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: | | June 30, 2018March 31, 2019
| | | December 31, 20172018 | | Amortized | Unrealized | Unrealized | Market | Amortized | Unrealized | Unrealized | Market | | Cost | | Gains | | Losses | | Value | | Cost | | Gain | | Losses | | Value | Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | $ | 262,471254,265
| | $ | 12364
| | $ | 3,7451,688
| | $ | 258,738252,941
| | $ | 237,505264,298
| | $ | -167
| | $ | 2,1642,616
| | $ | 235,341261,849
| U.S. Government Agency | | 159,906133,566
| | | 656495
| | | 653468
| | | 159,909133,593
| | | 144,324133,201
| | | 727520
| | | 407515
| | | 144,644133,206
| States and Political Subdivisions | | 66,34833,900
| | | 13
| | | 21847
| | | 66,13133,856
| | | 91,533
| | | 2
| | | 378
| | | 91,157
| Mortgage-Backed Securities
| | 940
| | | 5842,509
| | | - | | | 998144
| | | 1,10242,365
| Mortgage-Backed Securities | | 736 | | | 8343
| | | - | | | 1,185779
| | | 903 | | | 40 | | | - | | | 943 | Equity Securities(1) | | 7,8867,847
| | | - | | | - | | | 7,8867,847
| | | 8,5847,794
| | | - | | | - | | | 8,5847,794
| Total | $ | 497,551430,314
| | $ | 905 | | $ | 2,203 | | $ | 429,016 | | $ | 448,705 | | $ | 727 | | $ | 4,6163,275
| | $ | 493,662
| | $
| 483,048
| | $
| 812
| | $
| 2,949
| | $
| 480,911446,157
| | | | | | | | | | | | | | | | | | | | | | | | | Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | $ | 50,12435,076
| | $ | - | | $ | 668311
| | $ | 49,45634,765
| | $ | 98,25635,088
| | $ | - | | $ | 441477
| | $ | 97,81534,611
| States and Political Subdivisions | | 6,6215,960
| | | - | | | 3210
| | | 6,5895,950
| | | 6,9966,512
| | | - | | | 4126
| | | 6,9556,486
| Mortgage-Backed Securities | | 180,019185,143
| | | 165668
| | | 3,0501,209
| | | 177,134184,602
| | | 111,427175,720
| | | 22220
| | | 1,2122,624
| | | 110,237173,316
| Total | $ | 236,764226,179
| | $ | 165668
| | $ | 3,7501,530
| | $ | 233,179225,317
| | $ | 216,679217,320
| | $ | 22220
| | $ | 1,6943,127
| | $ | 215,007214,413
| | | | | | | | | | | | | | | | | | | | | | | | | Total Investment Securities | $ | 734,315656,493
| | $ | 8921,573
| | $ | 8,3663,733
| | $ | 726,841654,333
| | $ | 699,727666,025
| | $ | 834947
| | $ | 4,6436,402
| | $ | 695,918660,570
|
(1) Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $3.1 million, $4.8 million, respectively, at June 30, 2018March 31, 2019 and includes Federal Home Loan Bank and Federal Reserve Bank and FNBB Inc. stock recorded at cost of $3.1 million, $4.8$3.0 million and $0.8$4.8 million, respectively, at December 31, 2017.2018. The FNBB, Inc. equity investment was reclassified to other assets at March 31, 2018 in accordance with ASU 2016-01, which was adopted prospectively as allowed by the standard. Securities with an amortized cost of $247.1$368.1 million and $328.1$319.6 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 June 30, 2018,March 31, 2019, 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 | Available for Sale | | Held to Maturity | (Dollars in Thousands) | Amortized Cost | | Market Value | | Amortized Cost | | Market Value | Amortized Cost | | Market Value | | Amortized Cost | | Market Value | Due in one year or less | $ | 92,474 | | $ | 92,106 | | $ | 16,635 | | $ | 16,617 | $ | 131,777 | | $ | 131,011 | | $ | 20,620 | | $ | 20,516 | Due after one year through five years | | 264,809 | | 260,934 | | 40,110 | | 39,428 | | 172,196 | | 171,513 | | 20,416 | | 20,199 | Mortgage-Backed Securities | | 940 | | 998 | | 180,019 | | 177,134 | | 736 | | 779 | | 185,143 | | 184,602 | U.S. Government Agency | | 131,442 | | 131,738 | | - | | - | | 117,758 | | 117,866 | | - | | - | Equity Securities | | 7,886 | | | 7,886 | | | - | | | - | | 7,847 | | | 7,847 | | | - | | | - | Total | $ | 497,551 | | $ | 493,662 | | $ | 236,764 | | $ | 233,179 | $ | 430,314 | | $ | 429,016 | | $ | 226,179 | | $ | 225,317 |
Unrealized Losses on Investment 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: | Less Than | | Greater Than | | | | | | Less Than | | Greater Than | | | | | | | 12 Months | | 12 Months | | Total | 12 Months | | 12 Months | | Total | | Market | | Unrealized | | Market | | Unrealized | | Market | | Unrealized | Market | | Unrealized | | Market | | Unrealized | | Market | | Unrealized | (Dollars in Thousands) | Value | | Losses | | Value | | Losses | | Value | | Losses | Value | | Losses | | Value | | Losses | | Value | | Losses | June 30, 2018 | | | | | | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | | | | | | Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | $ | 146,449 | | $ | 2,127 | | $ | 97,386 | | $ | 1,618 | | $ | 243,835 | | $ | 3,745 | $ | - | | $ | - | | $ | 197,921 | | $ | 1,688 | | $ | 197,921 | | $ | 1,688 | U.S. Government Agency | | 67,628 | | | 377 | | | 25,212 | | | 276 | | | 92,840 | | | 653 | | 35,901 | | | 238 | | | 39,054 | | | 230 | | | 74,955 | | | 468 | States and Political Subdivisions | | 54,511 | | | 176 | | | 5,079 | | | 42 | | | 59,590 | | | 218 | | 4,148 | | | 1 | | | 22,769 | | | 46 | | | 26,917 | | | 47 | Mortgage-Backed Securities | | 2 | | | - | | | - | | | - | | | 2 | | | - | | 9 | | | - | | | - | | | - | | | 9 | | | - | Total | | 268,590 | | | 2,680 | | | 127,677 | | | 1,936 | | | 396,267 | | | 4,616 | | 40,058 | | | 239 | | | 259,744 | | | 1,964 | | | 299,802 | | | 2,203 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | | 24,574 | | | 489 | | | 24,882 | | | 179 | | | 49,456 | | | 668 | | - | | | - | | | 34,766 | | | 311 | | | 34,766 | | | 311 | States and Political Subdivisions | | 6,093 | | | 25 | | | 496 | | | 7 | | | 6,589 | | | 32 | | 203 | | | - | | | 5,747 | | | 10 | | | 5,950 | | | 10 | Mortgage-Backed Securities | | 108,323 | | | 1,742 | | | 29,894 | | | 1,308 | | | 138,217 | | | 3,050 | | 10,210 | | | 82 | | | 85,679 | | | 1,127 | | | 95,889 | | | 1,209 | Total | $ | 138,990 | | $ | 2,256 | | $ | 55,272 | | $ | 1,494 | | $ | 194,262 | | $ | 3,750 | $ | 10,413 | | $ | 82 | | $ | 126,192 | | $ | 1,448 | | $ | 136,605 | | $ | 1,530 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | $ | 155,443 | | $ | 963 | | $ | 79,900 | | $ | 1,201 | | $ | 235,343 | | $ | 2,164 | $ | 28,420 | | $ | 80 | | $ | 193,501 | | $ | 2,536 | | $ | 221,921 | | $ | 2,616 | U.S. Government Agency | | 45,737 | | | 150 | | | 25,757 | | | 257 | | | 71,494 | | | 407 | | 53,237 | | | 271 | | | 28,735 | | | 244 | | | 81,972 | | | 515 | States and Political Subdivisions | | 82,999 | | | 320 | | | 5,549 | | | 58 | | | 88,548 | | | 378 | | 8,243 | | | 12 | | | 31,417 | | | 132 | | | 39,660 | | | 144 | Mortgage-Backed Securities | | 2 | | | - | | | - | | | - | | | 2 | | | - | | 10 | | | - | | | - | | | - | | | 10 | | | - | Total | | 284,181 | | | 1,433 | | | 111,206 | | | 1,516 | | | 395,387 | | | 2,949 | | 89,910 | | | 363 | | | 253,653 | | | 2,912 | | | 343,563 | | | 3,275 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government Treasury | | 77,861 | | | 298 | | | 14,939 | | | 143 | | | 92,800 | | | 441 | | - | | | - | | | 34,612 | | | 477 | | | 34,612 | | | 477 | States and Political Subdivisions | | 6,955 | | | 41 | | | - | | | - | | | 6,955 | | | 41 | | 204 | | | - | | | 6,281 | | | 26 | | | 6,485 | | | 26 | Mortgage-Backed Securities | | 56,030 | | | 469 | | | 30,216 | | | 743 | | | 86,246 | | | 1,212 | | 51,327 | | | 389 | | | 84,705 | | | 2,235 | | | 136,032 | | | 2,624 | Total | $ | 140,846 | | $ | 808 | | $ | 45,155 | | $ | 886 | | $ | 186,001 | | $ | 1,694 | $ | 51,531 | | $ | 389 | | $ | 125,598 | | $ | 2,738 | | $ | 177,129 | | $ | 3,127 |
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 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 June 30, 2018,March 31, 2019, there were 535414 positions (combined AFS and HTM) with unrealized losses totaling $8.4$3.7 million. 6148 of these positions were U.S. government treasury securities guaranteed by the U.S. government. 276265 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities, with theentities. The remaining 198101 positions beingwere municipal securities. 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 has the present ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company doesdid not consider these investments to be other-than-temporarily impaired at June 30, 2018.March 31, 2019.
NOTE 3 – LOANS, NET Loan Portfolio Composition. The composition of the loan portfolio was as follows: (Dollars in Thousands) | (Dollars in Thousands) | June 30, 2018 | | December 31, 2017 | (Dollars in Thousands) | March 31, 2019 | | December 31, 2018 | Commercial, Financial and Agricultural | Commercial, Financial and Agricultural | $ | 222,406 | | $ | 218,166 | Commercial, Financial and Agricultural | $ | 238,942 | | $ | 233,689 | Real Estate – Construction | Real Estate – Construction | | 88,169 | | 77,966 | Real Estate – Construction | | 87,123 | | 89,527 | Real Estate – Commercial Mortgage | Real Estate – Commercial Mortgage | | 575,993 | | 535,707 | Real Estate – Commercial Mortgage | | 615,129 | | 602,061 | Real Estate – Residential(1) | Real Estate – Residential(1) | | 331,944 | | 311,906 | Real Estate – Residential(1) | | 349,004 | | 342,215 | Real Estate – Home Equity | Real Estate – Home Equity | | 218,851 | | 229,513 | Real Estate – Home Equity | | 209,194 | | 210,111 | Consumer(2) | Consumer(2) | | 287,112 | | | 280,234 | Consumer(2) | | 297,713 | | | 296,622 | | Loans, Net of Unearned Income | $ | 1,724,475 | | $ | 1,653,492 | Loans, Net of Unearned Income | $ | 1,797,105 | | $ | 1,774,225 | | | | | | | | | | | |
(1) Includes loans in process with outstanding balances of $15.9$10.3 million and $9.1$9.2 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. (2) Includes overdraft balances of $1.5$1.4 million and $1.6 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Net deferred costs included in loans were $1.5$1.7 million at June 30, 2018March 31, 2019 and $1.5 million at December 31, 2017.2018. 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 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. 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 investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans. | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 | (Dollars in Thousands) | Nonaccrual | | 90 + Days | | Nonaccrual | | 90 + Days | Nonaccrual | | 90 + Days | | Nonaccrual | | 90 + Days | Commercial, Financial and Agricultural | $ | 455 | | $ | - | | $ | 629 | | $ | - | $ | 223 | | $ | - | | $ | 267 | | $ | - | Real Estate – Construction | | 609 | | | - | | | 297 | | | - | | 323 | | | - | | | 722 | | | - | Real Estate – Commercial Mortgage | | 2,181 | | | - | | | 2,370 | | | - | | 1,976 | | | - | | | 2,860 | | | - | Real Estate – Residential | | 1,543 | | | - | | | 1,938 | | | - | | 1,341 | | | - | | | 2,119 | | | - | Real Estate – Home Equity | | 910 | | | - | | | 1,748 | | | - | | 1,033 | | | - | | | 584 | | | - | Consumer | | 43 | | | - | | | 177 | | | 36 | | 151 | | | - | | | 320 | | | - | Total Nonaccrual Loans | $ | 5,741 | | $ | - | | $ | 7,159 | | $ | 36 | $ | 5,047 | | $ | - | | $ | 6,872 | | $ | - |
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 accruing past due loans by class of loans. | 30-59 | | 60-89 | | 90 + | | Total | | Total | | Total | 30-59 | | 60-89 | | 90 + | | Total | | Total | | Total | (Dollars in Thousands) | DPD | | DPD | | DPD | | Past Due | | Current | | Loans(1) | DPD | | DPD | | DPD | | Past Due | | Current | | Loans(1) | June 30, 2018 | | | | | | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | | | | | | Commercial, Financial and Agricultural | $ | 204 | | $ | 113 | | $ | - | | $ | 317 | | $ | 221,634 | | $ | 222,406 | $ | 509 | | $ | 128 | | $ | - | | $ | 637 | | $ | 238,082 | | $ | 238,942 | Real Estate – Construction | | 62 | | | - | | | - | | | 62 | | | 87,498 | | | 88,169 | | 59 | | | - | | | - | | | 59 | | | 86,741 | | | 87,123 | Real Estate – Commercial Mortgage | | 483 | | | 189 | | | - | | | 672 | | | 573,140 | | | 575,993 | | 1,235 | | | 340 | | | - | | | 1,575 | | | 611,578 | | | 615,129 | Real Estate – Residential | | 495 | | | 391 | | | - | | | 886 | | | 329,515 | | | 331,944 | | 560 | | | 100 | | | - | | | 660 | | | 347,003 | | | 349,004 | Real Estate – Home Equity | | 255 | | | - | | | - | | | 255 | | | 217,686 | | | 218,851 | | 415 | | | 48 | | | - | | | 463 | | | 207,698 | | | 209,194 | Consumer | | 1,009 | | | 271 | | | - | | | 1,280 | | | 285,789 | | | 287,112 | | 1,065 | | | 223 | | | - | | | 1,288 | | | 296,274 | | | 297,713 | Total Past Due Loans | $ | 2,508 | | $ | 964 | | $ | - | | $ | 3,472 | | $ | 1,715,262 | | $ | 1,724,475 | $ | 3,843 | | $ | 839 | | $ | - | | $ | 4,682 | | $ | 1,787,376 | | $ | 1,797,105 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | Commercial, Financial and Agricultural | $ | 87 | | $ | 55 | | $ | - | | $ | 142 | | $ | 217,395 | | $ | 218,166 | $ | 104 | | $ | 58 | | $ | - | | $ | 162 | | $ | 233,260 | | $ | 233,689 | Real Estate – Construction | | 811 | | | - | | | - | | | 811 | | | 76,858 | | | 77,966 | | 489 | | | - | | | - | | | 489 | | | 88,316 | | | 89,527 | Real Estate – Commercial Mortgage | | 437 | | | 195 | | | - | | | 632 | | | 532,705 | | | 535,707 | | 124 | | | - | | | - | | | 124 | | | 599,077 | | | 602,061 | Real Estate – Residential | | 701 | | | 446 | | | - | | | 1,147 | | | 308,821 | | | 311,906 | | 745 | | | 627 | | | - | | | 1,372 | | | 338,724 | | | 342,215 | Real Estate – Home Equity | | 80 | | | 2 | | | - | | | 82 | | | 227,683 | | | 229,513 | | 512 | | | 124 | | | - | | | 636 | | | 208,891 | | | 210,111 | Consumer | | 1,316 | | | 413 | | | 36 | | | 1,765 | | | 278,292 | | | 280,234 | | 1,661 | | | 313 | | | - | | | 1,974 | | | 294,328 | | | 296,622 | Total Past Due Loans | $ | 3,432 | | $ | 1,111 | | $ | 36 | | $ | 4,579 | | $ | 1,641,754 | | $ | 1,653,492 | $ | 3,635 | | $ | 1,122 | | $ | - | | $ | 4,757 | | $ | 1,762,596 | | $ | 1,774,225 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) Total Loans include nonaccrual loans | | | | | | | | | | | | | | | | | | | (1) Total Loans include nonaccrual loans of $5.0 million and $6.9 million at March 31, 2019 and December 31, 2018, respectively. | | (1) Total Loans include nonaccrual loans of $5.0 million and $6.9 million at March 31, 2019 and December 31, 2018, respectively. |
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 incurred 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. 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 | | | | | | | | | | | | | | Commercial, | | | | | Real Estate | | | | | | | | | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | (Dollars in Thousands) | (Dollars in Thousands) | Agricultural | | Construction | | Mortgage | | Residential | | Home Equity | Consumer | | Total | (Dollars in Thousands) | Agricultural | | Construction | | Mortgage | | Residential | | Home Equity | | Consumer | | Total | Three Months Ended | Three Months Ended | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | | | | | | | | | | | | | | | | | June 30, 2018 | | | | | | | | | | | | | | | | | | | | | | Beginning Balance | $ | 1,131 | | $ | 244 | | $ | 4,053 | | $ | 3,363 | | $ | 2,319 | | $ | 2,148 | | $ | 13,258 | | | Provision for Loan Losses | | 137 | | | 39 | | | 364 | | | (107) | | | 110 | | | 272 | | | 815 | | | Charge-Offs | | (141) | | | - | | | - | | | (456) | | | (157) | | | (509) | | | (1,263) | | | Recoveries | | 87 | | | - | | | 15 | | | 346 | | | 22 | | | 283 | | | 753 | | | Net Charge-Offs | | (54) | | | - | | | 15 | | | (110) | | | (135) | | | (226) | | | (510) | | Ending Balance | $ | 1,214 | | $ | 283 | | $ | 4,432 | | $ | 3,146 | | $ | 2,294 | | $ | 2,194 | | $ | 13,563 | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended | | | �� | | | | | | | | | | | | | | | | | | | June 30, 2018 | | | | | | | | | | | | | | | | | | | | | | March 31, 2019 | | March 31, 2019 | | | | | | | | | | | | | | | | | | | | | Beginning Balance | Beginning Balance | $ | 1,191 | | $ | 122 | | $ | 4,346 | | $ | 3,206 | | $ | 2,506 | | $ | 1,936 | | $ | 13,307 | Beginning Balance | $ | 1,434 | | $ | 280 | | $ | 4,181 | | $ | 3,400 | | $ | 2,301 | | $ | 2,614 | | $ | 14,210 | | Provision for Loan Losses | | 93 | | | 167 | | | 238 | | | 73 | | | 20 | | | 969 | | | 1,560 | Provision for Loan Losses | | 217 | | | 101 | | | (103) | | | 6 | | | (20) | | | 566 | | | 767 | | Charge-Offs | | (323) | | | (7) | | | (290) | | | (563) | | | (315) | | | (1,204) | | | (2,702) | Charge-Offs | | (95) | | | - | | | (155) | | | (264) | | | (52) | | | (795) | | | (1,361) | | Recoveries | | 253 | | | 1 | | | 138 | | | 430 | | | 83 | | | 493 | | | 1,398 | Recoveries | | 74 | | | - | | | 70 | | | 44 | | | 32 | | | 284 | | | 504 | | Net Charge-Offs | | (70) | | | (6) | | | (152) | | | (133) | | | (232) | | | (711) | | | (1,304) | Net Charge-Offs | | (21) | | | - | | | (85) | | | (220) | | | (20) | | | (511) | | | (857) | Ending Balance | Ending Balance | $ | 1,214 | | $ | 283 | | $ | 4,432 | | $ | 3,146 | | $ | 2,294 | | $ | 2,194 | | $ | 13,563 | Ending Balance | $ | 1,630 | | $ | 381 | | $ | 3,993 | | $ | 3,186 | | $ | 2,261 | | $ | 2,669 | | $ | 14,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | Three Months Ended | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | | | | | | | | | | | | | | | | | | | June 30, 2017 | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | March 31, 2018 | | | | | | | | | | | | | | | | | | | | | Beginning Balance | Beginning Balance | $ | 1,150 | | $ | 100 | | $ | 4,080 | | $ | 3,376 | | $ | 2,522 | | $ | 2,107 | | $ | 13,335 | Beginning Balance | $ | 1,191 | | $ | 122 | | $ | 4,346 | | $ | 3,206 | | $ | 2,506 | | $ | 1,936 | | $ | 13,307 | | Provision for Loan Losses | | 229 | | | 14 | | | 165 | | | (150) | | | (37) | | | 368 | | | 589 | Provision for Loan Losses | | (44) | | | 128 | | | (126) | | | 180 | | | (90) | | | 697 | | | 745 | | Charge-Offs | | (324) | | | - | | | (478) | | | (44) | | | - | | | (537) | | | (1,383) | Charge-Offs | | (182) | | | (7) | | | (290) | | | (107) | | | (158) | | | (695) | | | (1,439) | | Recoveries | | 40 | | | - | | | 58 | | | 202 | | | 39 | | | 362 | | | 701 | Recoveries | | 166 | | | 1 | | | 123 | | | 84 | | | 61 | | | 210 | | | 645 | | Net Charge-Offs | | (284) | | | - | | | (420) | | | 158 | | | 39 | | | (175) | | | (682) | Net Charge-Offs | | (16) | | | (6) | | | (167) | | | (23) | | | (97) | | | (485) | | | (794) | Ending Balance | Ending Balance | $ | 1,095 | | $ | 114 | | $ | 3,825 | | $ | 3,384 | | $ | 2,524 | | $ | 2,300 | | $ | 13,242 | Ending Balance | $ | 1,131 | | $ | 244 | | $ | 4,053 | | $ | 3,363 | | $ | 2,319 | | $ | 2,148 | | $ | 13,258 | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended | | | | | | | | | | | | | | | | | | | | | | June 30, 2017 | | | | | | | | | | | | | | | | | | | | | | Beginning Balance | $ | 1,198 | | $ | 168 | | $ | 4,315 | | $ | 3,445 | | $ | 2,297 | | $ | 2,008 | | $ | 13,431 | | | Provision for Loan Losses | | 193 | | | (54) | | | (22) | | | (316) | | | 251 | | | 847 | | | 899 | | | Charge-Offs | | (417) | | | - | | | (549) | | | (160) | | | (92) | | | (1,161) | | | (2,379) | | | Recoveries | | 121 | | | - | | | 81 | | | 415 | | | 68 | | | 606 | | | 1,291 | | | Net Charge-Offs | | (296) | | | - | | | (468) | | | 255 | | | (24) | | | (555) | | | (1,088) | | Ending Balance | $ | 1,095 | | $ | 114 | | $ | 3,825 | | $ | 3,384 | | $ | 2,524 | | $ | 2,300 | | $ | 13,242 | |
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. | Commercial, | | | | | Real Estate | | | | | | | | | | | | | Commercial, | | | | | Real Estate | | | | | | | | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | (Dollars in Thousands | Agricultural | | Construction | | Mortgage | | Residential | | Home Equity | Consumer | | Total | Agricultural | | Construction | | Mortgage | | Residential | | Home Equity | Consumer | | Total | June 30, 2018 | | | | | | | | | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | | | | | | | | | Period-end amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allocated to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans Individually | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | $ | 195 | | $ | 113 | | $ | 1,735 | | $ | 1,030 | | $ | 365 | | $ | 1 | | $ | 3,439 | $ | 186 | | $ | 152 | | $ | 827 | | $ | 625 | | $ | 310 | | $ | 2 | | $ | 2,102 | Loans Collectively | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | | 1,019 | | | 170 | | | 2,697 | | | 2,116 | | | 1,929 | | | 2,193 | | | 10,124 | | 1,444 | | | 229 | | | 3,166 | | | 2,561 | | | 1,951 | | | 2,667 | | | 12,018 | Ending Balance | $ | 1,214 | | $ | 283 | | $ | 4,432 | | $ | 3,146 | | $ | 2,294 | | $ | 2,194 | | $ | 13,563 | $ | 1,630 | | $ | 381 | | $ | 3,993 | | $ | 3,186 | | $ | 2,261 | | $ | 2,669 | | $ | 14,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | Period-end amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allocated to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans Individually | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | $ | 215 | | $ | 1 | | $ | 2,165 | | $ | 1,220 | | $ | 515 | | $ | 1 | | $ | 4,117 | $ | 118 | | $ | 52 | | $ | 1,026 | | $ | 919 | | $ | 289 | | $ | 1 | | $ | 2,405 | Loans Collectively | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | | 976 | | | 121 | | | 2,181 | | | 1,986 | | | 1,991 | | | 1,935 | | | 9,190 | | 1,316 | | | 228 | | | 3,155 | | | 2,481 | | | 2,012 | | | 2,613 | | | 11,805 | Ending Balance | $ | 1,191 | | $ | 122 | | $ | 4,346 | | $ | 3,206 | | $ | 2,506 | | $ | 1,936 | | $ | 13,307 | $ | 1,434 | | $ | 280 | | $ | 4,181 | | $ | 3,400 | | $ | 2,301 | | $ | 2,614 | | $ | 14,210 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2017 | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | | | | | | | | | | | | | | | | | | | | | Period-end amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allocated to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans Individually | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | $ | 82 | | $ | 4 | | $ | 1,685 | | $ | 1,405 | | $ | 408 | | $ | 3 | | $ | 3,587 | $ | 182 | | $ | 114 | | $ | 1,779 | | $ | 1,412 | | $ | 389 | | $ | 1 | | $ | 3,877 | Loans Collectively | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Evaluated for Impairment | | 1,013 | | | 110 | | | 2,140 | | | 1,979 | | | 2,116 | | | 2,297 | | | 9,655 | | 949 | | | 130 | | | 2,274 | | | 1,951 | | | 1,930 | | | 2,147 | | | 9,381 | Ending Balance | $ | 1,095 | | $ | 114 | | $ | 3,825 | | $ | 3,384 | | $ | 2,524 | | $ | 2,300 | | $ | 13,242 | $ | 1,131 | | $ | 244 | | $ | 4,053 | | $ | 3,363 | | $ | 2,319 | | $ | 2,148 | | $ | 13,258 |
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: | | Commercial, | | | | | Real Estate | | | | | | | | | | | | | Commercial, | | | | | Real Estate | | | | | | | | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | | Financial, | | Real Estate | | Commercial | | Real Estate | | Real Estate | | | | | | | (Dollars in Thousands) | (Dollars in Thousands) | Agricultural | | Construction | Mortgage | | Residential | | Home Equity | Consumer | | Total | (Dollars in Thousands) | Agricultural | | Construction | Mortgage | | Residential | | Home Equity | Consumer | | Total | June 30, 2018 | | | | | | | | | | | | | | | | | | | | | | March 31, 2019 | | March 31, 2019 | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | $ | 1,093 | | $ | 671 | | $ | 18,368 | | $ | 11,416 | | $ | 2,589 | | $ | 95 | | $ | 34,232 | Impairment | $ | 787 | | $ | 382 | | $ | 11,908 | | $ | 8,930 | | $ | 2,630 | | $ | 84 | | $ | 24,721 | Collectively Evaluated for | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | | 221,313 | | | 87,498 | | | 557,625 | | | 320,528 | | | 216,262 | | | 287,017 | | | 1,690,243 | Impairment | | 238,155 | | | 86,741 | | | 603,221 | | | 340,074 | | | 206,564 | | | 297,629 | | | 1,772,384 | Total | Total | $ | 222,406 | | $ | 88,169 | | $ | 575,993 | | $ | 331,944 | | $ | 218,851 | | $ | 287,112 | | $ | 1,724,475 | Total | $ | 238,942 | | $ | 87,123 | | $ | 615,129 | | $ | 349,004 | | $ | 209,194 | | $ | 297,713 | | $ | 1,797,105 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | $ | 1,378 | | $ | 361 | | $ | 19,280 | | $ | 12,871 | | $ | 3,332 | | $ | 113 | | $ | 37,335 | Impairment | $ | 873 | | $ | 781 | | $ | 12,650 | | $ | 10,593 | | $ | 2,210 | | $ | 88 | | $ | 27,195 | Collectively Evaluated for | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | | 216,788 | | | 77,605 | | | 516,427 | | | 299,035 | | | 226,181 | | | 280,121 | | | 1,616,157 | Impairment | | 232,816 | | | 88,746 | | | 589,411 | | | 331,622 | | | 207,901 | | | 296,534 | | | 1,747,030 | Total | Total | $ | 218,166 | | $ | 77,966 | | $ | 535,707 | | $ | 311,906 | | $ | 229,513 | | $ | 280,234 | | $ | 1,653,492 | Total | $ | 233,689 | | $ | 89,527 | | $ | 602,061 | | $ | 342,215 | | $ | 210,111 | | $ | 296,622 | | $ | 1,774,225 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2017 | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | March 31, 2018 | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Individually Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | $ | 1,078 | | $ | 363 | | $ | 21,502 | | $ | 14,879 | | $ | 3,314 | | $ | 140 | | $ | 41,276 | Impairment | $ | 1,283 | | $ | 671 | | $ | 18,445 | | $ | 13,204 | | $ | 3,198 | | $ | 109 | | $ | 36,910 | Collectively Evaluated for | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Collectively Evaluated for | | | | | | | | | | | | | | | | | | | | | Impairment | Impairment | | 212,466 | | | 66,968 | | | 497,638 | | | 304,250 | | | 227,681 | | | 270,917 | | | 1,579,920 | Impairment | | 197,492 | | | 79,565 | | | 532,864 | | | 308,834 | | | 220,796 | | | 285,434 | | | 1,624,985 | Total | Total | $ | 213,544 | | $ | 67,331 | | $ | 519,140 | | $ | 319,129 | | $ | 230,995 | | $ | 271,057 | | $ | 1,621,196 | Total | $ | 198,775 | | $ | 80,236 | | $ | 551,309 | | $ | 322,038 | | $ | 223,994 | | $ | 285,543 | | $ | 1,661,895 |
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. | | Unpaid | | Recorded | | Recorded | | | | | Unpaid | | Recorded | | Recorded | | | | | | Principal | | Investment | | Investment | | Related | | Principal | | Investment | | Investment | | Related | (Dollars in Thousands) | | Balance | | With No Allowance | With Allowance | | Allowance | | Balance | | With No Allowance | With Allowance | | Allowance | June 30, 2018 | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | Commercial, Financial and Agricultural | | $ | 1,093 | | $ | 110 | | $ | 983 | | $ | 195 | | $ | 787 | | $ | 96 | | $ | 691 | | $ | 186 | Real Estate – Construction | | | 671 | | | - | | | 671 | | | 113 | | | 382 | | | 59 | | | 323 | | | 152 | Real Estate – Commercial Mortgage | | | 18,368 | | | 2,023 | | | 16,345 | | | 1,735 | | | 11,908 | | | 2,453 | | | 9,455 | | | 827 | Real Estate – Residential | | | 11,416 | | | 1,813 | | | 9,603 | | | 1,030 | | | 8,930 | | | 2,402 | | | 6,528 | | | 625 | Real Estate – Home Equity | | | 2,589 | | | 977 | | | 1,612 | | | 365 | | | 2,630 | | | 1,057 | | | 1,573 | | | 310 | Consumer | | | 95 | | | 39 | | | 56 | | | 1 | | | 84 | | | 47 | | | 37 | | | 2 | Total | | $ | 34,232 | | $ | 4,962 | | $ | 29,270 | | $ | 3,439 | | $ | 24,721 | | $ | 6,114 | | $ | 18,607 | | $ | 2,102 | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | Commercial, Financial and Agricultural | | $ | 1,378 | | $ | 118 | | $ | 1,260 | | $ | 215 | | $ | 873 | | $ | 101 | | $ | 772 | | $ | 118 | Real Estate – Construction | | | 361 | | | 297 | | | 64 | | | 1 | | | 781 | | | 459 | | | 322 | | | 52 | Real Estate – Commercial Mortgage | | | 19,280 | | | 1,763 | | | 17,517 | | | 2,165 | | | 12,650 | | | 2,384 | | | 10,266 | | | 1,026 | Real Estate – Residential | | | 12,871 | | | 1,516 | | | 11,355 | | | 1,220 | | | 10,593 | | | 1,482 | | | 9,111 | | | 919 | Real Estate – Home Equity | | | 3,332 | | | 1,157 | | | 2,175 | | | 515 | | | 2,210 | | | 855 | | | 1,355 | | | 289 | Consumer | | | 113 | | | 45 | | | 68 | | | 1 | | | 88 | | | 49 | | | 39 | | | 1 | Total | | $ | 37,335 | | $ | 4,896 | | $ | 32,439 | | $ | 4,117 | | $ | 27,195 | | $ | 5,330 | | $ | 21,865 | | $ | 2,405 |
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, | | Three Months Ended March 31, | | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | | Average | | Total | | Average | | Total | | Average | | Total | | Average | | Total | | Average | | Total | | Average | | Total | | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | (Dollars in Thousands) | | Investment | | Income | | Investment | | Income | | Investment | | Income | | Investment | | Income | | Investment | | Income | | Investment | | Income | Commercial, Financial and | | | | | | | | | | | | | | | | | | | | | | | | | | Agricultural | | $ | 1,188 | | $ | 22 | | $ | 1,158 | | $ | 11 | | $ | 1,251 | | $ | 50 | | $ | 1,119 | | $ | 23 | | Commercial, Financial and Agricultural | | | $ | 830 | | $ | 11 | | $ | 1,330 | | $ | 29 | Real Estate – Construction | | | 671 | | | 1 | | | 363 | | | 1 | | | 568 | | | 1 | | | 324 | | | 2 | | | 582 | | | - | | | 517 | | | 1 | Real Estate – Commercial Mortgage | | | 18,406 | | | 168 | | | 22,281 | | | 220 | | | 18,697 | | | 344 | | | 22,806 | | | 443 | | | 12,279 | | | 123 | | | 18,862 | | | 175 | Real Estate – Residential | | | 12,310 | | | 136 | | | 14,789 | | | 174 | | | 12,497 | | | 284 | | | 15,058 | | | 353 | | | 9,761 | | | 127 | | | 13,038 | | | 148 | Real Estate – Home Equity | | | 2,894 | | | 24 | | | 3,414 | | | 27 | | | 3,040 | | | 51 | | | 3,401 | | | 54 | | | 2,420 | | | 26 | | | 3,265 | | | 26 | Consumer | | | 102 | | | 2 | | | 142 | | | 2 | | | 106 | | | 4 | | | 153 | | | 4 | | | 86 | | | 2 | | | 111 | | | 2 | Total | | $ | 35,571 | | $ | 353 | | $ | 42,147 | | $ | 435 | | $ | 36,159 | | $ | 734 | | $ | 42,861 | | $ | 879 | | $ | 25,958 | | $ | 289 | | $ | 37,123 | | $ | 381 |
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 are used 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 types 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/permanent 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. Construction loans are generally based upon estimates of costs and value associated with the completed project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines. The disbursement of funds for construction loans is made in relation to the progress of the project and as such these loans are closely monitored by on-site inspections. 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. 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. | | Commercial, | | | | | | | | | | | Commercial, | | | | | | | | | | | | Financial, | | | | | | | | Total Criticized | | Financial, | | | | | | | | Total | (Dollars in Thousands) | | Agriculture | | Real Estate | | Consumer | | Loans | | Agriculture | | Real Estate | | Consumer | | Loans | June 30, 2018 | | | | | | | | | | | | | | March 31, 2019 | | | | | | | | | | | | | | Pass | | | $ | 237,133 | | $ | 1,222,160 | | $ | 297,255 | | $ | 1,756,548 | Special Mention | | $ | 5,143 | | $ | 12,187 | | $ | 59 | | $ | 17,389 | | | 1,109 | | | 17,178 | | | 51 | | | 18,338 | Substandard | | | 1,089 | | | 28,124 | | | 370 | | | 29,583 | | | 700 | | | 21,112 | | | 407 | | | 22,219 | Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | Total Criticized Loans | | $ | 6,232 | | $ | 40,311 | | $ | 429 | | $ | 46,972 | | Total Loans | | | $ | 238,942 | | $ | 1,260,450 | | $ | 297,713 | | $ | 1,797,105 | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | Pass | | | $ | 232,417 | | $ | 1,211,451 | | $ | 295,888 | | $ | 1,739,756 | Special Mention | | $ | 7,879 | | $ | 13,324 | | $ | 65 | | $ | 21,268 | | | 479 | | | 11,048 | | | 54 | | | 11,581 | Substandard | | | 1,057 | | | 29,291 | | | 654 | | | 31,002 | | | 793 | | | 21,415 | | | 680 | | | 22,888 | Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | Total Criticized Loans | | $ | 8,936 | | $ | 42,615 | | $ | 719 | | $ | 52,270 | | Total Loans | | | $ | 233,689 | | $ | 1,243,914 | | $ | 296,622 | | $ | 1,774,225 |
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 make concessions including the extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. 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. A TDR classification can be removed if the borrower’s financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, and the loan is subsequently refinanced or restructured at market terms and qualifies as a new loan.
The following table presents loans classified as TDRs. | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 | (Dollars in Thousands) | | Accruing | | Nonaccruing | | Accruing | | Nonaccruing | | Accruing | | Nonaccruing | | Accruing | | Nonaccruing | Commercial, Financial and Agricultural | | $ | 666 | | $ | 224 | | $ | 822 | | $ | - | | $ | 695 | | $ | - | | $ | 873 | | $ | - | Real Estate – Construction | | | 62 | | | - | | | 64 | | | - | | | 59 | | | - | | | 59 | | | - | Real Estate – Commercial Mortgage | | | 16,282 | | | 1,250 | | | 17,058 | | | 1,636 | | | 9,652 | | | 674 | | | 9,910 | | | 1,239 | Real Estate – Residential | | | 10,571 | | | 631 | | | 11,666 | | | 503 | | | 8,371 | | | 535 | | | 9,234 | | | 1,222 | Real Estate – Home Equity | | | 2,305 | | | 99 | | | 2,441 | | | 186 | | | 1,930 | | | 178 | | | 1,920 | | | 179 | Consumer | | | 95 | | | - | | | 113 | | | - | | | 84 | | | - | | | 88 | | | - | Total TDRs | | $ | 29,981 | | $ | 2,204 | | $ | 32,164 | | $ | 2,325 | | $ | 20,791 | | $ | 1,387 | | $ | 22,084 | | $ | 2,640 |
For TDRs, the Company estimated $1.7 million and $2.3 million of impaired loan loss reserves for these loans at March 31, 2019 and December 31, 2018, respectively. Loans classified as TDRs during the periods indicated are presented in the table below. The modifications made during the reporting period involved either an extension of the loan term, an interest rate adjustment, or a principal moratorium, anda reduction in the interest rate, or a combination thereof. The financial impact of these modifications was not material. | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2018 | | | | | Pre- | | Post- | | | | Pre- | | Post- | | | Number | | Modified | | Modified | | Number | | Modified | | Modified | | | of | | Recorded | | Recorded | | of | | Recorded | | Recorded | (Dollars in Thousands) | | Contracts | | Investment | | Investment | | Contracts | | Investment | | Investment | Commercial, Financial and Agricultural | | - | | $ | - | | $ | - | | 1 | | $ | 498 | | $ | 230 | Real Estate – Construction | | - | | | - | | | - | | - | | | - | | | - | Real Estate – Commercial Mortgage | | - | | | - | | | - | | 1 | | | 227 | | | 227 | Real Estate – Residential | | 1 | | | 33 | | | 33 | | 1 | | | 33 | | | 33 | Real Estate – Home Equity | | 1 | | | 27 | | | 27 | | 1 | | | 27 | | | 27 | Consumer | | - | | | - | | | - | | - | | | - | | | - | Total TDRs | | 2 | | $ | 60 | | $ | 60 | | 4 | | $ | 785 | | $ | 517 | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2017 | | 2017 | | | | | Pre- | | Post- | | | | Pre- | | Post- | | | Number | | Modified | | Modified | | Number | | Modified | | Modified | | | of | | Recorded | | Recorded | | of | | Recorded | | Recorded | (Dollars in Thousands) | | Contracts | | Investment | | Investment | | Contracts | | Investment | | Investment | Commercial, Financial and Agricultural | | - | | $ | - | | $ | - | | - | | $ | - | | $ | - | Real Estate – Construction | | - | | | - | | | - | | 1 | | | 64 | | | 65 | Real Estate – Commercial Mortgage | | - | | | - | | | - | | - | | | - | | | - | Real Estate – Residential | | 1 | | | 215 | | | 182 | | 1 | | | 215 | | | 182 | Real Estate – Home Equity | | - | | | - | | | - | | 1 | | | 56 | | | 55 | Consumer | | - | | | - | | | - | | - | | | - | | | - | Total TDRs | | 1 | | $ | 215 | | $ | 182 | | 3 | | $ | 335 | | $ | 302 |
For the three and six months ended June 30, 2018, the loans modified as TDRs within the previous 12 months that have substantially defaulted are presented below. For the three and six month period ended June 30, 2017 there were no loans modified as TDRs within the previous 12 months that have substantially defaulted.
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2018 | | | Number | | Post-Modified | | Number | | Post-Modified | | | of | | Recorded | | of | | Recorded | (Dollars in Thousands) | | Contracts | | Investment(1) | | Contracts | | Investment(1) | Commercial, Financial and Agricultural | | - | | $ | - | | - | | $ | - | Real Estate – Construction | | - | | | - | | - | | | - | Real Estate – Commercial Mortgage | | 1 | | | 64 | | 1 | | | 64 | Real Estate – Residential | | - | | | - | | - | | | - | Real Estate – Home Equity | | - | | | - | | - | | | - | Consumer | | - | | | - | | - | | | - | Total TDRs | | 1 | | $ | 64 | | 1 | | $ | 64 |
(1) Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.
The following table provides information on how TDRs were modified during the periods indicated.
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2018 | | | Number of | | Recorded | | Number of | | Recorded | (Dollars in Thousands) | | Contracts | | Investment(1) | | Contracts | | Investment(1) | Extended amortization | | - | | $ | - | | 1 | | $ | 227 | Interest rate adjustment | | 1 | | | 33 | | 1 | | | 33 | Extended amortization and interest rate adjustment | | 1 | | | 27 | | 1 | | | 27 | Principal moratorium | | - | | | - | | 1 | | | 230 | Total TDRs | | 2 | | $ | 60 | | 4 | | $ | 517 |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2017 | | 2017 | | | Number of | | Recorded | | Number of | | Recorded | (Dollars in Thousands) | | Contracts | | Investment(1) | | Contracts | | Investment(1) | Extended amortization | | - | | $ | - | | - | | $ | - | Interest rate adjustment | | 1 | | | 182 | | 3 | | | 302 | Extended amortization and interest rate adjustment | | - | | | - | | - | | | - | Total TDRs | | 1 | | $ | 182 | | 3 | | $ | 302 |
| | Three Months Ended March 31, | | Three Months Ended March 31, | | | 2019 | | 2018 | | | | | Post- | | | | Post- | | | Number | | Modified | | Number | | Modified | | | of | | Recorded | | of | | Recorded | (Dollars in Thousands) | | Contracts | | Investment(1) | | Contracts | | Investment | Commercial, Financial and Agricultural | | - | | $ | - | | 1 | | $ | 230 | Real Estate – Construction | | - | | | - | | - | | | - | Real Estate – Commercial Mortgage | | - | | | - | | 1 | | | 228 | Real Estate – Residential | | 1 | | | 74 | | - | | | - | Real Estate – Home Equity | | 1 | | | 31 | | - | | | - | Consumer | | - | | | - | | - | | | - | Total TDRs | | 2 | | $ | 105 | | 2 | | $ | 458 |
(1) Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable. For the three months ended March 31, 2019 and March 31, 2018, there were no loans modified as TDRs within the previous 12 months that had defaulted. The following table provides information on how TDRs were modified during the periods indicated. | | Three Months Ended March 31, | | Three Months Ended March 31, | | | 2019 | | 2018 | | | Number of | | Recorded | | Number of | | Recorded | (Dollars in Thousands) | | Contracts | | Investment | | Contracts | | Investment(1) | Extended amortization | | - | | $ | - | | 1 | | $ | 228 | Interest rate adjustment | | - | | | - | | - | | | - | Extended amortization and interest rate adjustment | | 2 | | | 105 | | - | | | - | Principal Moratorium | | - | | | - | | 1 | | | 230 | Other | | - | | | - | | - | | | - | Total TDRs | | 2 | | $ | 105 | | 2 | | $ | 458 |
NOTE 4 – OTHER REAL ESTATE OWNED The following table presents other real estate owned activity for the periods indicated. | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | Beginning Balance | $ | 3,330 | | $ | 9,501 | | $ | 3,941 | | $ | 10,638 | $ | 2,229 | | $ | 3,941 | Additions | | 533 | | | 144 | | | 840 | | | 1,685 | | 527 | | | 307 | Valuation Write-downs | | (138) | | | (275) | | | (632) | | | (769) | | (190) | | | (494) | Sales | | (352) | | | (1,209) | | | (776) | | | (3,320) | | (664) | | | (424) | Other | | - | | | (193) | | | - | | | (266) | | Ending Balance | $ | 3,373 | | $ | 7,968 | | $ | 3,373 | | $ | 7,968 | $ | 1,902 | | $ | 3,330 |
Net expenses applicable to other real estate owned include the following: | Net expenses applicable to other real estate owned include the following: | Net expenses applicable to other real estate owned include the following: | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | Gains from the Sale of Properties | $ | (53) | | $ | (162) | | $ | (81) | | $ | (268) | $ | (12) | | $ | (28) | Losses from the Sale of Properties | | 54 | | | 93 | | | 142 | | | 195 | | 37 | | | 88 | Rental Income from Properties | | (3) | | | (22) | | | (6) | | | (54) | | (3) | | | (3) | Property Carrying Costs | | 112 | | | 131 | | | 187 | | | 257 | | 151 | | | 75 | Valuation Adjustments | | 138 | | | 275 | | | 632 | | | 768 | | 190 | | | 494 | Total | $ | 248 | | $ | 315 | | $ | 874 | | $ | 898 | $ | 363 | | $ | 626 |
As of June 30, 2018,March 31, 2019, the Company had $1.5$0.9 million of loans secured by residential real estate in the process of foreclosure. NOTE 5 – LEASES
Operating leases in which the Company is the lessee are recorded as operating lease right of use (“ROU”) assets and operating liabilities, included in other assets and liabilities, respectively, on its consolidated statement of financial condition. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statement of income. The Company’s operating leases primarily relate to banking offices with remaining lease terms of 2 to 9 years. The Company’s leases are not complex and do not contain residual value guarantees, variable lease payments, or significant assumptions or judgments made in applying the requirements of Topic 842. Operating leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. At March 31, 2019, the operating lease ROU assets and liabilities were $1.9 million and $2.8 million, respectively. The Company does not have any finance leases or any significant lessor agreements.
The table below summarizes our lease expense and other information related to the Company’s operating leases: | Three Months Ended | (Dollars in Thousands) | | March 31, 2019 | Operating lease expense | $ | 81 | Short-term lease expense | | 35 | Total lease expense | $ | 116 | | | | Other information: | | | Cash paid for amounts included in the measurement of lease liabilities: | | | Operating cash flows from operating leases | $ | 83 | Right-of-use assets obtained in exchange for new operating lease liabilities | | 1,928 | | | | Weighted-average remaining lease term — operating leases (in years) | | 7.4 | Weighted-average discount rate — operating leases | | 2.9% |
The table below summarizes the maturity of remaining lease liabilities: | | | | | | (Dollars in Thousands) | March 31, 2019 | 2019 | $ | 316 | 2020 | | 451 | 2021 | | 420 | 2022 | | 417 | 2023 | | 398 | 2024 and thereafter | | 1,085 | Total | $ | 3,087 | Less: Interest | | (326) | Present Value of Lease liability | $ | 2,761 |
At March 31, 2019, the Company has additional operating lease payments for a banking office (to be constructed) that has not yet commenced of $1.4 million. Payments on the operating lease are expected to commence after the construction period ends, which is expected to occur during the second quarter of 2020. A related party is the lessor in an operating lease with the Company. The Company’s minimum payment is $0.2 million annually through 2028, for an aggregate remaining obligation of $1.1 million at March 31, 2019. NOTE 56 - 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 cost for the Company's qualified benefit pension plan were as follows: | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | Service Cost | $ | 1,721 | | $ | 1,688 | | $ | 3,442 | | $ | 3,376 | $ | 1,529 | | $ | 1,721 | Interest Cost | | 1,415 | | | 1,437 | | | 2,830 | | | 2,874 | | 1,545 | | | 1,415 | Expected Return on Plan Assets | | (2,391) | | | (2,006) | | | (4,782) | | | (4,012) | | (2,382) | | | (2,391) | Prior Service Cost Amortization | | 50 | | | 56 | | | 100 | | | 112 | | 4 | | | 50 | Net Loss Amortization | | 918 | | | 953 | | | 1,837 | | | 1,906 | | 965 | | | 918 | Net Periodic Benefit Cost | $ | 1,713 | | $ | 2,128 | | $ | 3,427 | | $ | 4,256 | $ | 1,661 | | $ | 1,713 | | | | | | | | | | | | | | | | | | Discount Rate | | 3.71% | | | 4.21% | | | 3.71% | | | 4.21% | | Discount Rate Used for Benefit Cost | | | 4.43% | | | 3.71% | Long-term Rate of Return on Assets | | 7.25% | | | 7.25% | | | 7.25% | | | 7.25% | | 7.25% | | | 7.25% |
The components of the net periodic benefit cost for the Company's SERP were as follows: | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | Interest Cost | $ | 57 | | $ | 48 | | $ | 113 | | $ | 96 | Net Loss Amortization | | 406 | | | 149 | | | 813 | | | 298 | Net Periodic Benefit Cost | $ | 463 | | $ | 197 | | $ | 926 | | $ | 394 | | | | | | | | | | | | | Discount Rate | | 3.53% | | | 3.92% | | | 3.53% | | | 3.92% |
The components of the net periodic benefit cost for the Company's SERP were as follows: | | | | | | | | Three Months Ended March 31, | (Dollars in Thousands) | 2019 | | 2018 | Interest Cost | $ | 87 | | $ | 57 | Net Loss Amortization | | 190 | | | 406 | Net Periodic Benefit Cost | $ | 277 | | $ | 463 | | | | | | | Discount Rate Used for Benefit Cost | | 4.23% | | | 3.53% |
The service cost component of net periodic benefit cost is reflected in compensation expense in the accompanying statements of income. The other components of net periodic cost are included in “other” within the noninterest expense category in the statements of income. See Note 1 – Significant Accounting Policies for additional information. During the first six months of 2018, the Company contributed $20 million (first quarter - $10 million, second quarter - $10 million) to its defined benefit pension plan for the 2017 plan year.
NOTE 67 - 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, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 | (Dollars in Thousands) | Fixed | | Variable | | Total | | Fixed | | Variable | | Total | Fixed | | Variable | | Total | | Fixed | | Variable | | Total | Commitments to Extend Credit (1) | $ | 87,183 | | $ | 388,016 | | $ | 475,199 | | $ | 78,390 | | $ | 366,750 | | $ | 445,140 | $ | 109,646 | | $ | 388,161 | | $ | 497,807 | | $ | 94,572 | | $ | 373,438 | | $ | 468,010 | Standby Letters of Credit | | 4,722 | | | - | | | 4,722 | | | 4,678 | | | - | | | 4,678 | | 5,050 | | | - | | | 5,050 | | | 4,986 | | | - | | | 4,986 | Total | $ | 91,905 | | $ | 388,016 | | $ | 479,921 | | $ | 83,068 | | $ | 366,750 | | $ | 449,818 | $ | 114,696 | | $ | 388,161 | | $ | 502,857 | | $ | 99,558 | | $ | 373,438 | | $ | 472,996 |
(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. 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 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.shares. 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 June 2018, Visa increased the litigation reserve by $600 million and revised the conversion ratio for the Class B shares resulting in a $0.2 million payable due the counterparty under the swap contract. Fixed charges included in the swap liability are payable quarterly until the litigation reserve is fully liquidated and at which time the aforementioned swap contract will be terminated. Quarterly fixed payments approximate $119,000.$137,000. Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.
NOTE 78 – 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. 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 basedrevenue-based municipal bonds. Pricing for such instruments is easily obtained. From time to time,Quarterly, 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. Fair Value Swap. The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares. The valuation represents the amount due and payable to the counterparty based upon the revised share conversion rate, if any, during the period. At June 30, 2018,March 31, 2019, there was $0.2 million payable to the counterparty.were no amounts payable.
A summary of fair values for assets and liabilities consisted of the following: | | Level 1 | | Level 2 | | Level 3 | | Total Fair | | Level 1 | | Level 2 | | Level 3 | | Total Fair | (Dollars in Thousands) | (Dollars in Thousands) | Inputs | | Inputs | | Inputs | | Value | (Dollars in Thousands) | Inputs | | Inputs | | Inputs | | Value | June 30, 2018 | | | | | | | | | | | | | March 31, 2019 | | March 31, 2019 | | | | | | | | | | | | ASSETS: | ASSETS: | | | | | | | | | | | | ASSETS: | | | | | | | | | | | | Securities Available for Sale: | Securities Available for Sale: | | | | | | | | | | | | Securities Available for Sale: | | | | | | | | | | | | | U.S. Government Treasury | $ | 258,738 | | $ | - | | $ | - | | $ | 258,738 | U.S. Government Treasury | $ | 252,941 | | $ | - | | $ | - | | $ | 252,941 | | U.S. Government Agency | | - | | | 159,909 | | | - | | | 159,909 | U.S. Government Agency | | - | | | 133,593 | | | - | | | 133,593 | | States and Political Subdivisions | | - | | | 66,131 | | | - | | | 66,131 | States and Political Subdivisions | | - | | | 33,856 | | | - | | | 33,856 | | Mortgage-Backed Securities | | - | | | 998 | | | - | | | 998 | Mortgage-Backed Securities | | - | | | 779 | | | - | | | 779 | | Equity Securities | | - | | | 7,886 | | | - | | | 7,886 | Equity Securities | | - | | | 7,847 | | | - | | | 7,847 | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES: | | | | | | | | | | | | | Fair Value Swap | | - | | | - | | | 220 | | | 220 | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | | | | | | | | December 31, 2018 | | December 31, 2018 | | | | | | | | | | | | ASSETS: | ASSETS: | | | | | | | | | | | | ASSETS: | | | | | | | | | | | | Securities Available for Sale: | Securities Available for Sale: | | | | | | | | | | | | Securities Available for Sale: | | | | | | | | | | | | | U.S. Government Treasury | $ | 235,341 | | $ | - | | $ | - | | $ | 235,341 | U.S. Government Treasury | $ | 261,849 | | $ | - | | $ | - | | $ | 261,849 | | U.S. Government Agency | | - | | | 144,644 | | | - | | | 144,644 | U.S. Government Agency | | - | | | 133,206 | | | - | | | 133,206 | | States and Political Subdivisions | | - | | | 91,157 | | | - | | | 91,157 | States and Political Subdivisions | | - | | | 42,365 | | | - | | | 42,365 | | Mortgage-Backed Securities | | - | | | 1,185 | | | - | | | 1,185 | Mortgage-Backed Securities | | - | | | 943 | | | - | | | 943 | | Equity Securities | | - | | | 8,584 | | | - | | | 8,584 | Equity Securities | | - | | | 7,794 | | | - | | | 7,794 |
Assets Measured at Fair Value on a Non-Recurring Basis Certain assets are measured at fair value on a non-recurring basis (i.e., the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances). An example would be assets exhibiting evidence of impairment. The following is a description of valuation methodologies used for assets measured on a non-recurring basis. Impaired Loans. Impairment for collateral dependent loans is measured using the fair value of the collateral less selling costs. 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. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. Valuation techniques are consistent with those techniques applied in prior periods. Impaired collateral dependent loans had a carrying value of $4.8$4.4 million with a valuation allowance of $0.7 million at June 30, 2018March 31, 2019 and $6.1$5.6 million and $1.1$0.8 million, respectively, at December 31, 2017.2018. Loans Held for Sale. 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 sixthree months of 2018,2019, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset less estimated cost to sell. The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations. On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation adjustments as necessary. The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment and estimation involved in the real estate valuation process. 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. Securities Held to Maturity. Securities held to maturity are valued in accordance with the methodology previously noted in this footnote under the caption “Assets and Liabilities Measured at Fair Value on a Recurring Basis – Securities Available for Sale”.
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. For values reported prior to 2018, the discount rates, used to projecting cash flows reflected 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. Pursuant to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, for values reported for the 2018 period, fair value reflects the incorporation ofincorporates a liquidity discount to meet the objective of “exit price” valuation. 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, 2018 | | March 31, 2019 | | | Carrying | | Level 1 | | Level 2 | | Level 3 | | Carrying | | Level 1 | | Level 2 | | Level 3 | (Dollars in Thousands) | | Value | | Inputs | | Inputs | | Inputs | | Value | | Inputs | | Inputs | | Inputs | ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | $ | 56,573 | | $ | 56,573 | | $ | - | | $ | - | | $ | 49,501 | | $ | 49,501 | | $ | - | | $ | - | Short-Term Investments | | | 107,066 | | | 107,066 | | | - | | | - | | | 304,213 | | | 304,213 | | | - | | | - | Investment Securities, Available for Sale | | | 493,662 | | | 258,738 | | | 234,924 | | | - | | | 429,016 | | | 252,941 | | | 176,075 | | | - | Investment Securities, Held to Maturity | | | 236,764 | | | 49,456 | | | 183,723 | | | - | | | 226,179 | | | 34,765 | | | 190,552 | | | - | Equity Securities(1) | | | 3,600 | | | - | | | 3,600 | | | - | | | 3,588 | | | - | | | 3,588 | | | - | Loans Held for Sale | | | 8,246 | | | - | | | 8,246 | | | - | | | 4,557 | | | - | | | 4,557 | | | - | Loans, Net of Allowance for Loan Losses | | | 1,710,912 | | | - | | | - | | | 1,675,884 | | | 1,782,985 | | | - | | | - | | | 1,760,136 | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 2,459,190 | | $ | - | | $ | 2,457,218 | | $ | - | | $ | 2,617,294 | | $ | - | | $ | 2,615,572 | | $ | - | Short-Term Borrowings | | | 7,021 | | | - | | | 7,021 | | | - | | | 8,983 | | | - | | | 8,983 | | | - | Subordinated Notes Payable | | | 52,887 | | | - | | | 42,640 | | | - | | | 52,887 | | | - | | | 41,128 | | | - | Long-Term Borrowings | | | 12,897 | | | - | | | 12,903 | | | - | | | 7,661 | | | - | | | 7,715 | | | - |
| | December 31, 2017 | | December 31, 2018 | | | Carrying | | Level 1 | | Level 2 | | Level 3 | | Carrying | | Level 1 | | Level 2 | | Level 3 | (Dollars in Thousands) | | Value | | Inputs | | Inputs | | Inputs | | Value | | Inputs | | Inputs | | Inputs | ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | $ | 58,419 | | $ | 58,419 | | $ | - | | $ | - | | $ | 62,032 | | $ | 62,032 | | $ | - | | $ | - | Short-Term Investments | | | 227,023 | | | 227,023 | | | - | | | - | | | 213,968 | | | 213,968 | | | - | | | - | Investment Securities, Available for Sale | | | 480,911 | | | 235,341 | | | 245,570 | | | - | | | 446,157 | | | 261,849 | | | 184,308 | | | - | Investment Securities, Held to Maturity | | | 216,679 | | | 97,815 | | | 117,192 | | | - | | | 217,320 | | | 34,611 | | | 179,802 | | | - | Loans Held for Sale | | | 4,817 | | | - | | | 4,817 | | | - | | | 6,869 | | | - | | | 6,869 | | | - | Equity Securities(1) | | | | 3,591 | | | - | | | 3,591 | | | - | Loans, Net of Allowance for Loan Losses | | | 1,640,185 | | | - | | | - | | | 1,625,310 | | | 1,760,015 | | | - | | | - | | | 1,730,161 | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 2,469,877 | | $ | - | | $ | 2,382,818 | | $ | - | | $ | 2,531,856 | | $ | - | | $ | 2,529,841 | | $ | - | Short-Term Borrowings | | | 7,480 | | | - | | | 7,482 | | | - | | | 13,541 | | | - | | | 13,541 | | | - | Subordinated Notes Payable | | | 52,887 | | | - | | | 41,718 | | | - | | | 52,887 | | | - | | | 42,359 | | | - | Long-Term Borrowings | | | 13,967 | | | - | | | 14,081 | | | - | | | 8,568 | | | - | | | 7,879 | | | - |
(1) Not readily marketable securities - reflected in other assets.
All non-financial instruments are excluded from the above table. The disclosures also do not include goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
NOTE 89 – OTHER COMPREHENSIVE INCOME The amounts allocated to other comprehensive income are presented in the table below. Reclassification adjustments related to securities held for sale are included in net gain/loss on securities transactions in the accompanying consolidated statements of comprehensive income. For the periods presented, reclassifications adjustments related to securities held for sale was not material. | | | Before | | Tax | | Net of | | | Before | | Tax | | Net of | | | | Tax | | (Expense) | | Tax | | | Tax | | (Expense) | | Tax | (Dollars in Thousands) | (Dollars in Thousands) | Amount | | Benefit | | Amount | (Dollars in Thousands) | Amount | | Benefit | | Amount | Three Months Ended June 30, 2018 | | | | | | | | | | March 31, 2019 | | March 31, 2019 | | | | | | | | | Investment Securities: | Investment Securities: | | | | | | | | | Investment Securities: | | | | | | | | | Change in net unrealized gain/loss on securities available for sale | Change in net unrealized gain/loss on securities available for sale | $ | (265) | | $ | 67 | | $ | (198) | Change in net unrealized gain/loss on securities available for sale | $ | 1,250 | | $ | (317) | | $ | 933 | Amortization of losses on securities transferred from available for sale to held to | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | | maturity | | 14 | | | (4) | | | 10 | maturity | | 12 | | | (4) | | | 8 | | | Total Other Comprehensive Loss | $ | (251) | | $ | 63 | | $ | (188) | | Total Other Comprehensive Loss | $ | 1,262 | | $ | (321) | | $ | 941 | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2018 | | | | | | | | | | March 31, 2018 | | March 31, 2018 | | | | | | | | | Investment Securities: | Investment Securities: | | | | | | | | | Investment Securities: | | | | | | | | | Change in net unrealized gain/loss on securities available for sale | Change in net unrealized gain/loss on securities available for sale | $ | (1,752) | | $ | 443 | | $ | (1,309) | Change in net unrealized gain/loss on securities available for sale | $ | (1,488) | | $ | 377 | | $ | (1,111) | Amortization of losses on securities transferred from available for sale to held to | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | | maturity | | 28 | | | (7) | | | 21 | maturity | | 15 | | | (4) | | | 11 | | | Total Other Comprehensive Loss | $ | (1,724) | | $ | 436 | | $ | (1,288) | | Total Other Comprehensive Income | $ | (1,473) | | $ | 373 | | $ | (1,100) |
| | | Before | | Tax | | Net of | | | | Tax | | (Expense) | | Tax | (Dollars in Thousands) | Amount | | Benefit | | Amount | Three Months Ended June 30, 2017 | | | | | | | | | Investment Securities: | | | | | | | | | Change in net unrealized gain/loss on securities available for sale | $ | 110 | | $ | (42) | | $ | 68 | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | | maturity | | 18 | | | (7) | | | 11 | | | Total Other Comprehensive Income | $ | 128 | | $ | (49) | | $ | 79 | | | | | | | | | | | | Six Months Ended June 30, 2017 | | | | | | | | | Investment Securities: | | | | | | | | | Change in net unrealized gain/loss on securities available for sale | $ | 615 | | $ | (238) | | $ | 377 | Amortization of losses on securities transferred from available for sale to held to | | | | | | | | | | maturity | | 38 | | | (15) | | | 23 | | | Total Other Comprehensive Income | $ | 653 | | $ | (253) | | $ | 400 |
Accumulated other comprehensive loss was comprised of the following components: | | | | | | | | | | | | | | | | | Accumulated | | Securities | | | | | Other | | Available | | Retirement | | Comprehensive | (Dollars in Thousands) | for Sale | | Plans | | Loss | Balance as of January 1, 2019 | $ | (2,008) | | $ | (26,807) | | $ | (28,815) | Other comprehensive income during the period | | 941 | | | - | | | 941 | Balance as of March 31, 2019 | $ | (1,067) | | $ | (26,807) | | $ | (27,874) | | | | | | | | | | Balance as of January 1, 2018 | $ | (1,743) | | $ | (30,301) | | $ | (32,044) | Other comprehensive loss during the period | | (1,100) | | | - | | | (1,100) | Balance as of March 31, 2018 | $ | (2,843) | | $ | (30,301) | | $ | (33,144) |
Accumulated other comprehensive loss was comprised of the following components: | | | | | | | | | | | | | | | | | Accumulated | | Securities | | | | | Other | | Available | | Retirement | | Comprehensive | (Dollars in Thousands) | for Sale | | Plans | | Loss | Balance as of January 1, 2018 | $ | (1,743) | | $ | (30,301) | | $ | (32,044) | Other comprehensive loss during the period | | (1,288) | | | - | | | (1,288) | Balance as of June 30, 2018 | $ | (3,031) | | $ | (30,301) | | $ | (33,332) | | | | | | | | | | Balance as of January 1, 2017 | $ | (583) | | $ | (25,642) | | $ | (26,225) | Other comprehensive income during the period | | 400 | | | - | | | 400 | Balance as of June 30, 2017 | $ | (183) | | $ | (25,642) | | $ | (25,825) |
NOTE 910 – ACCOUNTING STANDARDS UPDATES ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted ASU 2014-09 January 1, 2018. See Note 1 – Significant Accounting Policies for additional information.
ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet.ASU 2016-02 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on its financial statements and related disclosures. As part of its implementation efforts to date, management has formed a cross-functional implementation team and developed a project plan. The Company has also engaged a vendor to assist in model development. The data set-upCompany’s implementation plan has progressed through the design and build phase and will begin testing and parallel modeling in the second quarter of 2019. In conjunction with the implementation, the Company is reviewing business process is near completion and evaluating potential changes to the overall project plan remains on schedule.control environment. The Company expects the new guidance will result in an increase in the allowance for credit losses given the change from accounting for losses inherent in the loan portfolio to accounting for losses over the remaining expected life of the portfolio. However, since the magnitude of the anticipated increase in the allowance for credit losses will be impacted by economic conditions and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated. ASU 2018-03,"Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 clarifies certain aspects of the guidance issued in ASU 2016-01. This includes the ability to irrevocably elect to change the measurement approach for equity securities measured using the practical expedient (at cost plus or minus observable transactions less impairment) to a fair value method in accordance with Topic 820, Fair Value Measurement; clarification that if an observable transaction occurs for such securities, the adjustment is as of the observable transaction date; clarification that the prospective transition approach for equity securities without a readily determinable fair values is meant only for instances in which the practical expedient is elected; and various other clarifications. ASU 2018-03 is effective for the Company on July 1, 2018 and is not expected to have a significant impact on its financial statements.
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 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 20182019 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, is referred to as "CCBG," "Company," "we," "us," or "our." CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our 20172018 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report. However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law. BUSINESS OVERVIEW We are a financial holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly owned subsidiary, Capital City Bank (the "Bank" or "CCB"). The Bank offers a broad array of products and services through a total of 59 full-service offices located in Florida, Georgia, and Alabama. The Bank offers commercial and retail banking services, as well as trust and asset management, and retail securities brokerage. Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest and fees received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, noninterest income such as deposit fees, wealth management fees, mortgage banking fees and bank card fees, and operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes. A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 20172018 Form 10-K. NON-GAAP FINANCIAL MEASURE We present a tangible common equity ratio and a tangible book value per diluted share that, in each case, removes the effect of goodwill resulting from merger and acquisition activity. We believe this measure isthese measures are useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry. The GAAP to non-GAAP reconciliation is provided below.
| | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 | (Dollars in Thousands) | | Second | | First | | Fourth | | Third | | Second | | First | | Fourth | | Third | | (Dollars in Thousands, except per share data) | | | First | | Fourth | | Third | | Second | | First | | Fourth | | Third | | Second | Shareowners' Equity (GAAP) | | $ | 293,571 | | $ | 288,360 | | $ | 284,210 | | $ | 285,201 | | $ | 281,513 | | $ | 278,059 | | $ | 275,168 | | $ | 276,624 | | $ | 308,986 | | $ | 302,587 | | $ | 298,016 | | $ | 293,571 | | $ | 288,360 | | $ | 284,210 | | $ | 285,201 | | $ | 281,513 | Less: Goodwill (GAAP) | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | Tangible Shareowners' Equity (non-GAAP) | A | | 208,760 | | | 203,549 | | | 199,399 | | | 200,390 | | | 196,702 | | | 193,248 | | | 190,357 | | | 191,813 | A | | 224,175 | | | 217,776 | | | 213,205 | | | 208,760 | | | 203,549 | | | 199,399 | | | 200,390 | | | 196,702 | Total Assets (GAAP) | | | 2,880,278 | | | 2,924,832 | | | 2,898,794 | | | 2,790,842 | | | 2,814,843 | | | 2,895,531 | | | 2,845,197 | | | 2,753,154 | | | 3,052,051 | | | 2,959,183 | | | 2,819,190 | | | 2,880,278 | | | 2,924,832 | | | 2,898,794 | | | 2,790,842 | | | 2,814,843 | Less: Goodwill (GAAP) | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | | | 84,811 | Tangible Assets (non-GAAP) | B | $ | 2,795,467 | | $ | 2,840,021 | | $ | 2,813,983 | | $ | 2,706,031 | | $ | 2,730,032 | | $ | 2,810,720 | | $ | 2,760,386 | | $ | 2,668,343 | B | $ | 2,967,240 | | $ | 2,874,372 | | $ | 2,734,379 | | $ | 2,795,467 | | $ | 2,840,021 | | $ | 2,813,983 | | $ | 2,706,031 | | $ | 2,730,032 | Tangible Common Equity Ratio (non-GAAP) | A/B | | 7.47% | | | 7.17% | | | 7.09% | | | 7.41% | | | 7.21% | | | 6.88% | | | 6.90% | | | 7.19% | A/B | | 7.56% | | | 7.58% | | | 7.80% | | | 7.47% | | | 7.17% | | | 7.09% | | | 7.41% | | | 7.21% | Actual Diluted Shares Outstanding (GAAP) | C | | 17,114,380 | | | 17,088,419 | | | 17,071,107 | | | 17,045,326 | | | 17,025,148 | | | 16,978,681 | | | 16,949,359 | | | 16,873,822 | C | | 16,840,496 | | | 16,808,542 | | | 17,127,846 | | | 17,114,380 | | | 17,088,419 | | | 17,071,107 | | | 17,045,326 | | | 17,025,148 | Diluted Tangible Book Value (non-GAAP) | A/C | | 12.20 | | | 11.91 | | | 11.68 | | | 11.76 | | | 11.55 | | | 11.38 | | | 11.23 | | | 11.37 | A/C | | 13.31 | | | 12.96 | | | 12.45 | | | 12.20 | | | 11.91 | | | 11.68 | | | 11.76 | | | 11.55 |
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in Thousands, Except | (Dollars in Thousands, Except | 2018 | | 2017 | | 2016 | (Dollars in Thousands, Except | 2019 | | 2018 | | 2017 | (Per Share Data) | (Per Share Data) | Second | | | First | | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | (Per Share Data) | First | | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | Summary of Operations: | Summary of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Income | $ | 24,419 | | | $ | 23,214 | | | $ | 22,627 | | | $ | 22,341 | | | $ | 21,422 | | | $ | 20,540 | | | $ | 20,832 | | | $ | 20,104 | | Interest Income | $ | 27,722 | | | $ | 26,370 | | | $ | 25,392 | | | $ | 24,419 | | | $ | 23,214 | | | $ | 22,627 | | | $ | 22,341 | | | $ | 21,422 | | | Interest Expense | | 1,649 | | | | 1,451 | | | | 1,138 | | | | 1,080 | | | | 926 | | | | 804 | | | | 773 | | | | 784 | | Interest Expense | | 2,814 | | | | 2,022 | | | | 1,769 | | | | 1,649 | | | | 1,451 | | | | 1,138 | | | | 1,080 | | | | 926 | | | Net Interest Income | | 22,770 | | | | 21,763 | | | | 21,489 | | | | 21,261 | | | | 20,496 | | | | 19,736 | | | | 20,059 | | | | 19,320 | | Net Interest Income | | 24,908 | | | | 24,348 | | | | 23,623 | | | | 22,770 | | | | 21,763 | | | | 21,489 | | | | 21,261 | | | | 20,496 | | | Provision for Loan Losses | | 815 | | | | 745 | | | | 826 | | | | 490 | | | | 589 | | | | 310 | | | | 464 | | | | - | | Provision for Loan Losses | | 767 | | | | 457 | | | | 904 | | | | 815 | | | | 745 | | | | 826 | | | | 490 | | | | 589 | | | Net Interest Income After | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Interest Income After | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Provision for Loan Losses | | 21,955 | | | | 21,018 | | | | 20,663 | | | | 20,771 | | | | 19,907 | | | | 19,426 | | | | 19,595 | | | | 19,320 | | Provision for Loan Losses | | 24,141 | | | | 23,891 | | | | 22,719 | | | | 21,955 | | | | 21,018 | | | | 20,663 | | | | 20,771 | | | | 19,907 | | | Noninterest Income | | 12,542 | | | | 12,477 | | | | 12,897 | | | | 12,996 | | | | 13,135 | | | | 12,718 | | | | 12,778 | | | | 13,011 | | Noninterest Income | | 12,552 | | | | 13,238 | | | | 13,308 | | | | 12,542 | | | | 12,477 | | | | 12,897 | | | | 12,996 | | | | 13,135 | | | Noninterest Expense | | 28,393 | | | | 27,906 | | | | 26,897 | | | | 26,707 | | | | 27,921 | | | | 27,922 | | | | 27,560 | | | | 28,022 | | Noninterest Expense | | 28,198 | | | | 26,505 | | | | 28,699 | | | | 28,393 | | | | 27,906 | | | | 26,897 | | | | 26,707 | | | | 27,921 | | | Income Before Income Taxes | | 6,104 | | | | 5,589 | | | | 6,663 | | | | 7,060 | | | | 5,121 | | | | 4,222 | | | | 4,813 | | | | 4,309 | | Income Before Income Taxes | | 8,495 | | | | 10,624 | | | | 7,328 | | | | 6,104 | | | | 5,589 | | | | 6,663 | | | | 7,060 | | | | 5,121 | | | Income Tax Expense (Benefit)(2) | | 101 | | | | (184) | | | | 6,660 | | | | 2,505 | | | | 1,560 | | | | 1,478 | | | | 1,517 | | | | 1,436 | | Income Tax Expense (Benefit)(2) | | 2,059 | | | | 2,166 | | | | 1,338 | | | | 101 | | | | (184) | | | | 6,660 | | | | 2,505 | | | | 1,560 | | | Net Income | | 6,003 | | | | 5,773 | | | | 3 | | | | 4,555 | | | | 3,561 | | | | 2,744 | | | | 3,296 | | | | 2,873 | | Net Income | | 6,436 | | | | 8,458 | | | | 5,990 | | | | 6,003 | | | | 5,773 | | | | 3 | | | | 4,555 | | | | 3,561 | | | Net Interest Income (FTE) | $ | 22,917 | | | $ | 21,943 | | | $ | 21,808 | | | $ | 21,595 | | | $ | 20,799 | | | $ | 20,006 | | | $ | 20,335 | | | $ | 19,603 | | Net Interest Income (FTE) | $ | 25,042 | | | $ | 24,513 | | | $ | 23,785 | | | $ | 22,917 | | | $ | 21,943 | | | $ | 21,808 | | | $ | 21,595 | | | $ | 20,799 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share: | Per Common Share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Income Basic | $ | 0.35 | | | $ | 0.34 | | | $ | 0.00 | | | $ | 0.27 | | | $ | 0.21 | | | $ | 0.16 | | | $ | 0.20 | | | $ | 0.18 | | Net Income Basic | $ | 0.38 | | | $ | 0.50 | | | $ | 0.35 | | | $ | 0.35 | | | $ | 0.34 | | | $ | 0.00 | | | $ | 0.27 | | | $ | 0.21 | | | Net Income Diluted | | 0.35 | | | | 0.34 | | | | 0.00 | | | | 0.27 | | | | 0.21 | | | | 0.16 | | | | 0.20 | | | | 0.17 | | Net Income Diluted | | 0.38 | | | | 0.50 | | | | 0.35 | | | | 0.35 | | | | 0.34 | | | | 0.00 | | | | 0.27 | | | | 0.21 | | | Cash Dividends Declared | | 0.07 | | | | 0.07 | | | | 0.07 | | | | 0.07 | | | | 0.05 | | | | 0.05 | | | | 0.05 | | | | 0.04 | | Cash Dividends Declared | | 0.11 | | | | 0.09 | | | | 0.09 | | | | 0.07 | | | | 0.07 | | | | 0.07 | | | | 0.07 | | | | 0.05 | | | Diluted Book Value | | 17.15 | | | | 16.87 | | | | 16.65 | | | | 16.73 | | | | 16.54 | | | | 16.38 | | | | 16.23 | | | | 16.39 | | Diluted Book Value | | 18.35 | | | | 18.00 | | | | 17.40 | | | | 17.15 | | | | 16.87 | | | | 16.65 | | | | 16.73 | | | | 16.54 | | | Diluted Tangible Book Value(1) | | 12.20 | | | | 11.91 | | | | 11.68 | | | | 11.76 | | | | 11.55 | | | | 11.38 | | | | 11.23 | | | | 11.37 | | Diluted Tangible Book Value(1) | | 13.31 | | | | 12.96 | | | | 12.45 | | | | 12.20 | | | | 11.91 | | | | 11.68 | | | | 11.76 | | | | 11.55 | | | Market Price: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market Price: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High | | 25.99 | | | | 26.50 | | | | 26.01 | | | | 24.58 | | | | 22.39 | | | | 21.79 | | | | 23.15 | | | | 15.35 | | High | | 25.87 | | | | 26.95 | | | | 25.91 | | | | 25.99 | | | | 26.50 | | | | 26.01 | | | | 24.58 | | | | 22.39 | | | Low | | 22.28 | | | | 22.80 | | | | 22.21 | | | | 19.60 | | | | 17.68 | | | | 19.22 | | | | 14.29 | | | | 13.32 | | Low | | 21.04 | | | | 19.92 | | | | 23.19 | | | | 22.28 | | | | 22.80 | | | | 22.21 | | | | 19.60 | | | | 17.68 | | | Close | | 23.63 | | | | 24.75 | | | | 22.94 | | | | 24.01 | | | | 20.42 | | | | 21.39 | | | | 20.48 | | | | 14.77 | | Close | | 21.78 | | | | 23.21 | | | | 23.34 | | | | 23.63 | | | | 24.75 | | | | 22.94 | | | | 24.01 | | | | 20.42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Average Balances: | Selected Average Balances: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selected Average Balances: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans, Net | $ | 1,691,287 | | | $ | 1,647,612 | | | $ | 1,640,738 | | | $ | 1,638,578 | | | $ | 1,608,629 | | | $ | 1,585,561 | | | $ | 1,573,264 | | | $ | 1,555,889 | | Loans, Net | $ | 1,780,406 | | | $ | 1,785,570 | | | $ | 1,747,093 | | | $ | 1,691,287 | | | $ | 1,647,612 | | | $ | 1,640,738 | | | $ | 1,638,578 | | | $ | 1,608,629 | | | Earning Assets | | 2,566,006 | | | | 2,592,465 | | | | 2,511,985 | | | | 2,466,287 | | | | 2,502,030 | | | | 2,529,207 | | | | 2,423,388 | | | | 2,417,943 | | Earning Assets | | 2,704,802 | | | | 2,554,482 | | | | 2,535,292 | | | | 2,566,006 | | | | 2,592,465 | | | | 2,511,985 | | | | 2,466,287 | | | | 2,502,030 | | | Total Assets | | 2,861,104 | | | | 2,892,120 | | | | 2,822,451 | | | | 2,779,960 | | | | 2,817,479 | | | | 2,845,140 | | | | 2,743,463 | | | | 2,734,465 | | Total Assets | | 2,996,511 | | | | 2,849,245 | | | | 2,826,924 | | | | 2,861,104 | | | | 2,892,120 | | | | 2,822,451 | | | | 2,779,960 | | | | 2,817,479 | | | Deposits | | 2,431,956 | | | | 2,456,106 | | | | 2,378,411 | | | | 2,329,162 | | | | 2,373,423 | | | | 2,407,278 | | | | 2,306,917 | | | | 2,288,741 | | Deposits | | 2,564,715 | | | | 2,412,375 | | | | 2,392,272 | | | | 2,431,956 | | | | 2,456,106 | | | | 2,378,411 | | | | 2,329,162 | | | | 2,373,423 | | | Shareowners’ Equity | | 291,806 | | | | 287,502 | | | | 288,044 | | | | 285,296 | | | | 281,661 | | | | 278,489 | | | | 278,943 | | | | 277,407 | | Shareowners’ Equity | | 307,262 | | | | 302,196 | | | | 297,757 | | | | 291,806 | | | | 287,502 | | | | 288,044 | | | | 285,296 | | | | 281,661 | | | Common Equivalent Average Shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Equivalent Average Shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | 17,045 | | | | 17,028 | | | | 16,967 | | | | 16,965 | | | | 16,955 | | | | 16,919 | | | | 16,809 | | | | 16,804 | | Basic | | 16,791 | | | | 16,989 | | | | 17,056 | | | | 17,045 | | | | 17,028 | | | | 16,967 | | | | 16,965 | | | | 16,955 | | | Diluted | | 17,104 | | | | 17,073 | | | | 17,050 | | | | 17,044 | | | | 17,016 | | | | 16,944 | | | | 16,913 | | | | 16,871 | | Diluted | | 16,819 | | | | 17,050 | | | | 17,125 | | | | 17,104 | | | | 17,073 | | | | 17,050 | | | | 17,044 | | | | 17,016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance Ratios: | Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Return on Average Assets | | 0.84 | % | | | 0.81 | % | | | 0.00 | % | | | 0.65 | % | | | 0.51 | % | | | 0.39 | % | | | 0.48 | % | | | 0.42 | % | Return on Average Assets | | 0.87 | % | | | 1.18 | % | | | 0.84 | % | | | 0.84 | % | | | 0.81 | % | | | 0.00 | % | | | 0.65 | % | | | 0.51 | % | | Return on Average Equity | | 8.25 | | | | 8.14 | | | | 0.00 | | | | 6.33 | | | | 5.07 | | | | 4.00 | | | | 4.70 | | | | 4.12 | | Return on Average Equity | | 8.49 | | | | 11.10 | | | | 7.98 | | | | 8.25 | | | | 8.14 | | | | 0.00 | | | | 6.33 | | | | 5.07 | | | Net Interest Margin (FTE) | | 3.58 | | | | 3.43 | | | | 3.45 | | | | 3.48 | | | | 3.33 | | | | 3.21 | | | | 3.34 | | | | 3.23 | | Net Interest Margin (FTE) | | 3.75 | | | | 3.81 | | | | 3.72 | | | | 3.58 | | | | 3.43 | | | | 3.45 | | | | 3.48 | | | | 3.33 | | | Noninterest Income as % of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest Income as % of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Revenue | | 35.52 | | | | 36.44 | | | | 37.51 | | | | 37.94 | | | | 39.05 | | | | 39.19 | | | | 38.91 | | | | 40.24 | | Operating Revenue | | 33.51 | | | | 35.22 | | | | 36.04 | | | | 35.52 | | | | 36.44 | | | | 37.51 | | | | 37.94 | | | | 39.05 | | | Efficiency Ratio | | 80.07 | | | | 81.07 | | | | 77.50 | | | | 77.21 | | | | 82.28 | | | | 85.33 | | | | 83.23 | | | | 85.92 | | Efficiency Ratio | | 75.01 | | | | 70.21 | | | | 77.37 | | | | 80.07 | | | | 81.07 | | | | 77.50 | | | | 77.21 | | | | 82.28 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Quality: | Asset Quality: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Quality: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for Loan Losses | $ | 13,563 | | | $ | 13,258 | | | $ | 13,307 | | | $ | 13,339 | | | $ | 13,242 | | | $ | 13,335 | | | $ | 13,431 | | | $ | 13,744 | | Allowance for Loan Losses | $ | 14,120 | | | $ | 14,210 | | | $ | 14,219 | | | $ | 13,563 | | | $ | 13,258 | | | $ | 13,307 | | | $ | 13,339 | | | $ | 13,242 | | | Allowance for Loan Losses to Loans | 0.78 | % | | | 0.80 | % | | | 0.80 | % | | | 0.82 | % | | | 0.81 | % | | | 0.84 | % | | | 0.86 | % | | | 0.88 | % | Allowance for Loan Losses to Loans | 0.78 | % | | | 0.80 | % | | | 0.80 | % | | | 0.78 | % | | | 0.80 | % | | | 0.80 | % | | | 0.82 | % | | | 0.81 | % | | Nonperforming Assets (“NPAs”) | | 9,114 | | | | 10,644 | | | | 11,100 | | | | 12,545 | | | | 15,934 | | | | 17,799 | | | | 19,171 | | | | 21,352 | | Nonperforming Assets (“NPAs”) | | 6,949 | | | | 9,101 | | | | 9,587 | | | | 9,114 | | | | 10,644 | | | | 11,100 | | | | 12,545 | | | | 15,934 | | | NPAs to Total Assets | | 0.32 | | | | 0.36 | | | | 0.38 | | | | 0.45 | | | | 0.57 | | | | 0.61 | | | | 0.67 | | | | 0.78 | | NPAs to Total Assets | | 0.23 | | | | 0.31 | | | | 0.34 | | | | 0.32 | | | | 0.36 | | | | 0.38 | | | | 0.45 | | | | 0.57 | | | NPAs to Loans plus OREO | | 0.52 | | | | 0.64 | | | | 0.67 | | | | 0.76 | | | | 0.97 | | | | 1.11 | | | | 1.21 | | | | 1.35 | | NPAs to Loans plus OREO | | 0.39 | | | | 0.51 | | | | 0.54 | | | | 0.52 | | | | 0.64 | | | | 0.67 | | | | 0.76 | | | | 0.97 | | | Allowance to Non-Performing Loans | 236.25 | | | | 181.26 | | | | 185.87 | | | | 203.39 | | | | 166.23 | | | | 160.70 | | | | 157.40 | | | | 159.56 | | Allowance to Non-Performing Loans | 279.77 | | | | 206.79 | | | | 207.06 | | | | 236.25 | | | | 181.26 | | | | 185.87 | | | | 203.39 | | | | 166.23 | | | Net Charge-Offs to Average Loans | 0.12 | | | | 0.20 | | | | 0.21 | | | | 0.10 | | | | 0.17 | | | | 0.10 | | | | 0.20 | | | | (0.02) | | Net Charge-Offs to Average Loans | 0.20 | | | | 0.10 | | | | 0.06 | | | | 0.12 | | | | 0.20 | | | | 0.21 | | | | 0.10 | | | | 0.17 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Ratios: | Capital Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Capital | | 16.25 | % | | | 16.31 | % | | | 16.33 | % | | | 16.19 | % | | | 15.58 | % | | | 15.68 | % | | | 15.51 | % | | | 15.48 | % | Tier 1 Capital | | 16.34 | % | | | 16.36 | % | | | 16.17 | % | | | 16.25 | % | | | 16.31 | % | | | 16.33 | % | | | 16.19 | % | | | 15.58 | % | | Total Capital | | 17.00 | | | | 17.05 | | | | 17.10 | | | | 16.96 | | | | 16.32 | | | | 16.44 | | | | 16.28 | | | | 16.28 | | Total Capital | | 17.09 | | | | 17.13 | | | | 16.94 | | | | 17.00 | | | | 17.05 | | | | 17.10 | | | | 16.96 | | | | 16.32 | | | Common Equity Tier 1 | | 13.46 | | | | 13.44 | | | | 13.42 | | | | 13.26 | | | | 12.72 | | | | 12.77 | | | | 12.61 | | | | 12.55 | | Common Equity Tier 1 | | 13.62 | | | | 13.58 | | | | 13.43 | | | | 13.46 | | | | 13.44 | | | | 13.42 | | | | 13.26 | | | | 12.72 | | | Leverage | | 10.69 | | | | 10.36 | | | | 10.47 | | | | 10.48 | | | | 10.20 | | | | 9.95 | | | | 10.23 | | | | 10.12 | | Leverage | | 10.53 | | | | 10.89 | | | | 10.99 | | | | 10.69 | | | | 10.36 | | | | 10.47 | | | | 10.48 | | | | 10.20 | | | Tangible Common Equity(1) | | 7.47 | | | | 7.17 | | | | 7.09 | | | | 7.41 | | | | 7.21 | | | | 6.88 | | | | 6.90 | | | | 7.19 | | Tangible Common Equity(1) | | 7.56 | | | | 7.58 | | | | 7.80 | | | | 7.47 | | | | 7.17 | | | | 7.09 | | | | 7.41 | | | | 7.21 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1)Non-GAAP financial measure. See non-GAAP reconciliation on page 30. | | | | | | | | | | | | | | | | | | (1)Non-GAAP financial measure. See non-GAAP reconciliation on page 27. | | | | | | | | | | | | | | | | | | | (2)Includes $1.4 million and $1.5 million income tax benefit in the second and first quarter of 2018, respectively, related to two 2017 plan year pension plan contributions. Also, a $4.1 million | | (2)Includes $0.4 million, $1.4 million, and $1.5 million income tax benefit in the third, second and first quarter of 2018, respectively, related to 2017 plan year pension plan | | | income tax expense adjustment in the fourth quarter, 2017 related to the Tax Cuts and Jobs act of 2017. | | | | | | | | | | | | | | | contributions. Also includes $4.1 million income tax expense adjustment in the fourth quarter of 2017 related to the Tax Cuts and Jobs Act of 2017. | | | | | |
FINANCIAL OVERVIEW A summary overview of our financial performance is provided below. Results of Operations · Net income of $6.0$6.4 million, or $0.35$0.38 per diluted share, for the secondfirst quarter of 2019 compared to net income of $8.5 million, or $0.50 per diluted share, for the fourth quarter of 2018, compared toand net income of $5.8 million, or $0.34 per diluted share for the first quarter of 2018. Net income for the first quarter of 2018 and net income of $3.6included a $1.5 million, or $0.21$0.09 per diluted share tax benefit related to a 2017 plan year pension plan contribution. Net income for the secondfourth quarter of 2017. For the first six months of 2018 we realized net income of $11.8included a $2.0 million, or $0.69$0.09 per diluted share, compared to net incomegain from the sale of $6.3a banking office and a $0.3 million, or $0.37$0.02 per diluted share, for the same period of 2017.tax benefit from a tax accounting method change. · TaxTaxable equivalent net interest income for the secondfirst quarter of 2019 was $25.0 million compared to $24.5 million for the fourth quarter of 2018 was $22.9 million compared toand $21.9 million for the first quarter of 2018 and $20.8 million for2018. During the secondfirst quarter of 2017. For the first six months2019, overnight funds increased as a result of 2018, tax equivalentseasonal growth in our deposit balances. The increase in tax-equivalent net interest income totaled $44.9 million compared to $40.8 million for the comparable periodfirst quarter of 2017. The increase compared to all prior periods2018 reflected higher interest rates and a favorable shiftgrowth in the earning asset mix. Higherloan portfolio and higher rates earned on overnight funds, investment securities, and variable rate loans, were partially offset by a higher cost on our negotiated rate deposits. · Provision for loan losses was $0.8 million for the secondfirst quarter of 2019 compared to $0.5 million for the fourth quarter of 2018 compared to $0.8and $0.7 million for the first quarter of 2018 and $0.6 million for the second quarter of 2017.2018. For the first six months of 2018, the loan loss provision totaled $1.6 million compared to $0.9 million for the same period of 2017. The higher provision incompared to the fourth quarter of 2018 reflected growth in thehigher net loan portfolio. charge-offs. · Noninterest income for the secondfirst quarter of 2019 totaled $12.6 million, a decrease of $0.7 million, or 5.2%, from the fourth quarter of 2018 totaled $12.5 million, an increase ofand a $0.1 million, or 0.5%0.6%, increase over the first quarter of 2018 and a $0.6 million, or 4.5%,2018. The decrease from the secondfourth quarter of 2017. For the first six months of 2018 noninterest income totaled $25.0 million, a $0.8 million, or 3.2%, decrease from the same period of 2017. The decrease from both prior year periods was primarily attributable to lower deposit fees and mortgage banking fees and deposit fees. · Noninterest expense for the secondfirst quarter of 20182019 totaled $28.4$28.2 million, an increase of $0.5$1.7 million, or 1.7%6.4%, over the fourth quarter of 2018 and $0.3 million, or 1.0%, over the first quarter of 2018 and the second quarter of 2017. For the first six months of 2018, noninterest expense totaled $56.3 million, an increase of $0.5 million, or 0.8%, over the same period of 2017. 2018. The increase over all prior periodsthe fourth quarter was primarily dueattributable to higher professional fees as well asother real estate owned (“OREO”) expense of $2.0 million, partially offset by lower occupancy expense of $0.3 million. The increase in OREO expense reflected a non-routine expense for our VISA Class B share swap contract related to VISA’s funding$2.0 million gain on the sale of their litigation reserve.a banking office in the fourth quarter of 2018. Financial Condition · Average earning assets were $2.566$2.705 billion for the secondfirst quarter of 2018, a decrease2019, an increase of $26.5$150.3 million, or 1.0%5.9%, fromover the firstfourth quarter of 2018, and an increase of $54.0$112.3 million, or 2.2%4.3%, over the fourthfirst quarter of 2017. The change in average earning assets compared to the first quarter 2018 was attributable to decreases in our short-term investments, primarily due to a decline in our seasonal public fund balances.2018. The change in average earning assets over the fourth quarter 2017 was attributable to growthboth periods reflected a higher level of total deposits, resulting in our loan and investment portfolios primarily funded by increases in our noninterest bearing deposits and savings accounts.a higher balance of overnight funds sold. · Average loans increaseddecreased by $43.7$5.2 million, or 2.7%0.29%, from the fourth quarter of 2018, and increased $132.8 million, or 8.1%, over the first quarter of 2018,2018. On an “as of” basis, loans grew $20.6 million and $50.5$134.9 million, or 3.1%, over the fourth quarter of 2017. The increase compared to the first quarter of 2018 reflected growth in all loans types except home equity loans. Growth over the fourth quarter of 2017 was experienced in all loan products except for commercial and home equity loans.respectively. · Nonperforming assets totaled $9.1$6.9 million at June 30, 2018,March 31, 2019, a decrease of $1.5$2.2 million, or 14.4%23.6%, from December 31, 2018 and $3.7 million, or 34.7%, from March 31, 2018 and $2.0 million, or 17.9%, from December 31, 2017.2018. Nonperforming assets represented 0.32%0.23% of total assets at June 30,March 31, 2019 compared to 0.31% at December 31, 2018 compared toand 0.36% at March 31, 2018 and 0.38% at December 31, 2017.2018. · At June 30, 2018,March 31, 2019, we were well-capitalized with a risk based capital ratio of 17.00%17.09% and a tangible common equity ratio of 7.47%7.56% compared to 17.13% and 7.58%, respectively, at December 31, 2018, and 17.05% and 7.17%, respectively, at March 31, 2018, and 17.10% and 7.09%, respectively, at December2018. At March 31, 2017. All2019, all of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards.
RESULTS OF OPERATIONS Net Income For the secondfirst quarter of 2018,2019, we realized net income of $6.0$6.4 million, or $0.35$0.38 per diluted share, compared to net income of $8.5 million, or $0.50 per diluted share, for the fourth quarter of 2018, and $5.8 million, or $0.34 per diluted share, for the first quarter of 2018, and net income of $3.6 million, or $0.21 per diluted share, for the second quarter of 2017. For the first six months of 2018, we realized net income of $11.8 million, or $0.69 per diluted share, compared to net income of $6.3 million, or $0.37 per diluted share for the same period of 2017.2018. Net income for the first six monthsquarter of 2018 included tax benefits totaling $2.9 million, or $0.17 per diluted share (1Q -a $1.5 million, or $0.09 per diluted share and 2Q - $1.4 million, or $0.08 per diluted share)tax benefit related to a 2017 plan year pension plan contributions. contribution. Net income for the fourth quarter of 2018 included a $2.0 million, or $0.09 per diluted share, gain from the sale of a banking office and a $0.3 million, or $0.02 per diluted share, tax benefit from a tax accounting method change.
Compared to the fourth quarter of 2018, the $2.1 million decrease in operating profit reflected a $1.7 million increase in noninterest expense, lower noninterest income of $0.7 million, and a $0.3 million increase in the loan loss provision, partially offset by higher net interest income of $0.6 million. Compared to the first quarter of 2018, the $0.5 million increase in operating profit reflected a $1.0 million increase in net interest income and higher noninterest income of $0.1 million, partially offset by higher noninterest expense of $0.5 million and a $0.1 million increase in the loan loss provision. Compared to the second quarter of 2017, the $1.0$2.9 million increase in operating profit was attributable to higher net interest income of $2.3$3.1 million and noninterest income of $0.1 million, partially offset by lower noninterest income of $0.6 million, a $ 0.5 million increase in noninterest expense, and a $0.2 million increase in the loan loss provision.
The increase in operating profit for the first six months of 2018 versus the comparable period of 2017 was attributable to higher net interest income of $4.3 million that was partially offset by lower noninterest income of $0.8 million, higher noninterest expense of $0.5 million, and $0.7 million increase in the loan loss provision.$0.3 million.
A condensed earnings summary of each major component of our financial performance is provided below: | | Three Months Ended | | Six Months Ended | | | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, | | Three Months Ended | (Dollars in Thousands, except per share data) | | 2018 | | 2018 | | 2017 | | 2018 | | 2017 | | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | Interest Income | | $ | 24,419 | | $ | 23,214 | | $ | 21,422 | | $ | 47,633 | | $ | 41,962 | | $ | 27,722 | | $ | 26,370 | | $ | 23,214 | Taxable Equivalent Adjustments | | | 147 | | | 180 | | | 303 | | | 327 | | | 573 | | | 134 | | | 165 | | | 180 | Total Interest Income (FTE) | | | 24,566 | | | 23,394 | | | 21,725 | | | 47,960 | | | 42,535 | | | 27,856 | | | 26,535 | | | 23,394 | Interest Expense | | | 1,649 | | | 1,451 | | | 926 | | | 3,100 | | | 1,730 | | | 2,814 | | | 2,022 | | | 1,451 | Net Interest Income (FTE) | | | 22,917 | | | 21,943 | | | 20,799 | | | 44,860 | | | 40,805 | | | 25,042 | | | 24,513 | | | 21,943 | Provision for Loan Losses | | | 815 | | | 745 | | | 589 | | | 1,560 | | | 899 | | | 767 | | | 457 | | | 745 | Taxable Equivalent Adjustments | | | 147 | | | 180 | | | 303 | | | 327 | | | 573 | | | 134 | | | 165 | | | 180 | Net Interest Income After Provision for Loan Losses | | | 21,955 | | | 21,018 | | | 19,907 | | | 42,973 | | | 39,333 | | | 24,141 | | | 23,891 | | | 21,018 | Noninterest Income | | | 12,542 | | | 12,477 | | | 13,135 | | | 25,019 | | | 25,853 | | | 12,552 | | | 13,238 | | | 12,477 | Noninterest Expense | | | 28,393 | | | 27,906 | | | 27,921 | | | 56,299 | | | 55,843 | | | 28,198 | | | 26,505 | | | 27,906 | Income Before Income Taxes | | | 6,104 | | | 5,589 | | | 5,121 | | | 11,693 | | | 9,343 | | | 8,495 | | | 10,624 | | | 5,589 | Income Tax Expense (Benefit) | | | 101 | | | (184) | | | 1,560 | | | (83) | | | 3,038 | | | 2,059 | | | 2,166 | | | (184) | Net Income | | $ | 6,003 | | $ | 5,773 | | $ | 3,561 | | $ | 11,776 | | $ | 6,305 | | $ | 6,436 | | $ | 8,458 | | $ | 5,773 | | | | | | | | | | | | | | | | | | | | | | | | | | Basic Net Income Per Share | | $ | 0.35 | | $ | 0.34 | | $ | 0.21 | | $ | 0.69 | | $ | 0.37 | | $ | 0.38 | | $ | 0.50 | | $ | 0.34 | Diluted Net Income Per Share | | $ | 0.35 | | $ | 0.34 | | $ | 0.21 | | $ | 0.69 | | $ | 0.37 | | $ | 0.38 | | $ | 0.50 | | $ | 0.34 |
Net Interest Income Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets less interest expense paid on interest bearing liabilities. This information is provided on a "taxable equivalent" basis to reflect the tax-exempt status of income earned on certain loans and state and local government debt obligations. We provide an analysis of our net interest income including average yields and rates in Table I on page 44.42. Tax-equivalent net interest income for the first quarter of 2019 was $22.9$25.0 million compared to $24.5 million for the secondfourth quarter of 2018 compared toand $21.9 million for the first quarter of 2018 and $20.8 million for2018. During the secondfirst quarter of 2017. For the first six months2019, overnight funds increased primarily due to seasonal growth in our public fund deposits and a higher balance of 2018, tax equivalent net interest income totaled $44.9 million compared to $40.8 million for the comparable period of 2017. one large negotiated rate client. The increase in tax-equivalent net interest income compared to all prior periodsthe first quarter of 2018 reflected growth in the loan portfolio and higher rates earned on overnight funds, investment portfolios, coupled with higher short-term rates,securities, and variable rate loans, partially offset by a higher rates paidcost on our negotiated rate deposits. The federal funds target rate was increased seven times since December 2015 to 2.00% as ofended the end of the secondfirst quarter of 2018, which2019 at a range of 2.25%-2.50%, with the most recent increase to the target rate occurring in December 2018. These federal funds rate increases positively affected our net interest income due to favorable repricing of our variable and adjustable rate earning assets. Although these increases have also resulted in higher rates paid on our negotiated rate deposit products, we continue to prudently manage our deposit mix and overall cost of funds, which was 26 basis points for the second quarter of 2018 and 2442 basis points for the first six monthsquarter of 2018. Due2019 compared to highly competitive fixed-rate loan pricing across most markets,31 basis points for the prior quarter. In conjunction with our overall balance sheet management, we have continuedcontinue to review our loan pricing and make adjustments where appropriate and prudent. deposit board rates to determine whether rate increases are appropriate.
Our net interest margin for the secondfirst quarter of 20182019 was 3.58%3.75%, a decrease of six basis points over the fourth quarter of 2019 and an increase of 1532 basis points over the first quarter of 2018. The decrease in margin compared to the fourth quarter of 2018 was attributable to a higher level and less favorable mix of earning assets and an increase in cost of 25 basis points overfunds, primarily negotiated NOW and MMAs. All three factors were driven by the secondseasonal inflow of public fund deposits, which is anticipated in the first quarter of 2017. For the first six months of 2018, the net interest margin increased 24 basis points to 3.51% compared to the same period of 2017.each year. The increase in the margin as compared to all prior periods reflected rising interestthe first quarter of 2018 was primarily due to loan growth and higher yields on our variable and adjustable rate earning assets, partially offset by higher rates and a favorable shift inon our earning asset mix, which has produced higher net interest income in each period.
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. negotiated rate deposits.
Provision for Loan Losses The provision for loan losses for the secondfirst quarter of 20182019 was $0.8 million compared to $0.8$0.5 million provision expensefor the fourth quarter of 2018 and $0.7 million for the first quarter of 2018 and $0.6 million for the second quarter of 2017. For the first six months of 2018, the loan loss provision was $1.6 million compared to $0.9 million for the same period of 2017.2018. The higher provision incompared to the fourth quarter of 2018 reflected growth in the loan portfolio. We realizedwas primarily attributable to higher net loan charge-offs. Net loan charge-offs for the first quarter of $0.52019 totaled $0.9 million, or 0.12%0.20% (annualized), of average loans for the second quarter of 2018.loans. This compares to net loan charge-offs$0.5 million, or 0.10% (annualized), for the fourth quarter of 2018 and $0.8 million, or 0.20% (annualized), for the first quarter of 20182018. At March 31, 2019, the allowance for loan losses of $14.1 million was 0.78% of outstanding loans (net of overdrafts) and net charge-offsprovided coverage of $0.7 million, or 0.17% (annualized) for the second quarter280% of 2017. For the first six months of 2018, net charge-offs totaled $1.3 million, or 0.16% (annualized), of averagenonperforming loans compared to $1.1 million, or 0.14% (annualized)0.80% and 207%, for the same period of 2017.respectively, at December 31, 2018 and 0.80% and 181%, respectively, at March 31, 2018. Charge-off activity for the respective periods is set forth below: | Charge-off activity for the respective periods is set forth below: | Charge-off activity for the respective periods is set forth below: | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | Six Months Ended | | | | | | | | | | | | | | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, | | Three Months Ended | (Dollars in Thousands, except per share data) | (Dollars in Thousands, except per share data) | 2018 | | 2018 | | 2017 | | 2018 | | 2017 | (Dollars in Thousands, except per share data) | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | CHARGE-OFFS | CHARGE-OFFS | | | | | | | | | | | | | | | | | | | | CHARGE-OFFS | | | | | | | | | | | | Commercial, Financial and Agricultural | Commercial, Financial and Agricultural | $ | 141 | | | $ | 182 | | | $ | 324 | | | $ | 323 | | | $ | 417 | | Commercial, Financial and Agricultural | $ | 95 | | | $ | 53 | | | $ | 182 | | Real Estate - Construction | Real Estate - Construction | | - | | | | 7 | | | | - | | | | 7 | | | | - | | Real Estate - Construction | | - | | | | - | | | | 7 | | Real Estate - Commercial Mortgage | Real Estate - Commercial Mortgage | | - | | | | 290 | | | | 478 | | | | 290 | | | | 549 | | Real Estate - Commercial Mortgage | | 155 | | | | - | | | | 290 | | Real Estate - Residential | Real Estate - Residential | | 456 | | | | 107 | | | | 44 | | | | 563 | | | | 160 | | Real Estate - Residential | | 264 | | | | 111 | | | | 107 | | Real Estate - Home Equity | Real Estate - Home Equity | | 157 | | | | 158 | | | | - | | | | 315 | | | | 92 | | Real Estate - Home Equity | | 52 | | | | 106 | | | | 158 | | Consumer | Consumer | | 509 | | | | 695 | | | | 537 | | | | 1,204 | | | | 1,161 | | Consumer | | 795 | | | | 728 | | | | 695 | | Total Charge-offs | Total Charge-offs | $ | 1,263 | | | $ | 1,439 | | | $ | 1,383 | | | $ | 2,702 | | | $ | 2,379 | | Total Charge-offs | $ | 1,361 | | | $ | 998 | | | $ | 1,439 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | RECOVERIES | RECOVERIES | | | | | | | | | | | | | | | | | | | | RECOVERIES | | | | | | | | | | | | Commercial, Financial and Agricultural | Commercial, Financial and Agricultural | $ | 87 | | | $ | 166 | | | $ | 40 | | | $ | 253 | | | $ | 121 | | Commercial, Financial and Agricultural | $ | 74 | | | $ | 128 | | | $ | 166 | | Real Estate - Construction | Real Estate - Construction | | - | | | | 1 | | | | - | | | | 1 | | | | - | | Real Estate - Construction | | - | | | | 25 | | | | 1 | | Real Estate - Commercial Mortgage | Real Estate - Commercial Mortgage | | 15 | | | | 123 | | | | 58 | | | | 138 | | | | 81 | | Real Estate - Commercial Mortgage | | 70 | | | | 13 | | | | 123 | | Real Estate - Residential | Real Estate - Residential | | 346 | | | | 84 | | | | 202 | | | | 430 | | | | 415 | | Real Estate - Residential | | 44 | | | | 106 | | | | 84 | | Real Estate - Home Equity | Real Estate - Home Equity | | 22 | | | | 61 | | | | 39 | | | | 83 | | | | 68 | | Real Estate - Home Equity | | 32 | | | | 61 | | | | 61 | | Consumer | Consumer | | 283 | | | | 210 | | | | 362 | | | | 493 | | | | 606 | | Consumer | | 284 | | | | 199 | | | | 210 | | Total Recoveries | Total Recoveries | $ | 753 | | | $ | 645 | | | $ | 701 | | | $ | 1,398 | | | $ | 1,291 | | Total Recoveries | $ | 504 | | | $ | 532 | | | $ | 645 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Charge-offs | Net Charge-offs | $ | 510 | | | $ | 794 | | | $ | 682 | | | $ | 1,304 | | | $ | 1,088 | | Net Charge-offs | $ | 857 | | | $ | 466 | | | $ | 794 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Charge-offs (Annualized) as a | | 0.12 | % | | | 0.20 | % | | | 0.17 | % | | | 0.16 | % | | | 0.14 | % | | Net Charge-offs (Annualized) as a percent of Average Loans | | Net Charge-offs (Annualized) as a percent of Average Loans | | 0.20 | % | | | 0.10 | % | | | 0.20 | % | | percent of Average Loans Outstanding, Net of | | | | | | | | | | | | | | | | | | | | Outstanding, Net of Unearned Income | | | | | | | | | | | | | Unearned Income | | | | | | | | | | | | | | | | | | | | |
Noninterest Income Noninterest income for the secondfirst quarter of 2019 totaled $12.6 million, a decrease of $0.7 million, or 5.2%, from the fourth quarter of 2018 totaled $12.5 million,and an increase of $0.1 million, or 0.5%0.6%, over the first quarter of 2018 and a $0.6 million, or 4.5%,2018. The decrease from the secondfourth quarter of 2017. For the first six months of 2018 noninterest income totaled $25.0 million, a $0.8 million, or 3.2%, decrease from the same period of 2017,was primarily dueattributable to lower mortgage banking fees of $0.6 million and deposit fees of $0.4 million partially offset byand mortgage banking fees of $0.1 million. The increase over the first quarter of 2018 reflected higher wealth management fees of $0.3 million. The decrease from the second quarter of 2017 also reflectedpartially offset by lower mortgage banking fees and deposit fees. The downward trend in our deposit fees has stabilized as lower overdraft fees are now beginning to be offset by account maintenance fees reflective of our migration of our checking account product from free checking to fee checking. Noninterest income represented 35.5%33.5% of operating revenues (net interest income plus noninterest income) in the second quarter of 2018 compared to 36.4% infor the first quarter of 2019 compared to 35.2% for the fourth quarter of 2018 and 39.1% in36.4% for the secondfirst quarter of 2017. For the first six months2018. The declining trend is due to continued improvement in our net interest income which has become a larger portion of 2018, noninterest income represented 36.0% ofour total operating revenues compared to 39.1% for the same period of 2017.revenues.
The table below reflects the major components of noninterest income. | | Three Months Ended | | Six Months Ended | | | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, | | Three Months Ended | (Dollars in Thousands) | (Dollars in Thousands) | 2018 | | 2018 | | 2017 | | 2018 | | 2017 | (Dollars in Thousands) | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | Deposit Fees | Deposit Fees | $ | 4,842 | | $ | 4,872 | | $ | 5,052 | | $ | 9,714 | | $ | 10,142 | Deposit Fees | $ | 4,775 | | $ | 5,172 | | $ | 4,872 | Bank Card Fees | Bank Card Fees | | 2,909 | | | 2,811 | | | 2,870 | | | 5,720 | | | 5,673 | Bank Card Fees | | 2,855 | | | 2,830 | | | 2,811 | Wealth Management Fees | Wealth Management Fees | | 2,037 | | | 2,173 | | | 2,073 | | | 4,210 | | | 3,915 | Wealth Management Fees | | 2,323 | | | 2,320 | | | 2,173 | Mortgage Banking Fees | Mortgage Banking Fees | | 1,206 | | | 1,057 | | | 1,556 | | | 2,263 | | | 2,864 | Mortgage Banking Fees | | 993 | | | 1,129 | | | 1,057 | Other | Other | | 1,548 | | | 1,564 | | | 1,584 | | | 3,112 | | | 3,259 | Other | | 1,606 | | | 1,787 | | | 1,564 | | | | | | | | | | | | | | | | | | | | | | | | | | Total Noninterest Income | Total Noninterest Income | $ | 12,542 | | $ | 12,477 | | $ | 13,135 | | $ | 25,019 | | $ | 25,853 | Total Noninterest Income | $ | 12,552 | | $ | 13,238 | | $ | 12,477 |
Significant components of noninterest income are discussed in more detail below. Deposit Fees. Deposit fees for the secondfirst quarter of 20182019 totaled $4.8 million, a decrease of $0.1$0.4 million, or 0.6%7.7%, from the firstfourth quarter of 2018 and a decrease of $0.2$0.1 million, or 4.2%2.0%, from the secondfirst quarter of 2017. For the first six months of 2018, deposit fees totaled $9.7 million, a decrease of $0.4 million, or 4.2%, from the same period of 2017.2018. The decrease from both prior year periods reflected lower overdraft service fees due to a reduction in accounts using this service as well as lower utilization by existing users. Lateusers. Over the past year, we have realized improvement in the second quarter of 2018,checking account maintenance fees as we continued the restructuring ofmigrate our deposit product line-up as we migrateproducts from a free to fee checking account model. We expect this change to have a favorable impact on deposit fees forplatform, which has partially offset the second half of 2018.decline in overdraft fees. Wealth Management Fees. Wealth management fees, which include both trust fees (i.e., managed accounts, trusts/estates, and retirement plans) and retail brokerage fees (i.e., investment and insurance products), totaled $2.0$2.3 million for the secondfirst quarter of 2019, comparable to the fourth quarter of 2018 and an increase of $0.2 million, or 6.9%, over the first quarter of 2018. The improvement in wealth management fees over the first quarter of 2018 reflected higher trust fees attributable to an increase in assets under management. At March 31, 2019, total assets under management were approximately $1.675 billion compared to $1.500 billion at December 31, 2018 and $1.407 billion at March 31, 2018. Mortgage Banking Fees. Mortgage banking fees totaled $1.0 million for the first quarter of 2019, a decrease of $0.1 million, or 6.3%12.0%, from the fourth quarter of 2018 and comparable to the first quarter of 2018 and $0.1 million, or 1.7%,2018. The decrease from the second quarter of 2017. For the first six months of 2018, wealth management fees totaled $4.2 million, an increase of $0.3 million, or 7.5%, over the same period of 2017. At June 30, 2018, total assets under management were approximately $1.421 billion compared to $1.418 billion at December 31, 2017 and $1.178 billion at June 30, 2017. Mortgage Banking Fees. Mortgage banking fees totaled $1.2 million for the secondfourth quarter of 2018 an increase of $0.1 million, or 14.1%, frommore readily reflected a seasonal slowdown typically seen in the first quarter of 2018 and a decrease of $0.4 million, or 22.5%, from the second quarter of 2017. For the first six months of 2018, fees totaled $2.3 million, a decrease of $0.6 million, or 21.0%, over the same period of 2017. quarter. The lower level of mortgage banking fees was due to a slowdown in secondary market loan production as adjustable rate loan production has picked up momentum andcurrent pipeline is being booked into our loan portfolio. Total (secondary market sales and portfolio) residential loan production during the first two quarters of 2018 was comparable toconsistent with the prior year.
Noninterest Expense Noninterest expense for the secondfirst quarter of 20182019 totaled $28.4$28.2 million, an increase of $0.5$1.7 million, or 1.7%6.4%, over the fourth quarter of 2018 and $0.3 million, or 1.0%, over the first quarter of 2018 and second quarter of 2017. For the first six months of 2018, noninterest expense totaled $56.3 million, a $0.5 million, or 0.8%,2018. The increase over the same periodfourth quarter was attributable to higher OREO expense of 2017.$2.0 million, partially offset by lower occupancy expense of $0.3 million. The increase overin OREO expense reflected a $2.0 million gain on the sale of a banking office in the fourth quarter of 2018. The increase compared to the first quarter of 2018 primarily reflected higher professional fees of $0.2 million and a $0.2 million expense for our VISA Class B share swap contract related to VISA’s funding of their litigation reserve. Compared to the three and six month periods of 2017, the increase was primarily attributable to higher professional fees. The increase in professional fees iscompensation expense, primarily related to non-routine consulting engagements that will be concluded early in the second halfannual merit raises. Expense management is an important part of 2018. our culture and strategic focus and we continue to review and evaluate opportunities to optimize our operations, reduce operating costs and manage our discretionary expenses.
The table below reflects the major components of noninterest expense. | The table below reflects the major components of noninterest expense. | The table below reflects the major components of noninterest expense. | | | | | | | | | | | | | | | | | | | | Three Months Ended | | Six Months Ended | | | | | | | | | | | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, | | Three Months Ended | (Dollars in Thousands) | (Dollars in Thousands) | 2018 | | 2018 | | 2017 | | 2018 | | 2017 | (Dollars in Thousands) | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | Salaries | Salaries | $ | 11,869 | | $ | 11,873 | | $ | 11,560 | | $ | 23,743 | | $ | 23,324 | Salaries | $ | 12,285 | | $ | 12,332 | | $ | 11,873 | Associate Benefits | Associate Benefits | | 3,928 | | | 4,038 | | | 4,080 | | | 7,965 | | | 8,176 | Associate Benefits | | 4,064 | | | 3,990 | | | 4,038 | | Total Compensation | | 15,797 | | | 15,911 | | | 15,640 | | | 31,708 | | | 31,500 | Total Compensation | | 16,349 | | | 16,322 | | | 15,911 | | | | | | | | | | | | | | | | | | | | | | | | | | Premises | Premises | | 2,191 | | | 2,209 | | | 2,217 | | | 4,400 | | | 4,421 | Premises | | 2,061 | | | 2,280 | | | 2,209 | Equipment | Equipment | | 2,312 | | | 2,342 | | | 2,338 | | | 4,654 | | | 4,515 | Equipment | | 2,448 | | | 2,524 | | | 2,342 | | Total Occupancy | | 4,503 | | | 4,551 | | | 4,555 | | | 9,054 | | | 8,936 | Total Occupancy | | 4,509 | | | 4,804 | | | 4,551 | | | | | | | | | | | | | | | | | | | | | | | | | | Legal Fees | Legal Fees | | 569 | | | 476 | | | 537 | | | 1,045 | | | 1,023 | Legal Fees | | 376 | | | 510 | | | 476 | Professional Fees | Professional Fees | | 1,374 | | | 1,146 | | | 885 | | | 2,520 | | | 1,789 | Professional Fees | | 972 | | | 1,168 | | | 1,146 | Processing Services | Processing Services | | 1,724 | | | 1,532 | | | 1,700 | | | 3,256 | | | 3,345 | Processing Services | | 1,478 | | | 1,283 | | | 1,532 | Advertising | Advertising | | 412 | | | 287 | | | 531 | | | 700 | | | 998 | Advertising | | 497 | | | 478 | | | 287 | Travel and Entertainment | Travel and Entertainment | | 277 | | | 180 | | | 222 | | | 457 | | | 396 | Travel and Entertainment | | 204 | | | 255 | | | 180 | Printing and Supplies | Printing and Supplies | | 162 | | | 163 | | | 188 | | | 325 | | | 364 | Printing and Supplies | | 173 | | | 158 | | | 163 | Telephone | Telephone | | 581 | | | 594 | | | 527 | | | 1,175 | | | 1,356 | Telephone | | 680 | | | 502 | | | 594 | Postage | Postage | | 182 | | | 206 | | | 185 | | | 388 | | | 402 | Postage | | 169 | | | 155 | | | 206 | Insurance - Other | Insurance - Other | | 408 | | | 401 | | | 410 | | | 809 | | | 812 | Insurance - Other | | 391 | | | 398 | | | 401 | Other Real Estate Owned, net | Other Real Estate Owned, net | | 248 | | | 626 | | | 315 | | | 874 | | | 898 | Other Real Estate Owned, net | | 363 | | | (1,663) | | | 626 | Miscellaneous | Miscellaneous | | 2,156 | | | 1,833 | | | 2,226 | | | 3,988 | | | 4,024 | Miscellaneous | | 2,037 | | | 2,135 | | | 1,833 | | Total Other | | 8,093 | | | 7,444 | | | 7,726 | | | 15,537 | | | 15,407 | Total Other | | 7,340 | | | 5,379 | | | 7,444 | | | | | | | | | | | | | | | | | | | | | | | | | | Total Noninterest Expense | Total Noninterest Expense | $ | 28,393 | | $ | 27,906 | | $ | 27,921 | | $ | 56,299 | | $ | 55,843 | Total Noninterest Expense | $ | 28,198 | | $ | 26,505 | | $ | 27,906 |
Significant components of noninterest expense are discussed in more detail below. Compensation. Compensation expense totaled $15.8$16.3 million for the secondfirst quarter of 2018, a decrease of $0.1 million, or 0.7%, from2019, comparable to the firstfourth quarter of 2018 and an increase of $0.2$0.4 million, or 1.0%0.2%, over the secondfirst quarter of 2017. For2018. The increase over the first six monthsquarter of 2018 compensationwas primarily attributable to higher base salaries which reflected annual merit increases and to a lesser extent higher incentive based compensation. Occupancy. Occupancy expense (including premises and equipment) totaled $31.7$4.5 million an increasefor the first quarter of $0.22019, a decrease of $0.3 million, or 0.7%6.1%, overfrom the same periodfourth quarter of 20172018 and reflected higher salary expense$0.1 million, or 0.9%, from the first quarter of $0.4 million, partially offset by lower associate benefit expense of $0.2 million.2018. The increase in salary expensedecrease from both prior year periods was attributable to higher cash incentive plan expense reflective of improved performance. The reduction in associate benefit expense was primarily due to lower stock compensation expense.maintenance expenses for premises.
Other. Other noninterest expense totaled $8.1increased $2.0 million, foror 36.5%, over the secondfourth quarter of 2018 an increase of $0.6and decreased $0.1 million, or 8.7% over1.4%, from the first quarter of 2018. The increase compared to the fourth quarter of 2018 was attributable to higher OREO expense of $2.0 million attributable to a $2.0 million gain on the sale of a banking office in the fourth quarter of 2018. The decrease compared to the first quarter of 2018 and $0.4 million, or 4.8%, over the second quarter of 2017. The increase over both prior periods was primarily attributable to higher professional fees related to non-routine consulting engagements that will be concluded early in the second half of 2018. Additionally, a non-routine payment of $0.2 million related to our VISA share swap contract contributed to the increase. For the first six months of 2018, otherlower OREO expense increased $0.1 million, or 0.8%, over the same period of 2017, andwhich reflected higher professional fees of $0.7 million, partially offset by lower advertising of $0.3 million and telephone expense of $0.2 million. The increase in professional fees was related to the aforementioned consulting engagements. valuation adjustments for properties. Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 80.07%75.01% for the secondfirst quarter of 2019 compared to 70.21% for the fourth quarter of 2018 compared toand 81.07% for the first quarter of 2018 and 82.28% for2018. The increase compared to the secondfourth quarter of 2017. For2018 reflected the increase in operating expenses, specifically the $2.0 million OREO gain in the fourth quarter of 2018. The improvement compared to the first six monthsquarter of 2018 this ratio was 80.57% compared to 83.78% for the same period of 2017.reflected higher operating revenues. Income Taxes We realized income tax expense of $2.1 million for the first quarter of 2019 compared to $2.2 million for the fourth quarter of 2018 and an income tax benefit of $0.1$0.2 million for the six months ended June 30,first quarter of 2018. Fourth quarter of 2018 whichincome tax expense reflected twoa discrete tax benefit items totaling $2.9of $0.3 million related to a tax accounting method change for a cost segregation and depreciation analysis for various properties we own. Income tax for the first quarter of 2018 included a discrete tax benefit of $1.5 million resulting from the effect of federal tax reform, enacted in December 2017, on a pension plan contributionscontribution made in 2018. The discrete tax item for the first quarter of 2018 totaled $1.5 million and the item for the second quarter of 2018 totaled $1.4 million.plan year 2017. Absent these discrete items, we expect our effective tax rate was approximatelyto approximate 24%. for 2019.
FINANCIAL CONDITION Average earning assets were $2.566$2.705 billion for the secondfirst quarter of 2018, a decrease2019, an increase of $26.5$150.3 million, or 1.0%5.9%, fromover the firstfourth quarter of 2018, and an increase of $54.0$112.3 million, or 2.2%4.3%, over the fourthfirst quarter of 2017. The change in average earning assets compared to the first quarter 2018 was attributable to decreases in our short-term investments, primarily due to a decline in our seasonal public fund balances.2018. The change in average earning assets over the fourth quarter 2017both periods reflected a higher level of overnight funds, which was attributable todriven by growth in our loan and investment portfolios primarily funded by increases in our noninterest bearing deposits and savings accounts.total deposits. Investment Securities In the secondfirst quarter of 2018,2019, our average investment portfolio increased $12.1decreased $29.4 million, or 1.7%4.3%, over the fourth quarter of 2018 and decreased $45.2 million, or 6.4%, over the first quarter of 2018 and increased $19.3 million, or 2.8%, over the fourth quarter of 2017.2018. Securities in our investment portfolio represented 27.9%24.4% of our average earning assets in the secondfirst quarter of 2019, compared to 26.9% in the fourth quarter of 2018, compared toand 27.2% in the first quarter of 2018, and 27.7% in the fourth quarter2018. Earning assets over both prior periods have increased due to higher levels of 2017.overnight funds resulting from deposit growth. In addition, not all investment securities are being replaced at maturity. For the remainder of 2018,2019, we will continue to closely monitor liquidity levels as well as look for new investment products that are prudent relative to our risk profile and overall investment strategy. L iquidity levels, including anticipated cash flow from the investment portfolio, will determine the extent to which investment cash flow willmay be reinvested into securities. The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management. Two types of classifications are approved for investment securities which are Available-for-Sale (“AFS”) and Held-to-Maturity (“HTM”). During the secondfirst quarter of 2018,2019, we purchased securities under both the AFS and HTM designations. At June 30, 2018, $493.7March 31, 2019, $429.0 million, or 67.6%65.5%, of our investment portfolio was classified as AFS, and $236.8$226.2 million, or 32.4%34.5%, classified as HTM. The average maturity of our total portfolio at June 30, 2018March 31, 2019 was 2.212.10 years compared to 2.11 years and 1.96 years at Marchboth December 31, 2018 and DecemberMarch 31, 2017, respectively.2018. We determine the classification of a security at the time of acquisition based on how the purchase will affect our asset/liability strategy and future business plans and opportunities. We consider multiple factors in determining classification, including regulatory capital requirements, volatility in earnings or other comprehensive income, and liquidity needs. Securities in the AFS portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income component of shareowners’ equity. HTM securities are acquired or owned with the intent of holding them to maturity (final payment date). HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio. At June 30, 2018, March 31, 2019, there were 535414 positions (combined AFS and HTM) with unrealized losses totaling $8.4$3.7 million. GNMA mortgage-backed securities, U.S. treasury securities (“UST”), and Small Business Administration (“SBA”) investments carry the full faith and credit guarantee of the U.S. government, and are 0% risk-weighted assets for regulatory capital purposes.purposes and constitute 96% of the $3.7 million unrealized loss. SBA securities float monthly or quarterly to the prime rate and are uncapped. Federal Home Loan Bank (“FHLB”) and Federal Farm Credit Bureau (“FFCB”) are direct obligations of U.S. government agencies. None of these positions with unrealized losses are considered impaired, and all are expected to mature at par. The table below provides further detail on investment securities with unrealized losses. | Less Than 12 months | | 12 months or Longer | | Total | Less Than 12 months | | 12 months or Longer | | Total | | | | Market | Unrealized | | | | Market | Unrealized | | | | Market | Unrealized | | | Market | Unrealized | | | | Market | Unrealized | | | | Market | Unrealized | (Dollars in Thousands) | Count | | Value | Losses | | Count | | Value | Losses | | Count | | Value | Losses | Count | | Value | Losses | | Count | | Value | Losses | | Count | | Value | Losses | GNMA | 128 | $ | 108,325 | $ | 1,742 | | 50 | $ | 29,894 | $ | 1,308 | | 178 | $ | 138,219 | $ | 3,050 | 16 | $ | 10,219 | $ | 82 | | 137 | $ | 85,679 | $ | 1,127 | | 153 | $ | 95,898 | $ | 1,209 | UST | 35 | | 171,023 | | 2,616 | | 26 | | 122,268 | | 1,797 | | 61 | | 293,291 | | 4,413 | - | | - | | - | | 48 | | 232,687 | | 1,999 | | 48 | | 232,687 | | 1,999 | SBA | 78 | | 63,166 | | 340 | | 2 | | 1,503 | | 21 | | 80 | | 64,669 | | 361 | 63 | | 35,901 | | 238 | | 41 | | 23,326 | | 150 | | 104 | | 59,227 | | 388 | FHLB and FFCB | 2 | | 4,462 | | 37 | | 16 | | 23,709 | | 255 | | 18 | | 28,171 | | 292 | - | | - | | - | | 8 | | 15,728 | | 80 | | 8 | | 15,728 | | 80 | States and Political Subdivisions | 184 | | 60,604 | | 201 | | 14 | | 5,575 | | 49 | | 198 | | 66,179 | | 250 | 10 | | 4,351 | | 1 | | 91 | | 28,516 | | 56 | | 101 | | 32,867 | | 57 | Total | 427 | $ | 407,580 | $ | 4,936 | | 108 | $ | 182,949 | $ | 3,430 | | 535 | $ | 590,529 | $ | 8,366 | 89 | $ | 50,471 | $ | 321 | | 325 | $ | 385,936 | $ | 3,412 | | 414 | $ | 436,407 | $ | 3,733 |
Loans AverageWhile average loans increased $43.7decreased slightly ($5.2 million, or 2.7%0.3%) when compared to the fourth quarter of 2018, they grew $132.8 million, or 8.1% when compared to the first quarter of 2018,2018. On an “as of” basis, loans grew $20.6 million and have grown $50.5$134.9 million, or 3.1%respectively. The average decrease compared to the fourth quarter of 2017. The increase compared to the prior quarter2018 primarily reflected growthdeclines in all loansloan types except home equitycommercial real estate and consumer loans. GrowthDuring the first quarter 2019, we purchased principal balances of $10.3 million in commercial real estate loans and $4.4 million in residential real estate loan pools, which partially offset the decline in quarterly loan production. Average growth over the fourthfirst quarter of 20172018 was experienced in all loan products except for commercial andcategories, with the exception of home equity loans. DuringA portion of this growth compared to the first quarter 2018 we have purchased a $4.0was attributable to $36.8 million in principal balances of several loan pool purchases ($22.1 million in 2018 and $14.7 million in the first quarter of adjustable rate residential loans (late2019). All loan purchases are individually reviewed and evaluated in first quarter) and a $12.1 million pool of fixed and adjustable rate commercial real estate loans (late in second quarter).accordance with our credit underwriting standards.
We continue to make minor modifications on some of our lending programs to try to mitigate the impact that consumer and business deleveraging has had on our portfolio. These programs, coupled with economic improvements in our anchor markets, and strategic loan purchases, have helped to increase overall loan growth. We originate mortgage loans secured by 1-4 family residential properties through our Residential Real Estate line of business, a majority of which are fixed-rate loans that are sold into the secondary market to third party purchasers on a best efforts delivery basis with servicing released. A majority of our adjustable rate loans are retained in our loan portfolio. Nonperforming Assets Nonperforming assets (nonaccrual loans and OREO) totaled $9.1$6.9 million at June 30, 2018,March 31, 2019, a decrease of $1.5$2.2 million, or 14.4%23.6%, from December 31, 2018 and $3.7 million, or 34.7%, from March 31, 2018 and $2.02018. Nonaccrual loans totaled $5.0 million or 17.9%,at March 31, 2019, a $1.8 million decrease from December 31, 2017. Nonaccrual loans totaled $5.7 million at June 30, 2018 and a $1.6$2.3 million decrease from March 31, 2018 and a $1.4 million decrease from December 31, 2017.2018. Nonaccrual loan additions totaled $2.5 million for the secondfirst quarter of 2019 compared to $3.1 million for the fourth quarter of 2018 compared to $3.8and $1.8 million for the first quarter of 2018 and $5.6 million for the fourth quarter of 2017.2018. The balance of OREO totaled $3.4$1.9 million at June 30, 2018, an increaseMarch 31, 2019, a decrease of $0.1$0.4 million over Marchand $1.4 million, respectively, from December 31, 2018 and a decrease of $0.6 million from DecemberMarch 31, 2017.2018. For the secondfirst quarter of 2018,2019, we added properties totaling $0.5 million, sold properties totaling $0.3$0.7 million, and recorded valuation adjustments totaling $0.1$0.2 million. Nonperforming assets represented 0.23% of total assets at March 31, 2019 compared to 0.31% at December 31, 2018 and 0.36% at March 31, 2018. (Dollars in Thousands) | (Dollars in Thousands) | June 30, 2018 | | March 31, 2018 | | December 30, 2017 | (Dollars in Thousands) | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | Nonaccruing Loans: | Nonaccruing Loans: | | | | | | | | | | | | Nonaccruing Loans: | | | | | | | | | | | | | Commercial, Financial and Agricultural | $ | 455 | | | $ | 567 | | | $ | 629 | | Commercial, Financial and Agricultural | $ | 223 | | | $ | 267 | | | $ | 567 | | | Real Estate - Construction | | 609 | | | | 608 | | | | 298 | | Real Estate - Construction | | 323 | | | | 722 | | | | 608 | | | Real Estate - Commercial Mortgage | | 2,181 | | | | 1,940 | | | | 2,370 | | Real Estate - Commercial Mortgage | | 1,976 | | | | 2,860 | | | | 1,940 | | | Real Estate - Residential | | 1,543 | | | | 2,398 | | | | 1,938 | | Real Estate - Residential | | 1,341 | | | | 2,119 | | | | 2,398 | | | Real Estate - Home Equity | | 910 | | | | 1,686 | | | | 1,748 | | Real Estate - Home Equity | | 1,033 | | | | 584 | | | | 1,686 | | | Consumer | | 43 | | | | 115 | | | | 176 | | Consumer | | 151 | | | | 320 | | | | 115 | | Total Nonperforming Loans (“NPLs”)(1) | Total Nonperforming Loans (“NPLs”)(1) | $ | 5,741 | | | $ | 7,314 | | | $ | 7,159 | | Total Nonperforming Loans (“NPLs”)(1) | $ | 5,047 | | | $ | 6,872 | | | $ | 7,314 | | Other Real Estate Owned | Other Real Estate Owned | | 3,373 | | | | 3,330 | | | | 3,941 | | Other Real Estate Owned | | 1,902 | | | | 2,229 | | | | 3,330 | | Total Nonperforming Assets (“NPAs”) | Total Nonperforming Assets (“NPAs”) | $ | 9,114 | | | $ | 10,644 | | | $ | 11,100 | | Total Nonperforming Assets (“NPAs”) | $ | 6,949 | | | $ | 9,101 | | | $ | 10,644 | | | | | | | | | | | | | | | | | | | | | | | | | | | Past Due Loans 30 – 89 Days | Past Due Loans 30 – 89 Days | $ | 3,472 | | | $ | 4,268 | | | $ | 4,543 | | Past Due Loans 30 – 89 Days | $ | 4,682 | | | $ | 4,757 | | | $ | 4,268 | | Past Due Loans 90 Days or More (accruing) | | - | | | | - | | | | 36 | | | Performing Troubled Debt Restructurings | Performing Troubled Debt Restructurings | $ | 29,981 | | | $ | 31,472 | | | $ | 32,164 | | Performing Troubled Debt Restructurings | $ | 20,791 | | | $ | 22,084 | | | $ | 31,472 | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonperforming Loans/Loans | Nonperforming Loans/Loans | | 0.33 | % | | | 0.44 | % | | | 0.43 | % | Nonperforming Loans/Loans | | 0.28 | % | | | 0.39 | % | | | 0.44 | % | Nonperforming Assets/Total Assets | Nonperforming Assets/Total Assets | | 0.32 | | | | 0.36 | | | | 0.38 | | Nonperforming Assets/Total Assets | | 0.23 | | | | 0.31 | | | | 0.36 | | Nonperforming Assets/Loans Plus OREO | Nonperforming Assets/Loans Plus OREO | | 0.52 | | | | 0.64 | | | | 0.67 | | Nonperforming Assets/Loans Plus OREO | | 0.39 | | | | 0.51 | | | | 0.64 | | Allowance/Nonperforming Loans | Allowance/Nonperforming Loans | | 236.25 | % | | | 181.26 | % | | | 185.87 | % | Allowance/Nonperforming Loans | | 279.77 | % | | | 206.79 | % | | | 181.26 | % |
(1) NonperformingNonaccrual TDRs totaling $1.4 million, $2.6 million, and $2.2 million are included in the NPL totals.NPLs for March 31, 2019, December 31, 2018, and March 31, 2018, respectively.
Activity within our nonperforming asset portfolio is provided in the table below. | Activity within our nonperforming asset portfolio is provided in the table below. | Activity within our nonperforming asset portfolio is provided in the table below. | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | (Dollars in Thousands) | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | (Dollars in Thousands) | 2019 | | 2018 | NPA Beginning Balance: | NPA Beginning Balance: | $ | 10,644 | | $ | 17,799 | | $ | 11,100 | | $ | 19,171 | NPA Beginning Balance: | $ | 9,101 | | $ | 11,100 | Change in Nonaccrual Loans: | Change in Nonaccrual Loans: | | | | | | | | | | | | Change in Nonaccrual Loans: | | | | | | Beginning Balance | Beginning Balance | | 7,314 | | | 8,298 | | | 7,159 | | | 8,533 | Beginning Balance | | 6,872 | | | 7,159 | | Additions | | 2,506 | | | 3,247 | | | 6,280 | | | 6,115 | Additions | | 2,462 | | | 3,774 | | Charge-Offs | | (758) | | | (1,046) | | | (1,713) | | | (1,602) | Charge-Offs | | (907) | | | (955) | | Transferred to OREO | | (533) | | | (144) | | | (840) | | | (782) | Transferred to OREO | | (527) | | | (307) | | Paid Off/Payments | | (1,046) | | | (700) | | | (1,620) | | | (1,393) | Paid Off/Payments | | (1,590) | | | (574) | | Restored to Accrual | | (1,742) | | | (1,689) | | | (3,525) | | | (2,905) | Restored to Accrual | | (1,263) | | | (1,783) | Ending Balance | Ending Balance | | 5,741 | | | 7,966 | | | 5,741 | | | 7,966 | Ending Balance | | 5,047 | | | 7,314 | | | | | | | | | | | | | | | | | | | | Change in OREO: | Change in OREO: | | | | | | | | | | | | Change in OREO: | | | | | | | Beginning Balance | | 3,330 | | | 9,501 | | | 3,941 | | | 10,638 | Beginning Balance | | 2,229 | | | 3,941 | | Additions | | 533 | | | 144 | | | 840 | | | 1,685 | Additions | | 527 | | | 307 | | Valuation Write-downs | | (138) | | | (275) | | | (632) | | | (769) | Valuation Write-downs | | (190) | | | (494) | | Sales | | (352) | | | (1,209) | | | (776) | | | (3,320) | Sales | | (664) | | | (424) | Ending Balance | | Ending Balance | | 1,902 | | | 3,330 | | Other | | - | | | (193) | | | - | | | (266) | | | | | | | Ending Balance | | 3,373 | | | 7,968 | | | 3,373 | | | 7,968 | | NPA Net Change | NPA Net Change | | (1,530) | | | (1,865) | | | (1,986) | | | (3,237) | NPA Net Change | | (2,152) | | | (456) | NPA Ending Balance | NPA Ending Balance | $ | 9,114 | | $ | 15,934 | | $ | 9,114 | | $ | 15,934 | NPA Ending Balance | $ | 6,949 | | $ | 10,644 |
Activity within our TDR portfolio is provided in the table below. | Activity within our TDR portfolio is provided in the table below. | Activity within our TDR portfolio is provided in the table below. | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | (Dollars in Thousands) | (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | (Dollars in Thousands) | 2019 | | 2018 | TDR Beginning Balance: | TDR Beginning Balance: | $ | 33,703 | | $ | 39,066 | | $ | 34,489 | | $ | 39,976 | TDR Beginning Balance: | $ | 24,724 | | $ | 34,489 | | Additions | | 59 | | | 182 | | | 517 | | | 302 | Additions | | 105 | | | 458 | | Charge-Offs | | (21) | | | (375) | | | (391) | | | (453) | Charge-Offs | | (264) | | | (370) | | Paid Off/Payments | | (1,187) | | | (956) | | | (2,061) | | | (1,868) | Paid Off/Payments | | (1,957) | | | (874) | | Removal Due to Change in TDR Status | | (296) | | | - | | | (296) | | | - | Removal Due to Change in TDR Status | | - | | | - | | Transferred to OREO | | (73) | | | - | | | (73) | | | (40) | Transferred to OREO | | (430) | | | - | TDR Ending Balance(1) | TDR Ending Balance(1) | $ | 32,185 | | $ | 37,917 | | $ | 32,185 | | $ | 37,917 | TDR Ending Balance(1) | $ | 22,178 | | $ | 33,703 | | | | | | | | | | | | | | | | | | | | (1) Includes performing and nonaccrual TDR loan balances. | (1) Includes performing and nonaccrual TDR loan balances. | | | | | | | | | | (1) Includes performing and nonaccrual TDR loan balances. | | | |
Allowance for Loan Losses We maintain an allowance for loan losses at a level that management believes to be sufficient to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk. All related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely.losses are probable and reasonably quantifiable. The allowance for loan losses is based on management's judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the loan portfolio's overall credit quality. We evaluate the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses was $13.6$14.1 million at June 30,March 31, 2019 compared to $14.2 million at December 31, 2018, compared toand $13.3 million at March 31, 2018 and December 31, 2017.2018. The allowance for loan losses was 0.78% of outstanding loans (net of overdrafts) and provided coverage of 236%280% of nonperforming loans at June 30,March 31, 2019 compared to 0.80% and 207%, respectively, at December 31, 2018 compared toand 0.80% and 181%, respectively, at March 31, 2018 and 0.80% and 186%, respectively, at December 31, 2017.2018. We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at June 30, 2018.March 31, 2019.
Deposits Average total deposits were $2.432$2.565 billion for the secondfirst quarter of 2018, a decrease2019, an increase of $24.1$152.3 million, or 1.0%, from6.3% over the firstfourth quarter of 2018, and an increase of $53.5$108.6 million, or 2.3%4.4% over the first quarter of 2018. The increase in average deposits compared to both prior periods reflected increases in all deposit types except money market accounts and certificates of deposit. The seasonal influx of negotiated public NOW accounts has most likely peaked for this cycle and is expected to gradually decline through the fourth quarter of 2017. The decline in deposits compared to the first quarter of 2018 reflected lower public fund NOW accounts and certificates of deposit balances, partially offset by increases in all other deposit types. The increase in deposits when compared to the fourth quarter of 2017 reflected growth in all deposit products except certificates of deposit. Public fund accounts typically peak in the first quarter and trend downwards through the fourth quarter due to the cycle of tax receipts.2019. Deposit levels remain strong, particularly given the recent increases in the overnight funds rate. Averageand average core deposits continue to experience growth. We monitor deposit rates on an ongoing basis and adjust if necessary, as a prudent pricing discipline remains the key to managing our mix of deposits. MARKET RISK AND INTEREST RATE SENSITIVITY Market Risk and Interest Rate Sensitivity Overview. Market risk management arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk management policies to monitor and limit exposure to interest rate risk and do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. Our risk management policies are primarily designed to minimize structural interest rate risk. Interest Rate Risk Management. Our net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and shareowners’ equity. We have established a comprehensive interest rate risk management policy, which is administered by management’s Asset/Liability Management Committee (“ALCO”). The policy establishes risk limits, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model is designed to capture optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of analyzing interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology that we use. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from the assumptions that we use in our modeling. Finally, the methodology does not measure or reflect the impact that higher rates may have on variable and adjustable-rate loan clients’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products. We prepare a current base case and several alternative simulations at least once per quarter and present the analysis to ALCO, with the risk metrics being reported to the Board of Directors. In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate. Our interest rate risk management goal is to maintain expected changes in our net interest income and capital levels due to fluctuations in market interest rates within acceptable limits. Management attempts to achieve this goal by balancing, within policy limits, the volume of variable-rate liabilities with a similar volume of variable-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by maintaining our core deposits as a significant component of our total funding sources and by adjusting pricing rates to market conditions on a continuing basis. We test our balance sheet using varying interest rate shock scenarios to analyze our interest rate risk. Average interest rates are shocked by plus or minus 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determined are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over 12-month and 24-month periods, and the economic value of equity at risk, do not exceed policy guidelines at the various interest rate shock levels. At this time, all shock scenarios for net interest earnings at risk and EVE are within the desired ranges.
We augment our interest rate shock analysis with alternative external interest rate scenarios on a quarterly basis. These alternative interest rate scenarios may include non-parallel rate ramps.
Analysis. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period and do not necessarily indicate the long-term prospects or economic value of the institution. ESTIMATED CHANGES IN NET INTEREST INCOME (1) | ESTIMATED CHANGES IN NET INTEREST INCOME (1) | | ESTIMATED CHANGES IN NET INTEREST INCOME (1) | | | | | | Percentage Change (12-month shock) | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | | | | | Policy Limit | -15.0% | -12.5% | -10.0% | -7.5% | -15.0% | -12.5% | -10.0% | -7.5% | -10.0% | June 30, 2018 | 9.2% | 6.9% | 4.5% | 2.3% | -5.9% | | March 31, 2018 | 13.1% | 9.7% | 6.3% | 3.1% | -7.5% | | March 31, 2019 | | 12.4% | 9.3% | 6.2% | 3.3% | -5.8% | -12.9% | December 31, 2018 | | 8.9% | 6.6% | 4.3% | 2.3% | -5.0% | -12.4% | | | | | Percentage Change (24-month shock) | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | | | | | Policy Limit | -17.5% | -15.0% | -12.5% | -10.0% | -17.5% | -15.0% | -12.5% | -10.0% | -12.5% | June 30, 2018 | 37.7% | 29.4% | 21.1% | 13.1% | -7.8% | | March 31, 2018 | 40.7% | 31.4% | 22.1% | 13.2% | -9.6% | | March 31, 2019 | | 38.3% | 29.6% | 20.9% | 12.6% | -8.6% | -21.6% | December 31, 2018 | | 37.2% | 29.1% | 21.0% | 13.4% | -6.4% | -20.0% |
The Net Interest Income at Risk position indicates that in the short-term all, all rising rate environmentsenvironments will positively impact ourthe net interest margin of the Company, while a declining rate environment of 100bp both 100bp and 200 bp will have a negative impact on ourthe net interest income.margin. Compared to the prior quarter-end, both the 12-month Net Interest Income at Risk positions improved in a rising rate environment, and became less favorable in a falling rate environment. The 24-month Net Interest Income at Risk positions declined in a rising rate environment, and became moreslightly less favorable in all scenarios except +300 and +400 bps. Balance sheet growth was experienced during the down 100bp scenario. quarter primarily due to increases in public fund deposits which resulted in higher levels of overnight funds sold that are more sensitive to falling rates. All measures of Net Interest Income at Risk are within our prescribed policy limits over both the 12-month and 24-month periods. Quarter-over-quarter, these metrics became less favorable in a rising rate environmentperiods, with the exception of rates down 200 bp. The changes under the rates down scenarios exceeded our policy limits as most of March 31, 2019 due to our high beta deposit rates are now off their floors. The metrics in the down 100 bp scenario became more favorable as we have a greaterlimited ability to lower our deposit rates the full 200 bp relative to the decline in market rates. To a lesser degree, limited amounts of slightly longer investment purchases also reduced exposure to a falling rate scenario.rate. The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our cash flows, and discounting the cash flows to estimate the present value of assets and liabilities. The difference between the aggregated discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of our net assets. ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1) | ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1) | | ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1) | | | | | | | | Changes in Interest Rates | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | +400 bp | +300 bp | +200 bp | +100 bp | -100 bp | -200 bp | | | | | | Policy Limit | -30.0% | -25.0% | -20.0% | -15.0% | -30.0% | -25.0% | -20.0% | -15.0% | -15.0% | -20.0% | June 30, 2018 | 24.0% | 19.2% | 13.6% | 7.9% | -14.8% | | March 31, 2018 | 28.3% | 22.4% | 15.7% | 8.9% | -17.5% | | March 31, 2019 | | 33.1% | 26.5% | 18.9% | 10.6% | -17.7% | -43.7% | December 31, 2018 | | 24.6% | 19.7% | 13.9% | 8.0% | -13.8% | -36.8% |
At June 30, 2018,March 31, 2019, the economic value of equity results are favorable in all rising rate environments and are within prescribed tolerance levels with the exception of the rates down 100 bp and down 200 bp scenarios. Quarter-over-quarter EVE comparisons declined in each of the rates down scenarios versusas the base caseyield curve flattened and overnight funds increased. The EVE in each of the rates down scenarios was slightly less favorable comparedoutside desired parameters as we have limited ability to lower our deposit rates the full 200 bp relative to the prior quarter, but more favorabledecline in the falling rate scenario. Quarter-over-quarter, EVE became less favorable in a rising rate environment as most of our high beta deposit rates are now off their floors. EVE in the down 100 bps rate shock scenario became more favorable as high Beta deposit rates have risen enough off their floors to give us room to reduce them in response to a falling rate environment. To a lesser degree, slightly longer investment purchases also reduced exposure in a falling rate scenario.market rate. (1) Down 200, 300 and 400 bp scenarios have been excluded due to the historically low interest rate environment.
LIQUIDITY AND CAPITAL RESOURCES Liquidity In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our ALCO and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements. At June 30, 2018,March 31, 2019, we had the ability to generate $1.417$1.270 billion in additional liquidity through all of our available resources (this excludes $107$304 million in overnight funds sold). In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits. We recognize the importance of maintaining liquidity and have developed a ContingencyContingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases that certain credit facilities may no longer be available. We conduct a liquidity stress test on a quarterly basis based on events that could potentially occur at the Bank and report results to ALCO, our Market Risk Oversight Committee, Risk Oversight Committee, and the Board of Directors. At June 30, 2018,March 31, 2019, we believe the liquidity available to us was sufficient to meet our needs.on-going needs and execute our business strategy. We view our investment portfolio primarily as a source of liquidity and have the option to pledge the portfolio as collateral for borrowings or deposits, and/or sell selected securities. The portfolio consists of debt issued by the U.S. Treasury, U.S. governmental and federal agencies, and municipal governments. The weighted average life of the portfolio was approximately 2.212.10 years and, at June 30, 2018, itMarch 31, 2019, the available for sale portfolio had a net unrealized pre-tax loss of $3.9 million in the available-for-sale portfolio.$1.3 million. Our average overnight funds position (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $158.7$265.7 million during the secondfirst quarter of 2019 compared to $80.8 million in the fourth quarter of 2018 compared to an average net overnight funds sold position ofand $240.9 million in the first quarter of 2018 and $174.6 million2018. The increase in the fourth quarter of 2017. The decrease in average net overnight funds compared to both prior periods reflected growthresulted from increases in our loanall deposit types except money market accounts and investment portfolios. Additionally, partcertificates of the decrease compared to the first quarter of 2018 was attributable to the decline in our public deposits. deposit. We expect our capital expenditures will be approximately $5.0$7.0 million over the next 12 months, which will primarily consist of office remodeling, office equipment/furniture, and technology purchases. Management expects that these capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations. Borrowings At June 30, 2018,March 31, 2019, fixed rate credit advances from the FHLB totaled $10.7$9.6 million in outstanding debt consisting of 1311 notes. During the first sixthree months of 2018,2019, the Bank made FHLB advance payments totaling approximately $0.8$0.3 million. No advances matured or were paid off, in the first half of 2018, and we did not obtain any new FHLB advances during this period. The FHLB notes are collateralized by a blanket floating lien on all of our 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans. We have issued two junior subordinated deferrable interest notes to our wholly owned Delaware statutory trusts. The first note for $30.9 million was issued to CCBG Capital Trust I in November 2004, of which $10 million was retired in April 2016. The second note for $32.0 million was issued to CCBG Capital Trust II in May 2005. The interest payment for the CCBG Capital Trust I borrowing is due quarterly and adjusts quarterly to a variable rate of three-month LIBOR plus a margin of 1.90%. This note matures on December 31, 2034. The interest payment for the CCBG Capital Trust II borrowing is due quarterly and adjusts quarterly to a variable rate of three-month LIBOR plus a margin of 1.80%. This note matures on June 15, 2035. The proceeds from these borrowings were used to partially fund acquisitions. Under the terms of each junior subordinated deferrable interest note, in the event of default or if we elect to defer interest on the note, we may not, with certain exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock.
Capital Shareowners’ equity was $293.6$309.0 million at June 30,March 31, 2019, compared to $302.6 million at December 31, 2018 compared toand $288.4 million at March 31, 2018 and $284.2 million at December 31, 2017.2018. Our leverage ratio was 10.69%10.53%, 10.36%10.89%, and 10.47%10.36%, respectively, on these dates. Further, at June 30, 2018,March 31, 2019, our risk-adjusted capital ratio was 17.00%17.09% compared to 17.13% and 17.05% and 17.10% at MarchDecember 31, 2018 and DecemberMarch 31, 2017,2018, respectively. Our common equity tier 1 ratio was 13.46% at June 30, 2018 compared to 13.44% and 13.42%13.62% at March 31, 2019 compared to 13.58% and 13.44% at December 31, 2018 and DecemberMarch 31, 2017,2018, respectively. AllAt March 31, 2019, each of our regulatory capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards at June 30, 2018.standards. During the first sixthree months of 2018,2019, shareowners’ equity increased $9.4$6.4 million, or 6.6%8.5%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of $11.8$6.4 million, a $0.9 million decrease in the unrealized loss on investment securities, stock compensation accretion of $0.7$0.5 million, and net adjustments totaling $0.6$0.4 million related to transactions under our stock compensation plans. Shareowners’ equity was reduced by common stock dividends totaling $2.4 million and a $1.3 million net increase in the unrealized loss on investment securities.$1.8 million. At June 30, 2018,March 31, 2019, our common stock had a book value of $17.15$18.35 per diluted share compared to $18.00 at December 31, 2018 and $16.87 at March 31, 2018 and $16.65 at December 31, 2017. 2018. Book value is impacted through other comprehensive income by changes in the amount of our net unrealized gain orgains and losses in our available for sale investment portfolio. At March 31, 2019, the net after tax unrealized loss on investment securities available-for-salewas $1.1 million and changescompared to $2.0 million at December 31, 2018 and $2.8 million at March 31, 2018. Book value is also impacted by the amountrecording of our unfunded pension liability both of which impactthrough other comprehensive income. At June 30, 2018,March 31, 2019, the net unrealizedafter tax pension liability reflected in accumulated other comprehensive loss was $26.8 million. This liability is re-measured annually on investment securities available for sale was $3.0 millionDecember 31st based on an actuarial calculation of our pension liability. Significant assumptions used in calculating the liability are discussed in our 2018 Form 10-K “Critical Accounting Policies” and include the weighted average discount rate used to measure the present value of the pension liability, the weighted-average expected long-term rate of return on pension plan assets, and the amountassumed rate of our unfundedannual compensation increases, all of which will vary when re-measured. The discount rate assumption used to calculate the pension liability was $30.3 million.is subject to long-term corporate bond rates at December 31st. The estimated impact to the pension liability based on a 25 basis point increase or decrease in long-term corporate bond rates used to discount the pension obligation would decrease or increase the pension liability by approximately $4.7 million (after-tax) using the balances from the December 31, 2018 measurement date. In February 2014,January 2019, our Board of Directors authorized the repurchase of up to 1,500,000750,000 shares of our outstanding common stock through February 2024, which replaced our prior repurchase program that was set to expire in February 2019. Repurchases may be made in the open market or in privately negotiated transactions; however, we are not obligated to repurchase any specified number of shares. We haveAt March 31, 2019, we had not repurchased any shares during 2018. At June 30, 2018, we were authorized tounder our new repurchase up to 640,000 additional shares under the plan.program. OFF-BALANCE SHEET ARRANGEMENTS We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients. As of June 30, 2018,March 31, 2019, we had $475.2$497.8 million in commitments to extend credit and $4.7$5.1 million in standby letters of credit. Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments. If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet our on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, advances available from the FHLB and the Federal Reserve, and investment security maturities provide a sufficient source of funds to meet these commitments.
CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 20172018 Form 10-K. The preparation of our Consolidated Financial Statements in accordance with GAAP and reporting practices applicable to the banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for (i) the allowance for loan and lease losses, (ii) valuation of goodwill, (iii) pension benefits, and (iv) income taxes as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20172018 Form 10-K.
TABLE I | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | AVERAGE BALANCES & INTEREST RATES | AVERAGE BALANCES & INTEREST RATES | | | | | | | | | | | | | | | | | | | | | | | | AVERAGE BALANCES & INTEREST RATES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended | | 2018 | | 2017 | | 2018 | | | 2017 | March 31, 2019 | | | December 31, 2018 | | | March 31, 2018 | | Average | | | | Average | | Average | | | | Average | | Average | | | | Average | | | Average | | | | Average | Average | | | | | Average | | Average | | | | | Average | | | Average | | | | | Average | (Dollars in Thousands) | Balances | | Interest | | Rate | | Balances | | Interest | | Rate | | Balances | | Interest | | Rate | | | Balances | | Interest | | Rate | Balances | | Interest | | Rate | | Balances | | Interest | | Rate | | | Balances | | Interest | | Rate | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans(1)(2) | $ | 1,691,287 | | $ | 20,625 | | 4.89 | % | | $ | 1,608,629 | | $ | 18,880 | | 4.71 | % | | $ | 1,669,571 | | $ | 40,261 | | 4.86 | % | | $ | 1,597,159 | | $ | 37,017 | | 4.67 | % | $ | 1,780,406 | | $ | 22,718 | | 5.18 | % | | $ | 1,785,570 | | $ | 22,556 | | 5.01 | % | | $ | 1,647,612 | | $ | 19,636 | | 4.83 | % | Taxable Securities(2) | | 643,516 | | | 2,945 | | 1.83 | | | | 591,825 | | | 1,898 | | 1.28 | | | | 631,394 | | | 5,468 | | 1.74 | | | | 596,153 | | | 3,682 | | 1.24 | | | 618,127 | | | 3,387 | | 2.20 | | | | 637,735 | | | 3,325 | | 2.08 | | | | 619,137 | | | 2,523 | | 1.64 | | Tax-Exempt Securities | | 72,478 | | | 266 | | 1.47 | | | | 100,742 | | | 414 | | 1.64 | | | | 78,605 | | | 584 | | 1.49 | | | | 99,361 | | | 810 | | 1.63 | | | 40,575 | | | 158 | | 1.56 | | | | 50,362 | | | 193 | | 1.54 | | | | 84,800 | | | 318 | | 1.50 | | Funds Sold | | 158,725 | | | 730 | | 1.84 | | | | 200,834 | | | 533 | | 1.06 | | | | 199,593 | | | 1,647 | | 1.66 | | | | 222,871 | | | 1,026 | | 0.93 | | | 265,694 | | | 1,593 | | 2.43 | | | | 80,815 | | | 461 | | 2.26 | | | | 240,916 | | | 917 | | 1.54 | | Total Earning Assets | | 2,566,006 | | | 24,566 | | 3.84 | % | | | 2,502,030 | | | 21,725 | | 3.48 | % | | | 2,579,163 | | | 47,960 | | 3.75 | % | | | 2,515,544 | | | 42,535 | | 3.41 | % | | 2,704,802 | | | 27,856 | | 4.17 | % | | | 2,554,482 | | | 26,535 | | 4.12 | % | | | 2,592,465 | | | 23,394 | | 3.66 | % | Cash & Due From Banks | | 50,364 | | | | | | | | | 52,312 | | | | | | | | | 51,531 | | | | | | | | | 50,618 | | | | | | | | 53,848 | | | | | | | | | 52,344 | | | | | | | | | 52,711 | | | | | | | Allowance For Loan Losses | | (13,521) | | | | | | | | (13,662) | | | | | | | | (13,586) | | | | | | | | (13,550) | | | | | | | (14,347) | | | | | | | | | (14,642) | | | | | | | | | (13,651) | | | | | | | Other Assets | | 258,255 | | | | | | | | 276,799 | | | | | | | | 259,418 | | | | | | | | 278,621 | | | | | | | 252,208 | | | | | | | | | 257,061 | | | | | | | | | 260,595 | | | | | | | TOTAL ASSETS | $ | 2,861,104 | | | | | | | $ | 2,817,479 | | | | | | | $ | 2,876,526 | | | | | | | $ | 2,831,233 | | | | | | $ | 2,996,511 | | | | | | | | $ | 2,849,245 | | | | | | | | $ | 2,892,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | NOW Accounts | $ | 790,335 | | $ | 725 | | 0.37 | % | | $ | 806,621 | | $ | 222 | | 0.11 | % | | $ | 826,554 | | $ | 1,384 | | 0.34 | % | | $ | 843,459 | | $ | 356 | | 0.09 | % | $ | 884,277 | | $ | 1,755 | | 0.80 | % | | $ | 739,225 | | $ | 995 | | 0.53 | % | | $ | 863,175 | | $ | 659 | | 0.31 | % | Money Market Accounts | | 255,143 | | | 166 | | 0.26 | | | | 261,726 | | | 57 | | 0.09 | | | | 250,883 | | | 269 | | 0.22 | | | | 260,423 | | | 92 | | 0.07 | | | 239,516 | | | 247 | | 0.42 | | | | 248,486 | | | 216 | | 0.34 | | | | 246,576 | | | 103 | | 0.17 | | Savings Accounts | | 351,664 | | | 43 | | 0.05 | | | | 322,833 | | | 39 | | 0.05 | | | | 347,847 | | | 85 | | 0.05 | | | | 317,055 | | | 77 | | 0.05 | | | 364,783 | | | 44 | | 0.05 | | | | 356,723 | | | 44 | | 0.05 | | | | 343,987 | | | 42 | | 0.05 | | Other Time Deposits | | 134,171 | | | 61 | | 0.18 | | | | 152,811 | | | 70 | | 0.18 | | | | 137,248 | | | 125 | | 0.18 | | | | 155,535 | | | 144 | | 0.19 | | | 118,839 | | | 53 | | 0.18 | | | | 123,193 | | | 57 | | 0.18 | | | | 140,359 | | | 64 | | 0.18 | | Total Interest Bearing Deposits | | 1,531,313 | | | 995 | | 0.27 | | | | 1,543,991 | | | 388 | | 0.10 | | | | 1,562,532 | | | 1,863 | | 0.25 | | | | 1,576,472 | | | 669 | | 0.09 | | | 1,607,415 | | | 2,099 | | 0.53 | | | | 1,467,627 | | | 1,312 | | 0.37 | | | | 1,594,097 | | | 868 | | 0.23 | | Short-Term Borrowings | | 6,633 | | | 8 | | 0.49 | | | | 8,957 | | | 17 | | 0.75 | | | | 7,745 | | | 16 | | 0.42 | | | | 10,873 | | | 62 | | 1.15 | | | 11,378 | | | 35 | | 1.26 | | | | 15,424 | | | 53 | | 1.36 | | | | 8,869 | | | 8 | | 0.37 | | Subordinated Notes Payable | | 52,887 | | | 552 | | 4.13 | | | | 52,887 | | | 404 | | 3.02 | | | | 52,887 | | | 1,027 | | 3.86 | | | | 52,887 | | | 783 | | 2.94 | | | 52,887 | | | 608 | | 4.60 | | | | 52,887 | | | 572 | | 4.23 | | | | 52,887 | | | 475 | | 3.60 | | Other Long-Term Borrowings | | 13,151 | | | 94 | | 2.88 | | | | 16,065 | | | 117 | | 2.93 | | | | 13,467 | | | 194 | | 2.91 | | | | 15,271 | | | 216 | | 2.85 | | | 8,199 | | | 72 | | 3.55 | | | | 9,918 | | | 85 | | 3.40 | | | | 13,787 | | | 100 | | 2.93 | | Total Interest Bearing Liabilities | | 1,603,984 | | | 1,649 | | 0.43 | % | | | 1,621,900 | | | 926 | | 0.23 | % | | | 1,636,631 | | | 3,100 | | 0.40 | % | | | 1,655,503 | | | 1,730 | | 0.22 | % | | 1,679,879 | | | 2,814 | | 0.68 | % | | | 1,545,856 | | | 2,022 | | 0.54 | % | | | 1,669,640 | | | 1,451 | | 0.37 | % | Noninterest Bearing Deposits | | 900,643 | | | | | | | | | 829,432 | | | | | | | | | 881,433 | | | | | | | | | 813,785 | | | | | | | | 957,300 | | | | | | | | | 944,748 | | | | | | | | | 862,009 | | | | | | | Other Liabilities | | 64,671 | | | | | | | | 84,486 | | | | | | | | 68,796 | | | | | | | | 81,861 | | | | | | | 52,070 | | | | | | | | | 56,445 | | | | | | | | | 72,969 | | | | | | | TOTAL LIABILITIES | | 2,569,298 | | | | | | | | 2,535,818 | | | | | | | | 2,586,860 | | | | | | | | 2,551,149 | | | | | | | 2,689,249 | | | | | | | | | 2,547,049 | | | | | | | | | 2,604,618 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | TOTAL SHAREOWNERS’ EQUITY | | 291,806 | | | | | | | | 281,661 | | | | | | | | 289,666 | | | | | | | | 280,084 | | | | | | | 307,262 | | | | | | | | | 302,196 | | | | | | | | | 287,502 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES AND | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SHAREOWNERS’ EQUITY | $ | 2,861,104 | | | | | | | $ | 2,817,479 | | | | | | | $ | 2,876,526 | | | | | | | $ | 2,831,233 | | | | | | $ | 2,996,511 | | | | | | | | $ | 2,849,245 | | | | | | | | $ | 2,892,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Rate Spread | | | | | | 3.41 | % | | | | | | 3.25 | % | | | | | | 3.35 | % | | | | | | 3.19 | % | | | | | | | 3.49 | % | | | | | | | | 3.58 | % | | | | | | | | 3.29 | % | Net Interest Income | | | | $ | 22,917 | | | | | | | $ | 20,799 | | | | | | | $ | 44,860 | | | | | | | $ | 40,805 | | | | | | | $ | 25,042 | | | | | | | | $ | 24,513 | | | | | | | | $ | 21,943 | | | | Net Interest Margin(3) | | | | | | | 3.58 | % | | | | | | | 3.33 | % | | | | | | | 3.51 | % | | | | | | | 3.27 | % | | | | | | | 3.75 | % | | | | | | | | 3.81 | % | | | | | | | | 3.43 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1)Average Balances include nonaccrual loans. | (1)Average Balances include nonaccrual loans. | | | | | | | | | | | | | | | | | | | (1)Average Balances include nonaccrual loans. | | | | | | | | | | | | | | | | | | (2)Interest income includes the effects of taxable equivalent adjustments using a 21% tax rate for 2018 and a 35% Federal tax rate for 2017. | | | | | | | | | (2)Interest income includes the effects of taxable equivalent adjustments using a 25% tax rate. | | (2)Interest income includes the effects of taxable equivalent adjustments using a 25% tax rate. | | | | (3)Taxable equivalent net interest income divided by average earnings assets. | (3)Taxable equivalent net interest income divided by average earnings assets. | | | | | | | | | | | | | | | | | | | (3)Taxable equivalent net interest income divided by average earnings assets. | | | | | | | | | | | | | | | | | |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2017.2018. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures At June 30, 2018,March 31, 2019, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that at June 30, 2018,March 31, 2019, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures. Changes in Internal Control over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). There have been no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings We are party to lawsuits arising out of the normal course of business. In management's opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows. Item 1A. Risk Factors In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 20172018 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 20172018 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosure Not Applicable. Item 5. Other Information None.
Item 6. Exhibits (A) Exhibits 31.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized. CAPITAL CITY BANK GROUP, INC. (Registrant) /s/ J. Kimbrough Davis _________________ J. Kimbrough Davis Executive Vice President and Chief Financial Officer (Mr. Davis is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant) Date: May 3, 2019 | | J. Kimbrough Davis
| | Executive Vice President and Chief Financial Officer
| | (Mr. Davis is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)
| | | | Date: August 3, 2018
| |
|