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:

~~March 31,~~June 30, 2019

December 31, 2018

Amortized
Unrealized
Unrealized
Market
Amortized
Unrealized
Unrealized
Market

Cost

Gains

Losses

Value

Cost

Gain

Losses

Value
Available for Sale

U.S. Government Treasury
$
~~254,265~~241,731

$
~~364~~908

$
~~1,688~~616

$
~~252,941~~242,023

$
264,298

$
167

$
2,616

$
261,849
U.S. Government Agency

~~133,566~~138,046

~~495~~476

~~468~~395

~~133,593~~138,127

133,201

520

515

133,206
States and Political Subdivisions

~~33,900~~22,067

38

479

~~33,856~~22,066

42,509

-

144

42,365
Mortgage-Backed Securities

~~736~~723

4365

-

~~779~~788

903

40

-

943
Equity Securities⁽¹⁾

7,847

-

-

7,847

7,794

-

-

7,794
Total
$
~~430,314~~410,414

$
~~905~~1,457

$
~~2,203~~1,020

$
~~429,016~~410,851

$
448,705

$
727

$
3,275

$
446,157

Held to Maturity

U.S. Government Treasury
$
~~35,076~~35,062

$
-7

$
~~311~~96

$
~~34,765~~34,973

$
35,088

$
-

$
477

$
34,611
States and Political Subdivisions

~~5,960~~4,833

-1

103

~~5,950~~4,831

6,512

-

26

6,486
Mortgage-Backed Securities

~~185,143~~189,621

~~668~~1,614

~~1,209~~349

~~184,602~~190,886

175,720

220

2,624

173,316
Total
$
~~226,179~~229,516

$
~~668~~1,622

$
~~1,530~~448

$
~~225,317~~230,690

$
217,320

$
220

$
3,127

$
214,413

Total Investment Securities
$
~~656,493~~639,930

$
~~1,573~~3,079

$
~~3,733~~1,468

$
~~654,333~~641,541

$
666,025

$
947

$
6,402

$
660,570

⁽¹⁾     Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $3.1 million, $4.8 million, respectively, at ~~March 31,~~June 30, 2019 and includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $3.0 million and $4.8 million, respectively, at December 31, 2018.

Securities with an amortized cost of ~~$368.1~~$309.3 million and $319.6 million at ~~March 31,~~June 30, 2019 and December 31, 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 ~~March 31,~~June 30, 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
$
131,777

$
131,011

$
20,620

$
20,516
$
148,151

$
147,738

$
19,840

$
19,800
Due after one year through five years

172,196

171,513

20,416

20,199

130,952

131,635

20,055

20,004
Mortgage-Backed Securities

736

779

185,143

184,602

723

788

189,621

190,886
U.S. Government Agency

117,758

117,866

-

-

122,741

122,843

-

-
Equity Securities

7,847

7,847

-

-

7,847

7,847

-

-
Total
$
430,314

$
429,016

$
226,179

$
225,317
$
410,414

$
410,851

$
229,516

$
230,690
10

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
March 31, 2019

June 30, 2019

Available for Sale

U.S. Government Treasury
$
-

$
-

$
197,921

$
1,688

$
197,921

$
1,688
$
-

$
-

$
167,884

$
616

$
167,884

$
616
U.S. Government Agency

35,901

238

39,054

230

74,955

468

32,600

175

42,908

220

75,508

395
States and Political Subdivisions

4,148

1

22,769

46

26,917

47

-

-

11,369

9

11,369

9
Mortgage-Backed Securities

9

-

-

-

9

-
Total

40,058

239

259,744

1,964

299,802

2,203

32,600

175

222,161

845

254,761

1,020

Held to Maturity

U.S. Government Treasury

-

-


34,766

311


34,766

311

-

-


29,958

96


29,958

96
States and Political Subdivisions

203

-

5,747

10

5,950

10

-

-

2,880

3

2,880

3
Mortgage-Backed Securities

10,210

82

85,679

1,127

95,889

1,209

4,929

32

47,910

317

52,839

349
Total
$
10,413

$
82

$
126,192

$
1,448

$
136,605

$
1,530
$
4,929

$
32

$
80,748

$
416

$
85,677

$
448

December 31, 2018

Available for Sale

U.S. Government Treasury
$
28,420

$
80

$
193,501

$
2,536

$
221,921

$
2,616
$
28,420

$
80

$
193,501

$
2,536

$
221,921

$
2,616
U.S. Government Agency

53,237

271

28,735

244

81,972

515

53,237

271

28,735

244

81,972

515
States and Political Subdivisions

8,243

12

31,417

132

39,660

144

8,243

12

31,417

132

39,660

144
Mortgage-Backed Securities

10

-

-

-

10

-

10

-

-

-

10

-
Total

89,910

363

253,653

2,912

343,563

3,275

89,910

363

253,653

2,912

343,563

3,275

Held to Maturity

U.S. Government Treasury

-

-

34,612

477

34,612

477

-

-

34,612

477

34,612

477
States and Political Subdivisions

204

-

6,281

26

6,485

26

204

-

6,281

26

6,485

26
Mortgage-Backed Securities

51,327

389

84,705

2,235

136,032

2,624

51,327

389

84,705

2,235

136,032

2,624
Total
$
51,531

$
389

$
125,598

$
2,738

$
177,129

$
3,127
$
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 ~~March 31,~~June 30, 2019, there were ~~414~~298 positions (combined AFS and HTM) with unrealized losses totaling ~~$3.7~~$1.5 million. 4840 of these positions were U.S. government treasury securities guaranteed by the U.S. government. ~~265~~211 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities. The remaining ~~101~~47 positions were municipal securities. Because the declines in the market value of these securities were attributable to changes in interest rates and not credit quality, and because the Company ~~has~~had the ~~present~~ ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at ~~March 31,~~June 30, 2019.
11

NOTE 3 – LOANS, NET

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

(Dollars in Thousands)
(Dollars in Thousands)
March 31, 2019

December 31, 2018
(Dollars in Thousands)
June 30, 2019

December 31, 2018
Commercial, Financial and Agricultural
Commercial, Financial and Agricultural
$
238,942

$
233,689
Commercial, Financial and Agricultural
$
265,001

$
233,689
Real Estate – Construction
Real Estate – Construction

87,123

89,527
Real Estate – Construction

101,372

89,527
Real Estate – Commercial Mortgage
Real Estate – Commercial Mortgage

615,129

602,061
Real Estate – Commercial Mortgage

614,618

602,061
Real Estate – Residential⁽¹⁾
Real Estate – Residential⁽¹⁾

349,004

342,215
Real Estate – Residential⁽¹⁾

362,974

342,215
Real Estate – Home Equity
Real Estate – Home Equity

209,194

210,111
Real Estate – Home Equity

201,579

210,111
Consumer⁽²⁾
Consumer⁽²⁾

297,713

296,622
Consumer⁽²⁾

289,638

296,622

Loans, Net of Unearned Income
$
1,797,105

$
1,774,225
Loans, Net of Unearned Income
$
1,835,182

$
1,774,225

⁽¹⁾    Includes loans in process with outstanding balances of ~~$10.3~~$14.2 million and $9.2 million at ~~March 31,~~June 30, 2019 and December 31, 2018, respectively.
⁽²⁾    Includes overdraft balances of $1.4 million and $1.6 million at ~~March 31,~~June 30, 2019 and December 31, 2018, respectively.

Net deferred costs, which include premiums on purchased loans, included in loans were ~~$1.7~~$1.8 million at ~~March 31,~~June 30, 2019 and $1.5 million at December 31, 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.

March 31, 2019

December 31, 2018
June 30, 2019

December 31, 2018
(Dollars in Thousands)
Nonaccrual

90 + Days

Nonaccrual

90 + Days
Nonaccrual

90 + Days

Nonaccrual

90 + Days
Commercial, Financial and Agricultural
$
223

$
-

$
267

$
-
$
187

$
-

$
267

$
-
Real Estate – Construction

323

-

722

-

381

-

722

-
Real Estate – Commercial Mortgage

1,976

-

2,860

-

2,107

-

2,860

-
Real Estate – Residential

1,341

-

2,119

-

1,166

-

2,119

-
Real Estate – Home Equity

1,033

-

584

-

1,569

-

584

-
Consumer

151

-

320

-

212

-

320

-
Total Nonaccrual Loans
$
5,047

$
-

$
6,872

$
-
$
5,622

$
-

$
6,872

$
-

12

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⁾
March 31, 2019

June 30, 2019

Commercial, Financial and Agricultural
$
509

$
128

$
-

$
637

$
238,082

$
238,942
$
493

$
393

$
-

$
886

$
263,928

$
265,001
Real Estate – Construction

59

-

-

59

86,741

87,123

-

-

-

-

100,991

101,372
Real Estate – Commercial Mortgage

1,235

340

-

1,575

611,578

615,129

723

276

-

999

611,512

614,618
Real Estate – Residential

560

100

-

660

347,003

349,004

377

882

-

1,259

360,549

362,974
Real Estate – Home Equity

415

48

-

463

207,698

209,194

256

95

-

351

199,659

201,579
Consumer

1,065

223

-

1,288

296,274

297,713

1,613

335

-

1,948

287,478

289,638
Total Past Due Loans
$
3,843

$
839

$
-

$
4,682

$
1,787,376

$
1,797,105
Total Loans
$
3,462

$
1,981

$
-

$
5,443

$
1,824,117

$
1,835,182

December 31, 2018

Commercial, Financial and Agricultural
$
104

$
58

$
-

$
162

$
233,260

$
233,689
$
104

$
58

$
-

$
162

$
233,260

$
233,689
Real Estate – Construction

489

-

-

489

88,316

89,527

489

-

-

489

88,316

89,527
Real Estate – Commercial Mortgage

124

-

-

124

599,077

602,061

124

-

-

124

599,077

602,061
Real Estate – Residential

745

627

-

1,372

338,724

342,215

745

627

-

1,372

338,724

342,215
Real Estate – Home Equity

512

124

-

636

208,891

210,111

512

124

-

636

208,891

210,111
Consumer

1,661

313

-

1,974

294,328

296,622

1,661

313

-

1,974

294,328

296,622
Total Past Due Loans
$
3,635

$
1,122

$
-

$
4,757

$
1,762,596

$
1,774,225
Total Loans
$
3,635

$
1,122

$
-

$
4,757

$
1,762,596

$
1,774,225

⁽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 $5.6 million and $6.9 million at June 30, 2019 and December 31, 2018, respectively.
⁽¹⁾ Total Loans include nonaccrual loans of $5.6 million and $6.9 million at June 30, 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.

13
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

March 31, 2019

June 30, 2019
June 30, 2019

Beginning Balance
Beginning Balance
$
1,630

$
381

$
3,993

$
3,186

$
2,261

$
2,669

$
14,120

Provision for Loan Losses

195

140

(204)

(134)

107

542

646

Charge-Offs

(235)

-

-

(65)

(45)

(520)

(865)

Recoveries

58

-

100

223

60

251

692

Net Charge-Offs

(177)

-

100

158

15

(269)

(173)
Ending Balance
Ending Balance
$
1,648

$
521

$
3,889

$
3,210

$
2,383

$
2,942

$
14,593

Six Months Ended
Six Months Ended

June 30, 2019
June 30, 2019

Beginning Balance
Beginning Balance
$
1,434

$
280

$
4,181

$
3,400

$
2,301

$
2,614

$
14,210
Beginning Balance
$
1,434

$
280

$
4,181

$
3,400

$
2,301

$
2,614

$
14,210

Provision for Loan Losses

217

101

(103)

6

(20)

566

767
Provision for Loan Losses

412

241

(307)

(128)

87

1,108

1,413

Charge-Offs

(95)

-

(155)

(264)

(52)

(795)

(1,361)
Charge-Offs

(330)

-

(155)

(329)

(97)

(1,315)

(2,226)

Recoveries

74

-

70

44

32

284

504
Recoveries

132

-

170

267

92

535

1,196

Net Charge-Offs

(21)

-

(85)

(220)

(20)

(511)

(857)
Net Charge-Offs

(198)

-

15

(62)

(5)

(780)

(1,030)
Ending Balance
Ending Balance
$
1,630

$
381

$
3,993

$
3,186

$
2,261

$
2,669

$
14,120
Ending Balance
$
1,648

$
521

$
3,889

$
3,210

$
2,383

$
2,942

$
14,593

Three Months Ended
Three Months Ended

Three Months Ended

March 31, 2018

June 30, 2018
June 30, 2018

Beginning Balance
Beginning Balance
$
1,191

$
122

$
4,346

$
3,206

$
2,506

$
1,936

$
13,307
Beginning Balance
$
1,131

$
244

$
4,053

$
3,363

$
2,319

$
2,148

$
13,258

Provision for Loan Losses

(44)

128

(126)

180

(90)

697

745
Provision for Loan Losses

137

39

364

(107)

110

272

815

Charge-Offs

(182)

(7)

(290)

(107)

(158)

(695)

(1,439)
Charge-Offs

(141)

-

-

(456)

(157)

(509)

(1,263)

Recoveries

166

1

123

84

61

210

645
Recoveries

87

-

15

346

22

283

753

Net Charge-Offs

(16)

(6)

(167)

(23)

(97)

(485)

(794)
Net Charge-Offs

(54)

-

15

(110)

(135)

(226)

(510)
Ending Balance
Ending Balance
$
1,131

$
244

$
4,053

$
3,363

$
2,319

$
2,148

$
13,258
Ending Balance
$
1,214

$
283

$
4,432

$
3,146

$
2,294

$
2,194

$
13,563

Six Months Ended
Six Months Ended

June 30, 2018
June 30, 2018

Beginning Balance
Beginning Balance
$
1,191

$
122

$
4,346

$
3,206

$
2,506

$
1,936

$
13,307

Provision for Loan Losses

93

167

238

73

20

969

1,560

Charge-Offs

(323)

(7)

(290)

(563)

(315)

(1,204)

(2,702)

Recoveries

253

1

138

430

83

493

1,398

Net Charge-Offs

(70)

(6)

(152)

(133)

(232)

(711)

(1,304)
Ending Balance
Ending Balance
$
1,214

$
283

$
4,432

$
3,146

$
2,294

$
2,194

$
13,563

1314

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
March 31, 2019

June 30, 2019

Period-end amount

Allocated to:

Loans Individually

Evaluated for Impairment
$
186

$
152

$
827

$
625

$
310

$
2

$
2,102
$
95

$
254

$
637

$
585

$
360

$
2

$
1,933
Loans Collectively

Evaluated for Impairment

1,444

229

3,166

2,561

1,951

2,667

12,018

1,553

267

3,252

2,625

2,023

2,940

12,660
Ending Balance
$
1,630

$
381

$
3,993

$
3,186

$
2,261

$
2,669

$
14,120
$
1,648

$
521

$
3,889

$
3,210

$
2,383

$
2,942

$
14,593

December 31, 2018

Period-end amount

Allocated to:

Loans Individually

Evaluated for Impairment
$
118

$
52

$
1,026

$
919

$
289

$
1

$
2,405
$
118

$
52

$
1,026

$
919

$
289

$
1

$
2,405
Loans Collectively

Evaluated for Impairment

1,316

228

3,155

2,481

2,012

2,613

11,805

1,316

228

3,155

2,481

2,012

2,613

11,805
Ending Balance
$
1,434

$
280

$
4,181

$
3,400

$
2,301

$
2,614

$
14,210
$
1,434

$
280

$
4,181

$
3,400

$
2,301

$
2,614

$
14,210

March 31, 2018

June 30, 2018

Period-end amount

Allocated to:

Loans Individually

Evaluated for Impairment
$
182

$
114

$
1,779

$
1,412

$
389

$
1

$
3,877
$
195

$
113

$
1,735

$
1,030

$
365

$
1

$
3,439
Loans Collectively

Evaluated for Impairment

949

130

2,274

1,951

1,930

2,147

9,381

1,019

170

2,697

2,116

1,929

2,193

10,124
Ending Balance
$
1,131

$
244

$
4,053

$
3,363

$
2,319

$
2,148

$
13,258
$
1,214

$
283

$
4,432

$
3,146

$
2,294

$
2,194

$
13,563

1415

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
March 31, 2019

June 30, 2019
June 30, 2019

Individually Evaluated for
Individually Evaluated for

Individually Evaluated for

Impairment
Impairment
$
787

$
382

$
11,908

$
8,930

$
2,630

$
84

$
24,721
Impairment
$
1,261

$
381

$
13,239

$
9,366

$
2,324

$
80

$
26,651
Collectively Evaluated for
Collectively Evaluated for

Collectively Evaluated for

Impairment
Impairment

238,155

86,741

603,221

340,074

206,564

297,629

1,772,384
Impairment

263,740

100,991

601,379

353,608

199,255

289,558

1,808,531
Total
Total
$
238,942

$
87,123

$
615,129

$
349,004

$
209,194

$
297,713

$
1,797,105
Total
$
265,001

$
101,372

$
614,618

$
362,974

$
201,579

$
289,638

$
1,835,182

December 31, 2018
December 31, 2018

December 31, 2018

Individually Evaluated for
Individually Evaluated for

Individually Evaluated for

Impairment
Impairment
$
873

$
781

$
12,650

$
10,593

$
2,210

$
88

$
27,195
Impairment
$
873

$
781

$
12,650

$
10,593

$
2,210

$
88

$
27,195
Collectively Evaluated for
Collectively Evaluated for

Collectively Evaluated for

Impairment
Impairment

232,816

88,746

589,411

331,622

207,901

296,534

1,747,030
Impairment

232,816

88,746

589,411

331,622

207,901

296,534

1,747,030
Total
Total
$
233,689

$
89,527

$
602,061

$
342,215

$
210,111

$
296,622

$
1,774,225
Total
$
233,689

$
89,527

$
602,061

$
342,215

$
210,111

$
296,622

$
1,774,225

March 31, 2018

June 30, 2018
June 30, 2018

Individually Evaluated for
Individually Evaluated for

Individually Evaluated for

Impairment
Impairment
$
1,283

$
671

$
18,445

$
13,204

$
3,198

$
109

$
36,910
Impairment
$
1,093

$
671

$
18,368

$
11,416

$
2,589

$
95

$
34,232
Collectively Evaluated for
Collectively Evaluated for

Collectively Evaluated for

Impairment
Impairment

197,492

79,565

532,864

308,834

220,796

285,434

1,624,985
Impairment

221,313

87,498

557,625

320,528

216,262

287,017

1,690,243
Total
Total
$
198,775

$
80,236

$
551,309

$
322,038

$
223,994

$
285,543

$
1,661,895
Total
$
222,406

$
88,169

$
575,993

$
331,944

$
218,851

$
287,112

$
1,724,475

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
March 31, 2019

June 30, 2019

Commercial, Financial and Agricultural

$
787

$
96

$
691

$
186

$
1,261

$
723

$
538

$
95
Real Estate – Construction

382

59

323

152

381

-

381

254
Real Estate – Commercial Mortgage

11,908

2,453

9,455

827

13,239

5,489

7,750

637
Real Estate – Residential

8,930

2,402

6,528

625

9,366

3,060

6,306

585
Real Estate – Home Equity

2,630

1,057

1,573

310

2,324

696

1,628

360
Consumer

84

47

37

2

80

44

36

2
Total

$
24,721

$
6,114

$
18,607

$
2,102

$
26,651

$
10,012

$
16,639

$
1,933

December 31, 2018

Commercial, Financial and Agricultural

$
873

$
101

$
772

$
118

$
873

$
101

$
772

$
118
Real Estate – Construction

781

459

322

52

781

459

322

52
Real Estate – Commercial Mortgage

12,650

2,384

10,266

1,026

12,650

2,384

10,266

1,026
Real Estate – Residential

10,593

1,482

9,111

919

10,593

1,482

9,111

919
Real Estate – Home Equity

2,210

855

1,355

289

2,210

855

1,355

289
Consumer

88

49

39

1

88

49

39

1
Total

$
27,195

$
5,330

$
21,865

$
2,405

$
27,195

$
5,330

$
21,865

$
2,405

1516

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

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

$
830

$
11

$
1,330

$
29
Commercial, Financial and

Agricultural

$
1,024

$
21

$
1,188

$
22

$
974

$
32

$
1,251

$
50
Real Estate – Construction

582

-

517

1

381

-

671

1

515

-

568

1
Real Estate – Commercial Mortgage

12,279

123

18,862

175

12,574

145

18,406

168

12,599

268

18,697

344
Real Estate – Residential

9,761

127

13,038

148

9,148

127

12,310

136

9,629

253

12,497

284
Real Estate – Home Equity

2,420

26

3,265

26

2,477

18

2,894

24

2,388

44

3,040

51
Consumer

86

2

111

2

82

2

102

2

84

4

106

4
Total

$
25,958

$
289

$
37,123

$
381

$
25,686

$
313

$
35,571

$
353

$
26,189

$
601

$
36,159

$
734

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 we 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.

1617

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/~~economic and 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

Financial,

Total
(Dollars in Thousands)

Agriculture

Real Estate

Consumer

Loans

Agriculture

Real Estate

Consumer

Loans
March 31, 2019

June 30, 2019

Pass

$
237,133

$
1,222,160

$
297,255

$
1,756,548

$
263,033

$
1,242,619

$
289,012

$
1,794,664
Special Mention

1,109

17,178

51

18,338

465

13,599

49

14,113
Substandard

700

21,112

407

22,219

1,503

24,325

577

26,405
Doubtful

-

-

-

-

-

-

-

-
Total Loans

$
238,942

$
1,260,450

$
297,713

$
1,797,105

$
265,001

$
1,280,543

$
289,638

$
1,835,182

December 31, 2018

Pass

$
232,417

$
1,211,451

$
295,888

$
1,739,756

$
232,417

$
1,211,451

$
295,888

$
1,739,756
Special Mention

479

11,048

54

11,581

479

11,048

54

11,581
Substandard

793

21,415

680

22,888

793

21,415

680

22,888
Doubtful

-

-

-

-

-

-

-

-
Total Loans

$
233,689

$
1,243,914

$
296,622

$
1,774,225

$
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.

1718

The following table presents loans classified as TDRs.

March 31, 2019

December 31, 2018

June 30, 2019

December 31, 2018
(Dollars in Thousands)

Accruing

Nonaccruing

Accruing

Nonaccruing

Accruing

Nonaccruing

Accruing

Nonaccruing
Commercial, Financial and Agricultural

$
695

$
-

$
873

$
-

$
630

$
-

$
873

$
-
Real Estate – Construction

59

-

59

-

-

58

59

-
Real Estate – Commercial Mortgage

9,652

674

9,910

1,239

8,620

862

9,910

1,239
Real Estate – Residential

8,371

535

9,234

1,222

7,973

444

9,234

1,222
Real Estate – Home Equity

1,930

178

1,920

179

1,434

177

1,920

179
Consumer

84

-

88

-

80

-

88

-
Total TDRs

$
20,791

$
1,387

$
22,084

$
2,640

$
18,737

$
1,541

$
22,084

$
2,640

For TDRs, the Company estimated ~~$1.7~~$1.6 million and $2.3 million of impaired loan loss reserves for these loans at ~~March 31,~~June 30, 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, a principal moratorium, a reduction in the interest rate, or a combination thereof. The financial impact of these modifications was not material.

Three Months Ended March 31,

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2019

Post-

Post-

Pre-

Post-

Pre-

Post-

Number

Modified

Number

Modified

Number

Modified

Modified

Number

Modified

Modified

of

Recorded

of

Recorded

of

Recorded

Recorded

of

Recorded

Recorded
(Dollars in Thousands)

Contracts

Investment⁽¹⁾

Contracts

Investment

Contracts

Investment

Investment

Contracts

Investment

Investment
Commercial, Financial and Agricultural

-

$
-

1

$
230

-

$
-

$
-

-

$
-

$
-
Real Estate – Construction

-

-

-

-

-

-

-

-

-

-
Real Estate – Commercial Mortgage

-

-

1

228

1

58

61

1

58

61
Real Estate – Residential

1

74

-

-

-

-

-

1

46

74
Real Estate – Home Equity

1

31

-

-

-

-

-

1

30

31
Consumer

-

-

-

-

-

-

-

-

-

-
Total TDRs

2

$
105

2

$
458

1

$
58

$
61

3

$
134

$
166

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

⁽¹⁾      Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

For the three and six months ended ~~March 31,~~June 30, 2019, ~~and March 31, 2018,~~ there were no loans modified as TDRs within the previous 12 months that had defaulted. For the three and six months ended June 30, 2018, loans classified as TDRs for which there was a payment default and the loans were modified within twelve months prior to default is presented below.
19

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 March 31,

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2019

Number of

Recorded

Number of

Recorded

Number of

Recorded

Number of

Recorded
(Dollars in Thousands)

Contracts

Investment

Contracts

Investment⁽¹⁾

Contracts

Investment⁽¹⁾

Contracts

Investment⁽¹⁾
Extended amortization

-

$
-

1

$
228

-

$
-

-

$
-
Interest rate adjustment

-

-

-

-

-

-

-

-
Extended amortization and interest rate adjustment

2

105

-

-

1

61

3

166
Principal Moratorium

-

-

1

230
Other

-

-

-

-
Total TDRs

2

$
105

2

$
458

1

$
61

3

$
166

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
⁽¹⁾    Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.
1820

NOTE 4 – OTHER REAL ESTATE OWNED

The following table presents other real estate owned activity for the periods indicated.

Three Months Ended March 31,
Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
2019

2018
2019

2018

2019

2018
Beginning Balance
$
2,229

$
3,941
$
1,902

$
3,330

$
2,229

$
3,941
Additions

527

307

161

533

688

840
Valuation Write-downs

(190)

(494)

(41)

(138)

(231)

(632)
Sales

(664)

(424)

(1,012)

(352)

(1,676)

(776)
Ending Balance
$
1,902

$
3,330
$
1,010

$
3,373

$
1,010

$
3,373

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 March 31,
Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
2019

2018
2019

2018

2019

2018
Gains from the Sale of Properties
$
(12)

$
(28)
$
(80)

$
(53)

$
(92)

$
(81)
Losses from the Sale of Properties

37

88

29

54

65

142
Rental Income from Properties

(3)

(3)

(1)

(3)

(4)

(6)
Property Carrying Costs

151

75

86

112

237

187
Valuation Adjustments

190

494

41

138

232

632
Total
$
363

$
626
$
75

$
248

$
438

$
874

~~As of March 31,~~At June 30, 2019, the Company had ~~$0.9~~$1.0 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~~from 1 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,~~June 30, 2019, the operating lease ROU assets and liabilities were $1.9 million and ~~$2.8~~ $2.7million, respectively. The Company does not have any finance leases or any significant lessor agreements.

1921

The table below summarizes our lease expense and other information related to the Company’s operating leases:

Three Months Ended
Three Months Ended

Six Months Ended
(Dollars in Thousands)

March 31, 2019
June 30, 2019

June 30, 2019
Operating lease expense
$
81
$
81

$
162
Short-term lease expense

35

29

63
Total lease expense
$
116
$
110

$
225

June 30, 2019
Other information:

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
$
83

$
169
Right-of-use assets obtained in exchange for new operating lease liabilities

1,928

1,860

Weighted-average remaining lease term — operating leases (in years)

7.4

7.2
Weighted-average discount rate — operating leases

2.9%

2.9%

The table below summarizes the maturity of remaining lease liabilities:

(Dollars in Thousands)
March 31, 2019
June 30, 2019
2019
$
316
$
210
2020

451

451
2021

420

420
2022

417

417
2023

398

398
2024 and thereafter

1,085

1,085
Total
$
3,087
$
2,981
Less: Interest

(326)

(306)
Present Value of Lease liability
$
2,761
$
2,675

At ~~March 31,~~June 30, 2019, the Company ~~has~~had additional operating lease payments for a banking office (to be constructed) that ~~has~~have not yet commenced of $1.4 million. Payments onfor the ~~operating lease~~banking office 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,~~2024, for an aggregate remaining obligation of $1.1 million at ~~March 31,~~June 30, 2019.

NOTE 6 - EMPLOYEE BENEFIT PLANS

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

22
The components of the net periodic benefit cost for the Company's qualified benefit pension plan were as follows:

Three Months Ended March 31,
Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
2019

2018
2019

2018

2019

2018
Service Cost
$
1,529

$
1,721
$
1,529

$
1,721

$
3,057

$
3,442
Interest Cost

1,545

1,415

1,545

1,415

3,089

2,830
Expected Return on Plan Assets

(2,382)

(2,391)

(2,382)

(2,391)

(4,764)

(4,782)
Prior Service Cost Amortization

4

50

4

50

8

100
Net Loss Amortization

965

918

965

918

1,931

1,837
Net Periodic Benefit Cost
$
1,661

$
1,713
$
1,661

$
1,713

$
3,321

$
3,427

Discount Rate Used for Benefit Cost

4.43%

3.71%
Discount Rate

4.43%

3.71%

4.43%

3.71%
Long-term Rate of Return on Assets

7.25%

7.25%

7.25%

7.25%

7.25%

7.25%

20
The components of the net periodic benefit cost for the Company's SERP were as follows:
The components of the net periodic benefit cost for the Company's SERP were as follows:
The components of the net periodic benefit cost for the Company's SERP were as follows:

Three Months Ended March 31,
Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
2019

2018
2019

2018

2019

2018
Interest Cost
$
87

$
57
$
87

$
57

$
174

$
113
Net Loss Amortization

190

406

190

406

380

813
Net Periodic Benefit Cost
$
277

$
463
$
277

$
463

$
554

$
926

Discount Rate Used for Benefit Cost

4.23%

3.53%
Discount Rate

4.23%

3.53%

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.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

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

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

March 31, 2019

December 31, 2018
June 30, 2019

December 31, 2018
(Dollars in Thousands)
Fixed

Variable

Total

Fixed

Variable

Total
Fixed

Variable

Total

Fixed

Variable

Total
Commitments to Extend Credit⁽¹⁾
$
109,646

$
388,161

$
497,807

$
94,572

$
373,438

$
468,010
$
113,445

$
396,348

$
509,793

$
94,572

$
373,438

$
468,010
Standby Letters of Credit

5,050

-

5,050

4,986

-

4,986

5,441

-

5,441

4,986

-

4,986
Total
$
114,696

$
388,161

$
502,857

$
99,558

$
373,438

$
472,996
$
118,886

$
396,348

$
515,234

$
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.

23
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.

21
Indemnification Obligation. The Company is a member of the Visa U.S.A. network. Visa U.S.A member banks are required to indemnify itthe Visa U.S.A. network 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. 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. 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 ~~$137,000.~~$146,000. Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.

NOTE 8 – FAIR VALUE MEASUREMENTS

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

24
In general, the Company does not purchase securities that have a complicated structure. The Company’s entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue-based municipal bonds. Pricing for such instruments is easily obtained. 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 ~~March 31,~~June 30, 2019, there were no amounts payable.
22
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
March 31, 2019

June 30, 2019
June 30, 2019

ASSETS:
ASSETS:

ASSETS:

Securities Available for Sale:
Securities Available for Sale:

Securities Available for Sale:

U.S. Government Treasury
$
252,941

$
-

$
-

$
252,941
U.S. Government Treasury
$
242,023

$
-

$
-

$
242,023

U.S. Government Agency

-

133,593

-

133,593
U.S. Government Agency

-

138,127

-

138,127

States and Political Subdivisions

-

33,856

-

33,856
States and Political Subdivisions

-

22,066

-

22,066

Mortgage-Backed Securities

-

779

-

779
Mortgage-Backed Securities

-

788

-

788

Equity Securities

-

7,847

-

7,847
Equity Securities

-

7,847

-

7,847

December 31, 2018
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
$
261,849

$
-

$
-

$
261,849
U.S. Government Treasury
$
261,849

$
-

$
-

$
261,849

U.S. Government Agency

-

133,206

-

133,206
U.S. Government Agency

-

133,206

-

133,206

States and Political Subdivisions

-

42,365

-

42,365
States and Political Subdivisions

-

42,365

-

42,365

Mortgage-Backed Securities

-

943

-

943
Mortgage-Backed Securities

-

943

-

943

Equity Securities

-

7,794

-

7,794
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~~collateral-dependent loans had a carrying value of ~~$4.4~~$8.4 million with a valuation allowance of ~~$0.7~~$0.6 million at ~~March 31,~~June 30, 2019 and $5.6 million and $0.8 million, respectively, at December 31, 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 ~~three~~six months of 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.

25
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”.

23
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, estimated discount rates, and incorporates 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:

March 31, 2019

June 30, 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

$
49,501

$
49,501

$
-

$
-

$
53,731

$
53,731

$
-

$
-
Short-Term Investments

304,213

304,213

-

-

234,097

234,097

-

-
Investment Securities, Available for Sale

429,016

252,941

176,075

-

410,851

242,023

168,828

-
Investment Securities, Held to Maturity

226,179

34,765

190,552

-

229,516

34,973

195,717

-
Equity Securities⁽¹⁾

3,588

-

3,588

-

3,588

-

3,588

-
Loans Held for Sale

4,557

-

4,557

-

9,885

-

9,885

-
Loans, Net of Allowance for Loan Losses

1,782,985

-

-

1,760,136

1,820,589

-

-

1,804,474

LIABILITIES:

Deposits

$
2,617,294

$
-

$
2,615,572

$
-

$
2,561,104

$
-

$
2,559,752

$
-
Short-Term Borrowings

8,983

-

8,983

-

9,753

-

9,753

-
Subordinated Notes Payable

52,887

-

41,128

-

52,887

-

39,462

-
Long-Term Borrowings

7,661

-

7,715

-

7,313

-

7,418

-

26

December 31, 2018

Carrying

Level 1

Level 2

Level 3
(Dollars in Thousands)

Value

Inputs

Inputs

Inputs
ASSETS:

Cash

$
62,032

$
62,032

$
-

$
-
Short-Term Investments

213,968

213,968

-

-
Investment Securities, Available for Sale

446,157

261,849

184,308

-
Investment Securities, Held to Maturity

217,320

34,611

179,802

-
Loans Held for Sale

6,869

-

6,869

-
Equity Securities⁽¹⁾

3,591

-

3,591

-
Loans, Net of Allowance for Loan Losses

1,760,015

-

-

1,730,161

LIABILITIES:

Deposits

$
2,531,856

$
-

$
2,529,841

$
-
Short-Term Borrowings

13,541

-

13,541

-
Subordinated Notes Payable

52,887

-

42,359

-
Long-Term Borrowings

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.
24
NOTE 9 – 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
March 31, 2019

Three Months Ended June 30, 2019
Three Months Ended June 30, 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
$
1,250

$
(317)

$
933
Change in net unrealized gain/loss on securities available for sale
$
1,736

$
(439)

$
1,297
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

12

(4)

8
maturity

11

(4)

7

Total Other Comprehensive Loss
$
1,262

$
(321)

$
941

Total Other Comprehensive Loss
$
1,747

$
(443)

$
1,304

March 31, 2018

Six Months Ended June 30, 2019
Six Months Ended June 30, 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
$
(1,488)

$
377

$
(1,111)
Change in net unrealized gain/loss on securities available for sale
$
2,985

$
(756)

$
2,229
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

15

(4)

11
maturity

22

(6)

16

Total Other Comprehensive Income
$
(1,473)

$
373

$
(1,100)

Total Other Comprehensive Loss
$
3,007

$
(762)

$
2,245

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)
27

Before

Tax

Net of

Tax

(Expense)

Tax
(Dollars in Thousands)
Amount

Benefit

Amount
Three Months Ended June 30, 2018

Investment Securities:

Change in net unrealized gain/loss on securities available for sale
$
(265)

$
67

$
(198)
Amortization of losses on securities transferred from available for sale to held to

maturity

14

(4)

10

Total Other Comprehensive Loss
$
(251)

$
63

$
(188)

Six Months Ended June 30, 2018

Investment Securities:

Change in net unrealized gain/loss on securities available for sale
$
(1,752)

$
443

$
(1,309)
Amortization of losses on securities transferred from available for sale to held to

maturity

28

(7)

21

Total Other Comprehensive Income
$
(1,724)

$
436

$
(1,288)
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

2,245

-

2,245
Balance as of June 30, 2019
$
237

$
(26,807)

$
(26,570)

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)

NOTE 10 – ACCOUNTING STANDARDS UPDATES

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 Company’s implementation plan has progressed through the design and build phase and ~~will begin~~has begun testing and parallel ~~modeling in the second quarter of 2019.~~modeling. In conjunction with the implementation, the Company is reviewing business process and evaluating potential changes to the 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.
2528

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 2019 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 2018 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 5957 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 2018 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 these 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 for each quarter presented on page 30 is provided below.

2019

2018

2017
(Dollars in Thousands, except per share data)

Second

First

Fourth

Third

Second

First

Fourth

Third
Shareowners' Equity (GAAP)

$
314,595

$
308,986

$
302,587

$
298,016

$
293,571

$
288,360

$
284,210

$
285,201
Less: Goodwill (GAAP)

84,811

84,811

84,811

84,811

84,811

84,811

84,811

84,811
Tangible Shareowners' Equity (non-GAAP)
A

229,784

224,175

217,776

213,205

208,760

203,549

199,399

200,390
Total Assets (GAAP)

3,017,654

3,052,051

2,959,183

2,819,190

2,880,278

2,924,832

2,898,794

2,790,842
Less: Goodwill (GAAP)

84,811

84,811

84,811

84,811

84,811

84,811

84,811

84,811
Tangible Assets (non-GAAP)
B
$
2,932,843

$
2,967,240

$
2,874,372

$
2,734,379

$
2,795,467

$
2,840,021

$
2,813,983

$
2,706,031
Tangible Common Equity Ratio (non-GAAP)
A/B

7.83%

7.56%

7.58%

7.80%

7.47%

7.17%

7.09%

7.41%
Actual Diluted Shares Outstanding (GAAP)
C

16,773,449

16,840,496

16,808,542

17,127,846

17,114,380

17,088,419

17,071,107

17,045,326
Diluted Tangible Book Value (non-GAAP)
A/C

13.70

13.31

12.96

12.45

12.20

11.91

11.68

11.76
2629

2019

2018

2017
(Dollars in Thousands, except per share data)

First

Fourth

Third

Second

First

Fourth

Third

Second
Shareowners' Equity (GAAP)

$
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
Tangible Shareowners' Equity (non-GAAP)
A

224,175

217,776

213,205

208,760

203,549

199,399

200,390

196,702
Total Assets (GAAP)

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
Tangible Assets (non-GAAP)
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

7.56%

7.58%

7.80%

7.47%

7.17%

7.09%

7.41%

7.21%
Actual Diluted Shares Outstanding (GAAP)
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

13.31

12.96

12.45

12.20

11.91

11.68

11.76

11.55
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(Dollars in Thousands, Except
2019

2018

2017
Per Share Data)
Second

First

Fourth

Third

Second

First

Fourth

Third

Summary of Operations:

Interest Income
$
28,665

$
27,722

$
26,370

$
25,392

$
24,419

$
23,214

$
22,627

$
22,341

Interest Expense

2,681

2,814

2,022

1,769

1,649

1,451

1,138

1,080

Net Interest Income

25,984

24,908

24,348

23,623

22,770

21,763

21,489

21,261

Provision for Loan Losses

646

767

457

904

815

745

826

490

Net Interest Income After

Provision for Loan Losses

25,338

24,141

23,891

22,719

21,955

21,018

20,663

20,771

Noninterest Income

12,770

12,552

13,238

13,308

12,542

12,477

12,897

12,996

Noninterest Expense

28,396

28,198

26,505

28,699

28,393

27,906

26,897

26,707

Income Before Income Taxes

9,712

8,495

10,624

7,328

6,104

5,589

6,663

7,060

Income Tax Expense (Benefit)⁽²⁾

2,387

2,059

2,166

1,338

101

(184)

6,660

2,505

Net Income

7,325

6,436

8,458

5,990

6,003

5,773

3

4,555

Net Interest Income (FTE)
$
26,116

$
25,042

$
24,513

$
23,785

$
22,917

$
21,943

$
21,808

$
21,595

Per Common Share:

Net Income Basic
$
0.44

$
0.38

$
0.50

$
0.35

$
0.35

$
0.34

$
0.00

$
0.27

Net Income Diluted

0.44

0.38

0.50

0.35

0.35

0.34

0.00

0.27

Cash Dividends Declared

0.11

0.11

0.09

0.09

0.07

0.07

0.07

0.07

Diluted Book Value

18.76

18.35

18.00

17.40

17.15

16.87

16.65

16.73

Diluted Tangible Book Value⁽¹⁾

13.70

13.31

12.96

12.45

12.20

11.91

11.68

11.76

Market Price:

High

25.00

25.87

26.95

25.91

25.99

26.50

26.01

24.58

Low

21.57

21.04

19.92

23.19

22.28

22.80

22.21

19.60

Close

24.85

21.78

23.21

23.34

23.63

24.75

22.94

24.01

Selected Average Balances:

Loans, Net
$
1,823,311

$
1,780,406

$
1,785,570

$
1,747,093

$
1,691,287

$
1,647,612

$
1,640,738

$
1,638,578

Earning Assets

2,719,217

2,704,802

2,554,482

2,535,292

2,566,006

2,592,465

2,511,985

2,466,287

Total Assets

3,010,662

2,996,511

2,849,245

2,826,924

2,861,104

2,892,120

2,822,451

2,779,960

Deposits

2,565,431

2,564,715

2,412,375

2,392,272

2,431,956

2,456,106

2,378,411

2,329,162

Shareowners’ Equity

313,599

307,262

302,196

297,757

291,806

287,502

288,044

285,296

Common Equivalent Average Shares:

Basic

16,791

16,791

16,989

17,056

17,045

17,028

16,967

16,965

Diluted

16,818

16,819

17,050

17,125

17,104

17,073

17,050

17,044

Performance Ratios:

Return on Average Assets

0.98
%

0.87
%

1.18
%

0.84
%

0.84
%

0.81
%

0.00
%

0.65
%

Return on Average Equity

9.37

8.49

11.10

7.98

8.25

8.14

0.00

6.33

Net Interest Margin (FTE)

3.85

3.75

3.81

3.72

3.58

3.43

3.45

3.48


Noninterest Income as % of

Operating Revenue

32.95

33.51

35.22

36.04

35.52

36.44

37.51

37.94

Efficiency Ratio

73.02

75.01

70.21

77.37

80.07

81.07

77.50

77.21

Asset Quality:

Allowance for Loan Losses
$
14,593

$
14,120

$
14,210

$
14,219

$
13,563

$
13,258

$
13,307

$
13,339

Allowance for Loan Losses to Loans
0.79
%

0.78
%

0.80
%

0.80
%

0.78
%

0.80
%

0.80
%

0.82
%

Nonperforming Assets (“NPAs”)

6,632

6,949

9,101

9,587

9,114

10,644

11,100

12,545


NPAs to Total Assets

0.22

0.23

0.31

0.34

0.32

0.36

0.38

0.45

NPAs to Loans plus OREO

0.36

0.39

0.51

0.54

0.52

0.64

0.67

0.76

Allowance to Non-Performing Loans
259.55

279.77

206.79

207.06

236.25

181.26

185.87

203.39

Net Charge-Offs to Average Loans
0.04

0.20

0.10

0.06

0.12

0.20

0.21

0.10

Capital Ratios:

Tier 1 Capital

16.36
%

16.34
%

16.36
%

16.17
%

16.25
%

16.31
%

16.33
%

16.19
%

Total Capital

17.13

17.09

17.13

16.94

17.00

17.05

17.10

16.96

Common Equity Tier 1

13.67

13.62

13.58

13.43

13.46

13.44

13.42

13.26

Leverage

10.64

10.53

10.89

10.99

10.69

10.36

10.47

10.48


Tangible Common Equity⁽¹⁾

7.83

7.56

7.58

7.80

7.47

7.17

7.09

7.41


⁽¹⁾Non-GAAP financial measure. See non-GAAP reconciliation on page 29.

⁽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

   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.

27
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(Dollars in Thousands, Except
2019

2018

2017
(Per Share Data)
First

Fourth

Third

Second

First

Fourth

Third

Second

Summary of Operations:

Interest Income
$
27,722

$
26,370

$
25,392

$
24,419

$
23,214

$
22,627

$
22,341

$
21,422

Interest Expense

2,814

2,022

1,769

1,649

1,451

1,138

1,080

926

Net Interest Income

24,908

24,348

23,623

22,770

21,763

21,489

21,261

20,496

Provision for Loan Losses

767

457

904

815

745

826

490

589

Net Interest Income After

Provision for Loan Losses

24,141

23,891

22,719

21,955

21,018

20,663

20,771

19,907

Noninterest Income

12,552

13,238

13,308

12,542

12,477

12,897

12,996

13,135

Noninterest Expense

28,198

26,505

28,699

28,393

27,906

26,897

26,707

27,921

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⁾

2,059

2,166

1,338

101

(184)

6,660

2,505

1,560

Net Income

6,436

8,458

5,990

6,003

5,773

3

4,555

3,561

Net Interest Income (FTE)
$
25,042

$
24,513

$
23,785

$
22,917

$
21,943

$
21,808

$
21,595

$
20,799

Per Common Share:

Net Income Basic
$
0.38

$
0.50

$
0.35

$
0.35

$
0.34

$
0.00

$
0.27

$
0.21

Net Income Diluted

0.38

0.50

0.35

0.35

0.34

0.00

0.27

0.21

Cash Dividends Declared

0.11

0.09

0.09

0.07

0.07

0.07

0.07

0.05

Diluted Book Value

18.35

18.00

17.40

17.15

16.87

16.65

16.73

16.54

Diluted Tangible Book Value⁽¹⁾

13.31

12.96

12.45

12.20

11.91

11.68

11.76

11.55

Market Price:

High

25.87

26.95

25.91

25.99

26.50

26.01

24.58

22.39

Low

21.04

19.92

23.19

22.28

22.80

22.21

19.60

17.68

Close

21.78

23.21

23.34

23.63

24.75

22.94

24.01

20.42

Selected Average Balances:

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

2,704,802

2,554,482

2,535,292

2,566,006

2,592,465

2,511,985

2,466,287

2,502,030

Total Assets

2,996,511

2,849,245

2,826,924

2,861,104

2,892,120

2,822,451

2,779,960

2,817,479

Deposits

2,564,715

2,412,375

2,392,272

2,431,956

2,456,106

2,378,411

2,329,162

2,373,423

Shareowners’ Equity

307,262

302,196

297,757

291,806

287,502

288,044

285,296

281,661

Common Equivalent Average Shares:

Basic

16,791

16,989

17,056

17,045

17,028

16,967

16,965

16,955

Diluted

16,819

17,050

17,125

17,104

17,073

17,050

17,044

17,016

Performance Ratios:

Return on Average Assets

0.87
%

1.18
%

0.84
%

0.84
%

0.81
%

0.00
%

0.65
%

0.51
%

Return on Average Equity

8.49

11.10

7.98

8.25

8.14

0.00

6.33

5.07

Net Interest Margin (FTE)

3.75

3.81

3.72

3.58

3.43

3.45

3.48

3.33


Noninterest Income as % of

Operating Revenue

33.51

35.22

36.04

35.52

36.44

37.51

37.94

39.05

Efficiency Ratio

75.01

70.21

77.37

80.07

81.07

77.50

77.21

82.28

Asset Quality:

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
%

0.78
%

0.80
%

0.80
%

0.82
%

0.81
%

Nonperforming Assets (“NPAs”)

6,949

9,101

9,587

9,114

10,644

11,100

12,545

15,934


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

0.39

0.51

0.54

0.52

0.64

0.67

0.76

0.97

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
0.20

0.10

0.06

0.12

0.20

0.21

0.10

0.17

Capital Ratios:

Tier 1 Capital

16.34
%

16.36
%

16.17
%

16.25
%

16.31
%

16.33
%

16.19
%

15.58
%

Total Capital

17.09

17.13

16.94

17.00

17.05

17.10

16.96

16.32

Common Equity Tier 1

13.62

13.58

13.43

13.46

13.44

13.42

13.26

12.72

Leverage

10.53

10.89

10.99

10.69

10.36

10.47

10.48

10.20


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 27.

⁽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

   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.

2830

FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

·         Net income of $7.3 million, or $0.44 per diluted share, for the second quarter of 2019 compared to net income of $6.4 million, or $0.38 per diluted share, for the first quarter of 2019, and net income of $6.0 million, or $0.35 per diluted share, for the second quarter of 2018. For the first six months of 2019, we realized net income of $13.8 million, or $0.82 per diluted share, compared to net income of ~~$8.5~~$11.8 million, or ~~$0.50~~$0.69 per diluted share, for the ~~fourth quarter of 2018, and net income of $5.8 million, or $0.34 per diluted share for the first quarter~~same period of 2018. Net income for the first ~~quarter~~six months of 2018 included ~~a $1.5~~tax benefits totaling $2.9 million, or ~~$0.09~~$0.17 per diluted share ~~tax benefit~~ related to a 2017 plan year pension plan 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.contributions.

·         ~~Taxable~~Tax equivalent net interest income for the ~~first~~second quarter of 2019 was ~~$25.0~~$26.1 million compared to ~~$24.5 million for the fourth quarter of 2018 and $21.9~~$25.0 million for the first quarter of 2019 and $22.9 million for the second quarter of 2018. ~~During~~For the first ~~quarter~~six months of 2019, ~~overnight funds increased as a result~~tax equivalent net interest income totaled $51.2 million compared to $44.9 million for the comparable period of ~~seasonal growth in our deposit balances.~~2018. The increase in tax-equivalent net interest income compared to the first quarter of 2019 reflected loan growth, rising loan yields, and one additional calendar day. The favorable comparisons to 2018 ~~reflected~~were primarily driven by significant growth in ~~the loan portfolio~~our earning assets, as higher balances of noninterest bearing deposits funded growth in loans and ~~higher rates earned on~~ overnight ~~funds, investment securities, and variable rate loans, partially offset by a higher cost on our negotiated rate deposits.~~funds.

·         Provision for loan losses was $0.6 million for the second quarter of 2019 compared to $0.8 million for the first quarter of 2019 ~~compared to $0.5~~and $0.8 million for the ~~fourth quarter of 2018 and $0.7 million for the first~~second quarter of 2018. ~~The higher~~For the first six months of 2019, the loan loss provision was $1.4 million compared to $1.6 million for the ~~fourth quarter~~same period of ~~2018 reflected higher~~2018. We continue to realize a low level of net loan ~~charge-offs.~~charge-offs which favorably impacted the provision in 2019.

·          Noninterest income for the second quarter of 2019 totaled $12.8 million, an increase of $0.2 million, or 1.7%, over the first quarter of 2019 ~~totaled $12.6 million, a decrease of $0.7~~and $0.2 million, or ~~5.2%~~1.8%, ~~from~~over the ~~fourth~~second quarter of ~~2018~~ 2018. A higher level of mortgage banking fees and ~~a $0.1 million, or 0.6%,~~bank card fees drove the increase over the first quarter of 2019. For the first six months of 2019, noninterest income totaled $25.3 million, a $0.3 million, or 1.2%, increase over the same period of 2018. ~~The decrease from the fourth quarter of 2018 was primarily attributable to lower deposit~~Higher wealth management fees and ~~mortgage banking fees.~~bank card fees drove the favorable comparisons to 2018.

·         Noninterest expense for the ~~first~~second quarter of 2019 totaled ~~$28.2~~$28.4 million, an increase of ~~$1.7~~$0.2 million, or ~~6.4%, over the fourth quarter of 2018 and $0.3 million, or 1.0%~~0.7%, over the first quarter of 2019 and comparable to the second quarter of 2018. ~~The~~For the first six months of 2019, noninterest expense totaled $56.6 million, an increase of $0.3 million, or 0.5%, over the ~~fourth quarter was~~same period of 2018, primarily attributable to higher compensation expense (merit raises and commissions), partially offset by lower other real estate owned (“OREO”) expense ~~of $2.0 million, partially offset by lower occupancy~~and other expense ~~of $0.3 million. The increase in OREO expense reflected a $2.0 million gain on the sale of a banking office in the fourth quarter of 2018.~~(primarily professional fees and processing services).

Financial Condition

·         Average earning assets were ~~$2.705~~$2.719 billion for the second quarter of 2019, a slight increase of $14.4 million, or 0.5%, over the first quarter of 2019, ~~an increase of $150.3 million, or 5.9%, over the fourth quarter of 2018,~~ and an increase of ~~$112.3~~$164.7 million, or ~~4.3%~~6.4%, over the ~~first~~fourth quarter of 2018.   The change in average earning assets over ~~both periods reflected a higher level of total deposits, resulting~~the fourth quarter 2018 was attributable to growth in ~~a higher balance of~~our overnight funds ~~sold.~~position and loan portfolio, primarily funded by increases in our noninterest bearing and public fund deposits.

·         Average loans ~~decreased~~increased by ~~$5.2~~$42.9 million, or ~~0.29%, from the fourth quarter of 2018, and increased $132.8 million, or 8.1%~~2.4%, over the first quarter of 2019, and $37.7 million, or 2.1%, over the fourth quarter of 2018. ~~On an “as of” basis, loans grew $20.6 million~~Growth over both prior periods occurred in all loan types except institutional, home equity, and ~~$134.9 million, respectively.~~ consumer loans. During 2019, we have purchased commercial and residential loan pools totaling $18.6 million.

·         Nonperforming assets totaled ~~$6.9~~$6.6 million at ~~March 31,~~June 30, 2019, a decrease of ~~$2.2~~$0.3 million, or ~~23.6%~~4.6%, from March 31, 2019 and $2.5 million, or 27.1%, from December ~~31, 2018 and $3.7 million, or 34.7%, from March~~ 31, 2018. Nonperforming assets represented ~~0.23%~~0.22% of total assets at ~~March 31,~~June 30, 2019 compared to 0.31% at December 31, 2018 and ~~0.36%~~0.32% at ~~March 31,~~June 30, 2018.

·         At ~~March 31,~~June 30, 2019, we were well-capitalized with a risk based capital ratio of ~~17.09%~~17.13% and a tangible common equity ratio of ~~7.56%~~7.83% compared to 17.13% and 7.58%, respectively, at December 31, 2018, and ~~17.05%~~17.00% and ~~7.17%~~7.47%, respectively, at ~~March 31,~~June 30, 2018. At ~~March 31,~~June 30, 2019, all of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards.
2931

RESULTS OF OPERATIONS

Net Income

For the ~~first~~second quarter of 2019, we realized net income of $7.3 million, or $0.44 per diluted share, compared to net income of $6.4 million, or $0.38 per diluted share, for the first quarter of 2019, and net income of $6.0 million, or $0.35 per diluted share for the second quarter of 2018. Net income for the second quarter of 2018 included a tax benefit of $1.4 million, or $0.08 per diluted share, related to a 2017 plan year pension contribution made during the quarter.
For the first six months of 2019, net income totaled $13.8 million, or $0.82 per diluted share, compared to net income of ~~$8.5~~$11.8 million, or ~~$0.50~~$0.69 per diluted share for the ~~fourth quarter of 2018, and $5.8 million, or $0.34 per diluted share, for the first quarter~~same period of 2018.
Net income for the first ~~quarter~~six months of 2018 included atax benefits totaling $2.9 million, or $0.17 per diluted share (1Q - $1.5 million, or $0.09 per diluted share ~~tax benefit~~and 2Q - $1.4 million, or $0.08 per diluted share), related to a 2017 plan year pension plan 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.contributions made in 2018.

Compared to the ~~fourth~~first quarter of ~~2018,~~2019, the ~~$2.1~~$1.2 million ~~decrease~~increase in operating profit reflected a ~~$1.7~~$1.1 million increase in ~~noninterest expense, lower~~net interest income, higher noninterest income of ~~$0.7~~$0.2 million, and a ~~$0.3~~$0.1 million ~~increase~~decrease in the loan loss provision, partially offset by higher ~~net interest income~~noninterest expense of ~~$0.6~~$0.2 million.

Compared to the ~~first~~second quarter of 2018, the ~~$2.9~~$3.6 million increase in operating profit was attributable to higher net interest income of ~~$3.1~~$3.2 million, ~~and~~higher noninterest income of $0.2 million, and a $0.2 million decrease in the loan loss provision.
The $6.5 million increase in operating profit for the first six months of 2019 versus the comparable period of 2018 was attributable to higher net interest income of $6.4 million, higher noninterest income of $0.3 million, and a $0.1 million decrease in the loan provision, partially offset by higher noninterest expense of $0.3 million.

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

Three Months Ended

Six Months Ended

Three Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,
(Dollars in Thousands, except per share data)

March 31, 2019

December 31, 2018

March 31, 2018

2019

2019

2018

2019

2018
Interest Income

$
27,722

$
26,370

$
23,214

$
28,665

$
27,722

$
24,419

$
56,387

$
47,633
Taxable Equivalent Adjustments

134

165

180

132

134

147

266

327
Total Interest Income (FTE)

27,856

26,535

23,394

28,797

27,856

24,566

56,653

47,960
Interest Expense

2,814

2,022

1,451

2,681

2,814

1,649

5,495

3,100
Net Interest Income (FTE)

25,042

24,513

21,943

26,116

25,042

22,917

51,158

44,860
Provision for Loan Losses

767

457

745

646

767

815

1,413

1,560
Taxable Equivalent Adjustments

134

165

180

132

134

147

266

327
Net Interest Income After Provision for Loan Losses

24,141

23,891

21,018

25,338

24,141

21,955

49,479

42,973
Noninterest Income

12,552

13,238

12,477

12,770

12,552

12,542

25,322

25,019
Noninterest Expense

28,198

26,505

27,906

28,396

28,198

28,393

56,594

56,299
Income Before Income Taxes

8,495

10,624

5,589

9,712

8,495

6,104

18,207

11,693
Income Tax Expense (Benefit)

2,059

2,166

(184)

2,387

2,059

101

4,446

(83)
Net Income

$
6,436

$
8,458

$
5,773

$
7,325

$
6,436

$
6,003

$
13,761

$
11,776

Basic Net Income Per Share

$
0.38

$
0.50

$
0.34

$
0.44

$
0.38

$
0.35

$
0.82

$
0.69
Diluted Net Income Per Share

$
0.38

$
0.50

$
0.34

$
0.44

$
0.38

$
0.35

$
0.82

$
0.69

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 ~~42.~~44.

Tax-equivalent net interest income for the ~~first~~second quarter of 2019 was ~~$25.0~~$26.1 million compared to ~~$24.5 million for the fourth quarter of 2018 and $21.9~~$25.0 million for the first quarter of ~~2018. During~~2019 and $22.9 million for the ~~first~~second quarter of ~~2019, overnight funds increased primarily due to seasonal growth in our public fund deposits and a higher balance of one large negotiated rate client.~~ 2018. The increase in tax-equivalent net interest income compared to the first quarter of 2019 reflected loan growth, higher loan yields, and one additional calendar day. The favorable comparisons to 2018 ~~reflected~~were primarily driven by significant growth in ~~the loan portfolio~~our earning assets, as higher balances of noninterest bearing deposits funded growth in loans and ~~higher rates earned on~~ overnight ~~funds, investment securities, and variable rate loans, partially offset by a higher cost on our negotiated rate deposits.~~funds.
32

The federal funds target rate ~~ended~~has increased nine times since December 2015 to 2.50% by the ~~first quarter~~end of ~~2019 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~~The above comparisons reflected favorable repricing of our variable and adjustable rate earning ~~assets. Although~~assets as a result of these ~~increases resulted in higher rates paid on our negotiated~~ rate ~~deposit products, we continue to prudently manage our deposit mix and~~increases. Our overall cost of funds ~~which was 42~~were 40 basis points for the second quarter of 2019, a two basis point reduction compared to the first quarter of 2019, ~~compared~~due to ~~31 basis points for the prior quarter. In conjunction with~~a favorable shift in our ~~overall balance sheet management,~~deposit mix. Due to highly competitive fixed-rate loan pricing across most markets, we ~~continue~~have continued to review our ~~deposit board rates to determine whether rate increases are appropriate.~~loan pricing and make adjustments where appropriate and prudent.
30

Our net interest margin for the ~~first~~second quarter of 2019 was ~~3.75%~~3.85%, ~~a decrease~~an increase of ~~six~~10 basis points over the ~~fourth~~first quarter of 2019 and an increase of 3227 basis points over the ~~first~~second quarter of 2018. ~~The decrease in~~For the first six months of 2019, the net interest margin increased 29 basis points to 3.80% compared to the ~~fourth quarter~~same period of 2018 was attributable to a higher level and less favorable mix of earning assets and an increase in cost of funds, primarily negotiated NOW and MMAs. All three factors were driven by the seasonal inflow of public fund deposits, which is anticipated in the first quarter of each year.2018. The increase in the margin as compared to ~~the first quarter of 2018 was primarily due to loan growth~~all respective prior periods reflected rising interest rates and a favorable shift in our earning asset mix, which has produced higher ~~yields on our variable and adjustable rate earning assets, partially offset by higher rates on our negotiated rate deposits.~~net interest income in each period.

Provision for Loan Losses

The provision for loan losses for the ~~first~~second quarter of 2019 was ~~$0.8~~$0.6 million compared to ~~$0.5 million for the fourth quarter of 2018 and $0.7~~$0.8 million for the first quarter of 2019 and $0.8 million for the second quarter of 2018. ~~The higher~~For the first six months of 2019, the loan loss provision was $1.4 million compared to $1.6 million in 2018.We realized net loan charge-offs of $0.2 million, or 0.04% (annualized), of average loans for the ~~fourth~~second quarter of ~~2018 was primarily attributable~~2019. This compares to ~~higher~~ net loan ~~charge-offs.~~ ~~Net loan~~ charge-offs of $0.9 million, or 0.20% (annualized) for the first quarter of 2019 ~~totaled $0.9~~and net charge-offs of $0.5 million, or ~~0.20%~~0.12% (annualized) for the second quarter of 2018. For the first six months of 2019, net charge-offs totaled $1.0 million, or 0.12% (annualized), of average ~~loans. This compares~~loans compared to ~~$0.5~~$1.3 million, or ~~0.10%~~0.16% (annualized), for the ~~fourth quarter~~same period of 2018 and $0.8 million, or 0.20% (annualized), for the first quarter of 2018. At March 31, 2019, the allowance for loan losses of $14.1 million was 0.78% of outstanding loans (net of overdrafts) and provided coverage of 280% of nonperforming loans compared to 0.80% and 207%, 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

Three Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,
(Dollars in Thousands, except per share data)
(Dollars in Thousands, except per share data)
March 31, 2019

December 31, 2018

March 31, 2018
(Dollars in Thousands, except per share data)
2019

2019

2018

2019

2018
CHARGE-OFFS
CHARGE-OFFS

CHARGE-OFFS

Commercial, Financial and Agricultural
Commercial, Financial and Agricultural
$
95

$
53

$
182

Commercial, Financial and Agricultural
$
235

$
95

$
141

$
330

$
323

Real Estate - Construction
Real Estate - Construction

-

-

7

Real Estate - Construction

-

-

-

-

7

Real Estate - Commercial Mortgage
Real Estate - Commercial Mortgage

155

-

290

Real Estate - Commercial Mortgage

-

155

-

155

290

Real Estate - Residential
Real Estate - Residential

264

111

107

Real Estate - Residential

65

264

456

329

563

Real Estate - Home Equity
Real Estate - Home Equity

52

106

158

Real Estate - Home Equity

45

52

157

97

315

Consumer
Consumer

795

728

695

Consumer

520

795

509

1,315

1,204

Total Charge-offs
Total Charge-offs
$
1,361

$
998

$
1,439

Total Charge-offs
$
865

$
1,361

$
1,263

$
2,226

$
2,702

RECOVERIES
RECOVERIES

RECOVERIES

Commercial, Financial and Agricultural
Commercial, Financial and Agricultural
$
74

$
128

$
166

Commercial, Financial and Agricultural
$
58

$
74

$
87

$
132

$
253

Real Estate - Construction
Real Estate - Construction

-

25

1

Real Estate - Construction

-

-

-

-

1

Real Estate - Commercial Mortgage
Real Estate - Commercial Mortgage

70

13

123

Real Estate - Commercial Mortgage

100

70

15

170

138

Real Estate - Residential
Real Estate - Residential

44

106

84

Real Estate - Residential

223

44

346

267

430

Real Estate - Home Equity
Real Estate - Home Equity

32

61

61

Real Estate - Home Equity

60

32

22

92

83

Consumer
Consumer

284

199

210

Consumer

251

284

283

535

493

Total Recoveries
Total Recoveries
$
504

$
532

$
645

Total Recoveries
$
692

$
504

$
753

$
1,196

$
1,398

Net Charge-offs
Net Charge-offs
$
857

$
466

$
794

Net Charge-offs
$
173

$
857

$
510

$
1,030

$
1,304

Net Charge-offs (Annualized) as a percent of Average Loans

0.20
%

0.10
%

0.20
%
Net Charge-offs (Annualized) as a
Net Charge-offs (Annualized) as a

0.04
%

0.20
%

0.12
%

0.12
%

0.16
%

Outstanding, Net of Unearned Income

percent of Average Loans Outstanding, Net of

Unearned Income

Noninterest Income

Noninterest income for the ~~first~~second quarter of 2019 totaled ~~$12.6~~$12.8 million, ~~a decrease of $0.7 million, or 5.2%, from the fourth quarter of 2018 and~~ an increase of ~~$0.1~~$0.2 million, or ~~0.6%~~1.7%, over the first quarter of ~~2018. The decrease from~~2019 and $0.2 million, or 1.8%, over the ~~fourth~~second quarter of ~~2018 was primarily attributable~~2018. Compared to~~lower deposit fees of $0.4 million and mortgage banking fees of $0.1 million. The increase over~~ the first quarter of ~~2018 reflected~~2019, the increase was attributable to higher wealth management fees ~~partially offset by lower deposit~~and mortgage banking fees. ~~The downward trend in our deposit~~For the first six months of 2019, noninterest income totaled $25.3 million, a $0.3 million, or 1.2%, increase over the same period of 2018. Higher wealth management fees ~~has stabilized as lower overdraft~~and bank card fees ~~are now beginning~~drove the favorable comparisons to ~~be offset by account maintenance fees reflective of our migration of our checking account product from free checking to fee checking.~~    2018.
33

Noninterest income represented ~~33.5%~~33.0% of operating revenues (net interest income plus noninterest income) ~~for~~in the second quarter of 2019 compared to 33.5% in the first quarter of 2019 and 35.5% in the second quarter of 2018. For the first six months of 2019, noninterest income represented 33.2% of operating revenues compared to ~~35.2%~~36.0% for the ~~fourth quarter of 2018 and 36.4% for the first quarter~~same period of 2018. The declining trend is due to continued improvement in our net interest income which has become a larger portion of our total operating revenues.

31
The table below reflects the major components of noninterest income.

Three Months Ended

Six Months Ended

Three Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,
(Dollars in Thousands)
(Dollars in Thousands)
March 31, 2019

December 31, 2018

March 31, 2018
(Dollars in Thousands)
2019

2019

2018

2019

2018
Deposit Fees
Deposit Fees
$
4,775

$
5,172

$
4,872
Deposit Fees
$
4,756

$
4,775

$
4,842

$
9,531

$
9,714
Bank Card Fees
Bank Card Fees

2,855

2,830

2,811
Bank Card Fees

3,036

2,855

2,909

5,891

5,720
Wealth Management Fees
Wealth Management Fees

2,323

2,320

2,173
Wealth Management Fees

2,404

2,323

2,037

4,727

4,210
Mortgage Banking Fees
Mortgage Banking Fees

993

1,129

1,057
Mortgage Banking Fees

1,199

993

1,206

2,192

2,263
Other
Other

1,606

1,787

1,564
Other

1,375

1,606

1,548

2,981

3,112

Total Noninterest Income
Total Noninterest Income
$
12,552

$
13,238

$
12,477
Total Noninterest Income
$
12,770

$
12,552

$
12,542

$
25,322

$
25,019

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

~~Deposit~~Bank Card Fees. ~~Deposit~~Bank Card fees for the second quarter of 2019 totaled $3.0 million, an increase of $0.2 million, or 6.3%, over the first quarter of 2019, ~~totaled $4.8 million, a decrease of $0.4 million, or 7.7%, from the fourth quarter of 2018~~ and ~~a decrease of~~ $0.1 million, or ~~2.0%, from~~4.4% compared to the ~~first~~second quarter of 2018. ~~The decrease from both prior year periods reflected lower overdraft service~~For the first six months of 2019, bank card fees ~~due to a reduction in accounts using this service as well as lower utilization by existing users. Over~~totaled $5.9 million, an increase of $0.2 million, or 3.0%, over the ~~past year,~~same period of 2018. During 2018 and 2019, we have ~~realized improvement in checking account maintenance fees as we migrate~~implemented various strategies to drive interchange revenues, including a refresh of our deposit ~~products from a free to fee checking~~ account ~~platform, which has partially offset the decline in overdraft fees.~~     product line-up, an account acquisition program and various reward programs.

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 ~~$2.3~~$2.4 million for the ~~first~~second quarter of 2019, ~~comparable to the fourth quarter of 2018 and~~ an increase of ~~$0.2~~$0.1 million, or ~~6.9%~~3.5%, over the first quarter of 2019 and $0.4 million, or 18.0%, over the second quarter of 2018. ~~The improvement in~~For the first six months of 2019, wealth management fees totaled $4.7 million, an increase of $0.5 million, or 12.3%, over the ~~first quarter~~same period of ~~2018 reflected higher trust fees attributable to an increase in assets under management.~~2018. At ~~March 31,~~June 30, 2019, total assets under management were approximately ~~$1.675~~$1.735 billion compared to $1.500 billion at December 31, 2018 and ~~$1.407~~$1.421 billion at ~~March 31,~~June 30, 2018.
~~Mortgage Banking Fees~~. Mortgage banking fees totaled $1.0 million for the first quarter of 2019, a decrease of $0.1 million, or 12.0%, from the fourth quarter of 2018 and comparable to the first quarter of 2018. The decrease from the fourth quarter of 2018 more readily reflected a seasonal slowdown typically seen in the first quarter. The current pipeline is consistent with the prior year.

Noninterest Expense

Noninterest expense for the ~~first~~second quarter of 2019 totaled ~~$28.2~~$28.4 million, an increase of ~~$1.7~~$0.2 million, or ~~6.4%, over the fourth quarter of 2018 and $0.3 million, or 1.0%~~0.7%, over the first quarter of 2019 and comparable to the second quarter of 2018. ~~The~~For the first six months of 2019, noninterest expense totaled $56.6 million, a $0.3 million, or 0.5%, increase over the ~~fourth~~same period of 2018. Compared to both the first quarter ~~was attributable to~~of 2019 and the six month period of 2018, the variances primarily reflected higher ~~OREO~~compensation expense ~~of $2.0 million,~~(merit raises and commissions) partially offset by lower ~~occupancy~~OREO expense. Lower other expense ~~of $0.3 million. The increase in OREO expense reflected a $2.0 million gain on the sale of a banking office in the fourth quarter of 2018. The increase compared~~(primarily professional fees and processing services) also contributed to the first quarter of 2018 was attributable to higher compensation expense, primarily related to annual merit raises. Expense management is an important part of 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.variance for the six month period.

3234

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

Three Months Ended

June 30,

March 31,

June 30,

June 30,

June 30,
(Dollars in Thousands)
(Dollars in Thousands)
March 31, 2019

December 31, 2018

March 31, 2018
(Dollars in Thousands)
2019

2019

2018

2019

2018
Salaries
Salaries
$
12,285

$
12,332

$
11,873
Salaries
$
12,496

$
12,285

$
11,869

$
24,781

$
23,743
Associate Benefits
Associate Benefits

4,064

3,990

4,038
Associate Benefits

3,941

4,064

3,928

8,005

7,965

Total Compensation

16,349

16,322

15,911
Total Compensation

16,437

16,349

15,797

32,786

31,708

Premises
Premises

2,061

2,280

2,209
Premises

2,140

2,061

2,191

4,201

4,400
Equipment
Equipment

2,448

2,524

2,342
Equipment

2,397

2,448

2,312

4,845

4,654

Total Occupancy

4,509

4,804

4,551
Total Occupancy

4,537

4,509

4,503

9,046

9,054

Legal Fees
Legal Fees

376

510

476
Legal Fees

439

376

569

815

1,045
Professional Fees
Professional Fees

972

1,168

1,146
Professional Fees

1,102

972

1,374

2,074

2,520
Processing Services
Processing Services

1,478

1,283

1,532
Processing Services

1,451

1,478

1,724

2,929

3,256
Advertising
Advertising

497

478

287
Advertising

643

497

412

1,140

700
Travel and Entertainment
Travel and Entertainment

204

255

180
Travel and Entertainment

276

204

277

481

457
Printing and Supplies
Printing and Supplies

173

158

163
Printing and Supplies

162

173

162

335

325
Telephone
Telephone

680

502

594
Telephone

609

680

581

1,288

1,175
Postage
Postage

169

155

206
Postage

166

169

182

335

388
Insurance - Other
Insurance - Other

391

398

401
Insurance - Other

408

391

408

799

809
Other Real Estate Owned, net
Other Real Estate Owned, net

363

(1,663)

626
Other Real Estate Owned, net

75

363

248

438

874
Miscellaneous
Miscellaneous

2,037

2,135

1,833
Miscellaneous

2,091

2,037

2,156

4,128

3,988

Total Other

7,340

5,379

7,444
Total Other

7,422

7,340

8,093

14,762

15,537

Total Noninterest Expense
Total Noninterest Expense
$
28,198

$
26,505

$
27,906
Total Noninterest Expense
$
28,396

$
28,198

$
28,393

$
56,594

$
56,299

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

Compensation. Compensation expense totaled ~~$16.3~~$16.4 million for the ~~first~~second quarter of 2019, ~~comparable to the fourth quarter of 2018 and~~ an increase of ~~$0.4~~$0.1 million, or ~~0.2%~~0.5%, over the first quarter of 2019 and an increase of $0.6 million, or 4.1%, over the second quarter of 2018. For the first six months of 2019, compensation expense totaled $32.8 million, an increase of $1.1 million, or 3.4%, over the same period of 2018. The increase over both prior year periods was attributable to higher salary expense, primarily merit raises and commissions.
Other. Other noninterest expense totaled $7.4 million for the second quarter of 2019, an increase of $0.1 million, or 1.1%, over the first quarter of ~~2018 was primarily attributable to higher base salaries which reflected annual merit increases~~2019 and ~~to a lesser extent higher incentive based compensation.~~
~~Occupancy.~~ ~~Occupancy expense (including premises and equipment) totaled $4.5 million for the first quarter of 2019,~~ a decrease of ~~$0.3~~$0.7 million, or ~~6.1%~~8.3%, from the ~~fourth~~second quarter of ~~2018 and $0.1~~2018. For the first six months of 2019, other noninterest expense totaled $14.8 million, a decrease of $0.8 million, or ~~0.9%~~5.2%, from the ~~first quarter~~same period of 2018. The decrease from both prior year periods ~~was attributable to~~reflected lower ~~maintenance expenses for premises.~~professional fees, processing services, OREO expense, and legal fees.

~~Other~~. Other noninterest expense increased $2.0 million, or 36.5%, over the fourth quarter of 2018 and decreased $0.1 million, or 1.4%, 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 was primarily attributable to lower OREO expense which reflected lower 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 73.02% for the second quarter of 2019 compared to 75.01% for the first quarter of 2019 ~~compared to 70.21%~~and 80.07% for the ~~fourth quarter of 2018 and 81.07% for the first~~second quarter of 2018. ~~The increase~~For the first six months of 2019, this ratio was 74.0% compared to 80.57% for the ~~fourth quarter of 2018 reflected the increase in operating expenses, specifically the $2.0 million OREO gain in the fourth quarter~~same period of 2018. The improvement ~~compared to the first quarter of 2018 reflected~~was driven by higher operating ~~revenues.~~revenues while continuing to maintain control of our expenses which, has contributed to improving operating leverage.

Income Taxes

We realized income tax expense of ~~$2.1~~$4.4 million (effective rate of 25%) for the first ~~quarter~~six months of 2019 compared to ~~$2.2 million for the fourth quarter of 2018 and~~ an income tax benefit of ~~$0.2~~$0.1 million for the ~~first quarter~~same period of 2018. ~~Fourth quarter of~~During 2018, ~~income~~we realized tax ~~expense reflected a discrete tax benefit of $0.3~~benefits totaling $2.9 million ~~related to a tax accounting method change for a cost segregation~~(1Q - $1.5 million 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~~2Q - $1.4 million) resulting from the effect of federal tax reform on a pension plan ~~contribution~~contributions made in ~~the first quarter of~~ 2018 for the plan year 2017. ~~Absent discrete items, we expect our effective tax rate to approximate 24% for 2019.~~

3335

FINANCIAL CONDITION

Average earning assets were ~~$2.705~~$2.719 billion for the second quarter of 2019, a slight increase of $14.4 million, or 0.5%, over the first quarter of 2019, ~~an increase of $150.3 million, or 5.9%, over the fourth quarter of 2018,~~ and an increase of ~~$112.3~~$164.7 million, or ~~4.3%~~6.4%, over the ~~first~~fourth quarter of 2018. The change in average earning assets over ~~both periods reflected a higher level of~~the fourth quarter 2018 was attributable to growth in our overnight funds ~~which was driven~~position and loan portfolio, primarily funded by ~~growth~~increases in ~~total~~our noninterest bearing and public fund deposits.

Investment Securities

In the ~~first~~second quarter of 2019, our average investment portfolio decreased ~~$29.4~~$14.6 million, or ~~4.3%~~2.2%, ~~over~~from the ~~fourth~~first quarter of ~~2018~~2019 and decreased ~~$45.2~~$44.0 million, or 6.4%, ~~over~~from the ~~first~~fourth quarter of 2018. Securities in our investment portfolio represented ~~24.4%~~23.7% of our average earning assets for the second quarter of 2019 compared to 24.4% in the first quarter of 2019, ~~compared to~~and 26.9% in the fourth quarter of ~~2018, and 27.2% in the first quarter of~~ 2018. ~~Earning assets over both prior periods have increased due to higher levels of overnight funds resulting from deposit growth. In addition, not all investment securities are being replaced at maturity.~~ For the remainder of 2019, we will continue to closely monitor liquidity levels to determine the extent to which investment cash flow may 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 ~~first~~second quarter of 2019, we purchased securities under both the AFS and HTM designations. At ~~March 31,~~June 30, 2019, ~~$429.0~~$410.4 million, or ~~65.5%~~64.1%, of our investment portfolio was classified as AFS, and ~~$226.2~~$229.5 million, or ~~34.5%~~35.9%, classified as HTM. The average maturity of our total portfolio at ~~March 31,~~June 30, 2019 was ~~2.10~~1.99 years compared to 2.11 years and 2.10 years at ~~both~~ December 31, 2018 and March 31, ~~2018.~~2019, respectively.

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).~~maturity. HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

At ~~March 31,~~June 30, 2019, there were ~~414~~298 positions (combined AFS and HTM) with unrealized losses totaling ~~$3.7~~$1.5 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, are 0% risk-weighted assets for regulatory capital purposes and constitute ~~96%~~99% of the ~~$3.7~~$1.5 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
16
$
10,219
$
82

137
$
85,679
$
1,127

153
$
95,898
$
1,209
8
$
4,929
$
32

90
$
47,910
$
317

98
$
52,839
$
349
UST
-

-

-

48

232,687

1,999

48

232,687

1,999
-

-

-

40

197,842

712

40

197,842

712
SBA
63

35,901

238

41

23,326

150

104

59,227

388
50

32,600

175

56

27,623

200

106

60,223

375
FHLB and FFCB
-

-

-

8

15,728

80

8

15,728

80
-

-

-

7

15,285

20

7

15,285

20
States and Political Subdivisions
10

4,351

1

91

28,516

56

101

32,867

57
-

-

-

47

14,249

12

47

14,249

12
Total
89
$
50,471
$
321

325
$
385,936
$
3,412

414
$
436,407
$
3,733
58
$
37,529
$
207

240
$
302,909
$
1,261

298
$
340,438
$
1,468

Loans

~~While average~~Average loans ~~decreased slightly ($5.2~~increased $42.9 million, or ~~0.3%) when compared to~~2.4%, over the first quarter of 2019, and $37.7 million, or 2.1%, over the fourth quarter of ~~2018, they grew $132.8 million, or 8.1% when compared to the first quarter of~~ 2018. ~~On an “as of” basis, loans grew $20.6 million and $134.9 million, respectively. The average decrease compared to the fourth quarter of 2018 primarily reflected declines~~Growth over both prior periods occurred in all loan types except ~~commercial real estate~~institutional, home equity, and consumer loans. During the second quarter of 2019, we purchased pools of adjustable rate residential loans totaling $3.9 million. In the first quarter 2019, we purchased ~~principal balances of~~a $10.3 million inpool of fixed rate commercial ~~real estate~~ loans and a $4.4 million inpool of adjustable rate residential ~~real estate loan pools, which partially offset~~loans. During the decline in quarterly loan production. Average growth over the first quarter of 2018 was experienced in all loan categories, with the exception of home equity loans. A portion of this growth compared to the firstfourth quarter 2018, ~~was attributable to $36.8~~we purchased $1.0 million in ~~principal balances of several loan pool purchases ($22.1 million in 2018 and $14.7 million in the first quarter of 2019).~~adjustable rate residential loans. All loan purchases are individually reviewed and evaluated in accordance with our credit underwriting standards.

34
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, have helped to increase overall loan growth.

36
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. We also retain construction/permanent 1-4 family residential loans within our loan portfolio for a period of time (~ 9-12 months) until they are modified and sold into the secondary market.

Nonperforming Assets

Nonperforming assets (nonaccrual loans and OREO) totaled ~~$6.9~~$6.6 million at ~~March 31,~~June 30, 2019, a decrease of ~~$2.2~~$0.3 million, or ~~23.6%~~4.6%, from March 31, 2019, and $2.5 million, or 27.1%, from December ~~31, 2018 and $3.7 million, or 34.7%, from March~~ 31, 2018. Nonaccrual loans totaled ~~$5.0~~$5.6 million at June 30, 2019, a $0.6 million increase over March 31, 2019 and a ~~$1.8~~$1.2 million decrease from December 31, 2018 and a $2.3 million decrease from March 31, 2018. Nonaccrual loan additions totaled $2.5 million for the first quarter of 2019 compared to $3.1 million for the fourth quarter of 2018 and $1.8 million for the first quarter of 2018. The balance of OREO totaled ~~$1.9~~$1.0 million at ~~March 31,~~June 30, 2019, a decrease of ~~$0.4~~$0.9 million from March 31, 2019 and ~~$1.4~~$1.2 million ~~respectively,~~ from December 31, ~~2018 and March 31,~~ 2018. For the first quarter of 2019, we added properties totaling $0.5 million, sold properties totaling $0.7 million, and recorded valuation adjustments totaling $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)
March 31, 2019

December 31, 2018

March 31, 2018
(Dollars in Thousands)
June 30, 2019

March 31, 2019

December 31, 2018
Nonaccruing Loans:
Nonaccruing Loans:

Nonaccruing Loans:

Commercial, Financial and Agricultural
$
223

$
267

$
567

Commercial, Financial and Agricultural
$
187

$
223

$
267

Real Estate - Construction

323

722

608

Real Estate - Construction

381

323

722

Real Estate - Commercial Mortgage

1,976

2,860

1,940

Real Estate - Commercial Mortgage

2,107

1,976

2,860

Real Estate - Residential

1,341

2,119

2,398

Real Estate - Residential

1,166

1,341

2,119

Real Estate - Home Equity

1,033

584

1,686

Real Estate - Home Equity

1,569

1,033

584

Consumer

151

320

115

Consumer

212

151

320

Total Nonperforming Loans (“NPLs”)⁽¹⁾
Total Nonperforming Loans (“NPLs”)⁽¹⁾
$
5,047

$
6,872

$
7,314

Total Nonperforming Loans (“NPLs”)⁽¹⁾
$
5,622

$
5,047

$
6,872

Other Real Estate Owned
Other Real Estate Owned

1,902

2,229

3,330

Other Real Estate Owned

1,010

1,902

2,229

Total Nonperforming Assets (“NPAs”)
Total Nonperforming Assets (“NPAs”)
$
6,949

$
9,101

$
10,644

Total Nonperforming Assets (“NPAs”)
$
6,632

$
6,949

$
9,101

Past Due Loans 30 – 89 Days
Past Due Loans 30 – 89 Days
$
4,682

$
4,757

$
4,268

Past Due Loans 30 – 89 Days
$
5,443

$
4,682

$
4,757

Performing Troubled Debt Restructurings
Performing Troubled Debt Restructurings
$
20,791

$
22,084

$
31,472

Performing Troubled Debt Restructurings
$
18,737

$
20,791

$
22,084

Nonperforming Loans/Loans
Nonperforming Loans/Loans

0.28
%

0.39
%

0.44
%
Nonperforming Loans/Loans

0.30
%

0.28
%

0.39
%
Nonperforming Assets/Total Assets
Nonperforming Assets/Total Assets

0.23

0.31

0.36

Nonperforming Assets/Total Assets

0.22

0.23

0.31

Nonperforming Assets/Loans Plus OREO
Nonperforming Assets/Loans Plus OREO

0.39

0.51

0.64

Nonperforming Assets/Loans Plus OREO

0.36

0.39

0.51

Allowance/Nonperforming Loans
Allowance/Nonperforming Loans

279.77
%

206.79
%

181.26
%
Allowance/Nonperforming Loans

259.55
%

279.77
%

206.79
%

(1)   Nonaccrual TDRs totaling $1.5 million, $1.4 million, ~~$2.6 million,~~ and ~~$2.2~~$2.6 million are included in NPLs for June 30, 2019, March 31, 2019 ~~December 31, 2018,~~ and ~~March~~December 31, 2018, respectively.

3537

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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
(Dollars in Thousands)
2019

2018
(Dollars in Thousands)
2019

2018

2019

2018
NPA Beginning Balance:
NPA Beginning Balance:
$
9,101

$
11,100
NPA Beginning Balance:
$
6,949

$
10,644

$
9,101

$
11,100
Change in Nonaccrual Loans:
Change in Nonaccrual Loans:

Change in Nonaccrual Loans:

Beginning Balance
Beginning Balance

6,872

7,159
Beginning Balance

5,047

7,314

6,872

7,159

Additions

2,462

3,774
Additions

1,754

2,506

4,216

6,280

Charge-Offs

(907)

(955)
Charge-Offs

(478)

(758)

(1,385)

(1,713)

Transferred to OREO

(527)

(307)
Transferred to OREO

(91)

(533)

(618)

(840)

Paid Off/Payments

(1,590)

(574)
Paid Off/Payments

(442)

(1,046)

(2,032)

(1,620)

Restored to Accrual

(1,263)

(1,783)
Restored to Accrual

(168)

(1,742)

(1,431)

(3,525)
Ending Balance
Ending Balance

5,047

7,314
Ending Balance

5,622

5,741


5,622


5,741

Change in OREO:
Change in OREO:

Change in OREO:

Beginning Balance

2,229

3,941
Beginning Balance

1,902

3,330

2,229

3,941

Additions

527

307
Additions

161

533

688

840

Valuation Write-downs

(190)

(494)
Valuation Write-downs

(41)

(138)

(231)

(632)

Sales

(664)

(424)
Sales

(1,012)

(352)

(1,676)

(776)
Ending Balance
Ending Balance

1,902

3,330
Ending Balance

1,010

3,373


1,010


3,373

NPA Net Change
NPA Net Change

(2,152)

(456)
NPA Net Change

(317)

(1,530)

(2,469)

(1,986)
NPA Ending Balance
NPA Ending Balance
$
6,949

$
10,644
NPA Ending Balance
$
6,632

$
9,114

$
6,632

$
9,114

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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in Thousands)
(Dollars in Thousands)
2019

2018
(Dollars in Thousands)
2019

2018

2019

2018
TDR Beginning Balance:
TDR Beginning Balance:
$
24,724

$
34,489
TDR Beginning Balance:
$
22,178

$
33,703

$
24,724

$
34,489

Additions

105

458
Additions

61

59

166

517

Charge-Offs

(264)

(370)
Charge-Offs

(5)

(21)

(269)

(391)

Paid Off/Payments

(1,957)

(874)
Paid Off/Payments

(1,264)

(1,187)

(3,221)

(2,061)

Removal Due to Change in TDR Status

-

-
Removal Due to Change in TDR Status

(692)

(296)

(692)

(296)

Transferred to OREO

(430)

-
Transferred to OREO

-

(73)

(430)

(73)
TDR Ending Balance⁽¹⁾
TDR Ending Balance⁽¹⁾
$
22,178

$
33,703
TDR Ending Balance⁽¹⁾
$
20,278

$
32,185

$
20,278

$
32,185

⁽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 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 $14.6 million at June 30, 2019 compared to $14.1 million at March 31, 2019, ~~compared to~~and $14.2 million at December ~~31, 2018, and $13.3 million at March~~ 31, 2018. The allowance for loan losses was ~~0.78%~~0.79% of outstanding loans (net of overdrafts) and provided coverage of ~~280%~~260% of nonperforming loans at June 30, 2019 compared to 0.78% and 280%, respectively, at March 31, 2019 ~~compared to~~and 0.80% and 207%, respectively, at December 31, ~~2018 and 0.80% and 181%, respectively, at March 31, 2018.~~2019. We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at ~~March 31,~~June 30, 2019.

3638

Deposits

Average total deposits were $2.565 billion for the ~~first~~second quarter of 2019, an increase of ~~$152.3~~$0.7 million over the first quarter of 2019, and an increase of $153.1 million, or 6.3% over the fourth quarter of ~~2018, and an~~2018. The increase ~~of $108.6 million, or 4.4% over~~in deposits compared to the first quarter of ~~2018.~~2019 reflected higher noninterest bearing and savings accounts, partially offset by lower public fund NOW accounts, money market accounts, and certificates of deposit balances. The increase in ~~average~~ deposits when compared to ~~both prior periods~~the fourth quarter of 2018 reflected ~~increases~~growth in all deposit ~~types~~products except money market accounts and certificates of deposit. ~~The seasonal influx of negotiated public NOW~~Public fund accounts ~~has most likely peaked for this cycle~~typically peak in the first quarter and ~~is expected to gradually decline~~trend downwards through the fourth quarter due to the cycle of ~~2019.~~tax receipts.

Deposit levels remain strong, and 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~~also reported to the Board of Directors. In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate.

Our interest rate risk management goal is to maintain expected changes in our net interest income and capital levels due to fluctuations in market interest rates within acceptable limits. Management attempts to achieve this goal by balancing, within policy limits, the volume of variable-rate liabilities with a similar volume of variable-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by maintaining our core deposits as a significant component of our total funding sources and by adjusting rates to market conditions on a continuing basis.

We test our balance sheet using varying interest rate shock scenarios to analyze our interest rate risk. Average interest rates are shocked by plus or minus 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determined are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over 12-month and 24-month periods, and the economic value of equity at risk, do not exceed policy guidelines at the various interest rate shock levels.

We augment our interest rate shock analysis with alternative external interest rate scenarios on a quarterly basis. These alternative interest rate scenarios may include non-parallel rate ramps.
3739

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
-200 bp
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp

Policy Limit
-15.0%
-12.5%
-10.0%
-7.5%
-10.0%
-15.0%
-12.5%
-10.0%
-7.5%
-10.0%
June 30, 2019
13.2%
9.9%
6.6%
3.4%
-6.0%
-12.1%
March 31, 2019
12.4%
9.3%
6.2%
3.3%
-5.8%
-12.9%
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
-200 bp
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp

Policy Limit
-17.5%
-15.0%
-12.5%
-10.0%
-12.5%
-17.5%
-15.0%
-12.5%
-10.0%
-12.5%
June 30, 2019
37.5%
28.5%
19.5%
10.8%
-10.9%
-21.3%
March 31, 2019
38.3%
29.6%
20.9%
12.6%
-8.6%
-21.6%
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, allall rising rate ~~environment~~senvironments will positively impact the net interest margin of the Company, while a declining rate environment of both ~~100~~bp100bp and ~~200 bp~~ 200bp will have a negative impact on the net interest ~~margin~~.margin. Compared to the prior quarter-end, the 12-month Net Interest Income at Risk positions ~~improved in a rising rate environment, and~~ became ~~less~~more favorable in ~~a falling~~all rate ~~environment.~~environments, except rates down 100bp. The 24-month Net Interest Income at Risk positions became slightly less favorable in all scenarios, except ~~+300~~rates down 200bp. The primary driver for the unfavorable quarter-over-quarter comparisons for both time periods was lower replacement rates for both our loan and ~~+400 bps. Balance sheet growth was experienced during~~investment portfolios, as the ~~quarter primarily due~~yield curve shifted considerably lower compared to ~~increases in public fund deposits which resulted in higher levels of overnight funds sold that are more sensitive to falling rates.~~last quarter.

All measures of Net Interest Income at Risk are within our prescribed policy limits over the next 12-months except rates down 200bp. Over the next 24-month period, we are out of compliance in both the ~~12-month~~down 100bp and ~~24-month periods, with the exception~~down 200bp scenarios. These out of ~~rates down 200 bp. The changes under the rates down~~compliance scenarios ~~exceeded our policy limits as of March 31, 2019~~are due to our limited ability to lower our deposit rates ~~the full 200 bp~~ relative to the decline in market 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
-200 bp
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp

Policy Limit
-30.0%
-25.0%
-20.0%
-15.0%
-15.0%
-20.0%
-30.0%
-25.0%
-20.0%
-15.0%
-15.0%
-20.0%
June 30, 2019
40.2%
32.3%
23.1%
13.0%
-21.1%
-51.8%
March 31, 2019
33.1%
26.5%
18.9%
10.6%
-17.7%
-43.7%
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 ~~March 31,~~June 30, 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~~100bp and down ~~200 bp~~200bp scenarios. Quarter-over-quarter EVE comparisons ~~declined~~are more favorable in ~~each of~~the rising rate scenarios, and became less favorable in the down rate scenarios. The EVE in the rates down scenarios ~~as the yield curve flattened and overnight funds increased. The EVE in each of the rates down scenarios was~~is outside desired parameters as we have limited ability to lower our deposit rates ~~the full 200 bp~~ relative to the decline in market rate.

(1)     Down 300 and 400 bp scenarios have been excluded due to the historically low interest rate environment.

3840

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 ~~March 31,~~June 30, 2019, we had the ability to generate ~~$1.270~~$1.330 billion in additional liquidity through all of our available resources (this excludes ~~$304~~$234 million in overnight funds sold). In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits. We recognize the importance of maintaining liquidity and have developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases that certain credit facilities may no longer be available. We conduct a liquidity stress test on a quarterly basis based on events that could potentially occur at the Bank and report results to ALCO, our Market Risk Oversight Committee, Risk Oversight Committee, and the Board of Directors. At ~~March 31,~~June 30, 2019, we believe the liquidity available to us was sufficient to meet our on-going needs and execute our business strategy.

We view our investment portfolio primarily as a source of liquidity and have the option to pledge the portfolio as collateral for borrowings or deposits, and/or sell selected securities. The portfolio consists of debt issued by the U.S. Treasury, U.S. governmental and federal agencies, and municipal governments. The weighted average life of the portfolio was approximately ~~2.10~~1.99 years ~~and,~~ at ~~March 31,~~June 30, 2019, and the available for sale portfolio had a net unrealized pre-tax ~~loss~~gain of ~~$1.3~~$0.4 million.

Our average overnight funds position (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $251.8 million for the second quarter of 2019 compared to an average net overnight funds sold position of $265.7 million ~~during~~for the first quarter of 2019 ~~compared to~~and $80.8 million infor the fourth quarter of ~~2018 and $240.9 million in the first quarter of~~ 2018. The ~~increase~~decrease in ~~the~~ average net overnight funds compared to ~~both prior periods resulted~~the first quarter of 2019 reflected loan growth, partially offset by runoff from ~~increases~~the investment portfolio. The increase in average overnight funds compared to the fourth quarter of 2018 reflected growth in all deposit ~~types~~products except money market accounts and certificates of ~~deposit.~~deposit and a reduction in the investment portfolio, partially offset by loan growth.

We expect our capital expenditures will be approximately $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 ~~March 31,~~June 30, 2019, fixed rate credit advances from the FHLB totaled ~~$9.6~~$9.2 million in outstanding debt consisting of 11 notes. During the first ~~three~~six months of 2019, the Bank made FHLB advance payments totaling approximately ~~$0.3~~$0.7 million. No advances matured or were paid off, 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. We are in the process of evaluating the impact of the expected discontinuation of LIBOR in 2021 on our two junior subordinated deferrable interest notes.

3941

Capital

Shareowners’ equity was $314.6 million at June 30, 2019, compared to $309.0 million at March 31, 2019 ~~compared to~~and $302.6 million at December ~~31, 2018 and $288.4 million at March~~ 31, 2018. Our leverage ratio was ~~10.53%~~10.64%, ~~10.89%~~10.53%, and ~~10.36%~~10.89%, respectively, on these dates. Further, at ~~March 31,~~June 30, 2019, our total risk-adjusted capital ratio was ~~17.09%~~17.13% compared to 17.09% and 17.13% at March 31, 2019 and ~~17.05% at~~ December ~~31, 2018 and March~~ 31, 2018, respectively. Our common equity tier 1 capital ratio was 13.67% at June 30, 2019 compared to 13.62% and 13.58% at March 31, 2019 ~~compared to 13.58%~~ and ~~13.44% at~~ December ~~31, 2018 and March~~ 31, 2018, respectively. At ~~March 31,~~June 30, 2019, ~~each~~all of our regulatory capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards.

During the first ~~three~~six months of 2019, shareowners’ equity increased ~~$6.4~~$12.0 million, or ~~8.5%~~7.9%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of ~~$6.4~~$13.8 million, a ~~$0.9~~$2.2 million ~~decrease~~increase in the unrealized ~~loss~~gain on investment securities, stock compensation accretion of ~~$0.5~~$0.9 million, and net adjustments totaling ~~$0.4~~$0.6 million related to transactions under our stock compensation plans. Shareowners’ equity was reduced by common stock dividends totaling $3.7 million and common stock repurchases totaling $1.8 million.

At ~~March 31,~~June 30, 2019, our common stock had a book value of ~~$18.35~~$18.76 per diluted share compared to $18.35 at March 31, 2019 and $18.00 at December ~~31, 2018 and $16.87 at March~~ 31, 2018. Book value is impacted through other comprehensive income by the net unrealized gains and losses in our available for sale investment portfolio. At ~~March 31,~~June 30, 2019, the net after tax unrealized ~~loss~~gain was $0.2 million compared to a $1.1 million net after tax unrealized loss at March 31, 2019 and ~~compared to~~ $2.0 million at December ~~31, 2018 and $2.8 million at March~~ 31, 2018. Book value is also impacted by the recording of our unfunded pension liability through other comprehensive income. At ~~March 31,~~June 30, 2019, the net after tax pension liability reflected in accumulated other comprehensive loss was $26.8 million. This liability is re-measured annually on December 31^st 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 assumed rate of annual compensation increases, all of which will vary when re-measured. The discount rate assumption used to calculate the pension liability is subject to long-term corporate bond rates at December 31^st. The estimated impact to the pension liability based on a 25 basis point increase or decrease in long-term corporate bond rates used to discount the pension obligation would decrease or increase the pension liability by approximately $4.7 million (after-tax) using the balances from the December 31, 2018 measurement date.

In January 2019, our Board of Directors authorized the repurchase of up to 750,000 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. ~~At March 31,~~During the second quarter of 2019, we ~~had not~~ repurchased ~~any~~77,000 shares at an average price of $23.40 per share under ~~our new repurchase program.~~ the plan. No shares were acquired in the first quarter of 2019.

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 March 31,~~At June 30, 2019, we had ~~$497.8~~$509.8 million in commitments to extend credit and ~~$5.1~~$5.4 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.
4042

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2018 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 2018 Form 10-K.

4143

TABLE I

AVERAGE BALANCES & INTEREST RATES
AVERAGE BALANCES & INTEREST RATES

AVERAGE BALANCES & INTEREST RATES

Three Months Ended
Three Months Ended June 30,

Six Months Ended June 30,

March 31, 2019

December 31, 2018

March 31, 2018
2019

2018

2019

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⁾
$
1,780,406

$
22,718

5.18
%

$
1,785,570

$
22,556

5.01
%

$
1,647,612

$
19,636

4.83
%
$
1,823,311

$
23,873

5.25
%

$
1,691,287

$
20,625

4.89
%

$
1,801,977

$
46,591

5.21
%

$
1,669,571

$
40,261

4.86
%
Taxable Securities⁽²⁾

618,127

3,387

2.20

637,735

3,325

2.08

619,137

2,523

1.64

614,775

3,301

2.15

643,516

2,945

1.83

616,442

6,688

2.18

631,394

5,468

1.74

Tax-Exempt Securities

40,575

158

1.56

50,362

193

1.54

84,800

318

1.50

29,342

116

1.58

72,478

266

1.47

34,928

274

1.57

78,605

584

1.49

Funds Sold

265,694

1,593

2.43

80,815

461

2.26

240,916

917

1.54

251,789

1,507

2.40

158,725

730

1.84

258,703

3,100

2.42

199,593

1,647

1.66

Total Earning Assets

2,704,802

27,856

4.17
%

2,554,482

26,535

4.12
%

2,592,465

23,394

3.66
%

2,719,217

28,797

4.25
%

2,566,006

24,566

3.84
%

2,712,050

56,653

4.21
%

2,579,163

47,960

3.75
%
Cash & Due From Banks

53,848

52,344

52,711

51,832

50,364

52,834

51,531

Allowance For Loan Losses

(14,347)

(14,642)

(13,651)

(14,513)

(13,521)

(14,431)

(13,586)

Other Assets

252,208

257,061

260,595

254,126

258,255

253,173

259,418

TOTAL ASSETS
$
2,996,511

$
2,849,245

$
2,892,120

$
3,010,662

$
2,861,104

$
3,003,626

$
2,876,526

Liabilities:

NOW Accounts
$
884,277

$
1,755

0.80
%

$
739,225

$
995

0.53
%

$
863,175

$
659

0.31
%
$
832,982

$
1,623

0.78
%

$
790,335

$
725

0.37
%

$
858,488

$
3,378

0.79
%

$
826,554

$
1,384

0.34
%
Money Market Accounts

239,516

247

0.42

248,486

216

0.34

246,576

103

0.17

237,921

265

0.45

255,143

166

0.26

238,714

512

0.43

250,883

269

0.22

Savings Accounts

364,783

44

0.05

356,723

44

0.05

343,987

42

0.05

371,716

46

0.05

351,664

43

0.05

368,268

90

0.05

347,847

85

0.05

Other Time Deposits

118,839

53

0.18

123,193

57

0.18

140,359

64

0.18

115,442

54

0.19

134,171

61

0.18

117,131

107

0.18

137,248

125

0.18

Total Interest Bearing Deposits

1,607,415

2,099

0.53

1,467,627

1,312

0.37

1,594,097

868

0.23

1,558,061

1,988

0.51

1,531,313

995

0.27

1,582,601

4,087

0.52

1,562,532

1,863

0.25

Short-Term Borrowings

11,378

35

1.26

15,424

53

1.36

8,869

8

0.37

9,625

31

1.30

6,633

8

0.49

10,497

66

1.28

7,745

16

0.42

Subordinated Notes Payable

52,887

608

4.60

52,887

572

4.23

52,887

475

3.60

52,887

596

4.46

52,887

552

4.13

52,887

1,204

4.53

52,887

1,027

3.86

Other Long-Term Borrowings

8,199

72

3.55

9,918

85

3.40

13,787

100

2.93

7,509

66

3.53

13,151

94

2.88

7,853

138

3.54

13,467

194

2.91

Total Interest Bearing Liabilities

1,679,879

2,814

0.68
%

1,545,856

2,022

0.54
%

1,669,640

1,451

0.37
%

1,628,082

2,681

0.66
%

1,603,984

1,649

0.43
%

1,653,838

5,495

0.67
%

1,636,631

3,100

0.40
%
Noninterest Bearing Deposits

957,300

944,748

862,009

1,007,370

900,643

982,473

881,433

Other Liabilities

52,070

56,445

72,969

61,611

64,671

56,867

68,796

TOTAL LIABILITIES

2,689,249

2,547,049

2,604,618

2,697,063

2,569,298

2,693,178

2,586,860

TOTAL SHAREOWNERS’ EQUITY

307,262

302,196

287,502

313,599

291,806

310,448

289,666

TOTAL LIABILITIES AND

SHAREOWNERS’ EQUITY
$
2,996,511

$
2,849,245

$
2,892,120

$
3,010,662

$
2,861,104

$
3,003,626

$
2,876,526

Interest Rate Spread

3.49
%

3.58
%

3.29
%

3.59
%

3.41
%

3.54
%

3.35
%
Net Interest Income

$
25,042

$
24,513

$
21,943

$
26,116

$
22,917

$
51,158

$
44,860

Net Interest Margin⁽³⁾

3.75
%

3.81
%

3.43
%

3.85
%

3.58
%

3.80
%

3.51
%

⁽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 25% tax rate.

⁽²⁾Interest income includes the effects of taxable equivalent adjustments using a 21% Federal tax rate.
⁽²⁾Interest income includes the effects of taxable equivalent adjustments using a 21% Federal 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.

4244

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, 2018.

Item 4.           CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

At ~~March 31,~~June 30, 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 ~~March 31,~~June 30, 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 2018 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2018 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.~~
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information about all purchases made by, or on behalf of, us and any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.
45

Total number of

Maximum Number of

Total number

Average

shares purchased as

shares that may yet be

of shares

price paid

part of our share

purchased under our share
Period
purchased

per share

repurchase program⁽¹⁾

repurchase program

April 1, 2019 to

April 30, 2019
-

-

-

750,000

May 1, 2019 to

May 31, 2019
-

-

-

750,000

June 1, 2019 to

June 30, 2019
77,000

$23.40

77,000

673,000

Total
77,000

$23.40

77,000

673,000
(1)
This balance represents the number of shares that were repurchased during the second quarter of 2019 through the Capital City Bank Group, Inc. Share Repurchase Program (the “Program”), which was approved on January 31, 2019 for a five-year period, under which we were originally authorized to repurchase up to 750,000 shares of our common stock. The Program is flexible and shares are acquired from the public markets and other sources using free cash flow. No shares are repurchased outside of the Program.

Item 3.           Defaults Upon Senior Securities
None.

Item 4.           Mine Safety Disclosure
Not Applicable.

Item 5.           Other Information
None.
4346

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



4447

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,~~August 2, 2019

4548

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

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

(850) 402-7821
(Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par value $0.01	CCBG	Nasdaq Stock Market, LLC

Large accelerated filer [ ]	Accelerated filer [X]	Non-accelerated filer [ ]	Smaller reporting company [ ]
		(Do not check if smaller reporting company)	Emerging growth company [ ]

PART I. FINANCIAL INFORMATION	PART I. FINANCIAL INFORMATION						PART I. FINANCIAL INFORMATION
Item 1.	Item 1.						Item 1.

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

			(Unaudited)						(Unaudited)
			March 31,		December 31,				June 30,		December 31,
(Dollars in Thousands)	(Dollars in Thousands)		2019		2018		(Dollars in Thousands)		2019		2018
ASSETS	ASSETS						ASSETS
Cash and Due From Banks	Cash and Due From Banks		$	49,501	$	62,032	Cash and Due From Banks		$	53,731	$	62,032
Federal Funds Sold and Interest Bearing Deposits	Federal Funds Sold and Interest Bearing Deposits			304,213		213,968	Federal Funds Sold and Interest Bearing Deposits			234,097		213,968
		Total Cash and Cash Equivalents		353,714		276,000		Total Cash and Cash Equivalents		287,828		276,000

Investment Securities, Available for Sale, at fair value	Investment Securities, Available for Sale, at fair value			429,016		446,157	Investment Securities, Available for Sale, at fair value			410,851		446,157
Investment Securities, Held to Maturity, at amortized cost (fair value of $225,317 and $214,413)				226,179		217,320
Investment Securities, Held to Maturity, at amortized cost (fair value of $230,690 and $214,413)							Investment Securities, Held to Maturity, at amortized cost (fair value of $230,690 and $214,413)			229,516		217,320
		Total Investment Securities		655,195		663,477		Total Investment Securities		640,367		663,477

Loans Held For Sale	Loans Held For Sale			4,557		6,869	Loans Held For Sale			9,885		6,869

Loans, Net of Unearned Income	Loans, Net of Unearned Income			1,797,105		1,774,225	Loans, Net of Unearned Income			1,835,182		1,774,225
	Allowance for Loan Losses			(14,120)		(14,210)	Allowance for Loan Losses			(14,593)		(14,210)
		Loans, Net		1,782,985		1,760,015		Loans, Net		1,820,589		1,760,015

Premises and Equipment, net	Premises and Equipment, net			86,846		87,190	Premises and Equipment, net			86,005		87,190
Goodwill	Goodwill			84,811		84,811	Goodwill			84,811		84,811
Other Real Estate Owned	Other Real Estate Owned			1,902		2,229	Other Real Estate Owned			1,010		2,229
Other Assets	Other Assets			82,041		78,592	Other Assets			87,159		78,592
		Total Assets	$	3,052,051	$	2,959,183		Total Assets	$	3,017,654	$	2,959,183

LIABILITIES	LIABILITIES						LIABILITIES
Deposits:	Deposits:						Deposits:
	Noninterest Bearing Deposits		$	995,853	$	947,858	Noninterest Bearing Deposits		$	1,024,898	$	947,858
	Interest Bearing Deposits			1,621,441		1,583,998	Interest Bearing Deposits			1,536,206		1,583,998
		Total Deposits		2,617,294		2,531,856		Total Deposits		2,561,104		2,531,856

Short-Term Borrowings	Short-Term Borrowings			8,983		13,541	Short-Term Borrowings			9,753		13,541
Subordinated Notes Payable	Subordinated Notes Payable			52,887		52,887	Subordinated Notes Payable			52,887		52,887
Other Long-Term Borrowings	Other Long-Term Borrowings			7,661		8,568	Other Long-Term Borrowings			7,313		8,568
Other Liabilities	Other Liabilities			56,240		49,744	Other Liabilities			72,002		49,744
		Total Liabilities		2,743,065		2,656,596		Total Liabilities		2,703,059		2,656,596

SHAREOWNERS’ EQUITY	SHAREOWNERS’ EQUITY						SHAREOWNERS’ EQUITY
Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding	Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding			-		-	Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding			-		-
Common Stock, $.01 par value; 90,000,000 shares authorized; 16,812,460 and 16,747,571 shares
issued and outstanding at March 31, 2019 and December 31, 2018, respectively				168		167
Common Stock, $.01 par value; 90,000,000 shares authorized; 16,745,866 and 16,747,571 shares							Common Stock, $.01 par value; 90,000,000 shares authorized; 16,745,866 and 16,747,571 shares
issued and outstanding at June 30, 2019 and December 31, 2018, respectively							issued and outstanding at June 30, 2019 and December 31, 2018, respectively			167		167
Additional Paid-In Capital	Additional Paid-In Capital			31,929		31,058	Additional Paid-In Capital			30,751		31,058
Retained Earnings	Retained Earnings			304,763		300,177	Retained Earnings			310,247		300,177
Accumulated Other Comprehensive Loss, net of tax	Accumulated Other Comprehensive Loss, net of tax			(27,874)		(28,815)	Accumulated Other Comprehensive Loss, net of tax			(26,570)		(28,815)
Total Shareowners’ Equity	Total Shareowners’ Equity			308,986		302,587	Total Shareowners’ Equity			314,595		302,587
Total Liabilities and Shareowners' Equity	Total Liabilities and Shareowners' Equity		$	3,052,051	$	2,959,183	Total Liabilities and Shareowners' Equity		$	3,017,654	$	2,959,183

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

PART I – Financial Information			Page

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition – ~~March 31,~~June 30, 2019 and December 31, 2018			4
	Consolidated Statements of Income – Three and Six Months Ended ~~March 31,~~June 30, 2019 and 2018			5
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended ~~March 31,~~June 30, 2019 and 2018			6
	Consolidated Statements of Changes in Shareowners’ Equity – Three and Six Months Ended ~~March 31,~~June 30, 2019 and 2018			7
	Consolidated Statements of Cash Flows – ~~Three~~Six Months Ended ~~March 31,~~June 30, 2019 and 2018			8
	Notes to Consolidated Financial Statements			9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			2629

Item 3.	Quantitative and Qualitative Disclosure About Market Risk			4345

Item 4.	Controls and Procedures			4345

PART II – Other Information

Item 1.		Legal Proceedings		4345

Item 1A.		Risk Factors		4345

~~Item 2.~~		~~Unregistered Sales of Equity Securities and Use of Proceeds~~		43

Item 3.		Defaults Upon Senior Securities		4346

Item 4.		Mine Safety Disclosure		4346

Item 5.		Other Information		4346

Item 6.		Exhibits		4447

Signatures				4548

								Accumulated
								Other
					Additional			Comprehensive
(Dollars In Thousands,	Shares	Common			Paid-In	Retained		(Loss) Income,
Except Share Data)	Outstanding	Stock			Capital	Earnings		Net of Taxes		Total
Six Months Ended:
Balance, January 1, 2019	16,747,571	$	167	$	31,058	$	300,177	$	(28,815)	$	302,587
Net Income	-		-		-		13,761		-		13,761
Other Comprehensive Income, net of tax	-		-		-		-		2,245		2,245
Cash Dividends ($0.2200 per share)	-		-		-		(3,691)		-		(3,691)
Repurchase of Common Stock	(77,000)		(1)		(1,805)		-		-		(1,806)
Stock Based Compensation	-		-		885		-		-		885
Impact of Transactions Under Compensation Plans, net	75,295		1		613		-		-		614
Balance, June 30, 2019	16,745,866	$	167	$	30,751	$	310,247	$	(26,570)	$	314,595

Balance, January 1, 2018	16,988,951	$	170	$	36,674	$	279,410	$	(32,044)	$	284,210
Net Income	-		-		-		11,776		-		11,776
Other Comprehensive Loss, net of tax	-		-		-		-		(1,288)		(1,288)
Cash Dividends ($0.1400 per share)	-		-		-		(2,386)		-		(2,386)
Stock Based Compensation	-		-		655		-		-		655
Impact of Transactions Under Compensation Plans, net	66,713		1		603		-		-		604
Balance, June 30, 2018	17,055,664	$	171	$	37,932	$	288,800	$	(33,332)	$	293,571

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