UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2017

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

For the transition period from ____________ to ____________

Commission File Number: 0-13358

CCB Group logo

(Exact name of registrant as specified in its charter)

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

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

(850) 402-7821

(Registrant's telephone number, including area code)

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act. [ ]

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

At October 31, 2017, 16,966,047 shares of the Registrant's Common Stock, $.01 par value, were outstanding.

CAPITAL CITY BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

PART I – Financial Information			Page

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition – September 30, 2017 and December 31, 2016			4
	Consolidated Statements of Changes in Shareowners’ Equity – Nine Months Ended September 30, 2017 and 2016			7
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016			8
	Notes to Consolidated Financial Statements			9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			29

Item 3.	Quantitative and Qualitative Disclosure About Market Risk			46

Item 4.	Controls and Procedures			46

PART II – Other Information

Item 1.		Legal Proceedings		46

Item 1A.		Risk Factors		46

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		46

Item 3.		Defaults Upon Senior Securities		46

Item 4.		Mine Safety Disclosure		46

Item 5.		Other Information		46

Item 6.		Exhibits		46

Signatures				48

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

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

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

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and the following sections of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”; (b) “Risk Factors” in Part I, Item 1A, as updated in our subsequent quarterly reports filed on Form 10-Q; and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7, as well as:

· our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;

· legislative or regulatory changes, including the Dodd-Frank Act, Basel III, and the ability to repay and qualified mortgage standards;

· the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products;

· the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision, deferred tax asset valuation and pension plan;

· the frequency and magnitude of foreclosure of our loans;

· the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;

· the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

· our ability to declare and pay dividends, the payment of which is now subject to our compliance with heightened capital requirements;

· changes in the securities and real estate markets;

· changes in monetary and fiscal policies of the U.S. Government;

· inflation, interest rate, market and monetary fluctuations;

· the effects of harsh weather conditions, including hurricanes, and man-made disasters;

· our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;

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

· increased competition and its effect on pricing;

· technological changes;

· negative publicity and the impact on our reputation;

· changes in consumer spending and saving habits;

· growth and profitability of our noninterest income;

· changes in accounting principles, policies, practices or guidelines;

· the limited trading activity of our common stock;

· the concentration of ownership of our common stock;

· anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;

· other risks described from time to time in our filings with the Securities and Exchange Commission; and

· our ability to manage the risks involved in the foregoing.

However, other factors besides those listed in Item 1A Risk Factors or discussed in this Form 10-Q 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.

PART I. FINANCIAL INFORMATION
Item 1.

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

			(Unaudited)
			September 30,		December 31,
(Dollars in Thousands)			2017		2016
ASSETS
Cash and Due From Banks			$	50,420	$	48,268
Federal Funds Sold and Interest Bearing Deposits				140,694		247,779
		Total Cash and Cash Equivalents		191,114		296,047

Investment Securities, Available for Sale, at fair value				510,846		522,734
Investment Securities, Held to Maturity, at amortized cost (fair value of $183,523 and $176,746)				184,262		177,365
		Total Investment Securities		695,108		700,099

Loans Held For Sale				7,800		10,886

Loans, Net of Unearned Income				1,630,338		1,561,289
	Allowance for Loan Losses			(13,339)		(13,431)
		Loans, Net		1,616,999		1,547,858

Premises and Equipment, net				92,345		95,476
Goodwill				84,811		84,811
Other Real Estate Owned				5,987		10,638
Other Assets				96,678		99,382
		Total Assets	$	2,790,842	$	2,845,197

LIABILITIES
Deposits:
	Noninterest Bearing Deposits		$	870,644	$	791,182
	Interest Bearing Deposits			1,476,973		1,621,104
		Total Deposits		2,347,617		2,412,286

Short-Term Borrowings				6,777		12,749
Subordinated Notes Payable				52,887		52,887
Other Long-Term Borrowings				15,047		14,881
Other Liabilities				83,313		77,226
		Total Liabilities		2,505,641		2,570,029

SHAREOWNERS’ EQUITY
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; 16,966,047 and 16,844,698 shares
issued and outstanding at September 30, 2017 and December 31, 2016, respectively				170		168
Additional Paid-In Capital				35,892		34,188
Retained Earnings				275,013		267,037
Accumulated Other Comprehensive Loss, net of tax				(25,874)		(26,225)
Total Shareowners’ Equity				285,201		275,168
Total Liabilities and Shareowners' Equity			$	2,790,842	$	2,845,197

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

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

		Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands, Except Per Share Data)		2017		2016		2017		2016
INTEREST INCOME
Loans, including Fees		$	19,479	$	18,046	$	56,204	$	54,196
Investment Securities:
	Taxable		2,150		1,633		5,832		4,591
	Tax Exempt		266		213		795		643
Federal Funds Sold and Interest Bearing Deposits			446		212		1,472		892
Total Interest Income			22,341		20,104		64,303		60,322

INTEREST EXPENSE
Deposits			530		223		1,199		655
Short-Term Borrowings			15		43		77		91
Subordinated Notes Payable			420		341		1,203		1,071
Other Long-Term Borrowings			115		177		331		599
Total Interest Expense			1,080		784		2,810		2,416

NET INTEREST INCOME			21,261		19,320		61,493		57,906
Provision for Loan Losses			490		-		1,389		355
Net Interest Income After Provision For Loan Losses			20,771		19,320		60,104		57,551

NONINTEREST INCOME
Deposit Fees			5,153		5,373		15,295		16,094
Bank Card Fees			2,688		2,759		8,361		8,467
Wealth Management Fees			2,197		1,774		6,112		5,256
Mortgage Banking Fees			1,480		1,503		4,344		3,800
Other			1,478		1,602		4,737		7,286
Total Noninterest Income			12,996		13,011		38,849		40,903

NONINTEREST EXPENSE
Compensation			16,349		15,993		49,137		48,285
Occupancy, net			4,501		4,734		13,437		13,777
Other Real Estate Owned, net			(118)		821		780		3,306
Other			5,975		6,474		19,196		20,286
Total Noninterest Expense			26,707		28,022		82,550		85,654

INCOME BEFORE INCOME TAXES			7,060		4,309		16,403		12,800
Income Tax Expense			2,505		1,436		5,543		4,350

NET INCOME		$	4,555	$	2,873	$	10,860	$	8,450

BASIC NET INCOME PER SHARE		$	0.27	$	0.18	$	0.64	$	0.50
DILUTED NET INCOME PER SHARE		$	0.27	$	0.17	$	0.64	$	0.49

Average Common Basic Shares Outstanding			16,965		16,804		16,946		17,049
Average Common Diluted Shares Outstanding			17,044		16,871		17,009		17,100

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in Thousands)	2017		2016		2017		2016
NET INCOME	$	4,555	$	2,873	$	10,860	$	8,450
Other comprehensive income, before tax:
Change in net unrealized gain/loss on securities available for sale		(99)		(1,158)		516		1,535
Amortization of unrealized losses on securities transferred from
available for sale to held to maturity		19		21		57		60
Total Investment Securities		(80)		(1,137)		573		1,595
Other comprehensive (loss) income, before tax		(80)		(1,137)		573		1,595
Deferred tax (benefit) expense related to other comprehensive income		(31)		(439)		222		615
Other comprehensive (loss) income, net of tax		(49)		(698)		351		980
TOTAL COMPREHENSIVE INCOME	$	4,506	$	2,175	$	11,211	$	9,430

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

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

								Accumulated
								Other
								Comprehensive
	Shares	Common		Additional		Retained		Loss, Net of
(Dollars In Thousands, Except Share Data)	Outstanding	Stock		Paid-In Capital		Earnings		Taxes		Total
Balance, January 1, 2016	17,156,919	$	172	$	38,256	$	258,181	$	(22,257)	$	274,352
Net Income	-		-		-		8,450		-		8,450
Other Comprehensive Income, net of tax	-		-		-		-		980		980
Cash Dividends ($0.1200 per share)	-		-		-		(2,050)		-		(2,050)
Repurchase of Common Stock	(435,461)		(4)		(6,308)		-		-		(6,312)
Stock Based Compensation	-		-		743		-		-		743
Impact of Transactions Under Compensation Plans, net	85,620		-		461		-		-		461
Balance, September 30, 2016	16,807,078	$	168	$	33,152	$	264,581	$	(21,277)	$	276,624

Balance, January 1, 2017	16,844,698	$	168	$	34,188	$	267,037	$	(26,225)	$	275,168
Net Income	-		-		-		10,860		-		10,860
Other Comprehensive Income, net of tax	-		-		-		-		351		351
Cash Dividends ($0.1700 per share)	-		-		-		(2,884)		-		(2,884)
Stock Based Compensation	-		-		1,196		-		-		1,196
Impact of Transactions Under Compensation Plans, net	121,349		2		508		-		-		510
Balance, September 30, 2017	16,966,047	$	170	$	35,892	$	275,013	$	(25,874)	$	285,201

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

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

	Nine Months Ended September 30,
(Dollars in Thousands)	2017		2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	10,860	$	8,450
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses		1,389		355
Depreciation		4,966		5,198
Amortization of Premiums, Discounts, and Fees, net		4,928		4,642
Gain on Partial Retirement of Trust Preferred Securities		-		(2,487)
Net Decrease in Loans Held-for-Sale		3,086		1,122
Stock Compensation		1,196		743
Net Tax Benefit From Stock-Based Compensation		(223)		-
Deferred Income Taxes		247		3,087
Net Loss on Sales and Write-Downs of Other Real Estate Owned		456		2,523
Loss on Disposal of Premises and Equipment		276		131
Net Decrease (Increase) in Other Assets		2,559		(6,610)
Net Increase in Other Liabilities		6,487		6,733
Net Cash Provided By Operating Activities		36,227		23,887

CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases		(60,703)		(40,320)
Payments, Maturities, and Calls		53,031		37,495
Securities Available for Sale:
Purchases		(122,949)		(125,975)
Payments, Maturities, and Calls		130,997		74,450
Purchases of Loans Held for Investment		(44,083)		-
Net Increase in Loans		(27,327)		(68,775)
Proceeds From Sales of Other Real Estate Owned		5,952		7,338
Purchases of Premises and Equipment		(3,052)		(3,696)
Net Cash Used In Investing Activities		(68,134)		(119,483)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposits		(64,669)		12,258
Net Decrease in Short-Term Borrowings		(3,020)		(50,023)
Redemption of Subordinated Notes		-		(7,500)
Repayment of Other Long-Term Borrowings		(2,786)		(5,819)
Dividends Paid		(2,884)		(2,050)
Payments to Repurchase Common Stock		-		(6,312)
Issuance of Common Stock Under Compensation Plans		333		321
Net Cash Used In Financing Activities		(73,026)		(59,125)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(104,933)		(154,721)

Cash and Cash Equivalents at Beginning of Period		296,047		378,905
Cash and Cash Equivalents at End of Period	$	191,114	$	224,184

Supplemental Cash Flow Disclosures:
Interest Paid	$	2,825	$	2,422
Income Taxes Paid (Refunded)	$	4,044	$	(355)

Noncash Investing and Financing Activities:
Loans and Premises Transferred to Other Real Estate Owned	$	2,024	$	3,309

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

CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of CCBG and its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank”). All material inter-company transactions and accounts have been eliminated. Certain previously reported amounts have been reclassified to conform to the current year’s presentation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated statement of financial condition at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

NOTE 2 – INVESTMENT SECURITIES

Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale and
held-to-maturity were as follows:
	September 30, 2017									December 31, 2016
	Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value		Cost		Gain		Losses		Value
Available for Sale
U.S. Government Treasury	$	257,635	$	32	$	869	$	256,798	$	286,867	$	262	$	851	$	286,278
U.S. Government Agency		147,550		729		290		147,989		131,489		495		344		131,640
States and Political Subdivisions		95,869		175		54		95,990		95,197		23		381		94,839
Mortgage-Backed Securities		1,218		114		-		1,332		1,312		118		-		1,430
Equity Securities⁽¹⁾		8,737		-		-		8,737		8,547		-		-		8,547
Total	$	511,009	$	1,050	$	1,213	$	510,846	$	523,412	$	898	$	1,576	$	522,734

Held to Maturity
U.S. Government Treasury	$	93,309	$	2	$	183	$	93,128	$	119,131	$	107	$	81	$	119,157
States and Political Subdivisions		7,051		31		2		7,080		8,175		1		38		8,138
Mortgage-Backed Securities		83,902		55		642		83,315		50,059		29		637		49,451
Total	$	184,262	$	88	$	827	$	183,523	$	177,365	$	137	$	756	$	176,746

Total Investment Securities	$	695,271	$	1,138	$	2,040	$	694,369	$	700,777	$	1,035	$	2,332	$	699,480

⁽¹⁾ Includes Federal Home Loan Bank, Federal Reserve Bank, and FNBB, Inc. stock recorded at cost of $3.2 million, $4.8 million, and $0.8 million, respectively, at September 30, 2017 and $3.3 million, $4.8 million, and $0.5 million, respectively, at December 31, 2016.

Securities with an amortized cost of $214.3 million and $332.7 million at September 30, 2017 and December 31, 2016, 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 September 30, 2017, the Company's investment securities had the following maturity distribution based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Mortgage-backed securities and certain amortizing U.S. government agency securities are shown separately because they are not due at a certain maturity date.

	Available for Sale				Held to Maturity
(Dollars in Thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value
Due in one year or less	$	138,454	$	138,421	$	63,439	$	63,370
Due after one through five years		253,590		252,720		36,922		36,838
Mortgage-Backed Securities		1,217		1,332		83,901		83,315
U.S. Government Agency		109,011		109,636		-		-
Equity Securities		8,737		8,737		-		-
Total	$	511,009	$	510,846	$	184,262	$	183,523

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
	12 Months				12 Months				Total
	Market		Unrealized		Market		Unrealized		Market		Unrealized
(Dollars in Thousands)	Value		Losses		Value		Losses		Value		Losses
September 30, 2017
Available for Sale
U.S. Government Treasury	$	191,720	$	759	$	9,981	$	110	$	201,701	$	869
U.S. Government Agency		34,775		126		17,853		164		52,628		290
States and Political Subdivisions		23,031		22		5,129		32		28,160		54
Total		249,526		907		32,963		306		282,489		1,213

Held to Maturity
U.S. Government Treasury		83,173		183		-		-		83,173		183
States and Political Subdivisions		504		2		-		-		504		2
Mortgage-Backed Securities		47,159		579		4,373		63		51,532		642
Total	$	130,836	$	764	$	4,373	$	63	$	135,209	$	827

December 31, 2016
Available for Sale
U.S. Government Treasury	$	116,704	$	851	$	-	$	-	$	116,704	$	851
U.S. Government Agency		48,520		310		6,699		34		55,219		344
States and Political Subdivisions		81,521		380		294		1		81,815		381
Mortgage-Backed Securities		3		-		-		-		3		-
Total		246,748		1,541		6,993		35		253,741		1,576

Held to Maturity
U.S. Government Treasury		35,210		81		-		-		35,210		81
States and Political Subdivisions		7,491		38		-		-		7,491		38
Mortgage-Backed Securities		36,710		599		4,010		38		40,720		637
Total	$	79,411	$	718	$	4,010	$	38	$	83,421	$	756

Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Declines in the fair value of available-for-sale (“AFS”) and held-to-maturity (“HTM”)securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers, (i) whether it has decided to sell the security, (ii) whether it is more likely than not that the Company will have to sell the security before its market value recovers, and (iii) whether the present value of expected cash flows is sufficient to recover the entire amortized cost basis. When assessing a security’s expected cash flows, the Company considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost and (ii) the financial condition and near-term prospects of the issuer. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by rating agencies have occurred, regulatory issues, and analysts’ reports.

At September 30, 2017, there were 266 positions (combined AFS and HTM) with unrealized losses totaling $2.0 million. 58 of these positions were U.S. government treasury securities guaranteed by the U.S. government. 103 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities. Because the declines in the market value of these securities are attributable to changes in interest rates and not credit quality and because the Company has the present ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017.

NOTE 3 – LOANS, NET

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

(Dollars in Thousands)		September 30, 2017		December 31, 2016
Commercial, Financial and Agricultural		$	215,963	$	216,404
Real Estate – Construction			67,813		58,443
Real Estate – Commercial Mortgage			527,331		503,978
Real Estate – Residential⁽¹⁾			315,583		281,509
Real Estate – Home Equity			228,499		236,512
Consumer			275,149		264,443
	Loans, Net of Unearned Income	$	1,630,338	$	1,561,289

⁽¹⁾ Includes loans in process with outstanding balances of $10.9 million and $9.6 million at September 30, 2017 and December 31, 2016, respectively.

Net deferred costs included in loans were $0.7 million at September 30, 2017 and $0.5 million at December 31, 2016.

The Company has pledged a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta.

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.

	September 30, 2017				December 31, 2016
(Dollars in Thousands)	Nonaccrual		90 + Days		Nonaccrual		90 + Days
Commercial, Financial and Agricultural	$	41	$	-	$	468	$	-
Real Estate – Construction		362		-		311		-
Real Estate – Commercial Mortgage		2,425		-		3,410		-
Real Estate – Residential		2,350		-		2,330		-
Real Estate – Home Equity		1,108		-		1,774		-
Consumer		272		-		240		-
Total Nonaccrual Loans	$	6,558	$	-	$	8,533	$	-

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
(Dollars in Thousands)	DPD		DPD		DPD		Past Due		Current		Loans⁽¹⁾
September 30, 2017
Commercial, Financial and Agricultural	$	249	$	584	$	-	$	833	$	215,089	$	215,963
Real Estate – Construction		-		5		-		5		67,446		67,813
Real Estate – Commercial Mortgage		1,277		168		-		1,445		523,461		527,331
Real Estate – Residential		374		754		-		1,128		312,105		315,583
Real Estate – Home Equity		455		1		-		456		226,935		228,499
Consumer		1,266		554		-		1,820		273,057		275,149
Total Past Due Loans	$	3,621	$	2,066	$	-	$	5,687	$	1,618,093	$	1,630,338

December 31, 2016
Commercial, Financial and Agricultural	$	209	$	48	$	-	$	257	$	215,679	$	216,404
Real Estate – Construction		949		282		-		1,231		56,901		58,443
Real Estate – Commercial Mortgage		835		1		-		836		499,732		503,978
Real Estate – Residential		1,199		490		-		1,689		277,490		281,509
Real Estate – Home Equity		577		51		-		628		234,110		236,512
Consumer		1,516		281		-		1,797		262,406		264,443
Total Past Due Loans	$	5,285	$	1,153	$	-	$	6,438	$	1,546,318	$	1,561,289

⁽¹⁾ Total Loans include nonaccrual loans

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

The following table details the activity in the allowance for loan losses by portfolio class. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

		Commercial,				Real Estate
		Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands)		Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
Three Months Ended
September 30, 2017
Beginning Balance		$	1,095	$	114	$	3,825	$	3,384	$	2,524	$	2,300	$	13,242
	Provision for Loan Losses		208		(26)		286		(32)		(103)		157		490
	Charge-Offs		(276)		-		(94)		(125)		(50)		(455)		(1,000)
	Recoveries		79		50		69		60		84		265		607
	Net Charge-Offs		(197)		50		(25)		(65)		34		(190)		(393)
Ending Balance		$	1,106	$	138	$	4,086	$	3,287	$	2,455	$	2,267	$	13,339

Nine Months Ended
September 30, 2017
Beginning Balance		$	1,198	$	168	$	4,315	$	3,445	$	2,297	$	2,008	$	13,431
	Provision for Loan Losses		401		(80)		264		(348)		148		1,004		1,389
	Charge-Offs		(693)		-		(643)		(285)		(142)		(1,616)		(3,379)
	Recoveries		200		50		150		475		152		871		1,898
	Net Charge-Offs		(493)		50		(493)		190		10		(745)		(1,481)
Ending Balance		$	1,106	$	138	$	4,086	$	3,287	$	2,455	$	2,267	$	13,339

Three Months Ended
September 30, 2016
Beginning Balance		$	1,048	$	126	$	4,389	$	3,835	$	2,391	$	1,888	$	13,677
	Provision for Loan Losses		163		(3)		224		(324)		(307)		247		-
	Charge-Offs		(143)		-		(5)		(96)		(51)		(479)		(774)
	Recoveries		199		-		45		139		237		221		841
	Net Charge-Offs		56		-		40		43		186		(258)		67
Ending Balance		$	1,267	$	123	$	4,653	$	3,554	$	2,270	$	1,877	$	13,744

Nine Months Ended
September 30, 2016
Beginning Balance		$	905	$	101	$	4,498	$	4,409	$	2,473	$	1,567	$	13,953
	Provision for Loan Losses		559		22		71		(1,030)		(168)		901		355
	Charge-Offs		(484)		-		(279)		(779)		(412)		(1,356)		(3,310)
	Recoveries		287		-		363		954		377		765		2,746
	Net Charge-Offs		(197)		-		84		175		(35)		(591)		(564)
Ending Balance		$	1,267	$	123	$	4,653	$	3,554	$	2,270	$	1,877	$	13,744

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
	Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands	Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
September 30, 2017
Period-end amount
Allocated to:
Loans Individually
Evaluated for Impairment	$	88	$	24	$	1,846	$	1,196	$	454	$	3	$	3,611
Loans Collectively
Evaluated for Impairment		1,018		114		2,240		2,091		2,001		2,264		9,728
Ending Balance	$	1,106	$	138	$	4,086	$	3,287	$	2,455	$	2,267	$	13,339

December 31, 2016
Period-end amount
Allocated to:
Loans Individually
Evaluated for Impairment	$	80	$	-	$	2,038	$	1,561	$	335	$	6	$	4,020
Loans Collectively
Evaluated for Impairment		1,118		168		2,277		1,884		1,962		2,002		9,411
Ending Balance	$	1,198	$	168	$	4,315	$	3,445	$	2,297	$	2,008	$	13,431

September 30, 2016
Period-end amount
Allocated to:
Loans Individually
Evaluated for Impairment	$	132	$	-	$	2,124	$	1,669	$	276	$	7	$	4,208
Loans Collectively
Evaluated for Impairment		1,135		123		2,529		1,885		1,994		1,870		9,536
Ending Balance	$	1,267	$	123	$	4,653	$	3,554	$	2,270	$	1,877	$	13,744

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
	Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands)	Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
September 30, 2017
Individually Evaluated for
Impairment	$	847	$	363	$	20,716	$	13,258	$	2,915	$	132	$	38,231
Collectively Evaluated for
Impairment		215,116		67,450		506,615		302,325		225,584		275,017		1,592,107
Total	$	215,963	$	67,813	$	527,331	$	315,583	$	228,499	$	275,149	$	1,630,338

December 31, 2016
Individually Evaluated for
Impairment	$	1,042	$	247	$	23,855	$	15,596	$	3,375	$	174	$	44,289
Collectively Evaluated for
Impairment		215,362		58,196		480,123		265,913		233,137		264,269		1,517,000
Total	$	216,404	$	58,443	$	503,978	$	281,509	$	236,512	$	264,443	$	1,561,289

September 30, 2016
Individually Evaluated for
Impairment	$	949	$	-	$	20,794	$	16,457	$	2,776	$	186	$	41,162
Collectively Evaluated for
Impairment		222,329		54,107		476,981		270,611		232,657		259,665		1,516,350
Total	$	223,278	$	54,107	$	497,775	$	287,068	$	235,433	$	259,851	$	1,557,512

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
	Principal		Investment		Investment		Related
(Dollars in Thousands)	Balance		With No Allowance		With Allowance		Allowance
September 30, 2017
Commercial, Financial and Agricultural	$	847	$	122	$	725	$	88
Real Estate – Construction		363		298		65		24
Real Estate – Commercial Mortgage		20,716		2,141		18,575		1,846
Real Estate – Residential		13,258		1,962		11,296		1,196
Real Estate – Home Equity		2,915		902		2,013		454
Consumer		132		58		74		3
Total	$	38,231	$	5,483	$	32,748	$	3,611

December 31, 2016
Commercial, Financial and Agricultural	$	1,042	$	565	$	477	$	80
Real Estate – Construction		247		-		247		-
Real Estate – Commercial Mortgage		23,855		8,954		14,901		2,038
Real Estate – Residential		15,596		2,509		13,087		1,561
Real Estate – Home Equity		3,375		1,871		1,504		335
Consumer		174		65		109		6
Total	$	44,289	$	13,964	$	30,325	$	4,020

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
	Average		Total		Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest		Recorded		Interest
(Dollars in Thousands)	Investment		Income		Investment		Income		Investment		Income		Investment		Income
Commercial, Financial and
Agricultural	$	963	$	12	$	871	$	12	$	1,051	$	35	$	847	$	37
Real Estate – Construction		363		-		-		-		334		2		24		-
Real Estate – Commercial Mortgage		21,109		219		20,692		203		22,283		662		20,757		658
Real Estate – Residential		14,068		162		17,091		197		14,608		516		17,743		602
Real Estate – Home Equity		3,114		28		2,824		29		3,280		81		3,001		84
Consumer		136		2		196		2		148		6		215		7
Total	$	39,753	$	423	$	41,674	$	443	$	41,704	$	1,302	$	42,587	$	1,388

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

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

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

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

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

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

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

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

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

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

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

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

The following table presents the risk category of loans by segment.

	Commercial,
	Financial,						Total Criticized
(Dollars in Thousands)	Agriculture		Real Estate		Consumer		Loans
September 30, 2017
Special Mention	$	9,277	$	16,105	$	317	$	25,699
Substandard		1,322		34,367		856		36,545
Doubtful		-		-		-		-
Total Criticized Loans	$	10,599	$	50,472	$	1,173	$	62,244

December 31, 2016
Special Mention	$	3,300	$	23,183	$	216	$	26,699
Substandard		1,158		39,800		549		41,507
Doubtful		-		-		-		-
Total Criticized Loans	$	4,458	$	62,983	$	765	$	68,206

Troubled Debt Restructurings (“TDRs”). TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower that it would not otherwise consider. In these instances, as part of a work-out alternative, the Company will make concessions including the extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. The impact of the TDR modifications and defaults are factored into the allowance for loan losses on a loan-by-loan basis as all TDRs are, by definition, impaired loans. Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent. A TDR classification can be removed if the borrower’s financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, and the loan is subsequently refinanced or restructured at market terms and qualifies as a new loan.

The following table presents loans classified as TDRs.

	September 30, 2017				December 31, 2016
(Dollars in Thousands)	Accruing		Nonaccruing		Accruing		Nonaccruing
Commercial, Financial and Agricultural	$	826	$	21	$	772	$	40
Real Estate – Construction		-		65		-		-
Real Estate – Commercial Mortgage		18,460		1,061		20,673		1,259
Real Estate – Residential		11,494		991		13,969		444
Real Estate – Home Equity		2,515		187		2,647		-
Consumer		132		-		172		-
Total TDRs	$	33,427	$	2,325	$	38,233	$	1,743

Loans classified as TDRs during the periods indicated are presented in the table below. The modifications made during the reporting period involved either an extension of the loan term, an interest rate adjustment, or a principal moratorium, and the financial impact of these modifications was not material.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017					2017
		Pre-		Post-			Pre-		Post-
	Number	Modified		Modified		Number	Modified		Modified
	of	Recorded		Recorded		of	Recorded		Recorded
(Dollars in Thousands)	Contracts	Investment		Investment		Contracts	Investment		Investment
Commercial, Financial and Agricultural	1	$	32	$	22	1	$	32	$	22
Real Estate – Construction	-		-		-	1		64		65
Real Estate – Commercial Mortgage	1		160		70	1		160		70
Real Estate – Residential	1		101		102	2		316		283
Real Estate – Home Equity	3		149		147	4		205		203
Consumer	-		-		-	-		-		-
Total TDRs	6	$	442	$	341	9	$	777	$	643

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016					2016
		Pre-		Post-			Pre-		Post-
	Number	Modified		Modified		Number	Modified		Modified
	of	Recorded		Recorded		of	Recorded		Recorded
(Dollars in Thousands)	Contracts	Investment		Investment		Contracts	Investment		Investment
Commercial, Financial and Agricultural	-	$	-	$	-	-	$	-	$	-
Real Estate – Construction	-		-		-	-		-		-
Real Estate – Commercial Mortgage	-		-		-	1		332		332
Real Estate – Residential	-		-		-	6		589		590
Real Estate – Home Equity	1		17		17	5		205		206
Consumer	-		-		-	-		-		-
Total TDRs	1	$	17	$	17	12	$	1,126	$	1,128

For the three and nine months ended September 30, 2017, there were no loans modified as TDRs within the previous 12 months that have substantially defaulted. For the three and nine months ended September 30, 2016, loans modified as TDRs within the previous 12 months that have substantially defaulted during periods indicated are presented in the table below.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2016			2016
	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	-		-	-		-
Real Estate – Residential	-		-	1		98
Real Estate – Home Equity	-		-	1		3
Consumer	-		-	1		35
Total TDRs	-	$	-	3	$	136

⁽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 September 30,			Nine Months Ended September 30,
	2017			2017
	Number of	Recorded		Number of	Recorded
(Dollars in Thousands)	Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Extended amortization	1	$	70	1	$	70
Interest rate adjustment	-		-	3		302
Extended amortization and interest rate adjustment	4		249	4		249
Other	1		22	1		22
Total TDRs	6	$	341	9	$	643

	Three Months Ended September 30,			Nine Months Ended September 30,
	2016			2016
	Number of	Recorded		Number of	Recorded
(Dollars in Thousands)	Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Extended amortization	1	$	17	2	$	107
Interest rate adjustment	-		-	-		-
Extended amortization and interest rate adjustment	-		-	10		1,021
Total TDRs	1	$	17	12	$	1,128

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

NOTE 4 – OTHER REAL ESTATE OWNED

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2017		2016		2017		2016
Beginning Balance	$	7,968	$	14,622	$	10,638	$	19,290
Additions		339		890		2,024		3,309
Valuation Write-downs		(350)		(397)		(1,118)		(1,910)
Sales		(1,970)		(2,377)		(5,291)		(7,951)
Other		-		-		(266)		-
Ending Balance	$	5,987	$	12,738	$	5,987	$	12,738

Net expenses applicable to other real estate owned include the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2017		2016		2017		2016
Gains from the Sale of Properties	$	(711)	$	(70)	$	(980)	$	(364)
Losses from the Sale of Properties		123		216		318		977
Rental Income from Properties		(19)		(34)		(73)		(66)
Property Carrying Costs		139		312		397		849
Valuation Adjustments		350		397		1,118		1,910
Total	$	(118)	$	821	$	780	$	3,306

As of September 30, 2017, the Company had $0.8 million of loans secured by residential real estate in the process of foreclosure.

NOTE 5 - EMPLOYEE BENEFIT PLANS

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2017		2016		2017		2016
Service Cost	$	1,688	$	1,613	$	5,064	$	4,839
Interest Cost		1,437		1,397		4,312		4,191
Expected Return on Plan Assets		(2,006)		(1,934)		(6,019)		(5,802)
Prior Service Cost Amortization		56		69		167		207
Net Loss Amortization		953		801		2,859		2,403
Net Periodic Benefit Cost	$	2,128	$	1,946	$	6,383	$	5,838

Discount Rate		4.21%		4.52%		4.21%		4.52%
Long-term Rate of Return on Assets		7.25%		7.50%		7.25%		7.50%

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2017		2016		2017		2016
Interest Cost	$	48	$	40	$	143	$	120
Net Loss Amortization		149		190		448		570
Net Periodic Benefit Cost	$	197	$	230	$	591	$	690

Discount Rate		3.92%		4.13%		3.92%		4.13%

NOTE 6 - 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:

	September 30, 2017						December 31, 2016
(Dollars in Thousands)	Fixed		Variable		Total		Fixed		Variable		Total
Commitments to Extend Credit⁽¹⁾	$	90,441	$	376,864	$	467,305	$	69,993	$	332,420	$	402,413
Standby Letters of Credit		4,676		-		4,676		4,768		-		4,768
Total	$	95,117	$	376,864	$	471,981	$	74,761	$	332,420	$	407,181

⁽¹⁾ Commitments include unfunded loans, revolving lines of credit, and other unused commitments.

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

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

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

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

Indemnification Obligation. The Company is a member of the Visa U.S.A. network. Visa U.S.A member banks are required to indemnify it for potential future settlement of certain litigation (the “Covered Litigation”) that relates to several antitrust lawsuits challenging the practices of Visa and MasterCard International. In 2008, the Company, as a member of the Visa U.S.A. network, obtained Class B shares of Visa, Inc. upon its initial public offering. Since its initial public offering, Visa, Inc. has funded a litigation reserve for the Covered Litigation resulting in a reduction in the Class B shares held by the Company. During the first quarter of 2011, the Company sold its remaining Class B shares resulting in a $3.2 million pre-tax gain. 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 $89,000. Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.

NOTE 7 – FAIR VALUE MEASUREMENTS

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

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 September 30, 2017, there were no amounts payable.

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

		Level 1		Level 2		Level 3		Total Fair
(Dollars in Thousands)		Inputs		Inputs		Inputs		Value
September 30, 2017
Securities Available for Sale:
	U.S. Government Treasury	$	256,798	$	-	$	-	$	256,798
	U.S. Government Agency		-		147,989		-		147,989
	States and Political Subdivisions		-		95,990		-		95,990
	Mortgage-Backed Securities		-		1,332		-		1,332
	Equity Securities		-		8,737		-		8,737

December 31, 2016
Securities Available for Sale:
	U.S. Government Treasury	$	286,278	$	-	$	-	$	286,278
	U.S. Government Agency		-		131,640		-		131,640
	States and Political Subdivisions		-		94,839		-		94,839
	Mortgage-Backed Securities		-		1,430		-		1,430
	Equity Securities		-		8,547		-		8,547

Assets Measured at Fair Value on a Non-Recurring Basis

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

Impaired Loans. Impairment for collateral dependent loans is measured using the fair value of the collateral less selling costs. The fair value of collateral is determined by an independent valuation or professional appraisal in conformance with banking regulations. Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market, and the judgment and estimation involved in the real estate appraisal process. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. Valuation techniques are consistent with those techniques applied in prior periods. Impaired collateral dependent loans had a carrying value of $5.7 million with a valuation allowance of $0.7 million at September 30, 2017 and $6.3 million and $0.6 million, respectively, at December 31, 2016.

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 nine months of 2017, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset less estimated cost to sell. The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations. On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation adjustments as necessary. The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment and estimation involved in the real estate valuation process.

Assets and Liabilities Disclosed at Fair Value

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

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

Securities Held to Maturity. Securities held to maturity are valued in accordance with the methodology previously noted in this footnote under the caption “Assets and Liabilities Measured at Fair Value on a Recurring Basis – Securities Available for Sale”.

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

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

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

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

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

	September 30, 2017
	Carrying		Level 1		Level 2		Level 3
(Dollars in Thousands)	Value		Inputs		Inputs		Inputs
ASSETS:
Cash	$	50,420	$	50,420	$	-	$	-
Short-Term Investments		140,694		140,694		-		-
Investment Securities, Available for Sale		510,846		256,798		254,048		-
Investment Securities, Held to Maturity		184,262		93,128		90,395		-
Loans Held for Sale		7,800		-		7,800		-
Loans, Net of Allowance for Loan Losses		1,616,999		-		-		1,608,364

LIABILITIES:
Deposits	$	2,347,617	$	-	$	2,280,468	$	-
Short-Term Borrowings		6,777		-		6,808		-
Subordinated Notes Payable		52,887		-		41,012		-
Long-Term Borrowings		15,047		-		15,238		-

	December 31, 2016
	Carrying		Level 1		Level 2		Level 3
(Dollars in Thousands)	Value		Inputs		Inputs		Inputs
ASSETS:
Cash	$	48,268	$	48,268	$	-	$	-
Short-Term Investments		247,779		247,779		-		-
Investment Securities, Available for Sale		522,734		286,278		236,456		-
Investment Securities, Held to Maturity		177,365		119,157		57,589		-
Loans Held for Sale		10,886		-		10,886		-
Loans, Net of Allowance for Loan Losses		1,547,858		-		-		1,543,576

LIABILITIES:
Deposits	$	2,412,286	$	-	$	2,272,572	$	-
Short-Term Borrowings		12,749		-		12,802		-
Subordinated Notes Payable		52,887		-		42,024		-
Long-Term Borrowings		14,881		-		15,122		-

All non-financial instruments are excluded from the above table. The disclosures also do not include goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

NOTE 8 – 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
			Tax		(Expense)		Tax
(Dollars in Thousands)			Amount		Benefit		Amount
Three Months Ended September 30, 2017
Investment Securities:
Change in net unrealized gain/loss on securities available for sale			$	(99)	$	38	$	(61)
Amortization of losses on securities transferred from available for sale to held to
	maturity			19		(7)		12
		Total Other Comprehensive Loss	$	(80)	$	31	$	(49)

Nine Months Ended September 30, 2017
Investment Securities:
Change in net unrealized gain/loss on securities available for sale			$	516	$	(200)	$	316
Amortization of losses on securities transferred from available for sale to held to
	maturity			57		(22)		35
		Total Other Comprehensive Income	$	573	$	(222)	$	351

			Before		Tax		Net of
			Tax		(Expense)		Tax
(Dollars in Thousands)			Amount		Benefit		Amount
Three Months Ended September 30, 2016
Investment Securities:
Change in net unrealized gain/loss on securities available for sale			$	(1,158)	$	447	$	(711)
Amortization of losses on securities transferred from available for sale to held to
	maturity			21		(8)		13
		Total Other Comprehensive Income	$	(1,137)	$	439	$	(698)

Nine Months Ended September 30, 2016
Investment Securities:
Change in net unrealized gain/loss on securities available for sale			$	1,535	$	(592)	$	943
Amortization of losses on securities transferred from available for sale to held to
	maturity			60		(23)		37
		Total Other Comprehensive Income	$	1,595	$	(615)	$	980

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, 2017	$	(583)	$	(25,642)	$	(26,225)
Other comprehensive income during the period		351		-		351
Balance as of September 30, 2017	$	(232)	$	(25,642)	$	(25,874)

Balance as of January 1, 2016	$	(127)	$	(22,130)	$	(22,257)
Other comprehensive income during the period		980		-		980
Balance as of September 30, 2016	$	853	$	(22,130)	$	(21,277)

NOTE 9 – ACCOUNTING STANDARDS UPDATES

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. A significant portion of the Company’s revenue is comprised of net interest income on financial instruments, which is explicitly excluded from the scope of ASU 2014-09. In addition to interest income, the Company has various noninterest income revenue streams that the Company is in the process of assessing. The Company formed a revenue recognition working group that has completed its scoping and walk-through of noninterest income revenue streams. Amongst non-interest income revenue streams, mortgage banking fees are not in the scope of the standard. Management has substantially completed its detailed contract review for the remaining revenue streams and is in the process of evaluating any impact on its financial statements. ASU 2014-09 is effective for the Company on January 1, 2018 and must be retrospectively applied. The Company expects to adopt the standard with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

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.

ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for the Company on January 1, 2020 and is not expected to have a significant impact on its financial statements.

ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.” ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, accounting principles generally accepted in the United States (“GAAP”) contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

ASU 2017-07, “Compensation – Retirement Benefits (Topic 715).” ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. ASU 2017-07 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

ASU 2017-09, “Compensation – Stock Compensation (Topic 718).” ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Modification accounting is required only if the fair value, or calculated intrinsic value if it is used to measure the award, the vesting conditions, or the classification of the award as equity or liability changes as a result of the change in terms or conditions. ASU 2017-09 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).” ASU 2017-11 has two parts (i) Accounting for Certain Financial Instruments with Down Round Features and (ii) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part (i) changes the classification analysis of certain equity-linked financial instruments with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. Part (ii) re-characterizes the indefinite deferral of certain provisions of Topic 480 that are now presented as pending continent in the Codification, to a scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.

ASU 2017-12, “Derivatives and Hedging (Topic 815).” ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815. The amendments objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and to simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2017 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 2016 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 60 full-service offices located in Florida, Georgia, and Alabama. The Bank offers commercial and retail banking services, as well as trust and asset management, retail securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest 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, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as deposit fees, wealth management fees, mortgage banking fees, and bank card fees.

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2016 Form 10-K.

NON-GAAP FINANCIAL MEASURE

We present a tangible common equity ratio that removes the effect of goodwill resulting from merger and acquisition activity. We believe this measure is useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry. The GAAP to non-GAAP reconciliation is provided below.

		2017						2016								2015
(Dollars in Thousands)		Third		Second		First		Fourth		Third		Second		First		Fourth
Shareowners' Equity (GAAP)		$	285,201	$	281,513	$	278,059	$	275,168	$	276,624	$	274,824	$	276,833	$	274,352
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		200,390		196,702		193,248		190,357		191,813		190,013		192,022		189,541
Total Assets (GAAP)			2,790,842		2,814,843		2,895,531		2,845,197		2,753,154		2,767,636		2,792,186		2,797,860
Less: Goodwill (GAAP)			84,811		84,811		84,811		84,811		84,811		84,811		84,811		84,811
Tangible Assets (non-GAAP)	B	$	2,706,031	$	2,730,032	$	2,810,720	$	2,760,386	$	2,668,343	$	2,682,825	$	2,707,375	$	2,713,049
Tangible Common Equity Ratio (non-GAAP)	A/B		7.41%		7.21%		6.88%		6.90%		7.19%		7.08%		7.09%		6.99%

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

		2017									2016												2015
(Dollars in Thousands, Except
(Per Share Data)		Third			Second			First			Fourth			Third			Second			First			Fourth
Summary of Operations:
	Interest Income	$	22,341		$	21,422		$	20,540		$	20,832		$	20,104		$	20,174		$	20,044		$	20,602
	Interest Expense		1,080			926			804			773			784			798			834			808
	Net Interest Income		21,261			20,496			19,736			20,059			19,320			19,376			19,210			19,794
	Provision for Loan Losses		490			589			310			464			-			(97)			452			513
	Net Interest Income After
	Provision for Loan Losses		20,771			19,907			19,426			19,595			19,320			19,473			18,758			19,281
	Noninterest Income⁽²⁾		12,996			13,135			12,718			12,778			13,011			15,215			12,677			13,221
	Noninterest Expense		26,707			27,921			27,922			27,560			28,022			28,702			28,930			28,280
	Income Before Income Taxes		7,060			5,121			4,222			4,813			4,309			5,986			2,505			4,222
	Income Tax Expense		2,505			1,560			1,478			1,517			1,436			2,056			858			1,620
	Net Income		4,555			3,561			2,744			3,296			2,873			3,930			1,647			2,602
	Net Interest Income (FTE)	$	21,595		$	20,799		$	20,006		$	20,335		$	19,603		$	19,617		$	19,421		$	20,006

Per Common Share:
	Net Income Basic	$	0.27		$	0.21		$	0.16		$	0.20		$	0.18		$	0.22		$	0.10		$	0.16
	Net Income Diluted		0.27			0.21			0.16			0.20			0.17			0.22			0.10			0.16
	Cash Dividends Declared		0.07			0.05			0.05			0.05			0.04			0.04			0.04			0.04
	Diluted Book Value		16.73			16.54			16.38			16.23			16.39			16.31			16.04			15.93
	Market Price:
	High		24.58			22.39			21.79			23.15			15.35			15.96			15.88			16.05
	Low		19.60			17.68			19.22			14.29			13.32			13.16			12.83			13.56
	Close		24.01			20.42			21.39			20.48			14.77			13.92			14.59			15.35

Selected Average Balances:
	Loans, Net	$	1,638,578		$	1,608,629		$	1,585,561		$	1,573,264		$	1,555,889		$	1,531,777		$	1,507,508		$	1,492,521
	Earning Assets		2,466,287			2,502,030			2,529,207			2,423,388			2,417,943			2,447,777			2,440,718			2,353,729
	Total Assets		2,779,960			2,817,479			2,845,140			2,743,463			2,734,465			2,767,854			2,763,746			2,678,214
	Deposits		2,329,162			2,373,423			2,407,278			2,306,917			2,288,741			2,276,553			2,258,600			2,174,718
	Shareowners’ Equity		285,296			281,661			278,489			278,943			277,407			279,532			277,464			275,893
	Common Equivalent Average Shares:
	Basic		16,965			16,955			16,919			16,809			16,804			17,144			17,202			17,145
	Diluted		17,044			17,016			16,944			16,913			16,871			17,196			17,235			17,214

Performance Ratios:
	Return on Average Assets		0.65	%		0.51	%		0.39	%		0.48	%		0.42	%		0.57	%		0.24	%		0.39	%
	Return on Average Equity		6.33			5.07			4.00			4.70			4.12			5.65			2.39			3.74
	Net Interest Margin (FTE)		3.48			3.33			3.21			3.34			3.23			3.22			3.20			3.37
	Noninterest Income as % of
	Operating Revenue		37.94			39.05			39.19			38.91			40.24			43.99			39.76			40.05
	Efficiency Ratio		77.21			82.28			85.33			83.23			85.92			82.40			90.13			85.11

Asset Quality:
	Allowance for Loan Losses	$	13,339		$	13,242		$	13,335		$	13,431		$	13,744		$	13,677		$	13,613		$	13,953
	Allowance for Loan Losses to Loans		0.82	%		0.81	%		0.84	%		0.86	%		0.88	%		0.89	%		0.90	%		0.93	%
	Nonperforming Assets (“NPAs”)	$	12,545		$	15,934		$	17,799		$	19,171		$	21,352		$	22,836		$	26,499		$	29,595
	NPAs to Total Assets		0.45	%		0.57	%		0.61	%		0.67	%		0.78	%		0.83	%		0.95	%		1.06	%
	NPAs to Loans plus OREO		0.76			0.97			1.11			1.21			1.35			1.48			1.73			1.94
	Allowance to Non-Performing Loans		203.39			166.23			160.70			157.40			159.56			166.50			150.44			135.40
	Net Charge-Offs to Average Loans		0.10			0.17			0.10			0.20			(0.02)			(0.04)			0.21			0.34

Capital Ratios:
	Tier 1 Capital		16.19	%		15.58	%		15.68	%		15.51	%		15.48	%		15.63	%		16.39	%		16.42	%
	Total Capital		16.96			16.32			16.44			16.28			16.28			16.44			17.20			17.25
	Common Equity Tier 1		13.26			12.72			12.77			12.61			12.55			12.65			12.82			12.84
	Leverage		10.48			10.20			9.95			10.23			10.12			9.98			10.34			10.65
	Tangible Common Equity⁽¹⁾		7.41			7.21			6.88			6.90			7.19			7.08			7.09			6.99

	⁽¹⁾Non-GAAP financial measure. See non-GAAP reconciliation on page 29.
	⁽²⁾Includes $2.5 million gain on partial retirement of trust preferred securities in second quarter, 2016.

FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

· Net income of $4.6 million, or $0.27 per diluted share, for the third quarter of 2017 compared to net income of $3.6 million, or $0.21 per diluted share, for the second quarter of 2017, and net income of $2.9 million, or $0.17 per diluted share for the third quarter of 2016. For the first nine months of 2017, we realized net income of $10.9 million, or $0.64 per diluted share, compared to net income of $8.4 million, or $0.49 per diluted share, for the same period of 2016.

· Tax equivalent net interest income for the third quarter of 2017 was $21.6 million compared to $20.8 million for the second quarter of 2017 and $19.6 million for the third quarter of 2016. The increase over both the prior quarters was driven by growth in the loan portfolio, coupled with higher short-term interest rates, partially offset by a higher rate paid on negotiated rate deposits. For the first nine months of 2017, tax equivalent net interest income totaled $62.4 million compared to $58.6 million for the comparable period in 2016. The year over year increase was driven by growth in the loan and investment portfolios, coupled with higher short-term interest rates, partially offset by a higher rate paid on negotiated rate deposits and one less calendar day.

· Provision for loan losses was $0.5 million for the third quarter of 2017 compared to $0.6 million for the second quarter of 2017 and no provision for the third quarter of 2016. For the first nine months of 2017, the loan loss provision totaled $1.4 million compared to $0.4 million for the same period of 2016. The increase in the loan loss provision compared to the prior year periods was primarily due to growth in the loan portfolio.

· Noninterest income for the third quarter of 2017 totaled $13.0 million, a decrease of $0.1 million, or 1.1%, from the second quarter of 2017 and comparable to the third quarter of 2016. For the first nine months of 2017, noninterest income totaled $38.8 million, a $2.0 million, or 5.0%, decrease from the same period of 2016, primarily due to a $2.5 million gain from the partial retirement of our trust preferred securities (“TRUPs”) in the second quarter of 2016, that was partially offset by higher wealth management fees and mortgage banking fees.

· Noninterest expense for the third quarter of 2017 totaled $26.7 million, a decrease of $1.2 million, or 4.3% from the second quarter of 2017 and a decrease of $1.3 million, or 4.7%, from the third quarter of 2016. The decrease from both prior periods was due to lower other real estate owned (“OREO”) expense (primarily related to gains on sale) and various other expenses (advertising, legal, professional, processing). For the first nine months of 2017, noninterest expense totaled $82.6 million, a decrease of $3.1 million, or 3.6%, from the same period of 2016 due to lower OREO expense (all categories: gain/loss on sale, carrying costs, and valuation adjustments), occupancy expense, and various other expenses (primarily legal and FDIC insurance), partially offset by higher compensation expense (stock compensation).

Financial Condition

· Average earning assets were $2.466 billion for the third quarter of 2017, a decrease of $35.7 million, or 1.4%, from the second quarter of 2017, and an increase of $42.9 million, or 1.8%, over the fourth quarter of 2016. The decrease in average earning assets from the second quarter of 2017 was attributable to a decline in short-term investments, partially offset by growth in our loan portfolio. The increase in earning assets compared to the fourth quarter 2016 was primarily due to growth in the loan portfolio, partially offset by a decline in total investment securities.

· Average loans increased by $29.9 million, or 1.9%, over the second quarter of 2017, and $65.3 million, or 4.2%, over the fourth quarter of 2016. Increases over both prior periods reflected growth in all loan types except commercial loans and home equity loans.

· Nonperforming assets totaled $12.5 million at September 30, 2017, a decrease of $3.4 million, or 21%, from June 30, 2017 and $6.6 million, or 35%, from December 31, 2016. Nonperforming assets represented 0.45% of total assets at September 30, 2017 compared to 0.57% at June 30, 2017 and 0.67% at December 31, 2016.

· At September 30, 2017, we were well-capitalized with a risk based capital ratio of 16.96% and a tangible common equity ratio of 7.41% compared to 16.32% and 7.21%, respectively, at June 30, 2017, and 16.28% and 6.90%, respectively, at December 31, 2016. All of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards.

RESULTS OF OPERATIONS

Net Income

For the third quarter of 2017, we realized net income of $4.6 million, or $0.27 per diluted share, compared to net income of $3.6 million, or $0.21 per diluted share for the second quarter of 2017, and net income of $2.9 million, or $0.17 per diluted share, for the third quarter of 2016. For the first nine months of 2017, we realized net income of $10.9 million, or $0.64 per diluted share, compared to net income of $8.4 million, or $0.49 per diluted share for the same period in 2016.

Compared to the second quarter of 2017, the increase in earnings reflected higher net interest income of $0.8 million, a $1.2 million decrease in noninterest expense, and a $0.1 million reduction in the loan loss provision, partially offset by higher income taxes of $1.0 million and a $0.1 million decrease in noninterest income.

Compared to the third quarter of 2016, performance reflected higher net interest income of $1.9 million and a $1.3 million decrease in noninterest expense, partially offset by higher income taxes of $1.1 million and a $0.4 million increase in the loan loss provision.

The increase in earnings for the first nine months of 2017 versus the comparable period in 2016 was attributable to higher net interest income of $3.6 million and a $3.1 million reduction in noninterest expense, partially offset by lower noninterest income of $2.0 million, a $1.2 million increase in income taxes, and a $1.0 million increase in the loan loss provision.

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

	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(Dollars in Thousands, except per share data)	2017		2017		2016		2017		2016
Interest Income	$	22,341	$	21,422	$	20,104	$	64,303	$	60,322
Taxable Equivalent Adjustments		334		303		283		907		735
Total Interest Income (FTE)		22,675		21,725		20,387		65,210		61,057
Interest Expense		1,080		926		784		2,810		2,416
Net Interest Income (FTE)		21,595		20,799		19,603		62,400		58,641
Provision for Loan Losses		490		589		-		1,389		355
Taxable Equivalent Adjustments		334		303		283		907		735
Net Interest Income After Provision for Loan Losses		20,771		19,907		19,320		60,104		57,551
Noninterest Income		12,996		13,135		13,011		38,849		40,903
Noninterest Expense		26,707		27,921		28,022		82,550		85,654
Income Before Income Taxes		7,060		5,121		4,309		16,403		12,800
Income Tax Expense		2,505		1,560		1,436		5,543		4,350
Net Income	$	4,555	$	3,561	$	2,873	$	10,860	$	8,450

Basic Net Income Per Share	$	0.27	$	0.21	$	0.18	$	0.64	$	0.50
Diluted Net Income Per Share	$	0.27	$	0.21	$	0.17	$	0.64	$	0.49

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 45.

Tax equivalent net interest income was $21.6 million for the third quarter of 2017 compared to $20.8 million for the second quarter of 2017 and $19.6 million for the third quarter of 2016. The increase in tax equivalent net interest income compared to the both prior periods reflected a favorable shift in the earning asset mix and improved yields, partially offset by higher rates paid on negotiated rate deposits. Also, as compared to the second quarter of 2017, there was one additional calendar day. For the first nine months of 2017, tax equivalent net interest income totaled $62.4 million compared to $58.6 million for the comparable period in 2016. The year over year increase was driven by growth in the loan and investment portfolios, coupled with higher short-term rates, partially offset by a higher rate paid on negotiated rate deposits and one less calendar day as 2016 was a leap year.

The overnight funds rate has increased four times since December 2015, positively affecting our net interest income due to favorable repricing of our variable and adjustable rate earning assets. Although these rate increases have also resulted in higher rates paid on our negotiated rate deposit products, we continue to monitor and manage our overall cost of funds, which was 17 basis points in the third quarter of 2017, and 15 basis points for the first nine months of 2017. Despite highly competitive loan pricing across most markets, the yield of the overall loan portfolio increased quarter-over-quarter.

Our net interest margin for the third quarter of 2017 was 3.48%, an increase of 15 basis points over the second quarter of 2017 and an increase of 25 basis points over the third quarter of 2016. For the first nine months of 2017, the net interest margin increased 12 basis points to 3.34% compared to the same period of 2016. The increase in the margin as compared to all respective periods reflects rising interest rates and a favorable shift in our earning asset mix, which has produced higher net interest income in each period.

We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2017 was $0.5 million compared to $0.6 million provision expense for the second quarter of 2017 and no provision for the third quarter of 2016. For the first nine months of 2017, the loan loss provision totaled $1.4 million compared to $0.4 million for the same period of 2016. The increase in the loan loss provision compared to the prior year periods was primarily attributable to growth in the loan portfolio. We realized net loan charge-offs of $0.4 million, or 0.10% (annualized), of average loans for the third quarter of 2017. This compares to net loan charge-offs of $0.7 million, or 0.17% (annualized) for the second quarter of 2017 and net loan recoveries of $0.1 million, or 0.02% (annualized) for the third quarter of 2016. For the first nine months of 2017, net charge-offs totaled $1.5 million, or 0.12% (annualized), of average loans compared to $0.6 million, or 0.05% (annualized), for the same period of 2016.

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

		Three Months Ended									Nine Months Ended
		September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in Thousands, except per share data)		2017			2017			2016			2017			2016
CHARGE-OFFS
Commercial, Financial and Agricultural		$	276		$	324		$	143		$	693		$	484
Real Estate - Construction			-			-			-			-			-
Real Estate - Commercial Mortgage			94			478			5			643			279
Real Estate - Residential			125			44			96			285			779
Real Estate - Home Equity			50			-			51			142			412
Consumer			455			537			479			1,616			1,356
Total Charge-offs		$	1,000		$	1,383		$	774		$	3,379		$	3,310

RECOVERIES
Commercial, Financial and Agricultural		$	79		$	40		$	199		$	200		$	287
Real Estate - Construction			50			-			-			50			-
Real Estate - Commercial Mortgage			69			58			45			150			363
Real Estate - Residential			60			202			139			475			954
Real Estate - Home Equity			84			39			237			152			377
Consumer			265			362			221			871			765
Total Recoveries		$	607		$	701		$	841		$	1,898		$	2,746

Net (Recoveries) Charge-offs		$	393		$	682		$	(67)		$	1,481		$	564

Net (Recoveries) Charge-offs (Annualized) as a			0.10	%		0.17	%		(0.02)	%		0.12	%		0.05	%
	percent of Average Loans Outstanding, Net of
	Unearned Income

Noninterest Income

Noninterest income for the third quarter of 2017 totaled $13.0 million, a decrease of $0.1 million, or 1.1%, from the second quarter of 2017 and unchanged from the third quarter of 2016. For the first nine months of 2017, noninterest income totaled $38.8 million, a $2.0 million, or 5.0%, decrease from the same period of 2016, due to lower other income of $2.5 million and deposit fees of $0.8 million, partially offset by higher wealth management fees of $0.9 million and mortgage banking fees of $0.5 million. The decrease in other income was attributable to a $2.5 million gain from the partial retirement of our trust preferred securities (“TRUPs”) in the second quarter of 2016.

Noninterest income represented 37.9% of operating revenues (net interest income plus noninterest income) in the third quarter of 2017 compared to 39.1% in the second quarter of 2017 and 40.2% in the third quarter of 2016. For the first nine months of 2017, noninterest income represented 38.7% of operating revenues compared to 41.4% for the same period of 2016.

The table below reflects the major components of noninterest income.

	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(Dollars in Thousands)	2017		2017		2016		2017		2016
Deposit Fees	$	5,153	$	5,052	$	5,373	$	15,295	$	16,094
Bank Card Fees		2,688		2,870		2,759		8,361		8,467
Wealth Management Fees		2,197		2,073		1,774		6,112		5,256
Mortgage Banking Fees		1,480		1,556		1,503		4,344		3,800
Other		1,478		1,584		1,602		4,737		7,286

Total Noninterest Income	$	12,996	$	13,135	$	13,011	$	38,849	$	40,903

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

Deposit Fees. Deposit fees for the third quarter of 2017 totaled $5.2 million, an increase of $0.1 million, or 2.0% over the second quarter of 2017, and a decrease of $0.2 million, or 4.1%, from the third quarter of 2016. For the first nine months of 2017, deposit fees totaled $15.3 million, a decrease of $0.8 million, or 5.0%, from the same period of 2016. The decrease from both prior year periods reflected lower overdraft service fees due to a reduction in accounts using this service as well as lower utilization by existing users.

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 $2.2 million for the third quarter of 2017, an increase of $0.1 million, or 6.0%, over the second quarter of 2017 and $0.4 million, or 23.8% over the third quarter of 2016. For the first nine months of 2017, wealth management fees totaled $6.1 million, an increase of $0.9 million, or 16.3%, over the same period of 2016. The increase over all respective prior periods was due to higher trust fees and retail brokerage fees driven by an increase in assets under management and improved sales efforts. Third quarter 2017 wealth management fees reflected a large account booked during the quarter that contributed $0.2 million in gross fees. At September 30, 2017, total assets under management were approximately $1.370 billion compared to $1.192 billion at December 31, 2016 and $1.182 billion at September 30, 2016.

Mortgage Banking Fees. Mortgage banking fees totaled $1.5 million for the third quarter of 2017, a decrease of $0.1 million, or 4.9%, from the second quarter of 2017 and comparable to the third quarter of 2016. For the first nine months of 2017, fees totaled $4.3 million, an increase of $0.5 million, or 14.3%, over the same period of 2016. Strong home sales in our markets and a growing market share of residential loan production continue to enhance our mortgage banking fees. Loan closings slowed during the third quarter of 2017 due to the impact of hurricanes during the quarter, but have since resumed normal closing timeframes.

Other. Other income totaled $1.5 million for the third quarter of 2017, a decrease of $0.1 million, or 6.7%, from the second quarter of 2017 and a decrease of $0.1 million, or 7.7%, from the third quarter of 2016. For the first nine months of 2017, other income decreased $2.5 million, or 35.0%, compared to the same period of 2016 attributable to a $2.5 million gain from the partial retirement of our TRUPs in the second quarter of 2016.

Noninterest Expense

Noninterest expense for the third quarter of 2017 totaled $26.7 million, a decrease of $1.2 million, or 4.3%, from the second quarter of 2017, and a decrease of $1.3 million, or 4.7%, from the third quarter of 2016. The decrease from both prior periods was due to lower OREO expense (primarily related to gains on sale) and various other expenses (advertising, legal, professional, and processing). For the first nine months of 2017, noninterest expense totaled $82.6 million, a decrease of $3.1 million, or 3.6%, from the same period of 2016 attributable to lower OREO expense of $2.5 million (all categories: gain/loss on sale, carrying costs, and valuation adjustments), occupancy expense of $0.3 million, and various other expenses totaling $0.9 million (primarily legal and FDIC insurance), partially offset by higher compensation expense $0.8 million (stock compensation). Expense management is an important part of our culture and strategic focus as we continue to review and evaluate opportunities to optimize our operations, reduce operating costs, and manage our discretionary expenses.

The table below reflects the major components of noninterest expense.

		Three Months Ended						Nine Months Ended
		September 30,		June 30,		September 30,		September 30,		September 30,
(Dollars in Thousands)		2017		2017		2016		2017		2016
Salaries		$	11,793	$	11,560	$	11,796	$	35,118	$	35,562
Associate Benefits			4,556		4,732		4,197		14,019		12,723
	Total Compensation		16,349		16,292		15,993		49,137		48,285

Premises			2,205		2,217		2,269		6,626		6,852
Equipment			2,296		2,338		2,465		6,811		6,925
	Total Occupancy		4,501		4,555		4,734		13,437		13,777

Legal Fees			405		537		452		1,428		1,788
Professional Fees			816		885		896		2,605		2,649
Processing Services			1,567		1,700		1,747		4,913		5,097
Advertising			296		531		441		1,293		1,310
Travel and Entertainment			194		222		230		590		653
Printing and Supplies			115		188		160		478		554
Telephone			502		527		699		1,858		1,637
Postage			185		185		201		586		685
Insurance - Other			409		410		397		1,221		1,658
Other Real Estate Owned, net			(118)		315		821		780		3,306
Miscellaneous			1,486		1,574		1,251		4,224		4,255
	Total Other		5,857		7,074		7,295		19,976		23,592

Total Noninterest Expense		$	26,707	$	27,921	$	28,022	$	82,550	$	85,654

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

Compensation. Compensation expense totaled $16.3 million for the third quarter of 2017, comparable to the second quarter of 2017 and an increase of $0.4 million, or 2.2% over the third quarter of 2016. The increase over the third quarter of 2016 was due to higher associate benefit expense. For the first nine months of 2017, compensation expense totaled $49.1 million, an increase of $0.8 million, or 1.8%, over the same period of 2016 attributable to higher associate benefit expense of $1.3 million, partially offset by lower salary expense of $0.5 million. Compared to both prior year periods, the increase in other associate benefit expense was primarily due to higher stock compensation attributable to higher pay-out values reflective of improving financial performance. To a lesser extent, higher pension plan expense attributable to a reduction in the discount rate for plan liabilities contributed to the increase. The reduction in salary expense was due to lower associate headcount.

Occupancy. Occupancy expense (including premises and equipment) totaled $4.5 million for the third quarter of 2017, a decrease of $0.1 million, or 1.2%, from the second quarter of 2017 and a decrease of $0.2 million from the third quarter of 2016. The decrease from the second quarter of 2017 was due to lower equipment and premises maintenance expense. The decrease from the third quarter of 2016 was due to lower depreciation on furniture and equipment. For the first nine months of 2017, occupancy expense totaled $13.4 million, a decrease of $0.3 million, or 2.5%, from the same period of 2016 and reflects a reduction in the number of banking offices as well as lower depreciation expense for furniture and fixtures reflective of assets being fully depreciated.

Other. Other noninterest expense totaled $5.9 million for the third quarter of 2017, a decrease of $1.2 million, or 17.2% from the second quarter of 2017 and a decrease of $1.4 million, or 19.7%, from the third quarter of 2016. The decrease from the second quarter of 2017 was primarily due to lower OREO expense of $0.4 million and various other expenses, including, advertising of $0.2 million, legal of $0.1 million, processing of $0.1 million, professional of $0.1 million, and printing/supplies of $0.1 million. The decrease in OREO expense reflects a higher level of gains from sale of properties. The decrease from the third quarter of 2016 primarily reflects lower OREO expense of $0.9 million and various other expenses, including, processing of $0.2 million, and telephone of $0.2 million. For the first nine months of 2017, other expense decreased $3.6 million, or 15.3%, from the same period of 2016, primarily attributable to lower OREO expense of $2.5 million, FDIC insurance expense of $0.4 million, legal fees of $0.4 million, and telephone expense of $0.2 million. All OREO expense categories (gain/loss on sale, carrying costs, and valuation adjustments) continue to improve as we liquidate our remaining properties. Lower FDIC assessment factors have driven the reduction in FDIC insurance premiums. Legal fees continue to decline as a result of lower support needed for problem asset resolutions. The higher level of telephone expense reflected the running of dual circuits for the first half of 2017 as our new telephone system was implemented.

Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 77.21% for the third quarter of 2017 compared to 82.28% for the second quarter of 2017 and 85.92% for the third quarter of 2016. For the first nine months of 2017, this ratio was 81.53% compared to 86.05% for the same period of 2016.

Income Taxes

We realized income tax expense of $2.5 million (35% effective rate) for the third quarter of 2017 compared to $1.6 million (30% effective rate) for the second quarter of 2017 and $1.4 million (33% effective rate) for the third quarter of 2016. The lower effective tax rate for the second quarter of 2017 reflected income tax benefits realized in connection with stock based compensation awards. For the first nine months of 2017, income tax expense totaled $5.5 million (34% effective rate) compared to $4.3 million (34% effective rate) for the comparable period of 2016. Absent any other future discrete events, we anticipate our effective income tax rate to approximate 35%.

FINANCIAL CONDITION

Average earning assets were $2.466 billion for the third quarter of 2017, a decrease of $35.7 million, or 1.4%, from the second quarter of 2017, and an increase of $42.9 million, or 1.8%, over the fourth quarter of 2016. The decline in earning assets compared to the second quarter 2017 was attributable to a decrease in our short-term investments, partially offset by growth in our loan portfolio. The increase in earning assets compared to the fourth quarter 2016 was primarily due to growth in the loan portfolio, partially offset by a decline in total investment securities. The decline in the level of our short-term investments (which consists primarily of overnight funds) during the third quarter was mostly attributable to the seasonality of our public fund deposits.

Investment Securities

In the third quarter of 2017, our average investment portfolio decreased $5.6 million, or 0.8%, from the second quarter of 2017 and decreased $17.6 million, or 2.5%, from the fourth quarter of 2016. Securities in our investment portfolio represented 27.9% of our average earning assets in the third quarter of 2017, compared to 27.7% in the second quarter of 2017, and 29.1% in the fourth quarter of 2016. Investment securities as a percent of average earning assets increased slightly compared to the second quarter of 2017, as the decline in average earning assets was greater relative to the decline in the investment portfolio. The decrease in the average balance of our investment portfolio compared to both prior periods primarily reflected a decrease in U.S. Treasury (“UST”) securities, partially offset by an increase in Ginnie Mae (“GNMA”) mortgage-backed securities. For the remainder of 2017, we will continue to closely monitor liquidity levels, as well as look for new investment products that are prudent relative to our risk profile and overall investment strategy. L iquidity levels, including anticipated cash flow from the investment portfolio, will determine the extent to which investment cash flow will 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 third quarter of 2017, we purchased securities under both the AFS and HTM designations. At September 30, 2017, $510.8 million, or 73.5%, of our investment portfolio was classified as AFS, and $184.3 million, or 26.5%, classified as HTM.

We determine the classification of a security at the time of acquisition based on how the purchase will affect our asset/liability strategy and future business plans and opportunities. We consider multiple factors in determining classification, including regulatory capital requirements, volatility in earnings or other comprehensive income, and liquidity needs. Securities in the AFS portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income component of shareowners’ equity. HTM securities are acquired or owned with the intent of holding them to maturity (final payment date). HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

At September 30, 2017, there were 266 positions (combined AFS and HTM) with unrealized losses totaling $2.0 million. GNMA mortgage-backed securities, UST, and Small Business Administration (“SBA”) investments carry the full faith and credit guarantee of the U.S. Government, and are 0% risk-weighted assets for regulatory capital purposes. 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
			Market	Unrealized				Market	Unrealized				Market	Unrealized
(Dollars in Thousands)	Count		Value	Losses		Count		Value	Losses		Count		Value	Losses
GNMA	58	$	47,159	$	579	13	$	4,373	$	63	71	$	51,532	$	642
UST	56		274,893		942	2		9,981		110	58		284,874		1,052
SBA	24		9,618		70	8		4,657		34	32		14,275		104
FHLB and FFCB	18		25,158		56	6		13,196		130	24		38,354		186
States and Political Subdivisions	67		23,534		24	14		5,129		32	81		28,663		56
Total	223	$	380,362	$	1,671	43	$	37,336	$	369	266	$	417,698	$	2,040

The average maturity of our total portfolio at September 30, 2017 was 1.87 years compared to 1.86 years and 1.85 years at June 30, 2017 and December 31, 2016, respectively.

Loans

Average loans increased $29.9 million, or 1.9% compared to the second quarter of 2017, and have grown $65.3 million, or 4.2% compared to the fourth quarter of 2016. Increases over both prior periods reflected growth in all loan types except commercial loans and home equity loans. We acquired three loan pools during the first nine months of 2017, including $18.3 million of adjustable rate residential loans in the first quarter, $16.4 million of fixed and adjustable commercial real estate loans in the second quarter, and $8.5 million of adjustable residential real estate loans in the third quarter. The loans were individually reviewed and evaluated in accordance with our credit underwriting standards.

We continue to make minor modifications on some of our lending programs to try to mitigate the impact that consumer and business deleveraging has had on our portfolio. None of these changes involved lowering our credit standards. These programs, coupled with economic improvements in our anchor markets, have helped to increase overall production.

Nonperforming Assets

Nonperforming assets (nonaccrual loans and OREO) totaled $12.5 million at September 30, 2017, a decrease of $3.4 million, or 21.3%, from June 30, 2017 and $6.6 million, or 34.6%, from December 31, 2016. Nonaccrual loans totaled $6.6 million at September 30, 2017, a $1.4 million decrease from June 30, 2017 and a $2.0 million decrease from December 31, 2016. The balance of OREO totaled $6.0 million at September 30, 2017, a decrease of $2.0 million from June 30, 2017 and $4.6 million from December 31, 2016. Nonperforming assets represented 0.45% of total assets at September 30, 2017 compared to 0.57% at June 30, 2017 and 0.67% at December 31, 2016.

(Dollars in Thousands)		September 30, 2017			June 30, 2017			December 31, 2016
Nonaccruing Loans:
	Commercial, Financial and Agricultural	$	41		$	455		$	468
	Real Estate - Construction		362			363			311
	Real Estate - Commercial Mortgage		2,425			2,984			3,410
	Real Estate - Residential		2,350			2,485			2,330
	Real Estate - Home Equity		1,108			1,496			1,774
	Consumer		272			183			240
Total Nonperforming Loans (“NPLs”)⁽¹⁾		$	6,558		$	7,966		$	8,533
Other Real Estate Owned			5,987			7,968			10,638
Total Nonperforming Assets (“NPAs”)		$	12,545		$	15,934		$	19,171

Past Due Loans 30 – 89 Days		$	5,687		$	3,789		$	6,438
Performing Troubled Debt Restructurings		$	33,427		$	35,436		$	38,233

Nonperforming Loans/Loans			0.40	%		0.49	%		0.54	%
Nonperforming Assets/Total Assets			0.45			0.57			0.67
Nonperforming Assets/Loans Plus OREO			0.76			0.97			1.21
Allowance/Nonperforming Loans			203.39	%		166.23	%		157.40	%

(1) Nonperforming TDRs are included in the NPL totals.

Activity within our nonperforming asset portfolio is provided in the table below.

		Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)		2017		2016		2017		2016
NPA Beginning Balance:		$	15,934	$	22,836	$	19,171	$	29,595
Change in Nonaccrual Loans:
Beginning Balance			7,966		8,214		8,533		10,305
	Additions		2,440		2,844		8,555		9,120
	Charge-Offs		(644)		(414)		(2,246)		(2,053)
	Transferred to OREO		(261)		(832)		(1,043)		(3,011)
	Paid Off/Payments		(1,534)		(529)		(2,927)		(1,892)
	Restored to Accrual		(1,409)		(669)		(4,314)		(3,855)
Ending Balance			6,558		8,614		6,558		8,614

Change in OREO:
	Beginning Balance		7,968		14,622		10,638		19,290
	Additions		339		890		2,024		3,309
	Valuation Write-downs		(350)		(397)		(1,118)		(1,910)
	Sales		(1,970)		(2,377)		(5,291)		(7,951)
	Other		-		-		(266)		-
Ending Balance			5,987		12,738		5,987		12,738
NPA Net Change			(3,389)		(1,484)		(6,626)		(8,243)
NPA Ending Balance		$	12,545	$	21,352	$	12,545	$	21,352

Activity within our TDR portfolio is provided in the table below.

		Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)		2017		2016		2017		2016
TDR Beginning Balance:		$	37,917	$	37,539	$	39,976	$	38,321
	Additions		341		17		643		1,128
	Charge-Offs		(5)		(10)		(458)		(10)
	Paid Off/Payments		(2,416)		(519)		(4,284)		(2,001)
	Transferred to OREO		(85)		(179)		(125)		(590)
TDR Ending Balance⁽¹⁾		$	35,752	$	36,848	$	35,752	$	36,848

⁽¹⁾ Includes performing and nonaccrual TDR loan balances.

Allowance for Loan Losses

We maintain an allowance for loan losses at a level that management believes to be sufficient to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk. All related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance for loan losses is based on management's judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the loan portfolio's overall credit quality. We evaluate the adequacy of the allowance for loan losses on a quarterly basis.

The allowance for loan losses was $13.3 million at September 30, 2017 compared to $13.2 million at June 30, 2017 and $13.4 million at December 31, 2016. The allowance for loan losses was 0.82% of outstanding loans and provided coverage of 203% of nonperforming loans at September 30, 2017 compared to 0.81% and 166%, respectively, at June 30, 2017 and 0.86% and 157%, respectively, at December 31, 2016. We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at June 30, 2017.

Deposits

Average total deposits were $2.329 billion for the third quarter of 2017, a decrease of $44.3 million, or 1.9%, from the second quarter of 2017, and an increase of $22.2 million, or 1.0% over the fourth quarter of 2016. The decline in average deposits compared to the second quarter of 2017 reflected lower public NOW account and certificates of deposit balances, partially offset by increases in all other deposit types. The increase over the fourth quarter 2016 reflects higher levels of noninterest bearing deposits, savings accounts, and money market accounts, partially offset by declines in public NOW accounts and certificates of deposit. The seasonal inflows of public funds peaked in the first quarter of 2017 for this cycle, and are expected to decline into the fourth quarter of 2017.

Deposit levels remain strong, as the seasonal decline in public NOW accounts was partially offset by increases in all other non-maturity deposits during the quarter. Although rates remain at historical lows and we have not adjusted our rate structure average core deposits grew year over year. We continue to monitor our overall liquidity position and deposit rates as we believe that 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 market 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 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 report the analysis to the Board of Directors. In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate.

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

We test our balance sheet using varying interest rate shock scenarios to analyze our interest rate risk. Average interest rates are shocked by plus or minus 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determined are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over 12-month and 24-month periods, and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. Management also acknowledges that at this time, policy guidelines are exceeded in the down 100 bp shock scenario. To bring these metrics into compliance with our policy limits would require the bank to extend its asset duration considerably, which we do not believe is prudent given the current historically low interest environment.

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

Analysis. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

ESTIMATED CHANGES IN NET INTEREST INCOME ⁽¹⁾

Percentage Change (12-month shock)	+400 bp	+300 bp	+200 bp	+100 bp	-100 bp

Policy Limit	-15.0%	-12.5%	-10.0%	-7.5%	-7.5%
September 30, 2017	14.8%	10.9%	6.9%	3.3%	-8.1%
June 30,2017	12.5%	9.0%	5.6%	2.7%	-8.7%

Percentage Change (24-month shock)	+400 bp	+300 bp	+200 bp	+100 bp	-100 bp

Policy Limit	-17.5%	-15.0%	-12.5%	-10.0%	-10.0%
September 30, 2017	41.4%	31.0%	20.6%	10.9%	-13.0%
June 30,2017	41.3%	30.9%	20.7%	11.3%	-13.2%

The Net Interest Income at Risk position indicates that in the short-term, all rising rate environments will positively impact our interest margin, while a declining rate environment of 100bp will have a negative impact on our net interest margin. The 12-month Net Interest Income at Risk positions improved at the end of the third quarter of 2017 when compared to the prior quarter-end in all rate scenarios primarily due to declines in average negotiated rate deposits, which are our most rate sensitive deposits. The 24-month Net Income at Risk positions had minimal movement in either direction for the various shock scenarios.

All measures of net interest income at risk are within our prescribed policy limits with the exception of an instantaneous rate shock of -100 bp over both a 12-month and 24-month period, which were -8.1% and -13.0% compared to limits of -7.50% and -10.0%, respectively. These metrics remain out of compliance due to our limited ability to lower our deposits rates in response to a decline in market rates. To bring this metric into compliance with our policy limits in the down 100bp scenario would require the bank to extend its asset duration considerably, which we do not believe is prudent given the historically low interest rate environment.

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⁾

Changes in Interest Rates	+400 bp	+300 bp	+200 bp	+100 bp	-100 bp

Policy Limit	-30.0%	-25.0%	-20.0%	-15.0%	-15.0%
September 30, 2017	34.4%	27.3%	19.2%	10.6%	-21.7%
June 30,2017	35.1%	27.8%	19.6%	10.8%	-23.7%

At September 30, 2017, the economic value of equity in all rising rate scenarios versus the base case was slightly less favorable compared to the prior quarter, but more favorable in the falling rate scenario compared to the prior quarter, as average balances of our negotiated rate deposits declined . The EVE in the rates down 100 bp scenario remains outside of the desired parameters as exposure to falling rates is more extreme due to the low level of current deposit costs and limited capacity to reduce those costs relative to comparable discount benchmarks used to value them. To bring this metric into compliance with our policy limits in the down 100 bp scenario would require the bank to extend its asset duration considerably, which we do not believe is prudent given the historically low interest rate environment.

(1) Down 200, 300, and 400 bp scenarios have been excluded due to the historically low interest rate environment.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and monitored by our ALCO and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.

At September 30, 2017, we had the ability to generate $1.363 billion in additional liquidity through all of our available resources (this excludes $141 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 Contingency 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, and the Board of Directors. At September 30, 2017, we believe the liquidity available to us was sufficient to meet our needs.

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 1.87 years, and at September 30, 2017, it had a net unrealized loss of $0.2 million in the available-for-sale portfolio.

Our average overnight funds position (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $140.7 million during the third quarter of 2017 compared to an average net overnight funds sold position of $200.8 million in the second quarter of 2017 and $145.5 million in the fourth quarter of 2016. The decrease in net overnight funds compared to the second quarter of 2017 reflected growth in our loan portfolio and declines in public fund balances. The decrease in net overnight funds compared to the fourth quarter of 2016 primarily reflected higher levels of loan growth, partially offset by higher deposit balances, specifically noninterest bearing deposits and savings accounts.

We expect our capital expenditures will be approximately $5.0 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 September 30, 2017, advances from the FHLB totaled $14.2 million in outstanding debt consisting of 17 notes. During the first nine months of 2017, the Bank made FHLB advance payments totaling approximately $3.9 million, which included paying off two advances totaling $1.4 million, and one maturing advance of $0.6 million. We did not obtain any new FHLB advances during the third quarter of 2017. 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 annually 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.

On April 12, 2016, we retired $10 million in face value of trust preferred securities that were auctioned as part of a liquidation of a pooled collateralized debt obligation fund. The trust preferred securities were originally issued through CCBG Capital Trust I. Our winning bid equated to approximately 75% of the $10 million par value, with the 25% discount resulting in a pre-tax gain of approximately $2.5 million.

We utilized internal resources and a $3.75 million draw on a short-term borrowing facility to fund the repurchase.

Late in the first quarter 2017, the remaining $3.0 million balance of this short-term facility was transferred to a long-term facility with a rate that floats to the prime rate. During the third quarter 2017, $150,000 was been paid down, leaving a balance of $2.85 million.

Capital

Shareowners’ equity was $285.2 million at September 30, 2017, compared to $281.5 million at June 30, 2017 and $275.2 million at December 31, 2016. Our leverage ratio was 10.48%, 10.20%, and 10.23%, respectively, for these periods. Further, at September 30, 2017, our risk-adjusted capital ratio was 16.96% compared to 16.32% and 16.28% at June 30, 2017 and December 31, 2016, respectively. Our common equity tier 1 ratio was 13.26% at September 30, 2017 compared to 12.72% and 12.61% at June 30, 2017 and December 31, 2016, respectively. All of our capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards at September 30, 2017.

During the first nine months of 2017, shareowners’ equity increased $10.0 million, or 4.9%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of $10.9 million, stock compensation accretion of $1.2 million, a $0.3 million net decrease in the unrealized loss on investment securities, and net adjustments totaling $0.5 million related to transactions under our stock compensation plans. Shareowners’ equity was reduced by common stock dividends totaling $2.9 million.

At September 30, 2017, our common stock had a book value of $16.73 per diluted share compared to $16.54 at June 30, 2017 and $16.23 at December 31, 2016. Book value is impacted by changes in the amount of our net unrealized gain or loss on investment securities available-for-sale and changes to the amount of our unfunded pension liability both of which impact other comprehensive income. At September 30, 2017, the net unrealized loss on investment securities available for sale was $0.2 million and the amount of our unfunded pension liability was $25.6 million.

In February 2014, our Board of Directors authorized the repurchase of up to 1,500,000 shares of our outstanding common stock through February 2019. Repurchases may be made in the open market or in privately negotiated transactions; however, we are not obligated to repurchase any specified number of shares. We have not repurchased any shares during 2017. At September 30, 2017, we were authorized to repurchase up to 640,000 additional shares under the plan.

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 September 30, 2017, we had $467.0 million in commitments to extend credit and $4.7 million in standby letters of credit. Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet our on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, advances available from the FHLB and the Federal Reserve, and investment security maturities provide a sufficient source of funds to meet these commitments.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2016 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, and (iii) pension benefits 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 2016 Form 10-K.

TABLE I
AVERAGE BALANCES & INTEREST RATES

	Three Months Ended September 30,													Nine Months Ended September 30,
	2017						2016							2017						2016
	Average				Average			Average				Average		Average				Average		Average				Average
(Dollars in Thousands)	Balances		Interest		Rate			Balances		Interest		Rate		Balances		Interest		Rate		Balances		Interest		Rate
Assets:
Loans⁽¹⁾⁽²⁾	$	1,638,578	$	19,672	4.76	%		$	1,555,889	$	18,216	4.66	%	$	1,611,117	$	56,689	4.70	%	$	1,531,813	$	54,590	4.76	%
Taxable Securities⁽²⁾		588,518		2,150	1.45				606,606		1,632	1.07			593,579		5,832	1.31			576,790		4,591	1.03
Tax-Exempt Securities		98,463		407	1.65				89,241		327	1.47			99,059		1,217	1.64			91,399		984	1.44
Funds Sold		140,728		446	1.26				166,207		212	0.51			195,189		1,472	1.01			235,414		892	0.51
Total Earning Assets		2,466,287		22,675	3.65	%			2,417,943		20,387	3.35	%		2,498,944		65,210	3.49	%		2,435,416		61,057	3.35	%
Cash & Due From Banks		51,880							45,139						51,043						46,521
Allowance For Loan Losses		(13,542)							(14,052)						(13,547)						(14,102)
Other Assets		275,335							285,435						277,514						287,444
TOTAL ASSETS	$	2,779,960						$	2,734,465					$	2,813,954					$	2,755,279

Liabilities:
NOW Accounts	$	755,620	$	339	0.18	%		$	774,899	$	78	0.04	%	$	813,858	$	694	0.11	%	$	778,840	$	214	0.04	%
Money Market Accounts		262,486		80	0.12				258,183		30	0.05			261,118		172	0.09			255,885		89	0.05
Savings Accounts		327,675		40	0.05				297,172		37	0.05			320,634		118	0.05			288,740		107	0.05
Other Time Deposits		148,652		71	0.19				165,324		78	0.19			153,215		215	0.19			171,052		245	0.19
Total Interest Bearing Deposits		1,494,433		530	0.14				1,495,578		223	0.06			1,548,825		1,199	0.11			1,494,517		655	0.06
Short-Term Borrowings		9,920		15	0.59				12,162		43	1.39			10,552		77	0.97			44,147		91	0.28
Subordinated Notes Payable		52,887		420	3.11				52,887		341	2.52			52,887		1,203	3.00			56,683		1,071	2.48
Other Long-Term Borrowings		15,427		115	2.95				23,629		177	2.98			15,324		331	2.89			26,031		599	3.07
Total Interest Bearing Liabilities		1,572,667		1,080	0.28	%			1,584,256		784	0.20	%		1,627,588		2,810	0.24	%		1,621,378		2,416	0.20	%
Noninterest Bearing Deposits		834,729							793,163						820,843						780,167
Other Liabilities		87,268							79,639						83,683						75,603
TOTAL LIABILITIES		2,494,664							2,457,058						2,532,114						2,477,148

TOTAL SHAREOWNERS’ EQUITY		285,296							277,407						281,840						278,131

TOTAL LIABILITIES AND
SHAREOWNERS’ EQUITY	$	2,779,960						$	2,734,465					$	2,813,954					$	2,755,279

Interest Rate Spread					3.37	%						3.15	%					3.25	%					3.15	%
Net Interest Income			$	21,595						$	19,603					$	62,400					$	58,641
Net Interest Margin⁽³⁾					3.48	%						3.23	%					3.34	%					3.22	%

⁽¹⁾Average Balances include nonaccrual loans.
⁽²⁾Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.
⁽³⁾Taxable equivalent net interest income divided by average earnings assets.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2016.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

At September 30, 2017, 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 September 30, 2017, 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 2016 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2016 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

None.

Item 5. Other Information

None.

Item 6. Exhibits

(A) Exhibits

31.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.

CAPITAL CITY BANK GROUP, INC.

(Registrant)

/s/ J. Kimbrough Davis
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Mr. Davis is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)

Date: November 2, 2017

Exhibit Index

Exhibit Description

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