CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES–BUSINESS AND BASIS OF PRESENTATION
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-ownedwholly owned subsidiary, Capital City Bank (“CCB” or the “Bank”). All material inter-company transactions and accounts have been eliminated. Certain previously reported amounts have been reclassified to conform to the current year’s presentation.
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.
The consolidated statement of financial condition at December 31, 20162019 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, 2016.2019.
NOTE 2 – INVESTMENT SECURITIES |
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale and |
held-to-maturity were as follows: |
| September 30, 2017 | | | December 31, 2016 |
| Amortized | Unrealized | Unrealized | Market | Amortized | Unrealized | Unrealized | Market |
| Cost | | Gains | | Losses | | Value | | Cost | | Gain | | Losses | | Value |
Available for Sale | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 257,635 | | $ | 32 | | $ | 869 | | $ | 256,798 | | $ | 286,867 | | $ | 262 | | $ | 851 | | $ | 286,278 |
U.S. Government Agency | | 147,550 | | | 729 | | | 290 | | | 147,989 | | | 131,489 | | | 495 | | | 344 | | | 131,640 |
States and Political Subdivisions | | 95,869 | | | 175 | | | 54 | | | 95,990 | | | 95,197 | | | 23 | | | 381 | | | 94,839 |
Mortgage-Backed Securities | | 1,218 | | | 114 | | | - | | | 1,332 | | | 1,312 | | | 118 | | | - | | | 1,430 |
Equity Securities(1) | | 8,737 | | | - | | | - | | | 8,737 | | | 8,547 | | | - | | | - | | | 8,547 |
Total | $ | 511,009 | | $ | 1,050 | | $ | 1,213 | | $ | 510,846 | | $ | 523,412 | | $ | 898 | | $ | 1,576 | | $ | 522,734 |
| | | | | | | | | | | | | | | | | | | | | | | |
Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 93,309 | | $ | 2 | | $ | 183 | | $ | 93,128 | | $ | 119,131 | | $ | 107 | | $ | 81 | | $ | 119,157 |
States and Political Subdivisions | | 7,051 | | | 31 | | | 2 | | | 7,080 | | | 8,175 | | | 1 | | | 38 | | | 8,138 |
Mortgage-Backed Securities | | 83,902 | | | 55 | | | 642 | | | 83,315 | | | 50,059 | | | 29 | | | 637 | | | 49,451 |
Total | $ | 184,262 | | $ | 88 | | $ | 827 | | $ | 183,523 | | $ | 177,365 | | $ | 137 | | $ | 756 | | $ | 176,746 |
| | | | | | | | | | | | | | | | | | | | | | | |
Total Investment Securities | $ | 695,271 | | $ | 1,138 | | $ | 2,040 | | $ | 694,369 | | $ | 700,777 | | $ | 1,035 | | $ | 2,332 | | $ | 699,480 |
Business Combination. On March 1, 2020, CCB completed its acquisition of a 51% membership interest in Brand Mortgage Group, LLC (“Brand”) which is now operated as Capital City Home Loans (“CCHL”). CCHL was consolidated into CCBG’s financial statements effective March 1, 2020. Assets acquired totaled $52 million (consisting primarily of loans held for sale) and liabilities assumed totaled $42 million (consisting primarily of warehouse line borrowings). The primary purpose of the acquisition was to gain access to an expanded residential mortgage product line-up and investor base (including a mandatory delivery channel for loan sales) and to generate other operational synergies and cost savings. CCB made a $7.1 million cash payment for its 51% membership interest and entered into a buyout agreement for the remaining 49% noncontrolling interest resulting in temporary equity with a fair value of $7.4 million. Goodwill totaling $4.3 million was recorded in connection with this acquisition. Factors that contributed to the purchase price resulting in goodwill include Brand’s strong management team and expertise in the mortgage industry, historical record of earnings, and operational synergies created as part of the strategic alliance.
Adoption of New Accounting Standard
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, ASC 326-30 provides a new credit loss model for available-for-sale debt securities. The most significant change requires credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is not more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of ASC 326 (“CECL”) had an impact of $4.0 million ($3.3 million increase in the allowance for credit losses and $0.7 million increase in the allowance for unfunded loan commitments (liability account)) that was offset by a corresponding decrease in retained earnings of $3.1 million and $0.9 million increase in deferred tax assets. The increase in the allowance for credit losses required under the ASC 326 generally reflected the impact of reserves calculated over the life of loan, and more specifically higher reserves required for longer duration loan portfolios, and the utilization of a longer historical look-back period in the calculation of loan loss rates (loss given default). Upon analyzing the debt security portfolios, the Company determined that no allowance was required as these debt securities are government guaranteed treasuries or government agency-backed securities for which the risk of loss was deemed minimal. Further, certain municipal debt securities held by the Company have been pre-refunded and secured by government guaranteed treasuries.
The following table illustrates the impact of adopting ASC 326 on January 1, 2020.
| | As Reported | | | | | Impact of |
| | Under | | Pre-ASC 326 | | ASC 326 |
(Dollars in Thousands) | | ASC 326 | | Adoption | | Adoption |
Loans: | | | | | | | | | |
Commercial, Financial and Agricultural | | $ | 2,163 | | $ | 1,675 | | $ | 488 |
Real Estate - Construction | | | 672 | | | 370 | | | 302 |
Real Estate - Commercial Mortgage | | | 4,874 | | | 3,416 | | | 1,458 |
Real Estate - Residential | | | 4,371 | | | 3,128 | | | 1,243 |
Real Estate - Home Equity | | | 2,598 | | | 2,224 | | | 374 |
Consumer, Other Loans and Overdrafts | | | 2,496 | | | 3,092 | | | (596) |
Allowance for Credit Losses on Loans | | | 17,174 | | | 13,905 | | | 3,269 |
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Other Liabilities: | | | | | | | | | |
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures | | $ | 815 | | $ | 157 | | $ | 658 |
Significant Accounting Policy Changes
Upon adoption of ASC 326, the Company revised certain accounting policies for Investment Securities, Loans, and the Allowance for Credit Losses as detailed below.
In addition, certain accounting policies were revised upon the acquisition of Brand on March 1, 2020 and are also discussed in further detail below under the Mortgage Banking Activities section.
Investment Securities
Investment securities are classified as held-to-maturity and carried at amortized cost when the Company has the positive intent and ability to hold them until maturity. Investment securities not classified as held-to-maturity or trading securities are classified as available-for-sale and carried at fair value. The Company determines the appropriate classification of securities at the time of purchase. For reporting and risk management purposes, we further segment investment securities by the issuer of the security which correlates to its risk profile: U.S. government treasury, U.S. government agency, state and political subdivisions, and mortgage-backed securities. Certain equity securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are classified as available-for-sale and carried at cost.
Interest income includes amortization and accretion of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Securities transferred from available-for-sale to held-to-maturity are recorded at amortized cost plus or minus any unrealized gain or loss at the time of transfer. Any existing unrecognized gain or loss continues to be reported in accumulated other comprehensive income (net of tax) and amortized as an adjustment to interest income over the remaining life of the security. Any existing allowance for credit loss is reversed at the time of transfer. Subsequent to transfer, the allowance for credit losses on the transferred security is evaluated in accordance with the accounting policy for held-to-maturity securities. Additionally, any allowance amounts reversed or established as part of the transfer are presented on a gross basis in the consolidated statement of income.
The accrual of interest is generally suspended on securities more than 90 days past due with respect to principal or interest. When a security is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income and thus not included in the estimate of credit losses.
Credit losses and changes thereto, are established as an allowance for credit loss through a provision for credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Certain debt securities in the Company’s investment portfolio were issued by a U.S. government entity or agency and are either explicitly or implicitly guaranteed by the U.S. government. The Company considers the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. Further, certain municipal securities held by the Company have been pre-refunded and secured by government guaranteed treasuries. Therefore, for the aforementioned securities, the Company does not assess or record expected credit losses due to the zero loss assumption.
Impairment - Available-for-Sale Securities.
Unrealized gains on available-for-sale securities are excluded from earnings and reported, net of tax, in other comprehensive income (“OCI”). For available-for-sale securities that are in an unrealized loss position, the Company first assesses whether it intends to sell, or whether it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale securities that do not meet the aforementioned criteria or have a zero loss assumption, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If the assessment indicates that a credit loss exists, the present value of cash flows to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded through a provision for credit loss expense, limited by the amount that fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Allowance for Credit Losses - Held-to-Maturity Securities.
Management measures expected credit losses on each individual held-to-maturity debt security that has not been deemed to have a zero assumption. Each security that is not deemed to have zero credit losses is individually measured based on net realizable value, or the difference between the discounted value of the expected cash flows, based on the original effective rate, and the recorded amortized basis of the security. To the extent a shortfall is related to credit loss, an allowance for credit loss is recorded through a provision for credit loss expense. Any shortfall related to other noncredit-related factors is recognized in other comprehensive income.
Loans Held for Investment
Loans held for investment (“HFI”) are stated at amortized cost which includes the principal amount outstanding, net premiums and discounts, and net deferred loan fees and costs. Accrued interest receivable on loans is reported in other assets and is not included in the amortized cost basis of loans. Interest income is accrued on the effective yield method based on outstanding principal balances, and includes loan late fees. Fees charged to originate loans and direct loan origination costs are deferred and amortized over the life of the loan as a yield adjustment.
The Company defines loans as past due when one full payment is past due or a contractual maturity is over 30 days late. The accrual of interest is generally suspended on loans more than 90 days past due with respect to principal or interest. When a loan is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income and thus a policy election has been made to not include in the estimate of credit losses. Interest income on nonaccrual loans is recognized when the ultimate collectability is no longer considered 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.
Loan charge-offs on commercial and investor real estate loans are recorded when the facts and circumstances of the individual loan confirm the loan is not fully collectible and the loss is reasonably quantifiable. Factors considered in making these determinations are the borrower’s and any guarantor’s ability and willingness to pay, the status of the account in bankruptcy court (if applicable), and collateral value. Charge-off decisions for consumer loans are dictated by the Federal Financial Institutions Examination Council’s (FFIEC) Uniform Retail Credit Classification and Account Management Policy which establishes standards for the classification and treatment of consumer loans, which generally require charge-off after 120 days of delinquency.
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk. Reporting systems are used to monitor loan originations, loan ratings, concentrations, loan delinquencies, nonperforming and potential problem loans, and other credit quality metrics. The ongoing review of loan portfolio quality and trends by Management and the Credit Risk Oversight Committee support the process for estimating the allowance for credit losses.
Allowance for Credit Losses
The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The allowance for credit losses is adjusted by a credit loss provision which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is accounted for as a separate liability included in other liabilities.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loan default and loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information incorporate management’s view of current conditions and forecasts.
The methodology for estimating the amount of credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and second, a pooled component for expected credit losses for pools of loans that share similar risk characteristics.
Loans That Do Not Share Risk Characteristics (Individually Analyzed)
Loans that do not share similar risk characteristics are evaluated on an individual basis. Loans deemed to be collateral dependent have differing risk characteristics and are individually analyzed to estimate the expected credit loss. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the liquidation and sale of the underlying collateral. For collateral dependent loans where foreclosure is probable, the expected credit loss is measured based on the difference between the fair value of the collateral (less selling cost) and the amortized cost basis of the asset. For collateral dependent loans where foreclosure is not probable, the Company has elected the practical expedient allowed by ASC 326-20 to measure the expected credit loss under the same approach as those loans where foreclosure is probable. For loans with balances greater than $250,000 the fair value of the collateral is obtained through independent appraisal of the underlying collateral. For loans with balances less than $250,000, the Company has made a policy election to measure expected loss for these individual loans utilizing loss rates for similar loan types. The aforementioned measurement criteria are applied for collateral dependent troubled debt restructurings.
Loans That Share Similar Risk Characteristics (Pooled Loans)
The general steps in determining expected credit losses for the pooled loan component of the allowance are as follows:
Segment loans into pools according to similar risk characteristics
Develop historical loss rates for each loan pool segment
Incorporate the impact of forecasts
Incorporate the impact of other qualitative factors
Calculate and review pool specific allowance for credit loss estimate
Methodology –
A discounted cash flow (“DCF”) methodology is utilized to calculate expected cash flows for the life of each individual loan. The discounted present value of expected cash flow is then compared to the loan’s amortized cost basis to determine the credit loss estimate. Individual loan results are aggregated at the pool level in determining total reserves for each loan pool.
The primary inputs used to calculate expected cash flows include historical loss rates which reflect probability of default (“PD”) and loss given default (“LGD”), and prepayment rates. The historical look-back period is a key factor in the calculation of the PD rate and is based on management’s assessment of current and forecasted conditions and may vary by loan pool. Loans subject to the Company’s risk rating process are further sub-segmented by risk rating in the calculation of PD rates. LGD rates generally reflect the historical average net loss rate by loan pool. Expected cash flows are further adjusted to incorporate the impact of loan prepayments which will vary by loan segment and interest rate conditions. In general, prepayment rates are based on observed prepayment rates occurring in the loan portfolio and consideration of forecasted interest rates.
Forecast Factors –
In developing loss rates, adjustments are made to incorporate the impact of forecasted conditions. Certain assumptions are also applied, including the length of the forecast and reversion periods. The forecast period is the period within which management is able to make a reasonable and supportable assessment of future conditions. The reversion period is the period beyond which management believes it can develop a reasonable and supportable forecast, and bridges the gap between the forecast period and the use of historical default and loss rates. The remainder period reflects the remaining life of the loan. The length of the forecast and reversion periods are periodically evaluated and based on management’s assessment of current and forecasted conditions and may vary by loan pool. For purposes of developing a reasonable and supportable assessment of future conditions, management utilizes established industry and economic data points and sources, including the Federal Open Market Committee forecast, with the forecasted unemployment rate being a significant factor. PD rates for the forecast period will be adjusted accordingly based on management’s assessment of future conditions. PD rates for the remainder period will reflect the historical mean PD rate. Reversion period PD rates reflect the difference between forecast and remainder period PD rates closed using a straight-line adjustment over the reversion period.
Qualitative Factors –
Loss rates are further adjusted to account for other risk factors that impact loan defaults and losses. These basis point adjustments are based on management’s assessment of trends and conditions that impact credit risk and resulting loan losses, more specifically internal and external factors that are independent of and not reflected in the quantitative loss rate calculations. Risk factors management considers in this assessment include trends in underwriting standards, nature/volume/terms of loan originations, past due loans, loan review systems, collateral valuations, concentrations, legal/regulatory/political conditions, and the unforeseen impact of natural disasters.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which it is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense and is recorded in other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life and applies the same estimated loss rate as determined for current outstanding loan balances by segment. Off-balance sheet credit exposures are identified and classified in the same categories as the allowance for credit losses with similar risk characteristics that have been previously mentioned.
Mortgage Banking Activities
Mortgage Loans Held for Sale and Revenue Recognition
Mortgage loans held for sale (“HFS”) are carried at fair value under the fair value option with changes in fair value recorded in gain on sale of mortgage loans held for sale on the consolidated statements of income. The fair value of mortgage loans held for sale committed to investors is calculated using observable market information such as the investor commitment, assignment of trade (AOT) or other mandatory delivery commitment prices. The Company bases loans committed to Agency investors based on the Agency’s quoted mortgage backed security (MBS) prices. The fair value of mortgage loans held for sale not committed to investors is based on quoted best execution secondary market prices. If no such quoted price exists, the fair value is determined using quoted prices for a similar asset or assets, such as MBS prices, adjusted for the specific attributes of that loan, which would be used by other market participants.
Gains and losses from the sale of mortgage loans held for sale are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in gain on sale of mortgage loans held for sale on the consolidated statements of income. Sales proceeds reflect the cash received from investors through the sale of the loan and servicing release premium. If the related mortgage servicing right (MSR) is sold servicing retained, the MSR addition is recorded in gain on sale of mortgage loans held for sale on the consolidated statements of income. Gain on sale of mortgage loans held for sale also includes the unrealized gains and losses associated with the changes in the fair value of mortgage loans held for sale, and the realized and unrealized gains and losses from derivative instruments.
Mortgage loans held for sale are considered sold when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through either an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. The Company typically considers the above criteria to have been met upon acceptance and receipt of sales proceeds from the purchaser.
Derivative Instruments (IRLC/Forward Commitments)
The Company holds and issues derivative financial instruments such as interest rate lock commitments (IRLCs) and other forward sale commitments. IRLCs are subject to price risk primarily related to fluctuations in market interest rates. To hedge the interest rate risk on certain IRLCs, the Company uses forward sale commitments, such as to-be-announced securities (TBAs) or mandatory delivery commitments with investors. Management expects these forward sale commitments to experience changes in fair value opposite to the changes in fair value of the IRLCs thereby reducing earnings volatility. Forward sale commitments are also used to hedge the interest rate risk on mortgage loans held for sale that are not committed to investors and still subject to price risk. If the mandatory delivery commitments are not fulfilled, the Company pays a pair-off fee. Best effort forward sale commitments are also executed with investors, whereby certain loans are locked with a borrower and simultaneously committed to an investor at a fixed price. If the best effort IRLC does not fund, there is no obligation to fulfill the investor commitment.
The Company considers various factors and strategies in determining what portion of the IRLCs and uncommitted mortgage loans held for sale to economically hedge. All derivative instruments are recognized as other assets or other liabilities on the consolidated statements of financial condition at their fair value. Changes in the fair value of the derivative instruments are recognized in gain on sale of mortgage loans held for sale on the consolidated statements of income in the period in which they occur. Gains and losses resulting from the pairing-out of forward sale commitments are recognized in gain on sale of mortgage loans held for sale on the consolidated statements of income. The Company accounts for all derivative instruments as free-standing derivative instruments and does not designate any for hedge accounting.
Mortgage Servicing Rights (“MSRs”) and Revenue Recognition
The Company sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Upon sale, an MSR asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. As the Company has not elected to subsequently measure any class of servicing assets under the fair value measurement method, the Company follows the amortization method. MSRs are amortized to noninterest income (other income) in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and included in other assets, net, on the consolidated statements of financial condition.
The Company periodically evaluates its MSRs asset for impairment. Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). As mortgage interest rates fall, prepayment speeds are usually faster and the value of the MSRs asset generally decreases, requiring additional valuation reserve. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the MSRs asset generally increases, requiring less valuation reserve. A valuation allowance is established, through a charge to earnings, to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the MSRs asset and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the MSRs asset and valuation allowance, precluding subsequent recoveries.
Derivative/Hedging Activities
At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company's intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation ("standalone derivative"). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods, in which the hedged transactions will affect earnings.
Accounting Standards Updates
ASU 2019-12,"Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation when there is a loss from continuing operations or a gain from other items and the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company January 1, 2021 and is not expected to have a material impact on the Company’s consolidated financial statements.
ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company on January 1, 2021 and is not expected to have a material impact on the Company’s consolidated financial statements.
ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)". ASU 2020-02 incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective on January 1, 2020 and had no material impact on the Company’s documentation requirements.
ASU 2020-03, "Codification Improvements to Financial Instruments". ASU 2020-03 revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a material impact on the Company’s consolidated financial statements.
ASU 2020-04, "Reference Rate Reform (Topic 848). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. It is anticipated this ASU will simplify any modifications executed between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. The Company is evaluating the impact of this ASU and has not yet determined if the LIBOR transition and this ASU will have material effects on the Company’s business operations and consolidated financial statements.
NOTE 2 – INVESTMENT SECURITIES |
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Portfolio Composition. The following table summarizes the amortized cost and related market value of investment securities |
available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses. |
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| June 30, 2020 | | | December 31, 2019 |
| Amortized | Unrealized | Unrealized | Market | Amortized | Unrealized | Unrealized | Market |
| Cost | | Gains | | Losses | | Value | | Cost | | Gain | | Losses | | Value |
Available for Sale | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 158,600 | | $ | 2,167 | | $ | - | | $ | 160,767 | | $ | 231,996 | | $ | 849 | | $ | 67 | | $ | 232,778 |
U.S. Government Agency | | 163,658 | | | 2,890 | | | 31 | | | 166,517 | | | 155,706 | | | 697 | | | 325 | | | 156,078 |
States and Political Subdivisions | | 5,451 | | | 122 | | | - | | | 5,573 | | | 6,310 | | | 9 | | | - | | | 6,319 |
Mortgage-Backed Securities | | 488 | | | 57 | | | - | | | 545 | | | 693 | | | 80 | | | - | | | 773 |
Equity Securities(1) | | 7,778 | | | - | | | - | | | 7,778 | | | 7,653 | | | - | | | - | | | 7,653 |
Total | $ | 335,975 | | $ | 5,236 | | $ | 31 | | $ | 341,180 | | $ | 402,358 | | $ | 1,635 | | $ | 392 | | $ | 403,601 |
| | | | | | | | | | | | | | | | | | | | | | | |
Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 20,017 | | $ | 119 | | $ | - | | $ | 20,136 | | $ | 20,036 | | $ | 15 | | $ | 9 | | $ | 20,042 |
States and Political Subdivisions | | - | | | - | | | - | | | - | | | 1,376 | | | - | | | - | | | 1,376 |
Mortgage-Backed Securities | | 212,161 | | | 6,202 | | | - | | | 218,363 | | | 218,127 | | | 2,064 | | | 180 | | | 220,011 |
Total | $ | 232,178 | | $ | 6,321 | | $ | - | | $ | 238,499 | | $ | 239,539 | | $ | 2,079 | | $ | 189 | | $ | 241,429 |
| | | | | | | | | | | | | | | | | | | | | | | |
Total Investment Securities | $ | 568,153 | | $ | 11,557 | | $ | 31 | | $ | 579,679 | | $ | 641,897 | | $ | 3,714 | | $ | 581 | | $ | 645,030 |
(1)Includes Federal Home Loan Bank and Federal Reserve Bank and FNBB, Inc. stock, recorded at cost of $3.2 million, $4.8$3.0 million and $0.8$4.8 million, respectively, at SeptemberJune 30, 20172020 and $3.3 million, $4.8includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $2.9 million and $0.5$4.8 million, respectively, at December 31, 2016.2019.
Securities with an amortized cost of $214.3$262.0 million and $332.7$353.8 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, 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 equity 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.
As a member of the Federal Reserve Bank of Atlanta, the Bank is required to maintain stock in the Federal Reserve Bank of Atlanta based on a specified ratio relative to the Bank’s capital. Federal Reserve Bank stock is carried at cost.
Maturity Distribution. At SeptemberJune 30, 2017,2020, the Company's investment securities had the following maturity distribution based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Mortgage-backed securities and certain amortizing U.S. government agency securities are shown separately because they are not due at a certain maturity date.
| Available for Sale | | Held to Maturity |
(Dollars in Thousands) | Amortized Cost | | Market Value | | Amortized Cost | | Market Value |
Due in one year or less | $ | 138,454 | | $ | 138,421 | | $ | 63,439 | | $ | 63,370 |
Due after one through five years | | 253,590 | | | 252,720 | | | 36,922 | | | 36,838 |
Mortgage-Backed Securities | | 1,217 | | | 1,332 | | | 83,901 | | | 83,315 |
U.S. Government Agency | | 109,011 | | | 109,636 | | | - | | | - |
Equity Securities | | 8,737 | | | 8,737 | | | - | | | - |
Total | $ | 511,009 | | $ | 510,846 | | $ | 184,262 | | $ | 183,523 |
| Available for Sale | | Held to Maturity |
(Dollars in Thousands) | Amortized Cost | | Market Value | | Amortized Cost | | Market Value |
Due in one year or less | $ | 120,988 | | $ | 122,200 | | $ | 20,017 | | $ | 20,136 |
Due after one year through five years | | 43,063 | | | 44,140 | | | - | | | - |
Mortgage-Backed Securities | | 488 | | | 545 | | | 212,161 | | | 218,363 |
U.S. Government Agency | | 163,658 | | | 166,517 | | | - | | | - |
Equity Securities | | 7,778 | | | 7,778 | | | - | | | - |
Total | $ | 335,975 | | $ | 341,180 | | $ | 232,178 | | $ | 238,499 |
10
Unrealized Losses on Investment Securities.The following table summarizes the available for sale investment securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position: | Less Than | | Greater Than | | | | | | |
| 12 Months | | 12 Months | | Total |
| Market | | Unrealized | | Market | | Unrealized | | Market | | Unrealized |
(Dollars in Thousands) | Value | | Losses | | Value | | Losses | | Value | | Losses |
September 30, 2017 | | | | | | | | | | | | | | | | | |
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 191,720 | | $ | 759 | | $ | 9,981 | | $ | 110 | | $ | 201,701 | | $ | 869 |
U.S. Government Agency | | 34,775 | | | 126 | | | 17,853 | | | 164 | | | 52,628 | | | 290 |
States and Political Subdivisions | | 23,031 | | | 22 | | | 5,129 | | | 32 | | | 28,160 | | | 54 |
Total | | 249,526 | | | 907 | | | 32,963 | | | 306 | | | 282,489 | | | 1,213 |
| | | | | | | | | | | | | | | | | |
Held to Maturity | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | | 83,173 | | | 183 | | | - | | | - | | | 83,173 | | | 183 |
States and Political Subdivisions | | 504 | | | 2 | | | - | | | - | | | 504 | | | 2 |
Mortgage-Backed Securities | | 47,159 | | | 579 | | | 4,373 | | | 63 | | | 51,532 | | | 642 |
Total | $ | 130,836 | | $ | 764 | | $ | 4,373 | | $ | 63 | | $ | 135,209 | | $ | 827 |
| | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | | |
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 116,704 | | $ | 851 | | $ | - | | $ | - | | $ | 116,704 | | $ | 851 |
U.S. Government Agency | | 48,520 | | | 310 | | | 6,699 | | | 34 | | | 55,219 | | | 344 |
States and Political Subdivisions | | 81,521 | | | 380 | | | 294 | | | 1 | | | 81,815 | | | 381 |
Mortgage-Backed Securities | | 3 | | | - | | | - | | | - | | | 3 | | | - |
Total | | 246,748 | | | 1,541 | | | 6,993 | | | 35 | | | 253,741 | | | 1,576 |
| | | | | | | | | | | | | | | | | |
Held to Maturity | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | | 35,210 | | | 81 | | | - | | | - | | | 35,210 | | | 81 |
States and Political Subdivisions | | 7,491 | | | 38 | | | - | | | - | | | 7,491 | | | 38 |
Mortgage-Backed Securities | | 36,710 | | | 599 | | | 4,010 | | | 38 | | | 40,720 | | | 637 |
Total | $ | 79,411 | | $ | 718 | | $ | 4,010 | | $ | 38 | | $ | 83,421 | | $ | 756 |
Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Declines in the fair value of
| Less Than | | Greater Than | | | | | | |
| 12 Months | | 12 Months | | Total |
| Market | | Unrealized | | Market | | Unrealized | | Market | | Unrealized |
(Dollars in Thousands) | Value | | Losses | | Value | | Losses | | Value | | Losses |
June 30, 2020 | | | | | | | | | | | | | | | | | |
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. Government Agency | $ | 6,168 | | $ | 24 | | $ | 2,734 | | $ | 7 | | $ | 8,902 | | $ | 31 |
Total | $ | 6,168 | | $ | 24 | | $ | 2,734 | | $ | 7 | | $ | 8,902 | | $ | 31 |
| | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | | | | | |
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. Government Treasury | $ | 9,955 | | $ | - | | $ | 93,310 | | $ | 67 | | $ | 103,265 | | $ | 67 |
U.S. Government Agency | | 36,361 | | | 244 | | | 17,364 | | | 81 | | | 53,725 | | | 325 |
States and Political Subdivisions | | 578 | | | - | | | - | | | - | | | 578 | | | - |
Mortgage-Backed Securities | | 8 | | | - | | | - | | | - | | | 8 | | | - |
Total | $ | 46,902 | | $ | 244 | | $ | 110,674 | | $ | 148 | | $ | 157,576 | | $ | 392 |
At June 30, 2020, there were 18 available-for-sale (“AFS”) and held-to-maturity (“HTM”)securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers, (i) whether it has decided to sell the security, (ii) whether it is more likely than not that the Company will have to sell the security before its market value recovers, and (iii) whether the present value of expected cash flows is sufficient to recover the entire amortized cost basis. When assessing a security’s expected cash flows, the Company considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost and (ii) the financial condition and near-term prospects of the issuer. 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.
At September 30, 2017, there were 266 positions (combined AFS and HTM) with unrealized losses totaling $2.0 million. 58 of these positions were U.S. government treasury securities guaranteed by the U.S. government. 103$31,000. All of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities. Because the declines in the market value of these securities arewere attributable to changes in interest rates and not credit quality, and because the Company hashad the present ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company did 0t record any allowance for credit losses on any investment securities at June 30, 2020. Additionally, 0ne of the AFS or held-to-maturity securities held by the Company were past due or in nonaccrual status at June 30, 2020.
Credit Quality Indicators
The Company monitors the credit quality of its investment securities through various risk management procedures, including the monitoring of credit ratings. A majority of the debt securities in the Company’s investment portfolio were issued by a U.S. government entity or agency and are either explicitly or implicitly guaranteed by the U.S. government. The Company considers the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. Further, certain municipal securities held by the Company have been pre-refunded and secured by government guaranteed treasuries. Therefore, for the aforementioned securities, the Company does not consider these investmentsassess or record expected credit losses due to be other-than-temporarily impaired at September 30, 2017.the zero loss assumption. The Company monitors the credit quality of its municipal securities portfolio via credit ratings which are updated on a quarterly basis. On a quarterly basis, municipal securities in an unrealized loss position are evaluated to determine if the loss is attributable to credit related factors and if an allowance for credit loss is needed.
NOTE 3 – LOANS NETHELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES
Loan Portfolio Composition. The composition of the loan portfolio was as follows:
(Dollars in Thousands) | (Dollars in Thousands) | September 30, 2017 | | December 31, 2016 | (Dollars in Thousands) | June 30, 2020 | | December 31, 2019 |
Commercial, Financial and Agricultural | Commercial, Financial and Agricultural | $ | 215,963 | | $ | 216,404 | Commercial, Financial and Agricultural | $ | 421,270 | | $ | 255,365 |
Real Estate – Construction | Real Estate – Construction | | 67,813 | | 58,443 | Real Estate – Construction | | 117,794 | | 115,018 |
Real Estate – Commercial Mortgage | Real Estate – Commercial Mortgage | | 527,331 | | 503,978 | Real Estate – Commercial Mortgage | | 662,434 | | 625,556 |
Real Estate – Residential(1) | Real Estate – Residential(1) | | 315,583 | | 281,509 | Real Estate – Residential(1) | | 358,714 | | 361,450 |
Real Estate – Home Equity | Real Estate – Home Equity | | 228,499 | | 236,512 | Real Estate – Home Equity | | 194,479 | | 197,360 |
Consumer | Consumer | | 275,149 | | | 264,443 | Consumer | | 267,486 | | | 281,180 |
| Loans, Net of Unearned Income | $ | 1,630,338 | | $ | 1,561,289 | Loans, Net of Unearned Income | $ | 2,022,177 | | $ | 1,835,929 |
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(1)
Includes loans in process with outstanding balances of $10.9$5.7 million and $9.6$8.3 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.
(2)Includes overdraft balances of $1.1 million and $1.6 million at June 30, 2020 and December 31, 2019, respectively.
Net deferred costsfees, which include premiums on purchased loans, included in loans were $0.7$2.3 million at SeptemberJune 30, 20172020 and $0.5net deferred costs were $1.8 million at December 31, 2016.2019.
Accrued interest receivable on loans which is excluded from amortized cost totaled $8.1 million at June 30, 2020 and $5.5 million at December 31, 2019, and is reported separately in Other Assets.
The Company has pledged a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta.
Loan Purchases. The Company will periodically purchase newly originated 1-4 family real estate secured adjustable rate loans from Capital City Home Loans, a related party effective on March 1, 2020 (see Note 1). Loan purchases totaled $18.4 million for the six month period ended June 30, 2020, and were not credit impaired.
Allowance for Credit Losses. The methodology for estimating the amount of credit losses reported in the allowance for credit losses (“ACL”) has two basic components: first, an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and second, a pooled component for expected credit losses for pools of loans that share similar risk characteristics. This methodology is discussed further in Note 1 – Business and Basis of Presentation/Significant Accounting Policies.
The following table details the activity in the allowance for credit losses by portfolio segment. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | Commercial, | | | | | Real Estate | | | | | | | | | | | | |
| | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | |
(Dollars in Thousands) | Agricultural | | Construction | | Mortgage | | Residential | | Home Equity | Consumer | | Total |
Three Months Ended | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | $ | 2,247 | | $ | 1,239 | | $ | 5,828 | | $ | 6,005 | | $ | 2,701 | | $ | 3,063 | | $ | 21,083 |
| Provision for Credit Losses | | 333 | | | 716 | | | 742 | | | (615) | | | 40 | | | 399 | | | 1,615 |
| Charge-Offs | | (186) | | | - | | | - | | | (1) | | | (52) | | | (1,175) | | | (1,414) |
| Recoveries | | 74 | | | - | | | 70 | | | 51 | | | 64 | | | 914 | | | 1,173 |
| Net Charge-Offs | | (112) | | | - | | | 70 | | | 50 | | | 12 | | | (261) | | | (241) |
Ending Balance | $ | 2,468 | | $ | 1,955 | | $ | 6,640 | | $ | 5,440 | | $ | 2,753 | | $ | 3,201 | | $ | 22,457 |
| | | | | | | | | | | | | | | | | | | | | |
Six Months Ended | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | $ | 1,675 | | $ | 370 | | $ | 3,416 | | $ | 3,128 | | $ | 2,224 | | $ | 3,092 | | $ | 13,905 |
| Impact of Adopting ASC 326 | | 488 | | | 302 | | | 1,458 | | | 1,243 | | | 374 | | | (596) | | | 3,269 |
| Provision for Credit Losses | | 739 | | | 1,283 | | | 1,516 | | | 1,089 | | | 141 | | | 1,837 | | | 6,605 |
| Charge-Offs | | (548) | | | - | | | (11) | | | (111) | | | (83) | | | (2,741) | | | (3,494) |
| Recoveries | | 114 | | | - | | | 261 | | | 91 | | | 97 | | | 1,609 | | | 2,172 |
| Net Charge-Offs | | (434) | | | - | | | 250 | | | (20) | | | 14 | | | (1,132) | | | (1,322) |
Ending Balance | $ | 2,468 | | $ | 1,955 | | $ | 6,640 | | $ | 5,440 | | $ | 2,753 | | $ | 3,201 | | $ | 22,457 |
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Three Months Ended | | | | | | | | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | $ | 1,630 | | $ | 381 | | $ | 3,993 | | $ | 3,186 | | $ | 2,261 | | $ | 2,669 | | $ | 14,120 |
| Provision for Credit Losses | | 195 | | | 140 | | | (204) | | | (134) | | | 107 | | | 542 | | | 646 |
| Charge-Offs | | (235) | | | - | | | - | | | (65) | | | (45) | | | (520) | | | (865) |
| Recoveries | | 58 | | | - | | | 100 | | | 223 | | | 60 | | | 251 | | | 692 |
| Net Charge-Offs | | (177) | | | - | | | 100 | | | 158 | | | 15 | | | (269) | | | (173) |
Ending Balance | $ | 1,648 | | $ | 521 | | $ | 3,889 | | $ | 3,210 | | $ | 2,383 | | $ | 2,942 | | $ | 14,593 |
| | | | | | | | | | | | | | | | | | | | | |
Six Months Ended | | | | | | | | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | $ | 1,434 | | $ | 280 | | $ | 4,181 | | $ | 3,400 | | $ | 2,301 | | $ | 2,614 | | $ | 14,210 |
| Provision for Credit Losses | | 412 | | | 241 | | | (307) | | | (128) | | | 87 | | | 1,108 | | | 1,413 |
| Charge-Offs | | (330) | | | - | | | (155) | | | (329) | | | (97) | | | (1,315) | | | (2,226) |
| Recoveries | | 132 | | | - | | | 170 | | | 267 | | | 92 | | | 535 | | | 1,196 |
| Net Charge-Offs | | (198) | | | - | | | 15 | | | (62) | | | (5) | | | (780) | | | (1,030) |
Ending Balance | $ | 1,648 | | $ | 521 | | $ | 3,889 | | $ | 3,210 | | $ | 2,383 | | $ | 2,942 | | $ | 14,593 |
On January 1, 2020, we adopted ASC 326 and recorded a pre-tax cumulative effect transition adjustment of $3.3 million. The adoption of ASC 326 is discussed further in Note 1 – Business and Basis of Presentation/Accounting Standards Updates. For the first six months ended June, 30, 2020, the provision for credit losses totaled $6.6 million for held for investment loans and net loan charge-offs totaled $1.3 million. See Note 7 – Commitments and Contingencies for information on the provision for credit losses related to off-balance sheet commitments. The additional $3.9 million increase in the allowance for credit losses was attributable to an expected decline in economic conditions, primarily a higher rate of unemployment due to the COVID-19 pandemic and its effect on rates of default. Three unemployment rate forecast scenarios were utilized to estimate probability of default and were weighted based on management’s estimate of probability. The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as various government sponsored loan programs, was also considered.
Nonaccrual Loans. Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.
The following table presents the recorded investmentamortized cost basis of loans in nonaccrual loansstatus and loans past due over 90 days and still on accrual by class of loans.
| | June 30, 2020 | | December 31, 2019 |
| | | | | Nonaccrual | | | | | | | | Nonaccrual | | | |
| September 30, 2017 | | December 31, 2016 | Total | | With No | | 90 + Days | | Total | | With No | | 90 + Days |
(Dollars in Thousands) | Nonaccrual | | 90 + Days | | Nonaccrual | | 90 + Days | Nonaccrual | | ACL | | Still Accruing | | Nonaccrual | | ACL | | Still Accruing |
Commercial, Financial and Agricultural | $ | 41 | | $ | - | | $ | 468 | | $ | - | $ | 548 | | $ | - | | $ | - | | $ | 446 | | $ | - | | $ | - |
Real Estate – Construction | | 362 | | | - | | | 311 | | | - | | 146 | | | - | | | - | | | - | | | - | | | - |
Real Estate – Commercial Mortgage | | 2,425 | | | - | | | 3,410 | | | - | | 2,580 | | | 1,789 | | | - | | | 1,434 | | | 958 | | | - |
Real Estate – Residential | | 2,350 | | | - | | | 2,330 | | | - | | 2,400 | | | 1,516 | | | - | | | 1,392 | | | 227 | | | - |
Real Estate – Home Equity | | 1,108 | | | - | | | 1,774 | | | - | | 1,010 | | | - | | | - | | | 797 | | | - | | | - |
Consumer | | 272 | | | - | | | 240 | | | - | | 282 | | | - | | | - | | | 403 | | | - | | | - |
Total Nonaccrual Loans | $ | 6,558 | | $ | - | | $ | 8,533 | | $ | - | $ | 6,966 | | $ | 3,305 | | $ | - | | $ | 4,472 | | $ | 1,185 | | $ | - |
The Company recognized $10,000 of interest income on nonaccrual loans for the six months ended June 30, 2020.
Collateral Dependent Loans.
The following table presents the amortized cost basis of collateral-dependent loans at June 30, 2020.
| June 30, 2020 |
| Real Estate | | Non Real Estate |
(Dollars in Thousands) | Secured | | Secured |
Commercial, Financial and Agricultural | $ | 106 | | $ | - |
Real Estate - Commercial Mortgage | | 4,939 | | | - |
Real Estate - Residential | | 2,358 | | | - |
Real Estate - Home Equity | | 429 | | | - |
Consumer | | - | | | - |
Total | $ | 7,832 | | $ | - |
A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the sale or operation of the underlying collateral.
The Bank’s collateral dependent loan portfolio is comprised primarily of real estate secured loans, collateralized by either residential or commercial collateral types. The loans are carried at fair value based on current values determined by either independent appraisals or internal evaluations, adjusted for selling costs or other amounts to be deducted when estimating expected net sales proceeds.
