$

1,033

 

$

11

 

$

 

$

9,798

 

Loans Collectively
Evaluated for Impairment

 

 

1,234

 

 

2,308

 

 

4,323

 

 

8,039

 

 

1,797

 

 

1,430

 

 

1,000

 

 

20,131

 

Ending Balance

 

$

1,320

 

$

2,703

 

$

8,550

 

$

12,085

 

$

2,830

 

$

1,441

 

$

1,000

 

$

29,929

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

Commercial,
Financial,
Agricultural

 

Real Estate
Construction

 

Real Estate
Commercial
Mortgage

 

Real Estate
Residential

 

Real Estate
Home
Equity

 

Consumer

 

Unallocated

 

Total

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount
allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually Evaluated for Impairment

 

$

591

 

$

487

 

$

3,582

 

$

5,800

 

$

506

 

$

41

 

$

 

$

11,007

 

Loans Collectively Evaluated for Impairment

 

 

1,193

 

 

1,258

 

 

4,979

 

 

8,147

 

 

1,742

 

 

1,754

 

 

1,000

 

 

20,073

 

Ending Balance

 

$

1,784

 

$

1,745

 

$

8,561

 

$

13,947

 

$

2,248

 

$

1,795

 

$

1,000

 

$

31,080

 

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

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

1,560

 

$

6,559

 

$

64,399

 

$

29,434

 

$

3,569

 

$

70

 

$

 

$

105,591

 

Collectively Evaluated for Impairment

 

 

135,176

 

 

40,244

 

 

541,420

 

 

323,764

 

 

239,361

 

 

170,680

 

 

 

 

1,450,645

 

Total

 

$

136,736

 

$

46,803

 

$

605,819

 

$

353,198

 

$

242,930

 

$

170,750

 

$

 

$

1,556,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

1,730

 

$

1,311

 

$

42,531

 

$

29,829

 

$

2,351

 

$

79

 

$

 

$

77,831

 

Collectively Evaluated for Impairment

 

 

148,100

 

 

29,556

 

 

617,526

 

 

365,297

 

 

245,878

 

 

203,414

 

 

 

 

1,609,771

 

Total

 

$

149,830

 

$

30,867

 

$

660,057

 

$

395,126

 

$

248,229

 

$

203,493

 

$

 

$

1,687,602

 

17


NOTE 4 - INTANGIBLE ASSETS

The Company had net intangible assets of $85.3 million and $85.5 million at June 30, 2012 and December 31, 2011, respectively. Intangible assets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

(Dollars in Thousands)

 

Gross
Amount

 

Accumulated
Amortization

 

Gross
Amount

 

Accumulated
Amortization

 

Core Deposit Intangibles

 

$

47,176

 

$

47,037

 

$

47,176

 

$

46,918

 

Goodwill

 

 

84,811

 

 

 

 

84,811

 

 

 

Customer Relationship Intangible

 

 

1,867

 

 

1,548

 

 

1,867

 

 

1,452

 

Total Intangible Assets

 

$

133,854

 

$

48,585

 

$

133,854

 

$

48,370

 

Net Core Deposit Intangibles: As of June 30, 2012 and December 31, 2011, the Company had net core deposit intangibles of $0.1 million and $0.3 million, respectively. Amortization expense for the first six months of 2012 and 2011 was approximately $0.2 million and $0.4 million, respectively. Estimated annual amortization expense for 2012 is $0.3 million. All of our core deposit intangibles will be fully amortized in January 2013.

Goodwill: As of June 30, 2012 and December 31, 2011, the Company had goodwill of $84.8 million.

Goodwill is tested for impairment on an annual basis, or more often if impairment indicators exist. A goodwill impairment test consists of two steps. Step One compares the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the estimated fair value, Step Two is performed by comparing the fair value of the reporting unit’s implied goodwill to the carrying value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds the estimated fair value, an impairment charge is recorded equal to the excess.

As of June 30, 2012, the book value of the Company’s equity exceeded its market capitalization, and as such the Company performed goodwill impairment testing. The Step One test indicated that the carrying amount (including goodwill) of the Company’s reporting unit exceeded its estimated fair value. The Step Two test indicated the estimated fair value of our reporting unit’s implied goodwill exceeded its carrying amount. Based on the results of the Step Two analysis, the Company concluded that goodwill was not impaired as of June 30, 2012. The Company will continue to evaluate goodwill for impairment as defined by ASC Topic 350.

Other: As of June 30, 2012 and December 31, 2011, the Company had a customer relationship intangible asset, net of accumulated amortization, of $0.3 million and $0.4 million, respectively. This intangible asset was recorded as a result of the March 2004 acquisition of trust customer relationships. Amortization expense for the first six months of 2012 and 2011 was approximately $96,000. Estimated annual amortization expense is approximately $0.2 million based on use of a 10-year useful life.

NOTE 5 - DEPOSITS

The composition of the Company’s interest bearing deposits were as follows:

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

June 30, 2012

 

December 31, 2011

 

NOW Accounts

 

$

789,103

 

$

828,990

 

Money Market Accounts

 

 

288,352

 

 

276,910

 

Savings Deposits

 

 

178,388

 

 

158,462

 

Other Time Deposits

 

 

271,413

 

 

289,840

 

Total Interest Bearing Deposits

 

$

1,527,256

 

$

1,554,202

 

18


NOTE 6 - EMPLOYEE BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all full-time and eligible part-time associates and a Supplemental Executive Retirement Plan (“SERP”) covering its executive officers.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Dollars in Thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Cost

 

$

1,750

 

$

1,550

 

$

3,500

 

$

3,100

 

Interest Cost

 

 

1,375

 

 

1,325

 

 

2,750

 

 

2,650

 

Expected Return on Plan Assets

 

 

(1,700

)

 

(1,650

)

 

(3,400

)

 

(3,300

)

Prior Service Cost Amortization

 

 

100

 

 

125

 

 

200

 

 

250

 

Net Loss Amortization

 

 

850

 

 

550

 

 

1,700

 

 

1,100

 

Net Periodic Benefit Cost

 

$

2,375

 

$

1,900

 

$

4,750

 

$

3,800

 

Discount Rate

 

 

5.00

%

 

5.55

%

 

5.00

%

 

5.55

%

Long-Term Rate of Return on Assets

 

 

8.00

%

 

8.00

%

 

8.00

%

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Dollars in Thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Cost

 

$

46

 

$

40

 

$

92

 

$

80

 

Prior Service Cost Amortization

 

 

48

 

 

45

 

 

96

 

 

90

 

Net Gain Amortization

 

 

(98

)

 

(98

)

 

(196

)

 

(196

)

Net Periodic Benefit Cost

 

$

(4

)

$

(13

)

$

(8

)

$

(26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

 

5.00

%

 

5.55

%

 

5.00

%

 

5.55

%

NOTE 7 - COMMITMENTS AND CONTINGENCIES

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

(Dollars in Thousands)

 

Fixed

 

Variable

 

Total

 

Fixed

 

Variable

 

Total

 

 

Commitments to Extend Credit(1)

 

$

43,992

 

$

252,645

 

$

296,637

 

$

38,432

 

$

257,081

 

$

295,513

 

Standby Letters of Credit

 

 

12,957

 

 

 

 

12,957

 

 

10,920

 

 

 

 

10,920

 

Total

 

$

56,949

 

$

252,645

 

$

309,594

 

$

49,352

 

$

257,081

 

$

306,433

 


 

 

(1)

Commitments include unfunded loans, revolving lines of credit, and other unused commitments.

Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

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

19


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

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

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

In July 2012, Visa and MasterCard International entered into a memorandum of understanding to enter into a settlement agreement to resolve the aforementioned covered litigation matter. Visa’s share of the claim is to be paid from the litigation reserve account. Subsequent to the memorandum of understanding, Visa increased the litigation reserve by $150 million and revised the conversion ratio for the Class B shares resulting in a $56,000 payment by the Company under the swap contract. The Company does not expect to make any additional payments to the counterparty other than certain fixed charges included in the liability, which are payable until the settlement is finalized.

NOTE 8 – FAIR VALUE MEASUREMENTS

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

 

 

 

 

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

 

 

 

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from, or corroborated, by market data by correlation or other means.

 

 

 

 

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

20


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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

Level 1
Inputs

 

Level 2
Inputs

 

Level 3
Inputs

 

Total Fair
Value

 

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

123,002

 

$

 

$

 

$

123,002

 

U.S. Government Agency

 

 

25,792

 

 

5,716

 

 

 

 

31,508

 

States and Political Subdivisions

 

 

 

 

65,573

 

 

 

 

65,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities

 

 

 

 

49,699

 

 

 

 

49,699

 

Other Securities

 

 

 

 

10,971

 

 

 

 

10,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

169,464

 

$

 

$

 

$

169,464

 

U.S. Government Agency

 

 

14,737

 

 

 

 

 

 

14,737

 

States and Political Subdivisions

 

 

 

 

59,094

 

 

 

 

59,094

 

Mortgage-Backed Securities

 

 

 

 

52,497

 

 

 

 

52,497

 

Other Securities

 

 

 

 

11,357

 

 

 

 

11,357

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Swap

 

 

 

 

 

 

572

 

 

572

 

Assets Measured at Fair Value on a Non-Recurring Basis

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

Impaired Loans. Loans deemed to be impaired are valued based upon the lower of cost or the fair value of the underlying collateral or discounted cash flow analysis. The fair value of collateral is determined by an independent valuation or professional appraisal in conformance with banking regulations. Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market, and the judgment and estimation involved in the real estate appraisal process. The inputs used in performing discounted cash flow analyses are not observable and therefore is considered a Level 3 input. Impaired loans had a carrying value of $103.6 million with a valuation allowance of $9.6 million at June 30, 2012 and $107.8 million and $11.2 million, respectively, at December 31, 2011.

Loans Held for Sale. Loans held for sale were $17.0 million and $21.2 million as of June 30, 2012 and December 31, 2011, respectively. These loans are carried at the lower of cost or fair value and are adjusted to fair value on a non-recurring basis. Fair value is based on observable markets rates for comparable loan products, which is considered a Level 2 fair value measurement.

Other Real Estate Owned. During the first six months of 2012, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for possible loan losses based on the fair value of the foreclosed asset. The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations. The fair value of foreclosed assets is estimated using Level 3 inputs due to the volatility of the real estate market, and judgment and estimation involved in the real estate valuation process. Foreclosed assets measured at fair value upon initial recognition totaled $11.2 million during the six months ended June 30, 2012. The Company disposed of $13.5 million in foreclosed assets and recognized subsequent write-downs totaling $2.2 million for properties that were re-valued during the six months ended June 30, 2012. The carrying value of foreclosed assets was $58.1 million at June 30, 2012.

21


Assets and Liabilities Disclosed at Fair Value

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

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

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

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

(Dollars in Thousands)

 

Carrying
Value

 

Level 1
Inputs

 

Level 2
Inputs

 

Level 3
Inputs

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

57,477

 

$

57,477

 

$

 

$

 

Short-Term Investments

 

 

434,814

 

 

434,814

 

 

 

 

 

Investment Securities

 

 

280,753

 

 

148,794

 

 

131,959

 

 

 

Loans, Net of Allowance for Loan Losses

 

 

1,526,307

 

 

 

 

 

 

1,395,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,150,386

 

$

 

$

2,150,961

 

$

 

Short-Term Borrowings

 

 

69,449

 

 

 

 

68,066

 

 

 

Subordinated Notes Payable

 

 

62,887

 

 

 

 

62,886

 

 

 

Long-Term Borrowings

 

 

38,846

 

 

 

 

42,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

(Dollars in Thousands)

 

Carrying
Value

 

Level 1
Inputs

 

Level 2
Inputs

 

Level 3
Inputs

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

54,953

 

$

54,953

 

$

 

$

 

Short-Term Investments

 

 

330,361

 

 

330,361

 

 

 

 

 

Investment Securities

 

 

307,149

 

 

184,201

 

 

122,948

 

 

 

Loans, Net of Allowance for Loan Losses

 

 

1,597,648

 

 

 

 

 

 

1,485,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,172,519

 

$

 

$

2,173,331

 

$

 

Short-Term Borrowings

 

 

43,372

 

 

 

 

42,021

 

 

 

Subordinated Notes Payable

 

 

62,887

 

 

 

 

62,858

 

 

 

Long-Term Borrowings

 

 

44,606

 

 

 

 

47,770

 

 

 

All non-financial instruments were excluded from the above table. The disclosures also do not include certain intangible assets such as client relationships, deposit base intangibles and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

22


NOTE 9 – ACCOUNTING STANDARDS UPDATES

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company’s financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-03 became effective for the Company on January 1, 2012, however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below. In connection with the application of ASU 2011-05, the Company’s financial statements now include one continuous statement of comprehensive income.

ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company’s financial statements.

ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to re-deliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company’s financial statements.

23


QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

(Dollars in Thousands, Except Per Share Data)

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First(1)

 

Fourth

 

Third

 

Summary of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

22,437

 

$

23,130

 

$

23,912

 

$

24,891

 

$

25,467

 

$

25,189

 

$

26,831

 

$

27,576

 

Interest Expense

 

 

1,372

 

 

1,469

 

 

1,515

 

 

1,791

 

 

2,208

 

 

2,203

 

 

2,473

 

 

2,792

 

Net Interest Income

 

 

21,065

 

 

21,661

 

 

22,397

 

 

23,100

 

 

23,439

 

 

22,986

 

 

24,358

 

 

24,784

 

Provision for Loan Losses

 

 

5,743

 

 

4,793

 

 

7,600

 

 

3,718

 

 

3,545

 

 

4,133

 

 

3,783

 

 

5,668

 

Net Interest Income After Provision for Loan Losses

 

 

15,322

 

 

16,868

 

 

14,797

 

 

19,382

 

 

19,894

 

 

18,853

 

 

20,575

 

 

19,449

 

Noninterest Income

 

 

13,906

 

 

13,586

 

 

13,873

 

 

14,193

 

 

14,448

 

 

16,334

 

 

14,735

 

 

13,449

 

Noninterest Expense

 

 

32,293

 

 

32,597

 

 

31,103

 

 

30,647

 

 

31,167

 

 

33,331

 

 

33,540

 

 

32,363

 

(Loss) Income Before Income Taxes

 

 

(3,065

)

 

(2,143

)

 

(2,433

)

 

2,928

 

 

3,175

 

 

1,856

 

 

1,770

 

 

202

 

Income Tax (Benefit) Expense

 

 

(1,339

)

 

(981

)

 

(1,898

)

 

951

 

 

1,030

 

 

546

 

 

(148

)

 

(199

)

Net (Loss) Income

 

$

(1,726

)

$

(1,162

)

$

(535

)

$

1,977

 

$

2,145

 

$

1,310

 

$

1,918

 

$

401

 

Net Interest Income (FTE)

 

$

21,219

 

$

21,833

 

$

22,560

 

$

23,326

 

$

23,704

 

$

23,257

 

$

24,654

 

$

25,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income Basic

 

$

(0.10

)

$

(0.07

)

$

(0.03

)

$

0.12

 

$

0.12

 

$

0.08

 

$

0.12

 

$

0.02

 

Net (Loss) Income Diluted

 

 

(0.10

)

 

(0.07

)

 

(0.03

)

 

0.12

 

 

0.12

 

 

0.08

 

 

0.12

 

 

0.02

 

Dividends Declared

 

 

0.00

 

 

0.00

 

 

0.00

 

 

0.10

 

 

0.10

 

 

0.10

 

 

0.10

 

 

0.10

 

Diluted Book Value

 

 

14.48

 

 

14.60

 

 

14.68

 

 

15.20

 

 

15.20

 

 

15.13

 

 

15.15

 

 

15.25

 

Market Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

8.73

 

 

9.91

 

 

11.11

 

 

11.18

 

 

13.12

 

 

13.80

 

 

14.19

 

 

14.24

 

Low

 

 

6.35

 

 

7.32

 

 

9.43

 

 

9.81

 

 

9.94

 

 

11.87

 

 

11.56

 

 

10.76

 

Close

 

 

7.37

 

 

7.45

 

 

9.55

 

 

10.38

 

 

10.26

 

 

12.68

 

 

12.60

 

 

12.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net

 

$

1,570,827

 

$

1,596,480

 

$

1,646,715

 

$

1,667,720

 

$

1,704,348

 

$

1,730,330

 

$

1,782,916

 

$

1,807,483

 

Earning Assets

 

 

2,262,847

 

 

2,268,307

 

 

2,146,463

 

 

2,202,927

 

 

2,258,931

 

 

2,278,602

 

 

2,218,049

 

 

2,273,198

 

Total Assets

 

 

2,624,417

 

 

2,636,907

 

 

2,509,915

 

 

2,563,251

 

 

2,618,287

 

 

2,643,017

 

 

2,576,793

 

 

2,626,758

 

Deposits

 

 

2,135,653

 

 

2,161,388

 

 

2,032,975

 

 

2,061,913

 

 

2,107,301

 

 

2,125,379

 

 

2,115,867

 

 

2,172,165

 

Shareowners’ Equity

 

 

252,644

 

 

254,447

 

 

264,276

 

 

263,902

 

 

262,371

 

 

261,603

 

 

262,622

 

 

263,742

 

Common Equivalent Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,192

 

 

17,181

 

 

17,160

 

 

17,152

 

 

17,127

 

 

17,122

 

 

17,095

 

 

17,087

 

Diluted

 

 

17,192

 

 

17,181

 

 

17,161

 

 

17,167

 

 

17,139

 

 

17,130

 

 

17,096

 

 

17,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

 

(0.26

)%

 

(0.18

)%

 

(0.08

)%

 

0.31

%

 

0.33

%

 

0.20

%

 

0.30

%

 

0.06

%

Return on Average Equity

 

 

(2.75

)

 

(1.84

)

 

(0.80

)

 

2.97

 

 

3.28

 

 

2.03

 

 

2.90

 

 

0.60

 

Net Interest Margin (FTE)

 

 

3.77

 

 

3.87

 

 

4.17

 

 

4.20

 

 

4.21

 

 

4.14

 

 

4.41

 

 

4.38

 

Noninterest Income as % of Operating Revenue

 

 

39.88

 

 

38.64

 

 

38.34

 

 

38.14

 

 

38.13

 

 

41.54

 

 

37.69

 

 

35.17

 

Efficiency Ratio

 

 

90.88

 

 

91.73

 

 

85.08

 

 

81.40

 

 

81.41

 

 

83.30

 

 

83.75

 

 

82.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

$

29,929

 

$

31,217

 

 

31,035

 

$

29,658

 

$

31,080

 

 

33,873

 

$

35,436

 

$

37,720

 

Allowance for Loan Losses to Loans

 

 

1.93

%

 

1.98

%

 

1.91

%

 

1.79

%

 

1.84

%

 

1.98

%

 

2.01

%

 

2.10

%

Nonperforming Assets (“NPA’s”)

 

 

132,829

 

 

136,826

 

 

137,623

 

 

114,592

 

 

122,092

 

 

129,318

 

 

123,637

 

 

125,376

 

NPA’s to Total Assets

 

 

5.02

 

 

5.14

 

 

5.21

 

 

4.54

 

 

4.70

 

 

4.86

 

 

4.72

 

 

4.86

 

NPA’s to Loans + OREO

 

 

8.23

 

 

8.36

 

 

8.14

 

 

6.67

 

 

6.98

 

 

7.31

 

 

6.81

 

 

6.77

 

Allowance to Non-Performing Loans

 

 

40.03

 

 

39.65

 

 

41.37

 

 

55.54

 

 

50.89

 

 

45.80

 

 

53.94

 

 

50.86

 

Net Charge-Offs to Average Loans

 

 

1.80

 

 

1.16

 

 

1.50

 

 

1.22

 

 

1.49

 

 

1.33

 

 

1.35

 

 

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital Ratio

 

 

14.17

%

 

14.17

%

 

13.96

%

 

14.05

%

 

13.83

%

 

13.46

%

 

13.24

%

 

12.93

%

Total Capital Ratio

 

 

15.54

 

 

15.54

 

 

15.32

 

 

15.41

 

 

15.19

 

 

14.82

 

 

14.59

 

 

14.29

 

Leverage Ratio

 

 

9.60

 

 

9.71

 

 

10.26

 

 

10.20

 

 

9.95

 

 

9.74

 

 

10.10

 

 

9.75

 

Tangible Capital Ratio

 

 

6.40

 

 

6.42

 

 

6.51

 

 

7.19

 

 

6.96

 

 

6.73

 

 

6.82

 

 

6.98

 


 

 

(1)

Includes a $2.6 million (net) pre-tax gain from sale of Visa shares – $3.2 million gain less $0.6 million related swap liability.

24



 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled “Business Overview,” “Financial Overview,” “Results of Operations,” “Financial Condition,” “Market Risk and Interest Rate Sensitivity, “ “Liquidity and Capital Resources,” “Off-Balance Sheet Arrangements,” and “Critical Accounting Policies.” 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 2012 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as “CCBG,” “Company,” “we,” “us,” or “our.”

In this MD&A, we present an operating efficiency ratio which is not calculated based on accounting principles generally accepted in the United States (“GAAP”), but that we believe provides important information regarding our results of operations. Our calculation of the operating efficiency ratio is computed by dividing noninterest expense less intangible amortization, by the sum of tax equivalent net interest income and noninterest income. Management uses this non-GAAP measure as part of its assessment of its performance in managing noninterest expenses. We believe that excluding intangible amortization and merger expenses in our calculations better reflect our periodic expenses and is more reflective of normalized operations.

Although we believe the above-mentioned non-GAAP financial measure enhances investors’ understanding of our business and performance this non-GAAP financial measure should not be considered an alternative to GAAP. In addition, there are material limitations associated with the use of this non-GAAP financial measure such as the risks that readers of our financial statements may disagree as to the appropriateness of items included or excluded in this measure and that our measure may not be directly comparable to other companies that calculate this measure differently. Our management compensates for this limitation by providing a detailed reconciliation between GAAP information and the non-GAAP financial measure as detailed below.

Reconciliation of operating efficiency ratio to efficiency ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

Efficiency ratio

 

 

91.18

%

 

92.03

%

 

81.69

%

 

91.60

%

 

82.97

%

Effect of intangible amortization expense

 

 

(0.30

)%

 

(0.30

)%

 

(0.28

)%

 

(0.29

)%

 

(0.60

)%

Operating efficiency ratio

 

 

90.88

%

 

91.73

%

 

81.41

%

 

91.31

%

 

82.37

%

25


The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our 2011 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

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

BUSINESS OVERVIEW

Our Business

We are a bank holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly-owned subsidiary, Capital City Bank (the “Bank” or “CCB”). The Bank offers a broad array of products and services through a total of 70 full-service offices located in Florida, Georgia, and Alabama. The Bank offers commercial and retail banking services, as well as trust and asset management, retail securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as service charges on deposit accounts, asset management and trust fees, retail securities brokerage fees, mortgage banking fees, bank card fees, and data processing fees.

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2011 Form 10-K.

26


FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

 

 

 

 

§

Net loss of $1.7 million, or $0.10 per diluted share for the second quarter of 2012 compared to a net loss of $1.2 million, or $0.07 per diluted share in the first quarter of 2012, and net income of $2.1 million, or $0.12 per diluted share for the second quarter of 2011. For the first six months of 2012, we realized a net loss of $2.9 million, or $0.17 per diluted share, compared to net income of $3.5 million, or $0.20 per diluted share, for the comparable period of 2011. Performance in 2011 reflects the sale of our Visa stock which resulted in a net pre-tax gain of $2.6 million.

 

 

 

 

§

Total credit costs (loan loss provision plus other real estate owned (“OREO”) costs) were $9.2 million, $8.3 million, and $6.6 million for the quarters ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively. Total credit costs for the first half of 2012 were $17.5 million compared to $14.4 million for the same period of 2011.

 

 

 

 

§

Tax equivalent net interest income for the second quarter of 2012 was $21.2 million compared to $21.8 million for the first quarter of 2012 and $23.7 million for the second quarter of 2011. For the first half of 2012, tax equivalent net interest income totaled $43.1 million compared to $47.0 million in 2011. The reduction from all prior periods was due to a reduction in loan income primarily attributable to declining loan balances and unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans.

 

 

 

 

§

Noninterest income for the second quarter of 2012 totaled $13.9 million, an increase of $0.3 million, or 2.4%, over the first quarter of 2012 and a decrease of $0.5 million, or 3.8%, from the second quarter of 2011. The increase/decrease compared to both prior periods was due to higher/lower gains from the sale of OREO properties. For the first six months of 2012, noninterest income totaled $27.5 million, a decrease of $3.3 million, or 10.7%, from the same period of 2011 attributable to a $3.2 million gain from the sale of our Visa stock realized in 2011.

 

 

 

 

§

Noninterest expense for the second quarter of 2012 totaled $32.3 million, a decrease of $0.3 million, or 0.9%, from the first quarter of 2012 and an increase of $1.1 million, or 3.6%, over the second quarter of 2011. The decrease from the first quarter of 2012 was primarily attributable to lower compensation expense. Higher OREO costs, professional fees, and miscellaneous expense drove the increase over the second quarter of 2011. For the first six months of 2012, noninterest expense totaled $64.9 million, an increase of $0.4 million, or 0.6%, over the same period of 2011 primarily attributable to higher compensation expense of $0.4 million.

          Financial Condition

 

 

 

 

§

Average earning assets were $2.263 billion for the second quarter of 2012, an increase of $116.4 million, or 5.4%, over the fourth quarter of 2011 reflective of a higher level of overnight funds driven by higher deposit balances, primarily public funds.

 

 

 

 

§

Nonperforming assets totaled $132.8 million at June 30, 2012, a decrease of $4.8 million from December 31, 2011 driven by a reduction in our OREO balance, reflecting continued progress in disposing of properties. Nonperforming assets represented 5.02% of total assets at June 30, 2012 compared to 5.21% at December 31, 2011.

 

 

 

 

§

As of June 30, 2012, we are well-capitalized with a risk based capital ratio of 15.54% and a tangible common equity ratio of 6.40% compared to 15.32% and 6.51%, respectively, at December 31, 2011.

27


RESULTS OF OPERATIONS

Net Income

For the second quarter of 2012, we realized a net loss of $1.7 million, or $0.10 per diluted share, compared to a net loss of $1.2 million, or $0.07 per diluted share for the first quarter of 2012, and net income of $2.1 million, or $0.12 per diluted share, for the second quarter of 2011. For the first six months of 2012, we realized a net loss of $2.9 million, or $0.17 per diluted share, compared to net income of $3.5 million, or $0.20 per diluted share for the same period in 2011.

Compared to the first quarter of 2012, performance reflects lower operating revenues (net interest income plus noninterest income) of $0.3 million and a higher loan loss provision of $0.9 million, partially offset by lower noninterest expense of $0.3 million and income taxes of $0.4 million.

Compared to the second quarter of 2011, the reduction in earnings was due to lower operating revenues of $2.9 million, a higher loan loss provision of $2.2 million, and an increase in noninterest expense of $1.1 million, partially offset by lower income taxes of $2.4 million.

The decrease in earnings for the first half of 2012 is attributable to lower operating revenues of $7.0 million, a higher loan loss provision of $2.9 million, and an increase in noninterest expense of $0.3 million, partially offset by lower income taxes of $3.8 million. Earnings for the first half of 2011 reflect the sale of our Visa Class B shares of stock which resulted in a net pre-tax gain of $2.6 million ($3.2 million pre-tax gain included in noninterest income and recognition of a $0.6 million swap liability included in noninterest expense).

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in Thousands, except per share data)

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

Interest Income

 

$

22,437

 

$

23,130

 

$

25,467

 

$

45,567

 

$

50,656

 

Taxable equivalent Adjustments

 

 

154

 

 

172

 

 

265

 

 

326

 

 

536

 

Total Interest Income (FTE)

 

 

22,591

 

 

23,302

 

 

25,732

 

 

45,893

 

 

51,192

 

Interest Expense

 

 

1,372

 

 

1,469

 

 

2,028

 

 

2,841

 

 

4,231

 

Net Interest Income (FTE)

 

 

21,219

 

 

21,833

 

 

23,704

 

 

43,052

 

 

46,961

 

Provision for Loan Losses

 

 

5,743

 

 

4,793

 

 

3,545

 

 

10,536

 

 

7,678

 

Taxable Equivalent Adjustments

 

 

154

 

 

172

 

 

265

 

 

326

 

 

536

 

Net Interest Income After provision for Loan Losses

 

 

15,322

 

 

16,868

 

 

19,894

 

 

32,190

 

 

38,747

 

Noninterest Income

 

 

13,906

 

 

13,586

 

 

14,448

 

 

27,492

 

 

30,782

 

Noninterest Expense

 

 

32,293

 

 

32,597

 

 

31,167

 

 

64,890

 

 

64,498

 

(Loss) Income Before Income Taxes

 

 

(3,065

)

 

(2,143

)

 

3,175

 

 

(5,208

)

 

5,031

 

Income Tax (Benefit) Expense

 

 

(1,339

)

 

(981

)

 

1,030

 

 

(2,320

)

 

1,576

 

Net (Loss) Income

 

$

(1,726

)

$

(1,162

)

$

2,145

 

$

(2,888

)

$

3,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net (Loss) Income Per Share

 

$

(0.10

)

$

(0.07

)

$

0.12

 

$

(0.17

)

$

0.20

 

Diluted Net (Loss) Income Per Share

 

$

(0.10

)

$

(0.07

)

$

0.12

 

$

(0.17

)

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Equity

 

 

(2.75

)%

 

(1.84

)%

 

3.28

%

 

(2.29

)%

 

2.66

%

Return on Average Assets

 

 

(0.26

)%

 

(0.18

)%

 

0.33

%

 

(0.22

)%

 

0.26

%

28


Net Interest Income

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets less interest expense paid on interest bearing liabilities. This information is provided on a “taxable equivalent” basis to reflect the tax-exempt status of income earned on certain loans and investments, the majority of which are state and local government debt obligations. We provide an analysis of our net interest income including average yields and rates in Table I on page 42.

Tax equivalent net interest income for the second quarter of 2012 was $21.2 million compared to $21.8 million for the first quarter of 2012 and $23.7 million for the second quarter of 2011. For the first six months of 2012, tax equivalent net interest income totaled $43.1 million compared to $47.0 million for the same period of 2011.

The declines of $0.6 million and $2.5 million in tax equivalent net interest income from the first quarter of 2012 and second quarter of 2011, respectively, were due to a reduction in loan income primarily attributable to declining loan balances and continued unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans. The lower interest expense is primarily attributable to certificates of deposit and reflects both lower balances and favorable repricing.

Tax equivalent interest income for the second quarter of 2012 was $22.6 million compared to $23.3 million for the first quarter of 2012 and $25.7 million for the second quarter of 2011. The decrease when compared to both periods is specifically attributable to both the shift in earning asset mix and lower yields. The declining loan portfolio has resulted in the higher yielding earning assets being replaced with lower yielding federal funds or investment securities. Additionally, low yields on new loan and investment production and loan portfolio repricing continue to unfavorably affect net interest income.

Interest expense for the second quarter of 2012 was $1.4 million compared to $1.5 million for the first quarter of 2012 and $2.0 million for the second quarter in 2011. The lower cost of funds when compared to both periods was a result of continued rate reductions on all deposit products except savings accounts. The rate reductions on deposits reflect our response to a historically low interest rate environment and desire to continue our focus on core banking relationships.

The decline in the loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income. The loan portfolio yield has been declining because the average rate on new loans is lower than the loans being paid off and the existing variable rate loans reprice lower. Lowering our cost of funds, to the extent we can, and continuing to shift the mix of our deposits will help to partially mitigate the unfavorable impact of weak loan demand and repricing, although the impact is expected to be minimal.

The net interest margin for the second quarter of 2012 was 3.77%, a decrease of 10 basis points from the first quarter of 2012 and a decline of 44 basis points from the second quarter of 2011. Year-to-date net interest margin of 3.82% declined 35 basis points from the comparable period in 2011. The decrease in the margin for all comparable periods is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

As experienced since at least 2010, historically low interest rates, foregone interest, lower loan fees, unfavorable asset repricing without the flexibility to significantly adjust deposit rates, and core deposit growth (which has strengthened our liquidity position, but contributed to an unfavorable shift in our earning asset mix), have all placed pressure on our net interest margin. Our current strategy, as well as our historic strategy, is to not accept greater interest rate risk by reaching further out the curve for yield, particularly given the fact that short term rates are at historical lows. We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions. As this strategy in the current environment has unfavorably impacted our net interest margin, over time this strategy has consistently resulted in our net interest margins significantly exceeding those in our peer group comparisons. Given the unfavorable asset repricing and low rate environment, we anticipate continued pressure on the margin for the remainder of 2012.

29


Provision for Loan Losses

The provision for loan losses for the second quarter of 2012 was $5.7 million compared to $4.8 million in the first quarter of 2012 and $3.5 million for the second quarter of 2011. The increase over both periods was driven by higher loan loss experience and the associated impact on our general reserve needs. For the first six months of 2012, the loan loss provision totaled $10.5 million compared to $7.7 million for the same period in 2011 with the increase primarily attributable to an increase in impaired loans. Net charge-offs for the second quarter of 2012 totaled $7.0 million, or 1.80% (annualized), of average loans compared to $4.6 million, or 1.16%, for the first quarter of 2012 and $6.3 million, or 1.49%, for the second quarter of 2011. For the first half of 2012, net charge-offs totaled $11.6 million, or 1.48% (annualized), of average loans compared to $12.0 million, or 1.41%, for the same period of 2011. At quarter-end, the allowance for loan losses of $29.9 million was 1.93% of outstanding loans (net of overdrafts) and provided coverage of 40% of nonperforming loans compared to 1.98% and 40%, respectively, at March 31, 2012, and 1.91% and 41%, respectively, at December 31, 2011.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in Thousands, except per share data)

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

 

CHARGE-OFFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

57

 

$

268

 

$

301

 

$

325

 

$

1,022

 

Real Estate - Construction

 

 

275

 

 

 

 

14

 

 

275

 

 

14

 

Real Estate - Commercial Mortgage

 

 

3,519

 

 

1,532

 

 

2,808

 

 

5,051

 

 

3,238

 

Real Estate - Residential

 

 

3,894

 

 

1,967

 

 

2,371

 

 

5,861

 

 

5,828

 

Real Estate - Home Equity

 

 

425

 

 

892

 

 

944

 

 

1,317

 

 

1,932

 

Consumer

 

 

550

 

 

732

 

 

606

 

 

1,282

 

 

1,226

 

Total Charge-offs

 

 

8,720

 

 

5,391

 

 

7,044

 

 

14,111

 

 

13,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECOVERIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

 

83

 

 

67

 

 

43

 

 

150

 

 

106

 

Real Estate - Construction

 

 

27

 

 

 

 

5

 

 

27

 

 

14

 

Real Estate - Commercial Mortgage

 

 

42

 

 

138

 

 

115

 

 

180

 

 

127

 

Real Estate - Residential

 

 

969

 

 

163

 

 

113

 

 

1,132

 

 

173

 

Real Estate - Home Equity

 

 

116

 

 

18

 

 

57

 

 

134

 

 

93

 

Consumer

 

 

452

 

 

394

 

 

373

 

 

846

 

 

713

 

Total Recoveries

 

 

1,689

 

 

780

 

 

706

 

 

2,469

 

 

1,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs

 

$

7,031

 

$

4,611

 

$

6,338

 

$

11,642

 

$

12,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs (Annualized)

 

 

1.80

%

 

1.16

%

 

1.49

%

 

1.48

%

 

1.41

%

as a percent of Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Outstanding, Net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


Noninterest Income

Noninterest income for the second quarter of 2012 totaled $13.9 million, an increase of $0.3 million, or 2.4%, over the first quarter of 2012 and a decrease of $0.5 million, or 3.8%, from the second quarter of 2011. The increase over the first quarter of 2012 was driven primarily by higher retail brokerage fees of $0.1 million and an increase in other income of $0.2 million, primarily gains from the sale of OREO properties. Compared to the second quarter of 2011, the decrease primarily reflects a $0.9 million reduction in other income attributable to a lower level of gains realized from the sale of OREO properties partially offset by higher mortgage banking fees of $0.3 million and bank card fees of $0.2 million.

For the first six months of 2012, noninterest income totaled $27.5 million, a decrease of $3.3 million, or 10.7%, from the same period of 2011 attributable to the Visa gain realized in the first quarter of 2011. Higher deposit fees, mortgage banking fees, and bank card fees partially offset by lower data processing fees and a reduction in other income, primarily lower gains from the sale of OREO properties, also contributed to the variance.

Noninterest income represented 39.88% of operating revenues (net interest income plus noninterest income) in the second quarter of 2012 compared to 38.64% in the first quarter of 2012 and 38.13% in the second quarter of 2011. For the first six months of 2012, noninterest income represented 39.3% of operating revenues compared to 39.9% for the same period of 2011. The decrease for the first six months of 2012 compared to 2011 is attributable to the gain from the sale of our Visa stock in the 2011. In addition to the Visa gain, this metric has also been impacted by the lower level of net interest income.

The table below reflects the major components of noninterest income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in Thousands)

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

 

Noninterest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Charges on Deposit Accounts

 

$

6,313

 

$

6,309

 

$

6,309

 

$

12,622

 

$

12,292

 

Data Processing Fees

 

 

680

 

 

675

 

 

764

 

 

1,355

 

 

1,738

 

Asset Management Fees

 

 

1,020

 

 

1,015

 

 

1,080

 

 

2,035

 

 

2,160

 

Retail Brokerage Fees

 

 

884

 

 

758

 

 

939

 

 

1,642

 

 

1,668

 

Mortgage Banking Fees

 

 

864

 

 

848

 

 

568

 

 

1,712

 

 

1,185

 

Interchange Fees (1)

 

 

1,580

 

 

1,526

 

 

1,443

 

 

3,106

 

 

2,803

 

ATM/Debit Card Fees (1)

 

 

1,204

 

 

1,245

 

 

1,115

 

 

2,449

 

 

2,251

 

Gain on Visa Stock

 

 

 

 

 

 

 

 

 

 

3,172

 

Other

 

 

1,361

 

 

1,210

 

 

2,230

 

 

2,571

 

 

3,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Income

 

$

13,906

 

$

13,586

 

$

14,448

 

$

27,492

 

$

30,782

 


 

 

(1)

Together referred to as “Bank Card Fees”

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

Service Charges on Deposit Accounts. Deposit service charge fees for the second quarter of 2012 totaled $6.3 million, comparable to both the first quarter of 2012 and second quarter of 2011. For the first six months of 2012, deposit service charge fees totaled $12.6 million, an increase of $330,000, or 2.7%, over the comparable period in 2011 driven by a lower level of overdraft charge-offs.

Data Processing Fees. Fees from data processing services for the second quarter of 2012 totaled $680,000, comparable to the first quarter of 2012. Fees decreased by $84,000, or 11.0%, compared to the second quarter of 2011, attributable to lower processing volume for our state government contract. For the first six months of 2012, fees totaled $1.4 million, a decrease of $383,000, or 22.0%, primarily due to a reduction in the number of banks that we provide processing services to as two of our user banks were acquired and discontinued service in mid 2011.

Retail Brokerage Fees. Fees from the sale of retail investment and insurance products totaled $884,000 for the second quarter of 2012, an increase of $126,000, or 16.6%, over the first quarter of 2012 and a decrease of $55,000, or 5.9%, from the second quarter of 2011. For the first six months of 2012, fees totaled $1.6 million, a $26,000 decrease from the comparable period of 2011. The change for each period reflects fluctuation in trading activity by our clients.

Mortgage Banking Fees. Mortgage banking fees totaled $864,000 for the second quarter of 2012, an increase of $15,000, or 1.8%, over the first quarter of 2012 and $296,000, or 52.1%, over the second quarter of 2011. For the first six months of 2012, fees totaled $1.7 million, an increase of $528,000, or 44.5%, over the same period of 2011. The increase for all respective periods is attributable to increased home purchase activity in our markets and an increase in refinance activity due to the lower rate environment. The mix of refinance and home purchase new loan production for the first half of 2012 was 38% and 62%, respectively, compared to 30% and 70%, respectively, for the same period of 2011.

31


Asset Management Fees. Fees from asset management activities totaled $1.0 million for the second quarter of 2012, which is comparable to the first quarter of 2012, and a decrease of $60,000, or 5.6%, from the second quarter of 2011. For the first six months of 2012, fees totaled $2.0 million, which is a decrease of $125,000, or 5.8%, from the same period of 2011. The decrease from the second quarter of 2011 reflects fluctuation in asset values for accounts under discretionary management for which fees are based on the account value at quarter-end. The decline in fees for the six month period was driven by both lower asset values for managed accounts as well as a decline in estate management fees. At June 30, 2012, assets under management totaled $668.4 million compared to $660.6 million at December 31, 2011 and $677.1 million at June 30, 2011.

Bank Card Fees. Bank Card Fees (including interchange fees and ATM/debit card fees) totaled $2.8 million for the second quarter of 2012, which is comparable to the first quarter of 2012, and an increase of $226,000, or 8.9%, over the second quarter of 2011. For the first six months of 2012, fees totaled $5.6 million, which represents an increase of $501,000, or 9.9%, over the same period of 2011. The increase over both periods in 2011 reflects higher card utilization as well as growth in active cards due to an increase in the number of deposit accounts.

Other. Other income totaled $1.4 million for the second quarter of 2012, an increase of $151,000, or 12.5%, over the first quarter of 2012, and a decrease of $869,000, or 39.0%, from the second quarter of 2011. The changes compared to both prior periods are attributable to higher or lower gains from the sale of OREO properties. For the first six months of 2012, other income totaled $2.6 million, a decrease of $4.1 million, from the same period of 2011. Compared to the first half of 2011, the decline in other income reflects the $3.2 million gain realized from the sale of our Visa stock as well as a lower level of gains from the sale of OREO properties.

Noninterest Expense

Noninterest expense for the second quarter of 2012 totaled $32.3 million, a decrease of $0.3 million, or 0.9%, from the first quarter of 2012 and an increase of $1.1 million, or 3.6%, over the second quarter of 2011. The decrease compared to the first quarter of 2012 reflects a reduction in compensation expense of $0.7 million partially offset by a $0.4 million increase in the other expense category. The decline in compensation expense was primarily due to lower pension plan and unemployment tax expense. The increase in other expense reflects higher advertising costs and an increase in miscellaneous expense partially offset by lower professional fees. Compared to the second quarter of 2011, the increase was attributable to higher compensation expense of $0.1 million and other expense of $1.1 million. Higher pension plan expense drove the increase in compensation while the other expense category increased due to higher OREO costs, professional fees, and miscellaneous expense.

For the first six months of 2012, noninterest expense totaled $64.9 million, an increase of $0.4 million, or 0.6%, over the same period of 2011 primarily attributable to higher compensation expense of $0.4 million and other expense of $0.2 million partially offset by lower occupancy expense of $0.2 million. The increase in compensation expense reflects higher expense for our pension plan partially offset by lower performance compensation. Higher professional fees and OREO costs partially offset by lower advertising costs, FDIC insurance fees, and intangible amortization drove the increase in the other expense category.

32


The table below reflects the major components of noninterest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(Dollars in Thousands)

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

 

Noninterest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

12,296

 

$

12,742

 

$

12,509

 

$

25,038

 

$

25,445

 

Associate Benefits

 

 

3,821

 

 

4,101

 

 

3,491

 

 

7,922

 

 

7,132

 

Total Compensation

 

 

16,117

 

 

16,843

 

 

16,000

 

 

32,960

 

 

32,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

 

2,276

 

 

2,266

 

 

2,447

 

 

4,542

 

 

4,843

 

Equipment

 

 

2,245

 

 

2,201

 

 

2,117

 

 

4,446

 

 

4,343

 

Total Occupancy

 

 

4,521

 

 

4,467

 

 

4,564

 

 

8,988

 

 

9,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal Fees

 

 

1,093

 

 

1,104

 

 

1,049

 

 

2,197

 

 

2,155

 

Professional Fees

 

 

1,184

 

 

1,321

 

 

910

 

 

2,504

 

 

1,755

 

Processing Services

 

 

1,016

 

 

963

 

 

939

 

 

1,979

 

 

1,889

 

Advertising

 

 

609

 

 

395

 

 

664

 

 

1,004

 

 

1,222

 

Travel and Entertainment

 

 

222

 

 

184

 

 

200

 

 

406

 

 

411

 

Printing and Supplies

 

 

282

 

 

289

 

 

284

 

 

571

 

 

632

 

Telephone

 

 

455

 

 

479

 

 

498

 

 

934

 

 

939

 

Postage

 

 

444

 

 

445

 

 

386

 

 

889

 

 

861

 

Insurance - Other

 

 

1,018

 

 

1,033

 

 

1,077

 

 

2,051

 

 

2,456

 

Intangible Amortization

 

 

107

 

 

108

 

 

107

 

 

215

 

 

460

 

Other Real Estate

 

 

3,460

 

 

3,513

 

 

3,033

 

 

6,973

 

 

6,710

 

Miscellaneous

 

 

1,765

 

 

1,453

 

 

1,456

 

 

3,219

 

 

3,245

 

Total Other

 

 

11,655

 

 

11,287

 

 

10,603

 

 

22,942

 

 

22,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Expense

 

$

32,293

 

$

32,597

 

$

31,167

 

$

64,890

 

$

64,498

 

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

Compensation. Compensation expense totaled $16.1 million for the second quarter of 2012, a decrease of $726,000, or 4.3%, from the first quarter of 2012 and an increase of $117,000, or 0.7%, over the second quarter of 2011. The decrease compared to the first quarter of 2012 reflects lower salaries of $445,000 and associate benefits of $280,000. The decrease in the salary expense category was primarily due to lower unemployment tax expense as a majority of this liability is paid in the first quarter. Associate benefit expense decreased due to lower pension plan expense. Compared to the second quarter of 2011, the increase was attributable to higher associate benefit expense related to our pension plan reflecting utilization of a lower discount rate in 2012 due to lower long-term bond rates.

For the first six months of 2012, compensation expense totaled $33.0 million, an increase of $383,000, or 1.2%, over the same period of 2011 driven by higher expense for associate benefits partially offset by lower salary expense. The increase in associate benefit expense reflects the aforementioned increase in the expense for our pension plan and the decrease in salaries was due to lower performance compensation.

Occupancy. Occupancy expense (including premises and equipment) totaled $4.5 million for the second quarter of 2012, comparable to the first quarter of 2012 and second quarter of 2011. For the first six months of 2012, occupancy expense totaled $9.0 million, a $198,000, or 2.2%, decrease from the same period in 2011, attributable to lower building maintenance costs.

Other. Other noninterest expense totaled $11.7 million for the second quarter of 2012 compared to $11.3 million for the first quarter of 2012 and $10.6 million for the second quarter of 2011. The $368,000, or 3.3%, increase over the first quarter of 2012 was due to higher advertising costs of $214,000 and miscellaneous expense of $312,000 partially offset by lower professional fees of $137,000. The increase in advertising costs reflects a higher level of promotional activities and the increase in miscellaneous expense was due to severance costs related to the closing of four banking offices and the outsourcing of our items processing function. Professional fees declined due to lower consulting fees and audit costs. The $1.1 million, or 9.9%, increase over the second quarter of 2011 was driven by higher OREO costs of $427,000, professional fees of $274,000, and miscellaneous expense of $309,000. The increase in OREO cost was due to a higher level of valuation adjustments for our OREO portfolio. Higher consulting fees drove the increase in professional fees. The increase in miscellaneous expense reflects the aforementioned severance costs.

33


For the first six months of 2012, other noninterest expense totaled $22.9 million, an increase of $207,000, or 0.9%, over the same period of 2011 primarily attributable to higher professional fees of $749,000 and OREO expense of $263,000, partially offset by lower advertising expense of $218,000, FDIC insurance fees of $405,000, and intangible amortization expense of $245,000. Professional fees increased due to higher audit fees and consulting fees. OREO expense increased due to higher carrying costs. Advertising expense declined due to improved cost controls over advertising for our free checking account products and a lower level of promotional activity. FDIC insurance fees declined due to a lower premium rate reflective of the revised rate structure implemented in mid-2011. The reduction in intangible amortization expense reflects the full amortization of certain core deposit intangibles from past acquisitions.

Our operating efficiency ratio (expressed as noninterest expense, excluding intangible amortization expense, as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 90.88% for the second quarter of 2012 compared to 91.73% for the first quarter of 2012 and 81.41% for the second quarter of 2011. For the first six months of 2012, this ratio was 91.31% compared to 82.37% for the comparable period of 2011. Lower noninterest expense drove the decrease in this ratio compared to the first quarter of 2012. The increase in this ratio over both prior periods in 2011 reflects a declining level of net interest income contribution to operating revenues as well as higher noninterest expense. The increase when compared to the first six months of 2011 also reflects the gain on sale of Visa stock realized in 2011. During 2012, we have continued to realize an elevated level of costs related to the management and resolution of nonperforming assets. We continue to review and evaluate opportunities to optimize our operations and reduce operating costs as well as better manage our discretionary expenses.

Income Taxes

We realized an income tax benefit of $1.3 million in the second quarter of 2012 compared to a benefit of $1.0 million for the first quarter of 2012 and income tax expense of $1.0 million for the second quarter of 2011. For the first six months of 2012, we realized an income tax benefit of $2.3 million compared to income tax expense of $1.6 million for the same period in 2011. A lower level of book taxable income drove the variance compared to all prior periods.

FINANCIAL CONDITION

Average assets totaled approximately $2.624 billion for the second quarter of 2012, a decrease of $12.5 million, or 0.5%, from the first quarter of 2012, and an increase of $114.5 million, or 4.6%, from the fourth quarter of 2011. Average earning assets were $2.263 billion for the second quarter of 2012, a decrease of $5.5 million, or 0.2%, from the first quarter of 2012, and an increase of $116.4 million, or 5.4%, over the fourth quarter of 2011. We discuss these variances in more detail below.

Investment Securities

In the second quarter of 2012, our average investment portfolio decreased $18.1 million, or 6.1%, from the first quarter of 2012 and decreased $27.2 million, or 8.8%, from the fourth quarter of 2011. As a percentage of average earning assets, the investment portfolio represented 12.4% in the second quarter of 2012, compared to 13.2% in the prior quarter and 14.3% in the fourth quarter of 2011. The decrease in the average balance of the investment portfolio compared to the prior periods was primarily attributable to declines in U.S. Treasury and mortgage-backed securities, partially offset by increases to municipal bonds and U.S. Agencies. Deposits which require collateralization declined during the comparable periods which allowed for maturing U.S. Treasuries not to be replaced. When appropriate, we will continue to look to deploy a portion of the overnight funds position in the investment portfolio during the remainder of 2012.

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. As of June 30, 2012, all securities are classified as available-for-sale, which offers management full flexibility in managing our liquidity and interest rate sensitivity without adversely impacting our regulatory capital levels. It is neither 36 management’s intent nor practice to participate in the trading of investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio. Securities in the available-for-sale portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income (loss) component of shareowners’ equity.

At June 30, 2012, the investment portfolio maintained a net pre-tax unrealized gain of $1.0 million compared to $1.3 million and $1.7 million at March 31, 2012 and December 31, 2011, respectively. The decrease in the unrealized gains for both periods resulted from declines in U.S. Treasuries, and to a lesser degree, mortgage backed securities. Yields increased slightly on the short-end of the Treasury curve during both periods, resulting in lower prices.

34


At quarter end, there were 102 positions with unrealized losses totaling approximately $0.2 million. The positions consisted of Ginnie Mae mortgage-backed securities (GNMA MBS), Small Business Administration (“SBA”) securities, a Federal Farm Credit Bank bond (FFCB), and municipal bonds. Both the GNMA and SBA securities carry the full faith and credit guarantee of the U.S. Government and float to the prime rate. The FFCB bond remains “AAA” rated by Moody’s, and the municipal bonds carry a minimum rating of “AA-”. All positions with unrealized losses are not considered impaired, and are expected to mature at par. We also maintain a $0.6 million unrealized loss on a preferred stock investment that maintained a zero book value as of June 30, 2012, March 31, 2012, and December 31, 2011. No additional impairment has been recorded in 2012, but we continue to closely monitor the fair value of this security as the issuer of this security continues to experience negative operating trends.

The average maturity of the total portfolio at June 30, 2012 was 1.53 years compared to 1.41 years and 1.39 years for the March 31, 2012 and December 31, 2011 periods, respectively. The average life of the total portfolio in the second quarter of 2012 extended slightly compared to both periods as Government agency positions with an average life of 2.70 years were added during the quarter.

Loans

Average loans declined (a portion of which is attributable to problem loan resolution) by $25.7 million, or 1.6%, from the first quarter of 2012 and $75.9 million, or 4.6%, from the fourth quarter of 2011. Loan balances continued to decline throughout the portfolio, as all loan categories have experienced declines with the reduction primarily in the commercial real estate and residential categories. Our core loan portfolio continues to be impacted by monthly amortization and payoffs that have outpaced our new loan production. New loan production continues to be impacted by weak loan demand attributable to the trend toward consumers and businesses deleveraging, the lack of consumer confidence, and a persistently sluggish economy.

Several new lending programs were introduced during the first half of 2012 to mitigate the impact that consumer and business deleveraging is having on our portfolio. These programs primarily used in our business and commercial real estate lending areas have had a positive impact, as the rate of decline has slowed during the quarter.

The resolution of problem loans (which has the effect of lowering the loan portfolio as loans are either charged off or transferred to other real estate “OREO”) also contributed to the overall decline. During the second quarter of 2012, loan charge-offs and loans transferred to OREO accounted for $15.9 million, or 70%, of the net reduction in total loans of $22.6 million from the first quarter of 2012. Compared to the fourth quarter of 2011, loan resolution accounted for $25.3 million, or 35%, of the net reduction in loans of $72.4 million. The problem loan resolutions and reductions in portfolio balances previously noted are based on “as of” balances, not averages.

Efforts to stimulate new loan growth remain ongoing and while we strive to identify opportunities to increase loans outstanding and enhance our loan portfolio’s overall contribution to earnings, we will only do so by adhering to sound lending principles applied in a prudent and consistent manner. Thus, we will not relax our underwriting standards in order to achieve designated growth goals and, where appropriate, have adjusted our standards to reflect risks inherent in the current economic environment.

Nonperforming Assets

Nonperforming assets (nonaccrual loans and OREO) totaled $132.8 million at the end of the second quarter of 2012 compared to $136.8 million at the end of the first quarter of 2012 and $137.6 million at the end of the fourth quarter of 2011. Nonaccrual loans totaled $74.8 million, a decrease of $3.9 million from the first quarter of 2012 and $0.3 million from the fourth quarter of 2011, reflective of loan charge-offs and the migration of loans to OREO, which outpaced gross additions. Gross additions declined for the second straight quarter and represented the lowest quarterly amount thus far in this cycle. The balance of OREO totaled $58.1 million at the end of the second quarter, comparable to the prior quarter and a $4.5 million decrease from the fourth quarter of 2011. We continue to experience progress in our efforts to dispose of OREO by selling properties totaling $13.1 million during the first half of the year. Nonperforming assets represented 5.02% of total assets at June 30, 2012 compared to 5.14% at March 31, 2012 and 5.21% at December 31, 2011.

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(Dollars in Thousands)

 

June 30,
2012

 

March 31,
2012

 

December 31,
2011

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccruing Loans:

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

815

 

$

808

 

$

755

 

Real Estate - Construction

 

 

6,382

 

 

943

 

 

334

 

Real Estate - Commercial Mortgage

 

 

39,701

 

 

46,886

 

 

42,820

 

Real Estate - Residential

 

 

22,805

 

 

25,445

 

 

25,671

 

Real Estate - Home Equity

 

 

4,192