10-Q - LKFN - Equibles

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ **** 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: 0-11487

LAKELAND FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Indiana		35-1559596
(State or Other Jurisdiction		(IRS Employer
of Incorporation or Organization)		Identification No.)

202 East Center Street,<br><br>Warsaw , Indiana ****		46580
(Address of principal executive offices)		(Zip Code)

( 574 ) 267 ‑ 6144

(Registrant’s Telephone Number, Including Area Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, No par value	LKFN	The Nasdaq Stock Market LLC
		(Nasdaq Global Select Market)

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 ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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 ◻ Non-accelerated filer◻

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 provided 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 ☒

Number of shares of common stock outstanding at July 31, 2020: 25,708,915

Table of Contents

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2020 and December 31, 2019	1
	Consolidated Statements of Income — three months and six months ended June 30, 2020 and 2019	2
	Consolidated Statements of Comprehensive Income — three months and six months ended June 30, 2020 and 2019	3
	Consolidated Statements of Changes in Stockholders’ Equity — three months and six months ended June 30, 2020 and 2019	4
	Consolidated Statements of Cash Flows — six months ended June 30, 2020 and 2019	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	59
Item 6.	Exhibits	60

SIGNATURES		61

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (in thousands, except share data)


		June 30,		December 31,
	****	2020		2019
		(Unaudited)
ASSETS
Cash and due from banks		$	68,991	$	68,605
Short-term investments			57,344		30,776
Total cash and cash equivalents			126,335		99,381

Securities available-for-sale (carried at fair value)			632,908		608,233
Real estate mortgage loans held-for-sale			16,640		4,527

Loans, net of allowance for loan losses of $59,019 and $50,652			4,431,513		4,015,176

Land, premises and equipment, net			60,331		60,365
Bank owned life insurance			83,927		83,848
Federal Reserve and Federal Home Loan Bank stock			13,772		13,772
Accrued interest receivable			15,850		15,391
Goodwill			4,970		4,970
Other assets			54,846		41,082
Total assets		$	5,441,092	$	4,946,745


LIABILITIES
Noninterest bearing deposits		$	1,425,901	$	983,307
Interest bearing deposits			3,217,526		3,150,512
Total deposits			4,643,427		4,133,819

Borrowings
Federal funds purchased			25,000		—
Federal Home Loan Bank advances			75,000		170,000
Miscellaneous borrowings			10,500		—
Total borrowings			110,500		170,000

Accrued interest payable			8,446		11,604
Other liabilities			57,827		33,222
Total liabilities			4,820,200		4,348,645

STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value 25,701,115 shares issued and 25,233,280 outstanding as of June 30, 2020 25,623,016 shares issued and 25,444,275 outstanding as of December 31, 2019			113,424		114,858
Retained earnings			496,891		475,247
Accumulated other comprehensive income			24,802		12,059
Treasury stock at cost (467,835 shares as of June 30, 2020, 178,741 shares as of December 31, 2019)			(14,314)		(4,153)
Total stockholders’ equity			620,803		598,011
Noncontrolling interest			89		89
Total equity			620,892		598,100
Total liabilities and equity		$	5,441,092	$	4,946,745

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands, except share and per share data)


		Three Months Ended						Six Months Ended
		June 30,						June 30,
	****	2020		****	2019		****	2020		****	2019
NET INTEREST INCOME
Interest and fees on loans
Taxable		$	42,649		$	50,089		$	88,703		$	98,955
Tax exempt			216			235			438			486
Interest and dividends on securities
Taxable			1,869			2,250			3,842			4,747
Tax exempt			2,033			1,710			4,039			3,352
Other interest income			64			351			248			589
Total interest income			46,831			54,635			97,270			108,129

Interest on deposits			7,184			15,556			18,383			29,439
Interest on borrowings
Short-term			45			232			407			1,182
Long-term			74			436			98			888
Total interest expense			7,303			16,224			18,888			31,509

NET INTEREST INCOME			39,528			38,411			78,382			76,620

Provision for loan losses			5,500			785			12,100			1,985

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			34,028			37,626			66,282			74,635

NONINTEREST INCOME
Wealth advisory fees			1,805			1,646			3,664			3,266
Investment brokerage fees			310			528			727			914
Service charges on deposit accounts			2,189			4,850			4,961			9,137
Loan and service fees			2,425			2,481			4,833			4,885
Merchant card fee income			594			670			1,263			1,292
Bank owned life insurance income			836			287			544			731
Mortgage banking income			1,354			398			1,940			620
Net securities gains			49			65			49			88
Other income			1,607			663			3,965			2,180
Total noninterest income			11,169			11,588			21,946			23,113

NONINTEREST EXPENSE
Salaries and employee benefits			11,424			11,854			22,990			24,061
Net occupancy expense			1,545			1,283			2,932			2,649
Equipment costs			1,430			1,409			2,847			2,758
Data processing fees and supplies			2,829			2,574			5,711			4,999
Corporate and business development			627			1,171			1,738			2,377
FDIC insurance and other regulatory fees			403			409			670			815
Professional fees			1,053			1,071			2,200			2,008
Other expense			1,768			2,321			4,080			4,898
Total noninterest expense			21,079			22,092			43,168			44,565

INCOME BEFORE INCOME TAX EXPENSE			24,118			27,122			45,060			53,183
Income tax expense			4,448			5,409			8,091			9,788
NET INCOME		$	19,670		$	21,713		$	36,969		$	43,395

BASIC WEIGHTED AVERAGE COMMON SHARES			25,412,014			25,614,701			25,517,499			25,553,254
BASIC EARNINGS PER COMMON SHARE		$	0.77		$	0.85		$	1.45		$	1.70
DILUTED WEIGHTED AVERAGE COMMON SHARES			25,469,680			25,774,002			25,594,959			25,721,079
DILUTED EARNINGS PER COMMON SHARE		$	0.77		$	0.85		$	1.44		$	1.69

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)


		Three months ended June 30,					Six months ended June 30,
	****	2020		2019		****	2020		****	2019
Net income		$	19,670	$	21,713		$	36,969		$	43,395
Other comprehensive income
Change in securities available for sale:
Unrealized holding gain on securities available-for-sale arising during the period			2,840		8,893			16,059			19,853
Reclassification adjustment for gains included in net income			(49)		(65)			(49)			(88)
Net securities gain activity during the period			2,791		8,828			16,010			19,765
Tax effect			(586)		(1,853)			(3,361)			(4,151)
Net of tax amount			2,205		6,975			12,649			15,614
Defined benefit pension plans:
Amortization of net actuarial loss			63		53			126			103
Net gain activity during the period			63		53			126			103
Tax effect			(16)		(15)			(32)			(26)
Net of tax amount			47		38			94			77

Total other comprehensive income, net of tax			2,252		7,013			12,743			15,691

Comprehensive income		$	21,922	$	28,726		$	49,712		$	59,086

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - in thousands, except share and per share data)


	Three Months Ended
									Accumulated
									Other						Total
	Common Stock					Retained			Comprehensive			Treasury			Stockholders'			Noncontrolling			Total
	Shares	****	Stock		****	Earnings		****	Income (Loss)		****	Stock		****	Equity		****	Interest		****	Equity
Balance at April 1, 2019	25,442,827		$	111,571		$	432,953		$	2,487		$	(3,833)		$	543,178		$	89		$	543,267
Comprehensive income:
Net income							21,713									21,713						21,713
Other comprehensive income, net of tax										7,013						7,013						7,013
Cash dividends declared, 0.30 per share							(7,697)									(7,697)						(7,697)
Treasury shares purchased under deferred directors' plan	(1,078)			51						—			(51)			—						—
Stock activity under equity compensation plans	551															—						—
Stock based compensation expense				1,067												1,067						1,067
Balance at June 30, 2019	25,442,300		$	112,689		$	446,969		$	9,500		$	(3,884)		$	565,274		$	89		$	565,363

Balance at April 1, 2020	25,234,572		$	113,337		$	484,857		$	22,550		$	(14,261)		$	606,483		$	89		$	606,572
Comprehensive income:
Net income			****			****	19,670									19,670						19,670
Other comprehensive income, net of tax			****			****				2,252						2,252						2,252
Cash dividends declared, 0.30 per share			****			****	(7,636)									(7,636)						(7,636)
Treasury shares purchased under deferred directors' plan	(1,292)		****	53		****			****			****	(53)			—						—
Stock activity under equity compensation plans			****													—						—
Stock based compensation expense			****	34		****										34						34
Balance at June 30, 2020	25,233,280		$	113,424		$	496,891		$	24,802		$	(14,314)		$	620,803		$	89		$	620,892

All values are in US Dollars.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - in thousands, except share and per share data)


		Six Months Ended
										Accumulated
										Other						Total
		Common Stock					Retained			Comprehensive			Treasury			Stockholders’			Noncontrolling			Total
	****	Shares	****	Stock		****	Earnings		****	Income (Loss)		****	Stock		****	Equity		****	Interest		****	Equity
Balance at January 1, 2019		25,128,773		$	112,383		$	419,179		$	(6,191)		$	(3,756)		$	521,615		$	89		$	521,704
Adoption of ASU 2017-08								(1,327)									(1,327)						(1,327)
Comprehensive income:
Net income								43,395									43,395						43,395
Other comprehensive income, net of tax											15,691						15,691						15,691
Cash dividends declared, $0.56 per share								(14,278)									(14,278)						(14,278)
Cashless exercise of warrants		224,066			—												—						—
Treasury shares purchased under deferred directors’ plan		(5,656)			246									(246)			—
Treasury shares sold and distributed under deferred directors' plan		5,699			(118)									118			—						—
Stock activity under equity compensation plans		89,418			(2,089)												(2,089)						(2,089)
Stock based compensation expense					2,267												2,267						2,267
Balance at June 30, 2019		25,442,300		$	112,689		$	446,969		$	9,500		$	(3,884)		$	565,274		$	89		$	565,363

Balance at January 1, 2020		25,444,275		$	114,858		$	475,247		$	12,059		$	(4,153)		$	598,011		$	89		$	598,100
Comprehensive income:
Net income								36,969									36,969						36,969
Other comprehensive income, net of tax											12,743						12,743						12,743
Cash dividends declared, $0.60 per share								(15,325)									(15,325)						(15,325)
Treasury shares purchased under share repurchase plan		(289,101)			—									(10,012)			(10,012)						(10,012)
Treasury shares purchased under deferred directors’ plan		(5,741)			268									(268)			—						—
Treasury shares sold and distributed under deferred directors' plan		5,748			(119)									119			—						—
Stock activity under equity compensation plans		78,099			(2,030)												(2,030)						(2,030)
Stock based compensation expense					447												447						447
Balance at June 30, 2020		25,233,280		$	113,424		$	496,891		$	24,802		$	(14,314)		$	620,803		$	89		$	620,892

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)


Six Months Ended June 30,	****	2020		****	2019
Cash flows from operating activities:
Net income		$	36,969		$	43,395
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			2,989			2,930
Provision for loan losses			12,100			1,985
Amortization of loan servicing rights			359			244
Net change in loan servicing rights valuation allowance			506			—
Loans originated for sale, including participations			(59,288)			(23,689)
Net gain on sales of loans			(1,458)			(690)
Proceeds from sale of loans, including participations			48,113			20,390
Net loss on sales of premises and equipment			81			1
Net gain on sales and calls of securities available-for-sale			(49)			(88)
Net securities amortization			1,959			1,866
Stock based compensation expense			447			2,267
Earnings on life insurance			(544)			(731)
Gain on life insurance			(576)			(841)
Tax benefit of stock award issuances			(71)			(529)
Net change:
Interest receivable and other assets			(655)			(3,039)
Interest payable and other liabilities			(142)			1,188
Total adjustments			3,771			1,264
Net cash from operating activities			40,740			44,659

Cash flows from investing activities:
Proceeds from sale of securities available for sale			1,148			25,819
Proceeds from maturities, calls and principal paydowns of securities available-for-sale			40,430			30,150
Purchases of securities available-for-sale			(47,370)			(60,007)
Purchase of life insurance			(242)			(5,422)
Net increase in total loans			(428,472)			(83,747)
Proceeds from sales of land, premises and equipment			242			10
Purchases of land, premises and equipment			(3,278)			(3,563)
Proceeds from life insurance			1,283			1,483
Net cash from investing activities			(436,259)			(95,277)

Cash flows from financing activities:
Net increase in total deposits			509,608			177,234
Net increase in short-term borrowings			35,500			(60,555)
Proceeds from short-term FHLB borrowings			—			100,000
Payments on short-term FHLB borrowings			(170,000)			(170,000)
Proceeds from long-term FHLB borrowings			75,000			—
Common dividends paid			(15,312)			(14,265)
Preferred dividends paid			(13)			(13)
Payments related to equity incentive plans			(2,030)			(2,089)
Purchase of treasury stock			(10,280)			(246)
Net cash from financing activities			422,473			30,066
Net change in cash and cash equivalents			26,954			(20,552)
Cash and cash equivalents at beginning of the period			99,381			216,922
Cash and cash equivalents at end of the period		$	126,335		$	196,370
Cash paid during the period for:
Interest		$	22,045		$	29,640
Income taxes			20			9,425
Supplemental non-cash disclosures:
Loans transferred to other real estate owned			35			—
Securities purchases payable			4,783			3,579
Right-of-use assets obtained in exchange for lease liabilities			—			5,483

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents NOTE 1. BASIS OF PRESENTATION

This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-months and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2020. The Company’s 2019 Annual Report on Form 10-K should be read in conjunction with these statements.

Adoption of New Accounting Standards

In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment." These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted this new accounting standard on January 1, 2020.

Adopting this standard did not have an impact on the Company's financial condition or results of operations.

In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." These amendments modify the disclosure requirements in Topic 820 as follows:

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and it did not have a material impact on its financial condition or results of operations. 6

Table of Contents In August 2018, the FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350- 40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. Early adoption is permitted. The Company adopted ASU 2018-15 on January 1, 2020 and it did not have a material impact on its financial condition or results of operations.

Newly Issued But Not Yet Effective Accounting Standards

In June 2016, the FASB issued guidance related to credit losses on financial instruments. This update, commonly referred to as the current expected credit losses methodology (“CECL”), will change the accounting for credit losses on loans and debt securities. Under the new guidance, the Company’s measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required, but still permitted, under GAAP, which delays recognition until it is probable a loss has been incurred. In addition, the guidance will modify the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which will allow for reversal of credit impairments in future periods. This guidance is effective, subject to optional delay discussed below, for the Company for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years.

Under a provision provided by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company elected to delay the adoption of FASB’s new rule covering the CECL standard until the earlier of the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 13, 2020, related to the outbreak of COVID-19, and December 31, 2020. Once the delay provision has been terminated, adoption will be retroactive to January 1, 2020. During 2019, the Company implemented the CECL methodology and ran it concurrently with the historical incurred method. While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings, net of tax, upon adoption. Once final, the calculation will require approval by the loan review committee and governance in accordance with the Company’s internal controls over financial reporting. Additionally, the Company has evaluated the need to recognize an allowance for credit impairment for available-for-sale debt securities. The impact on available-for-sale debt securities is subject to a limitation, which is based on the fair value of the debt securities. When evaluating the credit quality of our existing portfolio, the Company does not expect the allowance for credit impairment for available-for-sale securities to be significant. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including economic forecasting and qualitative factors.

In August 2018, the FASB issued ASU 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The ASU updates the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans by adding, clarifying and removing certain disclosures. These amendments are effective for fiscal years ending after December 15, 2020, for public business entities, and are to be applied on a retrospective basis to all periods presented. Management has reviewed the standard and does not anticipate ASU 2018-14 will have a material impact on its financial statements.

In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers' application of income tax- related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is assessing ASU 2019-12 and its impact on its financial statements. 7

Table of Contents On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform ("ASC 848"): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional working group to lead the transition from LIBOR to a planned adoption of the Secured Overnight Financial Rate (“SOFR”). The Company has identified loans that will renew prior to 2021 and will obtain updated reference rate language at the time of renewal. Loans maturing after 2021 will need loan modifications and fallback language has been implemented for newly originated loans. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop internal milestones during this transitional period. The guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Company expects to adopt the LIBOR transition relief allowed under this standard.

Reclassifications

Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.

NOTE 2. SECURITIES

Information related to the fair value and amortized cost of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income is provided in the tables below.


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gain		Losses		Value
June 30, 2020
Mortgage-backed securities: residential	$	263,766	$	11,026	$	(43)	$	274,749
Mortgage-backed securities: commercial		39,379		1,190		—		40,569
State and municipal securities		296,529		21,062		(1)		317,590
Total	$	599,674	$	33,278	$	(44)	$	632,908

December 31, 2019
Mortgage-backed securities: residential	$	283,817	$	4,751	$	(387)	$	288,181
Mortgage-backed securities: commercial		36,712		262		(2)		36,972
State and municipal securities		270,480		12,828		(228)		283,080
Total	$	591,009	$	17,841	$	(617)	$	608,233

Information regarding the fair value and amortized cost of available-for-sale debt securities by maturity as of June 30, 2020 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.


	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	4,453	$	4,486
Due after one year through five years		14,064		14,473
Due after five years through ten years		31,299		33,552
Due after ten years		246,713		265,079
		296,529		317,590
Mortgage-backed securities		303,145		315,318
Total debt securities	$	599,674	$	632,908

Table of Contents Securities proceeds, gross gains and gross losses are presented below.


		Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	****	2020		****	2019		****	2020		****	2019
Sales of securities available-for-sale
Proceeds		$	1,148		$	12,126		$	1,148		$	25,819
Gross gains			49			68			49			138
Gross losses			0			(3)			0			(50)
Number of securities			3			8			3			25

In accordance with ASU No. 2017-08, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with carrying values of $420.3 million and $59.3 million were pledged as of June 30, 2020 and December 31, 2019, respectively, as collateral for borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of June 30, 2020 and December 31, 2019 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.


	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2020
Mortgage-backed securities: residential	$	5,082	$	8	$	4,443	$	35	$	9,525	$	43
Mortgage-backed securities: commercial		38		0		0		0		38		0
State and municipal securities		559		1		0		0		559		1
Total temporarily impaired	$	5,679	$	9	$	4,443	$	35	$	10,122	$	44

December 31, 2019
Mortgage-backed securities: residential	$	23,436	$	112	$	14,174	$	275	$	37,610	$	387
Mortgage-backed securities: commercial		4,591		2		0		0		4,591		2
State and municipal securities		14,188		228		0		0		14,188		228
Total temporarily impaired	$	42,215	$	342	$	14,174	$	275	$	56,389	$	617

The total number of securities with unrealized losses as of June 30, 2020 and December 31, 2019 is presented below.


		Less than	12 months
	****	12 months	or more	Total
June 30, 2020
Mortgage-backed securities: residential		1	2	3
Mortgage-backed securities: commercial		2	0	2
State and municipal securities		2	0	2
Total temporarily impaired		5	2	7

December 31, 2019
Mortgage-backed securities: residential		7	6	13
Mortgage-backed securities: commercial		1	0	1
State and municipal securities		11	0	11
Total temporarily impaired		19	6	25

Table of Contents The following factors are considered in determining whether or not the impairment of these securities is other-than-temporary. In making this determination, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer, as well as the underlying fundamentals of the relevant market and the outlook for such market in the near future. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of June 30, 2020 and December 31, 2019, all of the securities in the Company’s portfolio were backed by the U.S. government, government agencies, government sponsored entities or were A-rated or better, except for certain non-local or local municipal securities, which are not rated. For the government, government agency, government-sponsored entity and municipal securities, management did not believe that there would be credit losses or that full principal would not be received. Management considers the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

NOTE 3. LOANS


	June 30,				December 31,
(dollars in thousands)	2020			****	2019
Commercial and industrial loans:
Working capital lines of credit loans	$	568,621	12.6	%	$	709,849	17.5	%
Non-working capital loans		1,238,556	27.5			717,019	17.6
Total commercial and industrial loans		1,807,177	40.1			1,426,868	35.1

Commercial real estate and multi-family residential loans:
Construction and land development loans		359,948	8.0			287,641	7.1
Owner occupied loans		576,213	12.8			573,665	14.1
Nonowner occupied loans		554,572	12.3			571,364	14.0
Multifamily loans		290,566	6.4			240,652	5.9
Total commercial real estate and multi-family residential loans		1,781,299	39.5			1,673,322	41.1

Agri-business and agricultural loans:
Loans secured by farmland		153,774	3.4			174,380	4.3
Loans for agricultural production		198,277	4.4			205,151	5.0
Total agri-business and agricultural loans		352,051	7.8			379,531	9.3

Other commercial loans		110,833	2.5			112,302	2.8
Total commercial loans		4,051,360	89.9			3,592,023	88.3

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		169,897	3.8			177,227	4.4
Open end and junior lien loans		174,300	3.9			186,552	4.6
Residential construction and land development loans		11,164	0.2			12,966	0.3
Total consumer 1-4 family mortgage loans		355,361	7.9			376,745	9.3

Other consumer loans		98,667	2.2			98,617	2.4
Total consumer loans		454,028	10.1			475,362	11.7
Subtotal		4,505,388	100.0	%		4,067,385	100.0	%
Less: Allowance for loan losses		(59,019)				(50,652)
Net deferred loan fees		(14,856)				(1,557)
Loans, net	$	4,431,513			$	4,015,176

The recorded investment in loans does not include accrued interest.

The Company had $1.4 million in residential real estate loans in the process of foreclosure as of June 30, 2020, compared to $1.6 million as of December 31, 2019.

Table of Contents NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended June 30, 2020 and 2019:


			Commercial
			Real Estate
	Commercial		and		Agri-business				Consumer
	and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated		Total
Three Months Ended June 30, 2020
Beginning balance, April 1	$	24,739	$	18,658	$	3,704	$	521	$	2,475	$	447	$	3,065	$	53,609
Provision for loan losses		2,062		2,387		(299)		21		953		387		(11)		5,500
Loans charged-off		(296)		0		0		0		0		(115)		0		(411)
Recoveries		239		18		3		0		6		55		0		321
Net loans charged-off		(57)		18		3		0		6		(60)		0		(90)
Ending balance	$	26,744	$	21,063	$	3,408	$	542	$	3,434	$	774	$	3,054	$	59,019


			Commercial
			Real Estate
	Commercial		and		Agri-business				Consumer
	and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated		Total
Three Months Ended June 30, 2019
Beginning balance, April 1	$	24,030	$	15,447	$	4,146	$	373	$	2,266	$	291	$	3,009	$	49,562
Provision for loan losses		824		(31)		(242)		(18)		(124)		40		336		785
Loans charged-off		(17)		0		0		0		(5)		(62)		0		(84)
Recoveries		187		76		2		0		16		20		0		301
Net loans charged-off		170		76		2		0		11		(42)		0		217
Ending balance	$	25,024	$	15,492	$	3,906	$	355	$	2,153	$	289	$	3,345	$	50,564

The following tables present the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 2020 and 2019:


				Commercial
				Real Estate
		Commercial		and		Agri-business				Consumer
		and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	****	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated		Total
Six Months Ended June 30, 2020
Beginning balance, January 1		$	25,789	$	15,796	$	3,869	$	447	$	2,086	$	345	$	2,320	$	50,652
Provision for loan losses			4,690		5,137		(466)		95		1,348		562		734		12,100
Loans charged-off			(4,031)		0		0		0		(13)		(216)		0		(4,260)
Recoveries			296		130		5		0		13		83		0		527
Net loans charged-off			(3,735)		130		5		0		0		(133)		0		(3,733)
Ending balance		$	26,744	$	21,063	$	3,408	$	542	$	3,434	$	774	$	3,054	$	59,019


			Commercial
			Real Estate
	Commercial		and		Agri-business				Consumer
	and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated		Total
Six Months Ended June 30, 2019
Beginning balance, January 1	$	22,518	$	15,393	$	4,305	$	368	$	2,292	$	283	$	3,294	$	48,453
Provision for loan losses		2,317		(13)		(403)		(13)		(79)		125		51		1,985
Loans charged-off		(100)		0		0		0		(87)		(181)		0		(368)
Recoveries		289		112		4		0		27		62		0		494
Net loans charged-off		189		112		4		0		(60)		(119)		0		126
Ending balance	$	25,024	$	15,492	$	3,906	$	355	$	2,153	$	289	$	3,345	$	50,564

Table of Contents The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020 and December 31, 2019:


				Commercial
				Real Estate
		Commercial		and		Agri-business				Consumer
		and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	****	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated		Total
June 30, 2020
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	6,384	$	1,318	$	64	$	0	$	411	$	0	$	0	$	8,177
Collectively evaluated for impairment			20,360		19,745		3,344		542		3,023		774		3,054		50,842
Total ending allowance balance		$	26,744	$	21,063	$	3,408	$	542	$	3,434	$	774	$	3,054	$	59,019

Loans:
Loans individually evaluated for impairment		$	14,870	$	6,093	$	430	$	0	$	2,615	$	0	$	0	$	24,008
Loans collectively evaluated for impairment			1,778,929		1,772,848		351,641		110,712		353,963		98,431		0		4,466,524
Total ending loans balance		$	1,793,799	$	1,778,941	$	352,071	$	110,712	$	356,578	$	98,431	$	0	$	4,490,532


			Commercial
			Real Estate
	Commercial		and		Agri-business				Consumer
	and		Multifamily		and		Other		1-4 Family		Other
(dollars in thousands)	Industrial		Residential		Agricultural		Commercial		Mortgage		Consumer		Unallocated			Total
December 31, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,324	$	538	$	90	$	0	$	426	$	6	$	0	$	10,384
Collectively evaluated for impairment		16,465		15,258		3,779		447		1,660		339		2,320		40,268
Total ending allowance balance	$	25,789	$	15,796	$	3,869	$	447	$	2,086	$	345	$	2,320	$	50,652

Loans:
Loans individually evaluated for impairment	$	19,580	$	4,998	$	445	$	0	$	2,789	$	17	$	0	$	27,829
Loans collectively evaluated for impairment		1,407,246		1,665,842		379,186		112,166		375,210		98,349		0		4,037,999
Total ending loans balance	$	1,426,826	$	1,670,840	$	379,631	$	112,166	$	377,999	$	98,366	$	0	$	4,065,828

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2020:


		Unpaid				Allowance for
		Principal		Recorded		Loan Losses
(dollars in thousands)	****	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		$	2,053	$	173	$	0
Non-working capital loans			3,108		1,011		0
Commercial real estate and multi-family residential loans:
Owner occupied loans			2,086		2,086		0
Agri-business and agricultural loans:
Loans secured by farmland			603		283		0
Consumer 1‑4 family loans:
Closed end first mortgage loans			385		304		0
Open end and junior lien loans			49		49		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans			1,908		1,907		467
Non-working capital loans			12,444		11,779		5,917
Commercial real estate and multi-family residential loans:
Owner occupied loans			4,006		4,007		1,318
Agri-business and agricultural loans:
Loans secured by farmland			147		147		64
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans			1,545		1,548		351
Open end and junior lien loans			663		662		50
Residential construction loans			51		52		10
Total		$	29,048	$	24,008	$	8,177

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019:


	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
(dollars in thousands)	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	22	$	22	$	0
Non-working capital loans		2,130		735		0
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,189		3,010		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Loans for ag production		15		15		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		411		330		0
Open end and junior lien loans		121		121		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,214		6,214		3,089
Non-working capital loans		13,230		12,609		6,235
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,988		1,988		538
Agri-business and agricultural loans:
Loans secured by farmland		147		147		90
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,643		1,646		363
Open end and junior lien loans		641		640		53
Residential construction loans		51		52		10
Other consumer loans		17		17		6
Total	$	30,422	$	27,829	$	10,384

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 2020:


						Cash Basis
		Average		Interest		Interest
		Recorded		Income		Income
(dollars in thousands)	****	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		$	774	$	0	$	0
Non-working capital loans			744		10		10
Commercial real estate and multi-family residential loans:
Owner occupied loans			2,104		4		4
Agri-business and agricultural loans:
Loans secured by farmland			283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans			313		1		0
Open end and junior lien loans			49		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans			2,171		0		0
Non-working capital loans			11,600		63		63
Commercial real estate and multi-family residential loans:
Owner occupied loans			3,108		0		0
Agri-business and agricultural loans:
Loans secured by farmland			147		0		0
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans			1,606		0		0
Open end and junior lien loans			639		0		0
Residential construction loans			52		0		0
Total		$	23,590	$	78	$	77

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 2019:


						Cash Basis
		Average		Interest		Interest
		Recorded		Income		Income
(dollars in thousands)	****	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		$	287	$	0	$	1
Non-working capital loans			933		9		4
Commercial real estate and multi-family residential loans:
Owner occupied loans			1,450		10		10
Agri-business and agricultural loans:
Loans secured by farmland			283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans			164		1		1
Open end and junior lien loans			93		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans			6,326		75		26
Non-working capital loans			11,105		127		94
Commercial real estate and multi-family residential loans:
Owner occupied loans			1,763		16		11
Agri-business and agricultural loans:
Loans secured by farmland			147		1		0
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans			1,680		13		13
Other consumer loans			28		1		0
Total		$	24,259	$	253	$	160

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 2020:


					****	Cash Basis
	Average		Interest			Interest
	Recorded		Income			Income
(dollars in thousands)	Investment		Recognized			Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	577	$	0		$	0
Non-working capital loans	****	652	****	11		****	11
Commercial real estate and multi-family residential loans:
Owner occupied loans	****	2,124	****	9		****	8
Agri-business and agricultural loans:
Loans secured by farmland	****	283	****	0		****	0
Consumer 1-4 family loans:
Closed end first mortgage loans	****	319	****	2		****	1
Open end and junior lien loans	****	67	****	0		****	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	****	3,729	****	0		****	0
Non-working capital loans	****	11,659	****	153		****	153
Commercial real estate and multi-family residential loans:
Owner occupied loans	****	2,554	****	30		****	30
Agri-business and agricultural loans:
Loans secured by farmland	****	147	****	0		****	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	****	1,623	****	21		****	20
Open end and junior lien loans	****	638	****	0		****	0
Residential construction loans	****	52	****	0		****	0
Total	$	24,424	$	226		$	223

Table of Contents The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 2019:


					Cash Basis
	Average		Interest		Interest
	Recorded		Income		Income
(dollars in thousands)	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	221	$	1	$	1
Non-working capital loans		1,241		38		28
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,535		21		18
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		272		2		2
Open end and junior lien loans		143		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,406		147		85
Non-working capital loans		11,260		259		222
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,922		29		23
Agri-business and agricultural loans:
Loans secured by farmland		147		3		1
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,639		25		25
Other consumer loans		36		2		1
Total	$	25,105	$	527	$	406

The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 by class of loans:


				30 ‑ 89		Greater than				Total Past
		Loans Not		Days		90 Days				Due and
(dollars in thousands)	****	Past Due		Past Due		Past Due		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans		$	566,602	$	8	$	0	$	2,079	$	2,087	$	568,689
Non-working capital loans			1,219,488		11		0		5,611		5,622		1,225,110
Commercial real estate and multi-family
residential loans:
Construction and land development loans			359,082		0		0		0		0		359,082
Owner occupied loans			570,680		0		0		5,178		5,178		575,858
Nonowner occupied loans			553,894		0		0		0		0		553,894
Multifamily loans			290,107		0		0		0		0		290,107
Agri-business and agricultural loans:
Loans secured by farmland			153,298		0		0		430		430		153,728
Loans for agricultural production			198,343		0		0		0		0		198,343
Other commercial loans			110,712		0		0		0		0		110,712
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans			168,367		427		19		718		1,164		169,531
Open end and junior lien loans			175,183		30		0		711		741		175,924
Residential construction loans			11,071		0		0		52		52		11,123
Other consumer loans			98,221		210		0		0		210		98,431
Total		$	4,475,048	$	686	$	19	$	14,779	$	15,484	$	4,490,532

Table of Contents

The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:



			30‑89		Greater than				Total Past
	Loans Not		Days		90 Days				Due and
(dollars in thousands)	Past Due		Past Due		Past Due		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	703,737	$	10	$	0	$	6,236	$	6,246	$	709,983
Non-working capital loans		710,557		4		0		6,282		6,286		716,843
Commercial real estate and multi-family residential loans:
Construction and land development loans		286,534		0		0		0		0		286,534
Owner occupied loans		569,303		0		0		4,056		4,056		573,359
Nonowner occupied loans		570,687		0		0		0		0		570,687
Multifamily loans		240,260		0		0		0		0		240,260
Agri-business and agricultural loans:
Loans secured by farmland		173,959		0		0		430		430		174,389
Loans for agricultural production		205,228		0		0		14		14		205,242
Other commercial loans		112,166		0		0		0		0		112,166
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		174,902		1,099		45		827		1,971		176,873
Open end and junior lien loans		187,255		188		0		761		949		188,204
Residential construction loans		12,870		0		0		52		52		12,922
Other consumer loans		98,176		173		0		17		190		98,366
Total	$	4,045,634	$	1,474	$	45	$	18,675	$	20,194	$	4,065,828

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $4.8 million and $2.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2020 and December 31, 2019, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.


	June 30,		December 31,
(dollars in thousands)	2020		2019
Accruing troubled debt restructured loans	$	5,772	$	5,909
Nonaccrual troubled debt restructured loans		7,582		3,188
Total troubled debt restructured loans	$	13,354	$	9,097

During the three months and six months ended June 30, 2020, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. 19

Table of Contents The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended June 30, 2020:


							Modified Repayment Terms
			Pre-Modification		Post-Modification			Extension
			Outstanding		Outstanding			Period or
		Number of	Recorded		Recorded		Number of	Range
(dollars in thousands)	****	Loans	Investment		Investment		Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans		1		250		315	1	0
Non-working capital loans		1		3,500		3,569	1	0
Commercial real estate and multi-
family residential loans:
Owner occupied loans		1		1,528		1,527	1	0
Total		3	$	5,278	$	5,411	3	0

For the three month period ended June 30, 2020, the troubled debt restructurings described above increased the allowance for loan losses by $2.3 million, and no charge-offs were recorded.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the six months ended June 30, 2020:


						Modified Repayment Terms
	****	Pre-Modification		Post-Modification			Extension
		Outstanding		Outstanding			Period or
	Number of	Recorded		Recorded		Number of	Range
(dollars in thousands)	Loans	Investment		Investment		Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans	1		250		315	1	0
Non-working capital loans	2		4,288		3,691	2	0
Commercial real estate and multi-
family residential loans:
Owner occupied loans	1		1,528		1,527	1	0
Total	4	$	6,066	$	5,533	4	0

For the six month period ended June 30, 2020, the troubled debt restructurings described above increased the allowance for loan losses by $2.4 million, and charge-offs of $666,000 were recorded.

As of June 30, 2020, total deferrals attributed to COVID-19 were $652.5 million representing 384 borrowers. This represented 15% of the total loan portfolio. Of that total 322 were commercial loan borrowers representing $647.0 million in loans, or 16%, of commercial loans and 62 were retail loan borrowers representing $5.5 million, or 1%, of total retail loans. Of the total commercial deferrals, 87% were for three-months or less. In accordance with Section 4013 of the CARES Act and the March 22, 2020 Joint Interagency Regulatory Guidance, these were not considered to be troubled debt restructurings and were excluded from the table above.

During the three months ended June 30, 2019, no loans were modified as troubled debt restructurings.

During the three months ending March 31, 2019, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. 20

Table of Contents Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period. One of the loans is for a commercial real estate building where the cash flow did not support the loan with a recorded investment of $533,000. The other loan is for commercial and industrial non-working capital purposes and this borrower had a recorded investment of $70,000 that was subsequently paid off prior to March 31, 2019. These concessions are not included in table below.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the six months ended June 30, 2019:


										Modified Repayment Terms
				Pre-Modification			Post-Modification					Extension
				Outstanding			Outstanding					Period or
		Number of		Recorded			Recorded			Number of		Range
(dollars in thousands)	****	Loans	****	Investment		****	Investment		****	Loans	****	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans		1			35			35		1		0
Total		1		$	35		$	35		1		0

For the three month and six month periods ending June 30, 2019, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded.

Credit Quality Indicators:

The Company 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 experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be “Pass” rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with “Not Rated” loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.

As of June 30, 2020, $554.6 million in PPP loans were included in the "Pass" category of loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA. 21

Table of Contents As of June 30, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


				Special						Not
(dollars in thousands)	****	Pass		Mention		Substandard		Doubtful		Rated		Total
Commercial and industrial loans:
Working capital lines of credit loans		$	517,324	$	31,787	$	19,254	$	0	$	324	$	568,689
Non-working capital loans			1,176,307		22,205		21,258		0		5,340		1,225,110
Commercial real estate and multi-family residential loans:
Construction and land development loans			359,082		0		0		0		0		359,082
Owner occupied loans			537,145		26,493		12,220		0		0		575,858
Nonowner occupied loans			546,936		6,395		563		0		0		553,894
Multifamily loans			290,107		0		0		0		0		290,107
Agri-business and agricultural loans:
Loans secured by farmland			140,131		12,136		1,461		0		0		153,728
Loans for agricultural production			146,520		51,823		0		0		0		198,343
Other commercial loans			110,712		0		0		0		0		110,712
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans			37,353		0		1,852		0		130,326		169,531
Open end and junior lien loans			8,575		0		711		0		166,638		175,924
Residential construction loans			0		0		52		0		11,071		11,123
Other consumer loans			28,047		0		0		0		70,384		98,431
Total		$	3,898,239	$	150,839	$	57,371	$	0	$	384,083	$	4,490,532

As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


			Special						Not
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Rated		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	631,728	$	40,551	$	37,278	$	0	$	426	$	709,983
Non-working capital loans		673,370		18,782		19,381		0		5,310		716,843
Commercial real estate and multi-family residential loans:
Construction and land development loans		286,534		0		0		0		0		286,534
Owner occupied loans		535,496		14,804		23,059		0		0		573,359
Nonowner occupied loans		569,315		781		591		0		0		570,687
Multifamily loans		240,260		0		0		0		0		240,260
Agri-business and agricultural loans:
Loans secured by farmland		165,005		7,952		1,432		0		0		174,389
Loans for agricultural production		191,489		13,738		15		0		0		205,242
Other commercial loans		112,166		0		0		0		0		112,166
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		47,405		0		1,976		0		127,492		176,873
Open end and junior lien loans		10,845		0		762		0		176,597		188,204
Residential construction loans		0		0		51		0		12,871		12,922
Other consumer loans		27,250		0		17		0		71,099		98,366
Total	$	3,490,863	$	96,608	$	84,562	$	0	$	393,795	$	4,065,828

Table of Contents NOTE 5. BORROWINGS

For the periods ended June 30, 2020 and December 31, 2019, the Company had advances outstanding from the Federal Home Loan Bank (“FHLB”) in the amount of $75.0 million and $170.0 million, respectively. The outstanding FHLB advance at June 30, 2020 is a ten-year fixed-rate putable advance with a rate of 0.39% and is due on March 4, 2030. The outstanding FHLB advance at December 31, 2019 was a short-term fixed rate advance with a rate of 1.61% and was due on January 7, 2020. All FHLB notes require monthly interest payments and are secured by residential real estate loans and securities.

On August 2, 2019 the Company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $30.0 million. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was authorized by the Company’s board of directors on January 14, 2020. The Company had drawn $10.5 million on this line at a rate of Prime minus 150 basis points, or 1.75%, as of June 30, 2020. There were no amounts drawn against this line as of December 31, 2019. The line was scheduled to mature on July 31, 2020, and has been renewed with a new maturity of July 30, 2021.

NOTE 6. FAIR VALUE DISCLOSURES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities: Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).

The Company’s Finance Department, which is responsible for all accounting and SEC compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting. 23

Table of Contents Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5%, government mbs/cmo +/- 3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.

Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).

Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).

Impaired loans: Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

Mortgage servicing rights: As of June 30, 2020, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $4.0 million, carried at amortized cost less $506,000 in a valuation reserve, or $3.5 million. These residential mortgage loans have a weighted average interest rate of 3.80%, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A valuation model is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At June 30, 2020, the constant prepayment speed (“PSA”) used was 198 and discount rate used was 9.4%. At December 31, 2019, the PSA used was 118 and the discount rate used was 9.4%. 24

Table of Contents Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Real estate mortgage loans held for sale: Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.

The table below presents the balances of assets measured at fair value on a recurring basis:


		June 30, 2020
		Fair Value Measurements Using									Assets
(dollars in thousands)	****	Level 1		****	Level 2		****	Level 3		****	at Fair Value
Assets:
Mortgage-backed securities: residential		$	0		$	274,749		$	0		$	274,749
Mortgage-backed securities: commercial			0			40,569			0			40,569
State and municipal securities			0			317,445			145			317,590
Total Securities			0			632,763			145			632,908
Mortgage banking derivative			0			1,766			0			1,766
Interest rate swap derivative			0			24,464			0			24,464
Total assets		$	0		$	658,993		$	145		$	659,138

Liabilities:
Mortgage banking derivative			0			236			0			236
Interest rate swap derivative			0			24,487			0			24,487
Total liabilities		$	0		$	24,723		$	0		$	24,723


	December 31, 2019
	Fair Value Measurements Using						Assets
(dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
Assets:
Mortgage-backed securities: residential	$	0	$	288,181	$	0	$	288,181
Mortgage-backed securities: commercial		0		36,972		0		36,972
State and municipal securities		0		282,935		145		283,080
Total Securities		0		608,088		145		608,233
Mortgage banking derivative		0		198		0		198
Interest rate swap derivative		0		7,263		0		7,263
Total assets	$	0	$	615,549	$	145	$	615,694

Liabilities:
Mortgage banking derivative		0		14		0		14
Interest rate swap derivative		0		7,860		0		7,860
Total liabilities	$	0	$	7,874	$	0	$	7,874

The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure. 25

Table of Contents The table below presents the balances of assets measured at fair value on a nonrecurring basis:


		June 30, 2020
		Fair Value Measurements Using									Assets
(dollars in thousands)	****	Level 1		****	Level 2		****	Level 3		****	at Fair Value
Assets
Impaired loans:
Commercial and industrial loans:
Working capital lines of credit loans		$	0		$	0		$	1,440		$	1,440
Non-working capital loans			0			0			5,862			5,862
Commercial real estate and multi-family residential loans:
Owner occupied loans			0			0			2,689			2,689
Agri-business and agricultural loans:
Loans secured by farmland			0			0			83			83
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans			0			0			392			392
Open end and junior lien loans			0			0			612			612
Residential construction loans			0			0			42			42
Total impaired loans		$	0		$	0		$	11,120		$	11,120
Other real estate owned			0			0			0			0
Mortgage servicing rights, net of valuation allowance			0			3,458			0			3,458
Total assets		$	0		$	3,458		$	11,120		$	14,578


	December 31, 2019
	Fair Value Measurements Using						Assets
(dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
Assets
Impaired loans:
Commercial and industrial loans:
Working capital lines of credit loans	$	0	$	0	$	3,126	$	3,126
Non-working capital loans		0		0		6,374		6,374
Commercial real estate and multi-family residential loans:
Construction and land development loans		0		0		43		43
Owner occupied loans		0		0		1,449		1,449
Agri-business and agricultural loans:
Loans secured by farmland		0		0		57		57
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		0		0		474		474
Open end and junior lien loans		0		0		587		587
Other consumer loans		0		0		11		11
Total impaired loans	$	0	$	0	$	12,121	$	12,121
Other real estate owned		0		0		0		0
Total assets	$	0	$	0	$	12,121	$	12,121

Table of Contents The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2020:


(dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Average		Range of Inputs
Impaired loans:
Commercial and industrial	$	7,302	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	47	%	1% -100%
Impaired loans:
Commercial real estate		2,689	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	33	%	11% -75%
Impaired loans:
Agribusiness and agricultural		83	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	43	%
Impaired loans:
Consumer 1‑4 family mortgage		1,004	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	14	%	6% -36%
Impaired loans:
Other consumer		42	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	19	%

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2019:


(dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Average		Range of Inputs
Impaired loans:
Commercial and industrial	$	9,500	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	53	%	1%-100%
Impaired loans:
Commercial real estate		1,492	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	27	%	7%-61%
Impaired loans:
Agribusiness and agricultural		57	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	61	%
Impaired loans:
Consumer 1‑4 family mortgage		1,061	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	14	%	5%-100%
Impaired loans:
Other consumer		11	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	36	%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $19.0 million, with a valuation allowance of $7.9 million at June 30, 2020. The change in the fair value of impaired loans resulted in increases in the provision for loan losses of $642,000 and $500,000, respectively, in the six months and three months ended June 30, 2020. At June 30, 2019, impaired loans had a gross carrying amount of $18.8 million, with a valuation allowance of $9.6 million. The change in the fair value of impaired loans resulted in increases in the provision for loan losses of $100,000 and $300,000, respectively, over the six months and three months ended June 30, 2019. 27

Table of Contents The following table contains the estimated fair values and the related carrying values of the Company’s financial instruments. Items which are not financial instruments are not included.


		June 30, 2020
		Carrying			Estimated Fair Value
(dollars in thousands)	****	Value		****	Level 1		****	Level 2		****	Level 3		****	Total
Financial Assets:
Cash and cash equivalents		$	126,335		$	123,710		$	2,925		$	0		$	126,635
Securities available-for-sale			632,908			0			632,763			145			632,908
Real estate mortgages held-for-sale			16,640			0			17,163			0			17,163
Loans, net			4,431,513			0			0			4,424,759			4,424,759
Federal Reserve and Federal Home Loan Bank Stock			13,772			N/A			N/A			N/A			N/A
Accrued interest receivable			15,850			0			3,447			12,403			15,850
Financial Liabilities:
Certificates of deposit			(1,169,231)			0			(1,182,018)			0			(1,182,018)
All other deposits			(3,474,196)			(3,474,196)			0			0			(3,474,196)
Federal funds purchased			(25,000)			0			(25,000)			0			(25,000)
Other short-term borrowings			(10,500)			0			(10,500)			0			(10,500)
Federal Home Loan Bank advances			(75,000)			0			(68,431)			0			(68,431)
Standby letters of credit			(696)			0			0			(696)			(696)
Accrued interest payable			(8,446)			(60)			(8,386)			0			(8,446)


	December 31, 2019
	Carrying		Estimated Fair Value
(dollars in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	99,381	$	96,603	$	2,778	$	0	$	99,381
Securities available-for-sale		608,233		0		608,088		145		608,233
Real estate mortgages held-for-sale		4,527		0		4,614		0		4,614
Loans, net		4,015,176		0		0		3,979,006		3,979,006
Federal Reserve and Federal Home Loan Bank Stock		13,772		N/A		N/A		N/A		N/A
Accrued interest receivable		15,391		0		3,729		11,662		15,391
Financial Liabilities:
Certificates of deposit		(1,192,067)		0		(1,202,060)		0		(1,202,060)
All other deposits		(2,941,752)		(2,941,752)		0		0		(2,941,752)
Federal Home Loan Bank advances		(170,000)		0		(169,998)		0		(169,998)
Standby letters of credit		(915)		0		0		(915)		(915)
Accrued interest payable		(11,604)		(102)		(11,502)		0		(11,604)

Table of Contents NOTE 7. OFFSETTING ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at June 30, 2020 and December 31, 2019.


		June 30, 2020
				Gross
		Gross		Amounts		Net Amounts		Gross Amounts Not
		Amounts of		Offset in the		presented in		Offset in the Statement
		Recognized		Statement of		the Statement		of Financial Position
		Assets/		Financial		of Financial		Financial		Cash Collateral
(dollars in thousands)	****	Liabilities		Position		Position		Instruments		Position		Net Amount
Assets
Interest Rate Swap Derivatives		$	24,464	$	0	$	24,464	$	0	$	0	$	24,464
Total Assets		$	24,464	$	0	$	24,464	$	0	$	0	$	24,464
Liabilities
Interest Rate Swap Derivatives		$	24,487	$	0	$	24,487	$	0	$	(24,310)	$	177
Total Liabilities		$	24,487	$	0	$	24,487	$	0	$	(24,310)	$	177


	December 31, 2019
			Gross
	Gross		Amounts		Net Amounts		Gross Amounts Not
	Amounts of		Offset in the		presented in		Offset in the Statement
	Recognized		Statement of		the Statement		of Financial Position
	Assets/		Financial		of Financial		Financial		Cash Collateral
(dollars in thousands)	Liabilities		Position		Position		Instruments		Position		Net Amount
Assets
Interest Rate Swap Derivatives	$	7,263	$	0	$	7,263	$	0	$	0	$	7,263
Total Assets	$	7,263	$	0	$	7,263	$	0	$	0	$	7,263
Liabilities
Interest Rate Swap Derivatives	$	7,860	$	0	$	7,860	$	0	$	(7,560)	$	300
Total Liabilities	$	7,860	$	0	$	7,860	$	0	$	(7,560)	$	300

If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.

NOTE 8. EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive.


		Three Months Ended June 30,						Six Months Ended June 30,
	****	2020		****	2019		****	2020		****	2019
Weighted average shares outstanding for basic earnings per common share			25,412,014			25,614,701			25,517,499			25,553,254
Dilutive effect of stock based awards and warrants			57,666			159,301			77,460			167,825
Weighted average shares outstanding for diluted earnings per common share			25,469,680			25,774,002			25,594,959			25,721,079

Basic earnings per common share		$	0.77		$	0.85		$	1.45		$	1.70
Diluted earnings per common share		$	0.77		$	0.85		$	1.44		$	1.69

Table of Contents

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) net of tax for the three months ended June 30, 2020 and 2019:


	****	Unrealized
	****	Gains and		****	Defined
	****	(Losses) on		****	Benefit
	****	Available-		****	Pension
	****	for-Sales		****	Gains
(dollars in thousands)	****	Securities		****	(Losses)		****	Total
Balance at April 1, 2020		$	24,051		$	(1,501)		$	22,550
Other comprehensive income before reclassification		****	2,254		****	0		****	2,254
Amounts reclassified from accumulated other comprehensive income (loss)		****	(49)		****	47		****	(2)
Net current period other comprehensive income		****	2,205		****	47		****	2,252
Balance at June 30, 2020		$	26,256		$	(1,454)		$	24,802


	Unrealized
	Gains and		Defined
	(Losses) on		Benefit
	Available-		Pension
	for-Sales		Gains
(dollars in thousands)	Securities		(Losses)		Total
Balance at April 1, 2019	$	3,843	$	(1,356)	$	2,487
Other comprehensive income before reclassification		7,040		0		7,040
Amounts reclassified from accumulated other comprehensive income (loss)		(65)		38		(27)
Net current period other comprehensive income		6,975		38		7,013
Balance at June 30, 2019	$	10,818	$	(1,318)	$	9,500

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) net of tax for the six months ended June 30, 2020 and 2019:


	****	Unrealized
		Gains and			Defined
		(Losses) on			Benefit
		Available-			Pension
		for-Sales			Gains
(dollars in thousands)	****	Securities		****	(Losses)		****	Total
Balance at January 1, 2020		$	13,607		$	(1,548)		$	12,059
Other comprehensive income before reclassification		****	12,698		****	0		****	12,698
Amounts reclassified from accumulated other comprehensive income (loss)		****	(49)		****	94		****	45
Net current period other comprehensive income		****	12,649		****	94		****	12,743
Balance at June 30, 2020		$	26,256		$	(1,454)		$	24,802


		Unrealized
		Gains and			Defined
		(Losses) on			Benefit
		Available-			Pension
		for-Sales			Gains
(dollars in thousands)	****	Securities		****	(Losses)		****	Total
Balance at January 1, 2019		$	(4,796)		$	(1,395)		$	(6,191)
Other comprehensive income before reclassification			15,702			0			15,702
Amounts reclassified from accumulated other comprehensive income (loss)			(88)			77			(11)
Net current period other comprehensive income			15,614			77			15,691
Balance at June 30, 2019		$	10,818		$	(1,318)		$	9,500

Table of Contents

Reclassifications out of accumulated comprehensive income for the three months ended June 30, 2020 are as follows:


Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated ** Other**		Where Net
Income Components	Comprehensive Income		Income is Presented

(dollars in thousands)
Unrealized gains and losses on available-for-sale securities	$	49	Net securities gains (losses)
Tax effect		0	Income tax expense
Subtotal		49	Net of tax
Amortization of defined benefit pension items		(63)	Other expense
Tax effect		16	Income tax expense
Subtotal		(47)	Net of tax
Total reclassifications for the period	$	2	Net income

Reclassifications out of accumulated comprehensive income for the three months ended June 30, 2019 are as follows:


Details about		Amount			Affected Line Item
Accumulated Other		Reclassified From			in the Statement
Comprehensive		Accumulated Other			Where Net
Income Components	****	Comprehensive Income		****	Income is Presented

(dollars in thousands)
Unrealized gains and losses on available-for-sale securities		$	65		Net securities gains (losses)
Tax effect			0		Income tax expense
Subtotal			65		Net of tax
Amortization of defined benefit pension items			(53)		Other expense
Tax effect			15		Income tax expense
Subtotal			(38)		Net of tax
Total reclassifications for the period		$	27		Net income

Table of Contents Reclassifications out of accumulated comprehensive income for the six months ended June 30, 2020 are as follows:


Details about	****	Amount		****	Affected Line Item
Accumulated Other		Reclassified From			in the Statement
Comprehensive		Accumulated Other			Where Net
Income Components	****	Comprehensive Income		****	Income is Presented

(dollars in thousands)
Unrealized gains and losses on available-for-sale securities		$	49		Net securities gains (losses)
Tax effect		****	0		Income tax expense
Subtotal		****	49		Net of tax
Amortization of defined benefit pension items		****	(126)		Other expense
Tax effect		****	32		Income tax expense
Subtotal		****	(94)		Net of tax
Total reclassifications for the period		$	(45)		Net income

Reclassifications out of accumulated comprehensive income for the six months ended June 30, 2019 are as follows:


Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented

(dollars in thousands)
Unrealized gains and losses on available-for-sale securities	$	88	Net securities gains (losses)
Tax effect		0	Income tax expense
Subtotal		88	Net of tax
Amortization of defined benefit pension items		(103)	Other expense
Tax effect		26	Income tax expense
Subtotal		(77)	Net of tax
Total reclassifications for the period	$	11	Net income

NOTE 10. LEASES

The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2029 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. 32

Table of Contents Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the standard.

The following is a maturity analysis of the operating lease liabilities as of June 30, 2020:


	****	Operating lease
Years ending December 31, (in thousands)	****	Obligation
2020		$	285
2021			581
2022			595
2023			606
2024			622
2025 and thereafter			2,873
Total undiscounted lease payments			5,562
Less imputed interest			(669)
Lease liability		$	4,893

Right-of-use asset		$	4,893


	****	Three months ended June 30,					Six months ended June 30,
	****	2020			2019		2020		****	2019
Lease cost
Operating lease cost		$	133		$	125	$	261		$	244
Short-term lease cost			6			6		12			12
Total lease cost		$	139		$	131	$	273		$	256

Other information
Operating cash outflows from operating leases		$	261
Weighted-average remaining lease term - operating leases			9.3 years
Weighted average discount rate - operating leases			2.8	%

NOTE 11. COVID-19 AND CURRENT ECONOMIC CONDITIONS

As of July 22, 2020, total COVID-19 related deferrals were $425.1 million, representing 212 borrowers, or 9% of the total loan portfolio. Of that total, 159 were commercial loan borrowers representing $419.8 million in loans, or 10% of total commercial loans. 53 were retail loan borrowers representing $5.3 million, or 1% of total retail loans. 80% of the commercial loan deferrals were for three-months or less.

The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, other real estate owned and mortgage servicing rights could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets.

The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and when state and local economies will return to operational norms, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. However, if the pandemic continues to evolve into a prolonged worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition, liquidity and cash flows.

Table of Contents ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Net income in the first six months of 2020 was $37.0 million, down 14.8% from $43.4 million for the comparable period of 2019. Diluted income per common share was $1.44 in the first six months of 2020, down 14.8% from $1.69 in the comparable period of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $12.1 million for the first six months of 2020, an increase of $10.1 million, or 509.6% compared to $2.0 million for the first six months of 2019. The provision increase was driven primarily by the economic impact of the Coronavirus Disease 2019 (“COVID-19”) pandemic on the Company’s loan customers using the incurred loss model. Pretax pre-provision earnings in the first six months of 2020 were $57.2 million, an increase of $2.0 million, or 3.6%, compared to $55.2 million for the comparable period of 2019. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.

Annualized return on average total equity was 12.22% in the first six months of 2020 versus 16.17% in the comparable period of 2019. Annualized return on average total assets was 1.43% in the first six months of 2020 versus 1.78% in the comparable period of 2019. The average equity to average assets ratio was 11.67% in the first six months of 2020 versus 11.00% in the comparable period of 2019.

Net income in the second quarter of 2020 was $19.7 million, down 9.4% from $21.7 million for the comparable period of 2019. Diluted income per common share was $0.77 in the second quarter of 2020, down 9.4% from $0.85 in the comparable period of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $5.5 million for the second quarter of 2020, an increase of $4.7 million, or 600.6% compared to $785,000 for the second quarter of 2019. Pretax pre-provision earnings in the second quarter of 2020 were $29.6 million, an increase of $1.7 million, or 6.1%, compared to $27.9 million for the comparable period of 2019.

Return on average total equity was 12.92% in the second quarter of 2020 versus 15.76% in the comparable period of 2019. Return on average total assets was 1.45% in the second quarter of 2020 versus 1.76% in the comparable period of 2019. The average equity to average assets ratio was 11.23% in the second quarter of 2020 versus 11.14% in the comparable period of 2019.

Total assets were $5.441 billion as of June 30, 2020 versus $4.947 billion as of December 31, 2019, an increase of $494.3 million, or 10.0%. This increase was primarily due to a $416.3 million increase in net loans, a $27.0 million increase in cash and cash equivalents, a $24.7 million increase in securities available-for-sale and an increase of $13.8 million in other assets driven by higher valuations on the Company’s back-to-back interest rate swap portfolio. Loan growth was driven by Paycheck Protection Program (PPP) loans originated during the second quarter. The outstanding balance of PPP loans at June 30, 2020, was $554.6 million. Balance sheet growth was primarily funded through growth in deposits during 2020 , which included the PPP loan proceeds. Deposits increased $509.6 million while total borrowings decreased by $59.5 million since December 31, 2019. Total equity increased by $22.8 million due primarily to net income of $37.0 million, an increase in accumulated other comprehensive income of $12.7 million, offset by share repurchases of $10.0 million and dividends declared and paid of $0.60 per share totaling $15.3 million.

Impact of COVID-19. The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three and six month periods ended June 30, 2020, and may have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty.

The broad decline in business activities in the state has led to a significant increase in the state’s unemployment rate, which grew from 3.6% in January 2020 to 12.3% in May 2020, according to the Indiana Department of Workforce Development. Because these developments commenced late in the first quarter, and because the public health effects of COVID-19 are generally expected to continue later this year in the communities in which we operate, we believe the economic consequences of the pandemic are difficult to quantify and may continue to worsen. As a result of the pandemic, our financial condition, capital levels and results of operations have been and could continue to be significantly adversely affected, as described in further detail below. 34

Table of Contents During the second quarter, Lake City Bank focused on its response to the crisis for its employees and its customers. The bank closed branch lobbies on March 21, 2020 and directed its clients and communities to its drive up facilities and by-appointment visits in addition to digital channels via online and mobile banking. The bank created a Branch Reopening Task Force, which established guidelines under which the bank could safely open its offices. On June 15, 2020, the bank reopened all of its branch lobbies. The bank will keep all safety protocols in place until it determines that the public health risks posed by COVID-19 no longer require the precautionary measures that are in place.

In addition, the bank continues to utilize its Remote Workplace Plan for staff to reduce staff density in its offices and to ensure operational redundancy in the event of an outbreak in any of the Bank's facilities. Technology has played a large role in the successful Remote Workplace Plan and the bank's digital solution utilization by its customers has increased significantly.

Active Management of Credit Risk

The Company’s Commercial Banking and Credit Administration leadership initiated a review of industries that the Company believed were most likely to be impacted by emerging COVID-19 events. The initial review identified approximately 19% of the total loan portfolio and included the following industries: recreational vehicle - 4%, nursing home and assisted living - 4%, hotel and accommodations - 2%, self-storage - 2%, automotive, boating, trailer and truck - 2%, transportation and trucking contractors - 1%, C&I building construction - 1%, restaurants - 2% and entertainment and recreation - 1%. The Company’s Commercial Banking and Credit Administration leadership continues to review and refine the list of industries that the Company believes are most likely to be materially impacted by the potential economic impact resulting from the COVID-19 pandemic. The current assessment includes a smaller group of industries as compared to the initial list of potentially affected industries disclosed in the company’s April 27, 2020 first quarter release. The company’s current list of industries under review represents 6.6%, or $261.2 million, of the total loan portfolio versus $764.9 million, or 18.7% as of April 27, 2020, excluding PPP loans. The following industries are included in the 6.6% along with their respective percentage of the loan portfolio as of June 30, 2020: hotel and accommodations – 2.5%, dairy and hogs – 1.6%, restaurants – 1.0%, education – 1.0% and entertainment and recreation – 0.5%. The Company has no direct exposure to oil and gas and limited exposure to retail shopping centers.

The Company’s commercial loan portfolio is highly diversified and no industry sector represents more than 8% of the bank’s loan portfolio as of June 30, 2020. Agri-business and agricultural loans represented the highest specific industry concentration at 8% of total loans. Commercial Banking and Credit Administration teams continue to actively work with customers to understand their business challenges and credit needs during this time.

COVID-19 Related Loan Deferrals

As detailed below, loan deferrals peaked on June 17, 2020, in the amount of $737 million, representing 487 borrowers, or 16% of the total loan portfolio. As of July 22, 2020, total deferrals attributable to COVID-19 were $425 million, representing 212 borrowers, or 9% of the total loan portfolio. Total deferrals as of July 22, 2020 represented a decline in deferral balances of 42% from the peak levels. Of that total, 159 were commercial loan borrowers representing $420 million in loans, or 10% of total commercial loans, and 53 were retail loan borrowers representing $5 million, or 1% of total retail loans. Loans removed from deferral status are expected to perform in accordance with their contractual terms.

As of July 22, 2020, 363 borrowers with loans outstanding of $416 million had reached their initial 90 day deferral maturity.

Of this group, 92 borrowers with loans outstanding of $110 million were granted a second deferral. This represents 25% of initial deferral borrowers and 26% of initial deferral loan amounts.

The company’s retail loan portfolio is comprised of 1-4 family mortgage loans, home equity lines of credit and other direct and indirect installment loans. As of July 22, 2020, 116 borrowers with loans outstanding of $7 million had reached their initial 90 day deferral maturity. 31 borrowers totaling $5 million, or 74% of the aggregate retail deferral amount, were granted a second deferral. A third-party vendor manages the company’s retail and commercial credit card program and the Company does not have any balance sheet exposure with respect to this program except for nominal recourse on limited commercial card accounts. 35

Table of Contents


Total Loan Deferrals
		Peak									% change
	****	June 17, 2020		****	June 30, 2020		****	July 22, 2020		****	from Peak
Borrowers			487			384			212		(56)	%
Amount (in millions)		$	737		$	653		$	425		(42)	%
% of Total Loan Portfolio			16	%		15	%		9	%	NA


Total Commercial Deferrals
		Peak									% change
	****	June 17, 2020		****	June 30, 2020		****	July 22, 2020		****	from Peak
Borrowers			351			322			159		(55)	%
Amount (in millions)		$	730		$	647		$	420		(42)	%
% of Commercial Loan Portfolio			18	%		16	%		10	%	NA


Total Retail Deferrals
		Peak									% change
	****	June 17, 2020		****	June 30, 2020		****	July 22, 2020		****	from Peak
Borrowers			136			62			53		(61)	%
Amount (in millions)		$	7		$	6		$	5		(29)	%
% of Retail Loan Portfolio			2	%		1	%		1	%	NA

Liquidity Preparedness

Throughout the COVID-19 crisis, the Company has monitored liquidity preparedness. Critical to this effort has been the monitoring of commercial and retail borrowers line of credit utilization. The company’s commercial and retail line of credit utilization at June 30, 2020 declined to 41% versus 48% at March 31, 2020 and 46% at December 31, 2019. The Company believes it has experienced a reduction in overall usage on outstanding lines of credit of approximately $200 million as a result of the PPP loan proceeds our borrowers have received. We expect the reduced credit line utilization to be temporary while our borrowers deploy the PPP loan proceeds to pay for qualifying payroll and business expenses. The Company has a long-standing liquidity plan in place that ensures there are appropriate liquidity resources available to fund the balance sheet.

The Paycheck Protection Program

The second quarter results reflect nearly a full quarter impact of PPP loan originations to the bank following submission of its first PPP loan application to the SBA on April 3, 2020, the first date SBA began accepting applications. As of July 22, 2020, Lake City Bank completed 2,378 applications for $569.2 million in loans. The majority of the PPP loans were for existing customers and 86% of the PPP loans were for amounts less than $350,000. In addition, roughly 70% of the total number of PPP loans were made to borrowers in amounts of $150,000, or less and would benefit from the pending legislation that may provide expedited relief to these borrowers.

In preparation for the forgiveness application process, the bank has selected a third-party Fintech partner to automate the process. The software solution provides tools to facilitate communications with borrowers, gathering of information securely, calculation of forgiveness amounts and, electronic transmission to the SBA for approval.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation and other-than-temporary impairment of investment securities. 36

Table of Contents Allowance for Loan Losses

The Company maintains an allowance for loan losses to provide for probable incurred credit losses. Loan losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for loan losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the loan loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The level of loan loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.

The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. With respect to specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, allocations are assigned based upon historical experience subject to a floor, unless the rate of loss is expected to be greater than historical losses as noted below. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates different scenarios where the risk that the borrower will be unable or unwilling to repay its debt in full or on time is combined with an estimate of loss in the event the borrower cannot pay to develop non-specific allocations for such loan pools. These allocations may be adjusted based on the other factors cited above. An appropriate level of general allowance for pooled loans is determined by portfolio segment using historical loss percentages subject to a floor, supplemented with other environmental factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of, and trends in, delinquencies and impaired loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. It is also possible that the following could affect the overall process: social, political, economic and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover probable losses inherent in the loan portfolio.

Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate the loan is impaired. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) does the customer’s cash flow or net worth appear insufficient to repay the loan; (b) is there adequate collateral to repay the loan; (c) has the loan been criticized in a regulatory examination; (d) is the loan impaired; (e) are there other reasons where the ultimate collectability of the loan is in question; or (f) are there unique loan characteristics that require special monitoring.

Allocations are also applied to categories of loans considered not to be individually impaired, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. In addition, general allocations are made for other pools of loans, including non-classified loans. These general pooled loan allocations are performed for portfolio segments of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, subject to a floor, and are adjusted for economic factors and portfolio trends. 37

Table of Contents Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes an unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.

Valuation and Other-Than-Temporary Impairment of Available-for-Sale Investment Securities

The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. The fair value of certain securities is determined using unobservable inputs, primarily observable inputs of similar securities.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with current accounting guidance. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.

Significant judgments are required in determining impairment, which includes making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

We consider the following factors when determining other-than-temporary impairment for a security or investment:

●	the length of time and the extent to which the market value has been less than amortized cost;
●	the financial condition and near-term prospects of the issuer;
---	---
●	the underlying fundamentals of the relevant market and the outlook for such market for the near future; and
---	---
●	our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in market value.
---	---

The assessment of whether a decline exists that is other-than-temporary, involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If, in management’s judgment, other-than-temporary impairment exists, the cost basis of the security will be written down to the computed net present value, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment). 38

Table of Contents RESULTS OF OPERATIONS

Overview

Selected income statement information for the three months and six months ended June 30, 2020 and 2019 is presented in the following table:


		Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	****	2020			2019			2020			2019
Income Statement Summary:
Net interest income		$	39,528		$	38,411		$	78,382		$	76,620
Provision for loan losses			5,500			785			12,100			1,985
Noninterest income			11,169			11,588			21,946			23,113
Noninterest expense			21,079			22,092			43,168			44,565
Other Data:
Efficiency ratio (1)			41.58	%		44.19	%		43.03	%		44.68	%
Dilutive EPS		$	0.77		$	0.85		$	1.44		$	1.69
Tangible capital ratio (2)			11.35	%		11.30	%		11.35	%		11.30	%
Net charge-offs (recoveries) to average loans			0.01	%		(0.02)	%		0.18	%		(0.01)	%
Net interest margin			3.10	%		3.37	%		3.22	%		3.42	%
Net interest margin, excluding PPP loans (4)			3.17	%		3.37	%		3.25	%		3.42	%
Noninterest income to total revenue			22.03	%		23.18	%		21.87	%		23.17	%
Pretax Pre-Provision Earnings (2) (3)		$	29,618		$	27,907		$	57,160			55,168
(1)	Noninterest expense/Net interest income plus Noninterest income.
---	---
(2)	Non-GAAP financial measure. The Company believes that providing non-GAAP financial measures provides investors with information useful to understanding the company’s financial performance. Additionally, these non-GAAP measures are used by management for planning and forecasting purposes, including measures based on “tangible common equity” which is “total equity” excluding intangible assets, net of deferred tax, and “tangible assets” which is “total assets” excluding intangible assets, net of deferred tax . See reconciliation on the next page.
---	---
(3)	Non-GAAP financial measure. Pretax pre-provision earnings is calculated by adding net interest income to noninterest income and subtracting noninterest expense. See reconciliation on the next page.
---	---
(4)	Non-GAAP financial measure. Calculated by subtracting the impact PPP loans had on average earnings assets, loan interest income, average interest bearing liabilities, and interest expense. Management believes this is an important measure because it provide for better comparability to prior periods, given the low fixed interest rate of 1.0% and because the accretion of net loan fee income can be accelerated upon borrower forgiveness and repayment by the SBA, management is actively monitoring net interest margin on a fully tax equivalent basis with and without PPP loan impact for the duration of this program.
---	---

Table of Contents A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data).


		Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	****	2020			2019		****	2020			2019
Total Equity		$	620,892		$	565,363		$	620,892		$	565,363
Less: Goodwill			(4,970)			(4,970)			(4,970)			(4,970)
Plus: Deferred tax assets related to goodwill			1,181			1,191			1,191			1,191
Tangible Common Equity			617,103			561,584			617,113			561,584

Total Assets		$	5,441,092		$	4,975,519		$	5,441,092		$	4,975,519
Less: Goodwill			(4,970)			(4,970)			(4,970)			(4,970)
Plus: Deferred tax assets related to goodwill			1,181			1,191			1,191			1,191
Tangible Assets			5,437,303			4,971,740			5,437,313			4,971,740

Tangible Common Equity/Tangible Assets			11.35	%		11.30	%		11.35	%		11.30	%

Net Interest Income		$	39,528		$	38,411		$	78,382		$	76,620
Noninterest Income			11,169			11,588			21,946			23,113
Noninterest Expense			(21,079)			(22,092)			(43,168)			(44,565)
Pretax Pre-Provision Earnings		$	29,618		$	27,907		$	57,160		$	55,168

Impact of Paycheck Protection Program on Net Interest Margin FTE


	Three Months Ended						Six Months Ended
	Jun. 30,			Jun. 30,			Jun. 30,			Jun. 30,
	2020			2019			2020			2019
Total Average Earnings Assets	$	5,212,985		$	4,625,949		$	4,975,358		$	4,588,656
Less: Average Balance of PPP Loans	****	457,757			—		****	228,878			—
Total Adjusted Earning Assets	****	4,755,228			4,625,949		****	4,746,480			4,588,656

Total Interest Income FTE	$	47,427		$	55,147		$	98,455		$	109,140
Less: PPP Loan Income	****	(3,029)			—		****	(3,029)			—
Total Adjusted Interest Income FTE	****	44,398			55,147		****	95,426			109,140

Adjusted Earning Asset Yield, net of PPP Impact	****	3.76	%		4.78	%	****	4.04	%		4.80	%

Total Average Interest Bearing Liabilities	$	3,421,041		$	3,444,382		$	3,373,027		$	3,435,366
Less: Average Balance of PPP Loans	****	457,757			—		****	228,878			—
Total Adjusted Average Interest Bearing Liabilities	****	3,878,798			3,444,382		****	3,601,905			3,435,366

Total Interest Expense FTE	$	7,303		$	16,224		$	18,888		$	31,509
Less: PPP Cost of Funds	****	(285)			—		****	(285)			—
Total Adjusted Interest Expense FTE	****	7,018			16,224		****	18,603			31,509

Adjusted Cost of Funds, net of PPP Impact	****	0.59	%		1.41	%	****	0.79	%		1.38	%

Net Interest Margin FTE, net of PPP Impact	****	3.17	%		3.37	%	****	3.25	%		3.42	%

Table of Contents Net Income

Net income was $37.0 million in the first six months of 2020, a decrease of $6.4 million, or 14.8%, versus net income of $43.4 million in the first six months of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $12.1 million for the first six months of 2020, an increase of $10.1 million, or 509.6% compared to $2.0 million for the first six months of 2019. The provision increase was driven primarily by the estimated economic impact of the COVID-19 pandemic on the Company’s loan portfolio. In addition, noninterest income decreased by $1.2 million. These were offset by an increase in net interest income of $1.8 million, a decrease in noninterest expense of $1.4 million and a decrease in income tax expense of $1.7 million.

Net income was $19.7 million in the second quarter of 2020, a decrease of $2.0 million, or 9.4%, versus net income of $21.7 million in the second quarter of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $5.5 million for the first second quarter of 2020, an increase of $4.7 million, or 600.6% compared to $785,000 for the second quarter of 2019. The provision increase was driven primarily by the estimated economic impact of the COVID-19 pandemic on the Company’s loan portfolio. In addition, noninterest income decreased by $419,000. These were offset by an increase in net interest income of $1.1 million, a decrease in noninterest expense of $1.0 million and a decrease in income tax expense of $961,000.

We anticipate that our net income for future fiscal periods will continue to be impacted as a result of the economic developments resulting from the COVID-19 pandemic. Specifically, while we are not yet able to measure the impact of the COVID- 19 crisis on our borrowers, we anticipate provision expense may remain elevated as the economic impact of COVID-19 may negatively affect them, and such effects may not be addressed by any future governmental policy responses. In addition, due to the asset-sensitive nature of the Company’s balance sheet, declines in interest rates, including the Federal Reserve Bank’s reductions to the target Federal Funds Rate in the first quarter of 2020, have caused and will continue to cause a reduction in our net interest income and resulting net interest margin. In addition, the Company believes it has experienced a reduction in overall usage on outstanding lines of credit of approximately $200 million as a result of the PPP loan proceeds our borrowers have received. We expect the reduced credit line utilization to be temporary while our borrowers deploy the PPP loan proceeds to pay for qualifying payroll and business expenses. Net interest margin compression will further be impacted from the PPP loan program and the low fixed rate of 1.0% on these loans. In addition, borrowers that meet the loan forgiveness requirements outlined in the SBA program will result in loan balance paydowns for the Bank and an acceleration in PPP loan fee income accretion. The timing and impact to net interest margin will be contingent on how quickly the PPP loans are forgiven and/or repaid over the course of the next few years. The Company also anticipates that retail customers may use fewer fee-based financial services due to liquidity provided by the CARES Act stimulus payments to customers. 41

Table of Contents Net Interest Income

The following table sets forth consolidated information regarding average balances and rates:


		Six Months Ended June 30,
		2020								2019
		Average			Interest			Yield (1)/		Average		Interest		Yield (1)/
(fully tax equivalent basis, dollars in thousands)	****	Balance		****	Income		****	Rate		Balance		Income		Rate
Earning Assets
Loans:
Taxable (2)(3)		$	4,236,995		$	88,703		4.21	%	$	3,915,011	$	98,955	5.10	%
Tax exempt (1)			22,797			550		4.85			24,781		606	4.93
Investments: (1)
Available -for- sale			620,005			8,954		2.90			594,141		8,990	3.05
Short-term investments			44,706			64		0.29			8,415		97	2.32
Interest bearing deposits			50,855			184		0.73			46,308		492	2.14
Total earning assets		$	4,975,358		$	98,455		3.98	%	$	4,588,656	$	109,140	4.80	%
Less: Allowance for loan losses			(55,894)								(49,370)
Nonearning Assets
Cash and due from banks			60,209								168,085
Premises and equipment			60,738								58,729
Other nonearning assets			170,462								155,633
Total assets		$	5,210,873							$	4,921,733

Interest Bearing Liabilities
Savings deposits		$	249,654		$	110		0.09	%	$	244,049	$	143	0.12	%
Interest bearing checking accounts			1,780,705			6,278		0.71			1,621,035		13,530	1.68
Time deposits:
In denominations under $100,000			275,648			2,586		1.89			275,106		2,532	1.86
In denominations over $100,000			967,808			9,409		1.96			1,151,904		13,234	2.32
Miscellaneous short-term borrowings			49,761			407		1.64			112,344		1,182	2.12
Long-term borrowings and
subordinated debentures			49,451			98		0.40			30,928		888	5.79
Total interest bearing liabilities		$	3,373,027		$	18,888		1.13	%	$	3,435,366	$	31,509	1.85	%
Noninterest Bearing Liabilities
Demand deposits			1,176,648								904,031
Other liabilities			52,905								41,011
Stockholders' Equity			608,293								541,325
Total liabilities and stockholders' equity		$	5,210,873							$	4,921,733

Interest Margin Recap
Interest income/average earning assets						98,455		3.98					109,140	4.80
Interest expense/average earning assets						18,888		0.76					31,509	1.38
Net interest income and margin					$	79,567		3.22	%			$	77,631	3.42	%
(1)	Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $1.2 million and $1.0 million in the six-month periods ended June 30, 2020 and 2019, respectively.
---	---
(2)	Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $1.87 million for the six months ended June 30, 2020.All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented.
---	---
(3)	Nonaccrual loans are included in the average balance of taxable loans.
---	---

Table of Contents


		Three Months Ended June 30,
		2020						2019
		Average		Interest		Yield (1)/		Average		Interest		Yield (1)/
(fully tax equivalent basis, dollars in thousands)	****	Balance		Income		Rate		Balance		Income		Rate
Earning Assets
Loans:
Taxable (2)(3)		$	4,437,843	$	42,649	3.87	%	$	3,936,747	$	50,089	5.10	%
Tax exempt (1)			22,568		272	4.85			24,575		292	4.77
Investments: (1)
Available- for- sale			621,134		4,442	2.88			601,178		4,415	2.95
Short-term investments			79,446		29	0.15			12,092		97	3.22
Interest bearing deposits			51,994		35	0.27			51,357		254	1.98
Total earning assets		$	5,212,985	$	47,427	3.66	%	$	4,625,949	$	55,147	4.78	%
Less: Allowance for loan losses			(56,005)						(49,965)
Nonearning Assets
Cash and due from banks			57,157						171,313
Premises and equipment			60,815						58,857
Other nonearning assets			179,656						155,299
Total assets		$	5,454,608					$	4,961,453

Interest Bearing Liabilities
Savings deposits		$	264,250	$	59	0.09	%	$	240,824	$	71	0.12	%
Interest bearing checking accounts			1,842,373		1,544	0.34			1,743,813		7,576	1.74
Time deposits:
In denominations under $100,000			271,064		1,216	1.80			274,217		1,300	1.90
In denominations over $100,000			957,502		4,365	1.83			1,119,176		6,609	2.37
Miscellaneous short-term borrowings			10,852		45	1.67			35,424		232	2.63
Long-term borrowings and
subordinated debentures			75,000		74	0.40			30,928		436	5.65
Total interest bearing liabilities		$	3,421,041	$	7,303	0.86	%	$	3,444,382	$	16,224	1.89	%
Noninterest Bearing Liabilities
Demand deposits			1,361,643						922,729
Other liabilities			59,611						41,806
Stockholders' Equity			612,313						552,536
Total liabilities and stockholders' equity		$	5,454,608					$	4,961,453

Interest Margin Recap
Interest income/average earning assets					47,427	3.66					55,147	4.78
Interest expense/average earning assets					7,303	0.56					16,224	1.41
Net interest income and margin				$	40,124	3.10	%			$	38,923	3.37	%
(1)	Tax exempt income was converted to a fully taxable equivalent basis at a 21 percent tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses. Taxable equivalent basis adjustments were $596,000 and $512,000 in the three-month periods ended June 30, 2020 and 2019, respectively.
---	---
(2)	Loan fees are included as taxable loan interest income. Net loan fees attributable to PPP loans were $1.87 million for the three months ended June 30, 2020.All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented.
---	---
(3)	Nonaccrual loans are included in the average balance of taxable loans.
---	---

Table of Contents Net interest income increased $1.8 million, or 2.3%, for the six months ended June 30, 2020 compared with the first six months of 2019. The increased level of net interest income during the first six months of 2020 was largely driven by an increase in average earning assets of $386.7 million, due primarily to loan growth of $320.0 million and growth in investment securities of $25.9 million. Average loans outstanding increased to $4.260 billion during the six months ended June 30, 2020 compared to $3.940 billion during the same period of 2019, with most of the growth being in commercial loans. The average balance of PPP loans was $228.9 million for the six months ended June 30, 2020 and makes up a majority of the loan growth during the comparable periods. The earning asset growth was funded through an increase in deposits. Average deposits increased $254.3 million to $4.450 billion during the six months ended June 30, 2020, compared to $4.196 billion for the same period of 2019. During this same period average core deposits increased $334.8 million and average brokered deposits decreased $80.5 million. We define “core deposits” as total deposits (including all deposits by municipalities and other government agencies), excluding brokered deposits. PPP loan proceeds to borrowers impacted the increase in deposits during the quarter, as loan proceeds were deposited into borrower checking accounts at the Bank. Management expects demand deposit balances to decrease over time as PPP loan proceeds are deployed by borrowers for payroll and other business operating needs. Average borrowings decreased by $44.1 million to $99.2 million in the six months ended June 30, 2020, compared to $143.3 million during the same period of 2019.

The tax equivalent net interest margin was 3.22% for the first six months of 2020 compared to 3.42% during the first six months of 2019. The yield on earning assets totaled 3.98% during the six months ended June 30, 2020 compared to 4.80% in the same period of 2019. Cost of funds (expressed as a percentage of average earning assets) totaled 0.76% during the first six months of 2020 compared to 1.38% in the same period of 2019. The lower margin in the first six months of 2020 was due to lower yields on loans and securities, partially offset by a lower cost of funds, driven by the Federal Reserve decreasing the target Federal Funds Rate in the second half of 2019, as well as two Federal Reserve emergency cuts to the target Federal Funds Rate during March 2020. The two emergency cuts reduced the target Federal Funds Rate by 150 basis points and brought the target Federal Funds Rate back to the zero bound range of 0% to 0.25%. Additionally, the company's net interest margin was negatively impacted by three basis points during the first six months of 2020 due to the lower yield on PPP loans, which would have made net interest margin 3.25%.

Average earning assets increased by $587.0 million for the three months ended June 30, 2020 compared with the same period of 2019. Average loans outstanding increased $499.1 million during the three months ended June 30, 2020 compared with the same period of 2019, with most of the growth being in commercial loans. The average balance of PPP loans was $457.8 million for the three months ended June 30, 2020 and makes up a majority of the loan growth relative to the comparable periods. In addition, investment securities increased by $20.0 million. The earning asset growth was funded through deposit growth as well as an increase in borrowings. Average noninterest bearing demand deposits increased by $438.9 million while average interest bearing deposits decreased by $42.8 million and average borrowings increased by $19.5 million.

The tax equivalent net interest margin was 3.10% for the second quarter of 2020 compared to 3.37% during the second quarter of 2019. The yield on earning assets totaled 3.66% during the second quarter of 2020 compared to 4.78% in the same period of 2019, while the cost of funds (expressed as a percentage of average earning assets) totaled 0.56% during the second quarter of 2020 compared to 1.41% in the same period of 2019. Additionally, the company's net interest margin was negatively impacted by seven basis points during the second quarter of 2020 due to the lower yield on PPP loans, which would have made net interest margin 3.17%.

Provision for Loan Losses

The Company elected to delay the adoption of FASB’s new rule covering the Current Expected Credit Loss (“CECL”) standard as permitted by the CARES Act. The Company expects to adopt CECL on the earlier of the termination of the national emergency declaration, or December 31, 2020, whichever comes first, with an effective date of January 1, 2020. 44

Table of Contents Under the incurred loan loss methodology, the Company recorded a provision for loan loss expense of $12.1 million and $5.5 million, respectively, in the six month and three month periods ended June 30, 2020, compared to a provision of $2.0 million and $785,000, respectively, during the comparable periods of 2019. Net charge-offs were $3.7 million and $90,000, respectively, in the six month and three month periods ended June 30, 2020, compared to net recoveries of $126,000 and $217,000, respectively, during the comparable periods of 2019. This activity was driven primarily by one commercial manufacturing borrower that was on nonaccrual status and had a loan loss reserve allocation of $4.2 million as of December 31, 2019. The $3.7 million charge-off was due to the restructuring of this relationship during the first quarter of 2020. The primary factor impacting management’s decision to record a higher provision in the six month and three month periods of 2020 was the emerging economic impact of the COVID-19 pandemic on the Company’s loan customers. Some of the Company’s commercial loan customers have been forced to temporarily suspend or reduce operations and some of the Company’s retail customers are currently without a paycheck, which impairs their abilities to make debt payments. As a result, the Company has granted loan deferrals to customers which represent 16% of commercial loans and 1% of retail loans as of June 30, 2020. In accordance with provisions of the CARES Act as well as the interagency guidance, loan deferrals granted to our customers that have been made as a result of the impact of COVID-19 and who were not past due are not considered troubled debt restructurings and are therefore not included in the troubled debt restructurings totals as of June 30, 2020. See “Note 4 – Allowance for Loan Losses and Credit Quality.”

Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the allocation for specific watch list credits. Management’s overall view on current credit quality was also a factor in the determination of the provision for loan losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.

Noninterest Income

Noninterest income categories for the six-month and three-month periods ended June 30, 2020 and 2019 are shown in the following tables:


		Six Months Ended
		June 30,
								Dollar		Percent
(dollars in thousands)	****	2020		****	2019			Change		Change
Wealth advisory fees		$	3,664		$	3,266		$	398	12.2	%
Investment brokerage fees			727			914			(187)	(20.5)
Service charges on deposit accounts			4,961			9,137			(4,176)	(45.7)
Loan and service fees			4,833			4,885			(52)	(1.1)
Merchant card fee income			1,263			1,292			(29)	(2.2)
Bank owned life insurance			544			731			(187)	(25.6)
Mortgage banking income			1,940			620			1,320	212.9
Net securities gains (losses)			49			88			(39)	(44.3)
Other income			3,965			2,180			1,785	81.9
Total noninterest income		$	21,946		$	23,113		$	(1,167)	(5.0)	%
Noninterest income to total revenue			21.87	%		23.17	%

Table of Contents


	****	Three Months Ended
		June 30,
								Dollar			Percent
(dollars in thousands)	****	2020		****	2019		****	Change		****	Change
Wealth advisory fees		$	1,805		$	1,646		$	159		9.7	%
Investment brokerage fees		****	310			528			(218)		(41.3)
Service charges on deposit accounts		****	2,189			4,850			(2,661)		(54.9)
Loan and service fees		****	2,425			2,481			(56)		(2.3)
Merchant card fee income		****	594			670			(76)		(11.3)
Bank owned life insurance		****	836			287			549		191.3
Mortgage banking income		****	1,354			398			956		240.2
Net securities gains (losses)		****	49			65			(16)		(24.6)
Other income		****	1,607			663			944		142.4
Total noninterest income		$	11,169		$	11,588		$	(419)		(3.6)	%
Noninterest income to total revenue		****	22.03	%		23.18	%

The Company’s noninterest income decreased $1.2 million, or 5%, to $21.9 million for the six months ended June 30, 2020 compared to $23.1 million in the prior year period. Noninterest income was positively impacted by a $1.3 million increase, or 213% growth in mortgage banking income, a $1.2 million increase, or 155% growth, in swap fee income generated from commercial lending transactions and a $398,000 increase, or 12% growth, in wealth management fees over the corresponding prior year period. The credit valuation adjustments on interest rate swaps increased noninterest income by $1.0 million in the six months ended June 30, 2020 compared to the corresponding prior year period. Noninterest income was negatively impacted by a $4.2 million decrease in service charges on deposit accounts, as well as decreases of $187,000 in investment brokerage fees and decreases of $187,000 in bank owned life insurance income primarily due to a variable bank owned life insurance product that contains equity based investments. Service charges on deposit accounts for the six months ended June 30, 2019, included $3.7 million of fees from a former commercial customer.

The company’s noninterest income decreased $419,000, or 4%, to $11.2 million for the second quarter of 2020, compared to $11.6 million for the second quarter of 2019. Noninterest income was positively impacted by a $956,000 increase, or 240% growth, in mortgage banking income, a $926,000 increase, or 242% growth, in swap fee income generated from commercial lending transactions and a $159,000 increase, or 10% growth, in wealth management fees over the prior year second quarter. The credit valuation adjustments on interest rate swaps increased noninterest income by $271,000 in the second quarter 2020 compared to the second quarter of 2019. Offsetting these increases were decreases of $2.7 million, or 55%, in service charges on deposit accounts driven by lower treasury management fees and lower transaction-based fees. Treasury management fees from a former commercial customer were $2.1 million in the second quarter of 2019. In addition, overdraft fee income declined by $494,000, or 55%, during the second quarter as compared to the prior year second quarter. The Company believes that economic stimulus payments paid by the U.S. Treasury to customers during the second quarter of 2020 provided liquidity to our retail customers and reduced overdrafts.

Future noninterest income may continue to be impacted due to the effects of the COVID-19 pandemic, and the scope of any future governmental policy responses. For example, reduced economic activity may result in lower merchant card fee income and lower interchange revenue that is reported in services charges on deposits accounts and loan and service fees. 46

Table of Contents Noninterest Expense

Noninterest expense categories for the six-month and three-month periods ended June 30, 2020 and 2019 are shown in the following tables:


		Six Months Ended
		June 30,
								Dollar		Percent
(dollars in thousands)	****	2020			2019			Change		Change
Salaries and employee benefits		$	22,990		$	24,061		$	(1,071)	(4.5)	%
Net occupancy expense			2,932			2,649			283	10.7
Equipment costs			2,847			2,758			89	3.2
Data processing fees and supplies			5,711			4,999			712	14.2
Corporate and business development			1,738			2,377			(639)	(26.9)
FDIC insurance and other regulatory fees			670			815			(145)	(17.8)
Professional fees			2,200			2,008			192	9.6
Other expense			4,080			4,898			(818)	(16.7)
Total noninterest expense		$	43,168		$	44,565		$	(1,397)	(3.1)	%
Efficiency ratio			43.03	%		44.68	%


		Three Months Ended
		June 30,
								Dollar		Percent
(dollars in thousands)		2020			2019			Change		Change
Salaries and employee benefits	****	$	11,424		$	11,854		$	(430)	(3.6)	%
Net occupancy expense		****	1,545			1,283			262	20.4
Equipment costs		****	1,430			1,409			21	1.5
Data processing fees and supplies		****	2,829			2,574			255	9.9
Corporate and business development		****	627			1,171			(544)	(46.5)
FDIC insurance and other regulatory fees		****	403			409			(6)	(1.5)
Professional fees		****	1,053			1,071			(18)	(1.7)
Other expense		****	1,768			2,321			(553)	(23.8)
Total noninterest expense		$	21,079		$	22,092		$	(1,013)	(4.6)	%
Efficiency ratio			41.58	%		44.19	%

Table of Contents The company’s noninterest expense decreased by $1.4 million, or 3%, to $43.2 million in the first six months of 2020 compared to $44.6 million in the corresponding prior year period. The decrease was driven by salaries and employee benefits, which decreased by 4%, or $1.1 million, primarily due to lower incentive-based compensation expense. Corporate and business development decreased $639,000 primarily due to reduced business development and training expense. Offsetting the decreases were increases in data processing fees. In addition, net occupancy expense increased driven by COVID-19 related expenses, primarily for personal protective equipment and the implementation of social distancing measures for both employees and customers.

The company’s noninterest expense decreased $1.0 million, or 5%, to $21.1 million in the second quarter of 2020, compared to $22.1 million in the second quarter of 2019. Corporate and business development decreased $544,000 primarily due to reduced business development and training expense. Salaries and employee benefits decreased $430,000 primarily due to lower incentive- based compensation expense. Offsetting the decreases were increases in net occupancy expense driven by COVID-19 related expenses of approximately $395,000 incurred to prepare for our branch reopening and our Return to Workplace Plan. In addition, data processing fees increased driven by the company’s continued investment in customer focused, technology-based solutions and ongoing cybersecurity and data management enhancements.

The company’s efficiency ratio was 41.6% for the second quarter of 2020, compared to 44.2% for the second quarter of 2019 and 44.5% for the linked first quarter of 2020. The company’s efficiency ratio was 43.0% for the six months ended June 30, 2020 compared to 44.7% in the prior year period.

Future noninterest expense may continue to be reduced due to the COVID-19 pandemic. For example, continued protracted economic inactivity may reduce balance sheet growth and resulting revenue growth which could decrease the amount the Company pays in incentive-based compensation. In addition, the COVID-19 mitigation efforts may lead to the postponement of certain of the Company’s growth initiatives.

The Company’s income tax expense decreased $1.7 million and $961,000, respectively, in the six-month and three-month periods ended June 30, 2020 compared to the same periods in 2019. The effective tax rate was 18.0% and 18.4%, respectively, in the six-month and three-month periods ended June 30, 2020, compared to 18.4% and 19.9% for the comparable periods of 2019. The year-to-date effective tax rate for 2020 decreased as compared to the prior year period primarily due a lower state tax rate as well as a higher percentage of income being derived from tax-advantaged sources.

FINANCIAL CONDITION

Overview

Total assets of the Company were $5.441 billion as of June 30, 2020, an increase of $494.3 million, or 10.0%, when compared to $4.947 billion as of December 31, 2019. Overall asset growth was primarily driven by a $416.3 million, or 267.6%, increase in net loans to $4.432 billion at June 30, 2020 from $4.015 billion at December 31, 2019, a $27.0 million, or 27.1%, increase in cash and cash equivalents to $126.3 million at June 30, 2020 from $99.4 million at December 31, 2019, an increase of $24.7 million, or 4.1%, in securities available-for-sale to $632.9 million at June 30, 2020 from $608.2 million at December 31, 2019 and an increase of $13.8 million, or 33.5%, in other assets driven by higher valuations on the Company’s swap portfolio. Total deposits increased $509.6 million, or 12.3%, while total borrowings decreased by $59.5 million, or 35.0%. The increase is deposits was primarily driven by growth in core deposits of $595.1 million offset by a decrease in wholesale funding of $85.5 million. Core deposits were $4.615 billion as of June 30, 2020 compared to $4.020 billion as of December 31, 2019, an increase of $595.1 million, or 14.8%. Additionally, commercial deposits increased by $507.1 million, or 39.7%, to $1.783 billion at June 30, 2020 compared to $1.276 billion at December 31, 2019.

Uses of Funds

Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $27.0 million, or 27.1% to $126.3 million at June 30, 2020, from $99.4 million at December 31, 2019. Cash and cash equivalents at June 30, 2020 reflect larger items in the process of clearing such as public funds checks outstanding for matured certificates of deposit which were distributed in the form of checks. Short-term investments include cash on deposit that earn interest such as excess liquidity maintained at the Federal Reserve Bank. Cash and cash equivalents balances will vary depending on the cyclical nature of the bank’s liquidity position. 48

Table of Contents Investment Portfolio

The amortized cost and the fair value of securities as of June 30, 2020 and December 31, 2019 were as follows:


		June 30, 2020				December 31, 2019
		Amortized		Fair		Amortized		Fair
(dollars in thousands)	****	Cost		Value		Cost		Value
Mortgage-backed securities: residential		$	263,766	$	274,749	$	283,817	$	288,181
Mortgage-backed securities: commercial			39,379		40,569		36,712		36,972
State and municipal securities			296,529		317,590		270,480		283,080
Total		$	599,674	$	632,908	$	591,009	$	608,233

At June 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the investment portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for other-than-temporary impairment.

Purchases of securities available for sale totaled $47.4 million in the first six months of 2020. The purchases consisted primarily of state and municipal securities and purchases of mortgage-backed securities issued by government sponsored entities. Paydowns from prepayments and scheduled payments of $36.5 million were received in the first six months of 2020, and the amortization of premiums, net of the accretion of discounts, was $2.0 million. The increase in net amortization expense from the prior year is being driven by increased prepayment speeds given the current rate environment. Maturities and calls of securities totaled $3.9 million in the first six months of 2020. Sales of securities totaled $1.1 million in the first six months of 2020. No other-than-temporary impairment was recognized in the first three months of 2020.

Purchases of securities available for sale totaled $60.0 million in the first six months of 2019. The purchases consisted primarily of state and municipal securities and also purchases of mortgage-backed securities issued by government sponsored entities. Paydowns from prepayments and scheduled payments of $22.3 million were received in the first six months of 2019, and the amortization of premiums, net of the accretion of discounts, was $1.9 million. Sales of securities totaled $25.8 million in the first six months of 2019. Maturities and calls of securities totaled $7.9 million in the first six months of 2019, as well as increased prepayment assumptions. The increase in the amortization of premiums, net of the accretion of discounts was primarily driven by the adoption of ASU 2017-08 on January 1, 2019, as well as the increase in prepayments that have resulted from decreased interest rates. No other-than-temporary impairment was recognized in the first six months of 2019.

The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio to an acceptable level. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale increased by $12.1 million, or 267.6%, to $16.6 million at June 30, 2020, from $4.5 million at December 31, 2019. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells all of the qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $48.1 million in the first six months of 2020 compared to $20.4 million in the first six months of 2019. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $348.4 million and $337.9 million, respectively, as of June 30, 2020 and December 31, 2019. 49

Table of Contents Loan Portfolio

The loan portfolio by portfolio segment as of June 30, 2020 and December 31, 2019 is summarized as follows:


										Current
		June 30,				December 31,				Period
(dollars in thousands)	****	2020				2019				Change
Commercial and industrial loans	****	$	1,807,177	40.1	%	$	1,426,868	35.1	%	$	380,309
Commercial real estate and multi-family residential loans			1,781,299	39.5			1,673,322	41.1			107,977
Agri-business and agricultural loans			352,051	7.8			379,531	9.3			(27,480)
Other commercial loans			110,833	2.5			112,302	2.8			(1,469)
Consumer 1-4 family mortgage loans			355,361	7.9			376,745	9.3			(21,384)
Other consumer loans			98,667	2.2			98,617	2.4			50
Subtotal, gross loans			4,505,388	100.0	%		4,067,385	100.0	%		438,003
Less: Allowance for loan losses			(59,019)				(50,652)				(8,367)
Net deferred loan fees			(14,856)				(1,557)				(13,299)
Loans, net		$	4,431,513			$	4,015,176			$	416,337

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $438.0 million to $4.505 billion at June 30, 2020 from $4.067 billion at December 31, 2019. The increase was concentrated in the commercial real estate and commercial and industrial categories and was driven by $569.2 million in loans originated under the PPP, with $554.6 million of the PPP loans remaining outstanding at June 30, 2020. We anticipate that the portion of our loan portfolio attributable to PPP loans will continue to decline in future quarters, as borrowers avail themselves of loan forgiveness opportunities under the PPP. The increase was partially offset by declines in the usage of commercial lines of credit of approximately $200 million, as a result of the PPP loan proceeds our borrowers have received. The Company expects the reduced credit line utilization to be temporary while our borrowers deploy the PPP loan proceeds to pay for qualifying payroll and business expenses.

The following table summarizes the Company’s non-performing assets as of June 30, 2020 and December 31, 2019:


		June 30,			December 31,
(dollars in thousands)	****	2020			2019
Nonaccrual loans including nonaccrual troubled debt restructured loans		$	14,779		$	18,675
Loans past due over 90 days and still accruing			19			45
Total nonperforming loans		$	14,798		$	18,720
Other real estate owned			316			316
Repossessions			0			0
Total nonperforming assets		$	15,114		$	19,036

Impaired loans including troubled debt restructurings		$	23,987		$	27,763

Nonperforming loans to total loans			0.33	%		0.46	%
Nonperforming assets to total assets			0.28	%		0.38	%

Performing troubled debt restructured loans		$	5,772		$	5,909
Nonperforming troubled debt restructured loans (included in nonaccrual loans)			7,582			3,188
Total troubled debt restructured loans		$	13,354		$	9,097

Total nonperforming assets decreased by $3.9 million, or 20.6%, to $15.1 million during the six-month period ended June 30, 2020. The ratio of nonperforming assets to total assets at June 30, 2020 decreased from 0.38% at December 31, 2019 to 0.28% at June 30, 2020. The decrease in nonperforming assets was primarily due to a $3.7 million charge-off taken on a single commercial manufacturing borrower. 50

Table of Contents A loan is impaired when full payment under the original loan terms is not expected. Impairment for smaller loans that are similar in nature and which are not in nonaccrual or troubled debt restructured status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans and impairment is determined on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral.

Total impaired loans decreased by $3.8 million, or 13.6%, to $24.0 million at June 30, 2020 from $27.8 million at December 31, 2019. The decrease in the impaired loans category was primarily due to the $3.7 million charge-off on the single commercial relationship that was on nonaccrual status as of December 31, 2019.

As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers will continue to encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings.

Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for loan losses for any assets where management has identified conditions or circumstances that indicate an asset is impaired. If an asset or portion thereof is classified as a loss, the Company’s policy is to either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

At June 30, 2020, the allowance for loan losses was 1.31% of total loans outstanding, versus 1.25% of total loans outstanding at December 31, 2019. The allowance for loan losses was 1.50% of total loans outstanding, excluding PPP loans of $554.6 million, as of June 30, 2020. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for loan losses calculation. At June 30, 2020, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions fail to recover or continue to deteriorate due to the COVID-19 pandemic, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying probable incurred credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover probable credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

The Company has a relatively high percentage of commercial and commercial real estate loans extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area.

As of June 30, 2020, based on management’s review of the loan portfolio, the Company had 93 credits totaling $208.2 million on the classified loan list versus 103 credits totaling $181.2 million on December 31, 2019. The increase in classified loans for the first six months of 2020 resulted primarily from three commercial borrowers. As of June 30, 2020, the Company had $150.8 million of assets classified as Special Mention, $57.4 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $96.6 million, $84.6 million, $0 and $0, respectively, at December 31, 2019. 51

Table of Contents Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions. The Company has regular discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio and are applied to individual loans based on loan type. In accordance with the incurred loan loss reserve accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. For a more thorough discussion of the allowance for loan losses methodology see the Critical Accounting Policies section of this Item 2.

The allowance for loan losses increased 16.5%, or $8.3 million, from $50.7 million at December 31, 2019 to $59.0 million at June 30, 2020. Pooled loan allocations increased from $40.3 million at December 31, 2019 to $50.8 million at June 30, 2020, which was primarily due to management’s view of current credit quality, the current economic environment and the impacts of COVID-19, and loan growth. Impaired loan allocations were $8.2 million at June 30, 2020 and $10.4 million at December 31, 2019. The unallocated component of the allowance for loan losses was $3.1 million at June 30, 2020 and $2.3 million at December 31, 2019. The Company believes that the unallocated component is appropriate given the high level of uncertainty that exists regarding near term economic conditions. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.

Most of the Company's recent loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining loan loss allocations. Management believes that it is prudent to continue to provide for loan losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.

Loan growth for the first six months of 2020, excluding the $569.2 million originated in PPP loans, has been muted and prior to the COVID-19 pandemic, economic conditions in the Company’s markets had been stable. Watch list loans are $27.0 million higher at $208.2 million compared to $181.2 million at December 31, 2019, which represents 4.64% of total loans at June 30, 2020 compared to 4.43% at December 31, 2019. When excluding PPP loans of $554.6 million as of June 30, 2020, watch list loans were 5.29% of total loans. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for loan losses calculation. Total impaired and watch list loans increased by $320,000, or 0%, to $208.2 million at June 30, 2020 versus $207.9 million as of June 30, 2019. On a linked quarter basis, total impaired and watch list loans increased by $24.4 million, or 13%, from $183.8 million at March 31, 2020. The increase in total impaired and watch list loans was due primarily to an increase in non-impaired watch list credits that resulted from five downgraded credits, which were offset by four upgraded credits. Impaired watch list loans decreased by $284,000, or 1%, to $24.0 million at June 30, 2020 versus June 30, 2019. On a linked quarter basis, impaired watch list loans increased by $1.1 million, or 5%, from $22.9 million at March 31, 2020 due to the addition of two nonaccrual commercial loans offset by paydowns of impaired loans. The Company’s continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative position in loan work-out situations.

Table of Contents A summary of loan deferrals, by loan segment, as of June 30, 2020 is as follows:


(dollars in thousands)	****	Borrowers			****	Balance
Commercial and industrial loans	****	140	****	34.5	%	$	188,911	****	29.0	%
CRE - Nonowner Occupied	****	59	****	14.5		****	139,190	****	21.3
CRE - Owner Occupied	****	106	****	26.1		****	135,658	****	20.8
CRE - Multifamily Loans	****	8	****	2.0		****	93,244	****	14.3
CRE - Construction	****	4	****	1.0		****	39,685	****	6.1
Agri-business and agricultural loans	****	8	****	2.0		****	31,407	****	4.8
Other commercial loans	****	8	****	2.0		****	13,796	****	2.1
Consumer 1-4 family mortgage loans	****	11	****	2.7		****	5,082	****	0.8
Other consumer loans	****	62	****	15.2		****	5,531	****	0.8
Total*	****	406	****	100.0	%	$	652,504	****	100.0	%

* The number of borrowers in the table is higher due to one single borrower impacting multiple loan segments.

Sources of Funds

The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the six months ended June 30, 2020 and 2019 are summarized in the following table:


		Six months ended June 30,
		2020					2019
(dollars in thousands)	****	Balance		****	Rate		Balance		Rate
Noninterest bearing demand deposits		$	1,176,648		0.00	%	$	904,031	0.00	%
Savings and transaction accounts:
Savings deposits			249,654		0.09			244,049	0.12
Interest bearing demand deposits			1,780,705		0.71			1,621,035	1.68
Time deposits:
Deposits of $100,000 or more			967,808		1.96			1,151,904	2.32
Other time deposits			275,648		1.89			275,106	1.86
Total deposits		$	4,450,463		0.83	%	$	4,196,125	1.41	%
FHLB advances and other borrowings			99,212		1.02			143,272	2.91
Total funding sources		$	4,549,675		0.83	%	$	4,339,397	1.46	%

Deposits and Borrowings

As of June 30, 2020, total deposits increased by $509.6 million, or 12.3%, from December 31, 2019. Core deposits increased by $595.1 million to $4.615 billion as of June 30, 2020 from $4.020 billion as of December 31, 2019. Total brokered deposits were $28.1 million at June 30, 2020 compared to $113.5 million at December 31, 2019 reflecting an $85.5 million decrease during the first six months of 2020. PPP loan proceeds to borrowers impacted the increase in deposits during the quarter as loan proceeds were deposited into borrower checking accounts at the bank. Management expects demand deposit balances to decrease over time as PPP loan proceeds are deployed by borrowers for payroll and other business operating needs.

Since December 31, 2019, the change in core deposits was comprised of increases in commercial deposits of $507.1 million and retail deposits of $112.1 million offset by declines in public funds deposits of $24.1 million. Total public funds deposits, including public funds transaction accounts, were $1.103 billion at June 30, 2020 and $1.127 billion at December 31, 2019. 53

Table of Contents The following table summarizes deposit composition at June 30, 2020 and December 31, 2019:


						Current
		June 30,		December 31,		Period
(dollars in thousands)	****	2020		2019		Change
Retail		$	1,729,201	$	1,617,133	$	112,068
Commercial			1,783,162		1,276,048		507,114
Public funds			1,103,012		1,127,111		(24,099)
Core deposits		$	4,615,375	$	4,020,292	$	595,083
Brokered deposits			28,052		113,527		(85,475)
Total deposits		$	4,643,427	$	4,133,819	$	509,608

Total borrowings decreased by $59.5 million, or 35.0%, from December 31, 2019, primarily due to FHLB advance net repayments of $95.0 million offset by federal funds purchased of $25.0 million. The Company also drew $10.5 million on its holding company line of credit with a correspondent bank during the first quarter of 2020 to repurchase Company stock. The Company utilizes wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to supplement funding of assets, which is primarily used for loan and investment securities growth. Additionally, management has completed the actions required to activate participation in the Federal Reserve Bank’s Paycheck Protection Program Lending Facility (PPPLF). Management anticipates that the Company’s deposit balances may fluctuate more than usual during the remainder of 2020 due to the impact of PPP loan fundings, which are made to PPP loan recipient deposit accounts. In addition, there will be fluctuations due to IRS stimulus payments direct deposited into the accounts of retail customers. The timing and use of these funds in addition to draws on unfunded commitments could increase our need to borrow throughout the year. 54

Table of Contents Capital

As of June 30, 2020, total stockholders’ equity was $620.8 million, an increase of $22.8 million, or 3.8%, from $598.0 million at December 31, 2019. In addition to net income of $37.0 million, other increases in equity during the first six months of 2020 included a $12.7 million increase in accumulated other comprehensive income component of equity, which was primarily driven by a net increase in the fair value of available-for-sale securities. Offsetting the increases to stockholders’ equity were decreases due to the repurchase of 289,101 common shares for $10.0 million under the share repurchase plan. Dividends declared and paid in the amount of $15.3 million as well as $1.6 million in stock activity under equity compensation plans.

During the first quarter of 2020, the Company repurchased 289,101 shares of its common stock for $10 million at a weighted average price per share of $34.63. Share repurchases under the repurchase plan were suspended in March with $20 million of authorization remaining available under the plan. No shares were repurchased under the plan during the second quarter of 2020.

The impact on equity by other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of June 30, 2020, the Company's capital levels remained characterized as "well- capitalized" under the new rules.

The actual capital amounts and ratios of the Company and the Bank as of June 30, 2020 and December 31, 2019, are presented in the table below:


																	Minimum Required to				****
							Minimum Required					For Capital Adequacy					Be Well Capitalized				****
							For Capital					Purposes Plus Capital					Under Prompt Corrective				****
		Actual					Adequacy Purposes					Conservation Buffer					Action Regulations				****
(dollars in thousands)	****	Amount		****	Ratio	****	Amount		****	Ratio	****	Amount		****	Ratio	****	Amount		****	Ratio	****
As of June 30, 2020:
Total Capital (to Risk
Weighted Assets)
Consolidated		$	645,185	****	14.93	%	$	345,626	****	8.00	%	$	453,635	****	N/A	****		N/A	****	N/A
Bank		$	641,437	****	14.83	%	$	345,977	****	8.00	%	$	454,095	****	10.50	%	$	432,471	****	10.00	%
Tier I Capital (to Risk
Weighted Assets)
Consolidated		$	591,030	****	13.68	%	$	259,220	****	6.00	%	$	367,228	****	N/A		****	N/A	****	N/A
Bank		$	587,228	****	13.58	%	$	259,483	****	6.00	%	$	367,601	****	8.50	%	$	345,977	****	8.00	%
Common Equity Tier 1 (CET1)
Consolidated		$	591,030	****	13.68	%	$	194,415	****	4.50	%	$	302,423	****	N/A		****	N/A	****	N/A
Bank		$	587,228	****	13.58	%	$	194,612	****	4.50	%	$	302,730	****	7.00	%	$	281,106	****	6.50	%
Tier I Capital (to Average Assets)
Consolidated		$	591,030	****	10.84	%	$	218,005	****	4.00	%	$	218,005	****	N/A		****	N/A	****	N/A
Bank		$	587,228	****	10.86	%	$	216,352	****	4.00	%	$	216,352	****	4.00	%	$	240,440	****	5.00	%

As of December 31, 2019:
Total Capital (to Risk
Weighted Assets)
Consolidated		$	631,723		14.36	%	$	351,894		8.00	%	$	461,862		N/A			N/A		N/A
Bank		$	616,386		14.04	%	$	351,227		8.00	%	$	460,985		10.500	%	$	439,034		10.00	%
Tier I Capital (to Risk
Weighted Assets)
Consolidated		$	580,982		13.21	%	$	263,921		6.00	%	$	373,887		N/A			N/A		N/A
Bank		$	565,645		12.88	%	$	263,420		6.00	%	$	373,179		8.500	%	$	351,227		8.00	%
Common Equity Tier 1 (CET1)
Consolidated		$	580,982		13.21	%	$	197,941		4.50	%	$	307,908		N/A			N/A		N/A
Bank		$	565,645		12.88	%	$	197,565		4.50	%	$	307,324		7.000	%	$	285,372		6.50	%
Tier I Capital (to Average Assets)
Consolidated		$	580,982		11.67	%	$	199,099		4.00	%	$	199,099		N/A			N/A		N/A
Bank		$	565,645		11.43	%	$	197,923		4.00	%	$	197,923		4.00	%	$	247,404		5.00	%

Table of Contents FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:

●	the effects of the COVID-19 pandemic, including its effects on our customers, local economic conditions, our operations and vendors, and the responses of federal, state and local governmental authorities;
●	the effects of future economic, business and market conditions and changes, both domestic and foreign, including the effects of federal trade policies;
---	---
●	governmental monetary and fiscal policies;
---	---
●	the timing and scope of any legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;
---	---
●	the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities and other interest sensitive assets and liabilities;
---	---
●	the phase out of LIBOR by the end of 2021 and establishment of a new reference rate
---	---
●	changes in borrowers’ credit risks and payment behaviors;
---	---
●	changes in the availability and cost of credit and capital in the financial markets;
---	---
●	the effects of disruption and volatility in capital markets on the value of our investment portfolio;
---	---
●	cyber-security risks and or cyber-security damage that could result from attacks on the Company’s or third-party service providers networks or data of the Company;
---	---
●	changes in the prices, values and sales volumes of residential and commercial real estate;
---	---
●	the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
---	---
●	changes in technology or products that may be more difficult or costly, or less effective than anticipated;
---	---
●	the effects of war or other conflicts, acts of terrorism or other catastrophic events, including storms, droughts, tornados and flooding, that may affect general economic conditions, including agricultural production and demand and prices for agricultural goods and land used for agricultural purposes, generally and in our markets;
---	---
●	the risk of trade policy and tariffs could impact loan demand from the manufacturing sector
---	---
●	the failure of assumptions and estimates used in our reviews of our loan portfolio, underlying the establishment of reserves for possible loan losses, our analysis of our capital position and other estimates;
---	---
●	changes in the scope and cost of FDIC insurance, the state of Indiana’s Public Deposit Insurance Fund and other coverages;
---	---
●	changes in accounting policies, rules and practices, including as a result of implementation of CECL;
---	---
●	the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; and
---	---

Table of Contents

●	the risks noted in the Risk Factors discussed under Item 1A of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the months ended March 31, 2020, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in July 2020. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but do not necessarily indicate the effect on future net interest income. The Company, through its Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by its Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. The Company continually evaluates the assumptions used in the model. The current balance sheet structure is considered to be within acceptable risk levels.

Interest rate scenarios for the base, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points and rising 300 basis points are listed below based upon the Company’s rate sensitive assets and liabilities at June 30, 2020. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.

The base scenario is an annual calculation that is highly dependent on numerous assumptions embedded in the model. While the base sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity core deposit products, such as savings, money market, NOW and demand deposits reflect management’s best estimate of expected future behavior.


			Falling			Rising			Rising			Rising			Rising			Rising
			(25 Basis			(25 Basis			(50 Basis			(100 Basis			(200 Basis			(300 Basis
(dollars in thousands)	Base		Points)			Points)			Points)			Points)			Points)			Points)
Net interest income	$	161,128	$	158,797		$	163,060		$	165,018		$	169,006		$	175,603		$	182,582
Variance from Base			$	(2,331)		$	1,932		$	3,890		$	7,878		$	14,475		$	21,454
Percent of change from Base				(1.45)	%		1.20	%		2.41	%		4.89	%		8.98	%		13.31	%

ITEM 4 – CONTROLS AND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2020. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2020, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Table of Contents PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s Form 10-K for the year ended December 31, 2019, except for the risk factors set forth in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020, which are incorporated by reference herein. Please refer to that section of the Company’s Form 10-K and Form 10-Q for disclosures regarding the risks and uncertainties related to the Company’s business.

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

None

ISSUER PURCHASES OF EQUITY SECURITIES

On January 8, 2019, the Company's board of directors approved a share repurchase program, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. The repurchase program expired on December 31, 2019, and it was reauthorized by the Company’s board of directors on January 14, 2020 through January 31, 2021, with an aggregate purchase price cap of $30 million. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time.

No shares were repurchased under the plan during the second quarter of 2020.

The following table provides information as of June 30, 2020 with respect to shares of common stock repurchased by the Company during the quarter then ended:

ISSUER PURCHASES OF EQUITY SECURITIES


					Maximum Number (or
				Total Number of	Appropriate Dollar
				Shares Purchased as	Value) of Shares that
				Part of Publicly	May Yet Be Purchased
	Total Number of	Average Price		Announced Plans or	Under the Plans or
Period	Shares Purchased	Paid per Share		Programs	Programs
April 1-30	0	$	0	0	$	19,988,273
May 1-31	1,292		41.22	0		19,988,273
June 1-30	0		0	0		19,988,273
Total	1,292	$	41.22	0	$	19,988,273

(a)	The shares purchased during May were credited to the deferred share accounts of non-employee directors under the Company’s directors’ deferred compensation plan. These shares were purchased in the ordinary course of business and consistent with past practice.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Table of Contents Item 5. Other Information

None

Table of Contents Item 6. Exhibits


31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive Data File
	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three months and six months ended June 30, 2020 and June 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2020 and June 30, 2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months and six months ended June 30, 2020 and June 30, 2019; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019; and (vi) Notes to Unaudited Consolidated Financial Statements.

Table of Contents 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 thereunto duly authorized.

LAKELAND FINANCIAL CORPORATION

(Registrant)


Date: August 5, 2020	/s/ David M. Findlay
	David M. Findlay – President and
	Chief Executive Officer


Date: August 5, 2020	/s/ Lisa M. O’Neill
	Lisa M. O’Neill – Executive Vice President and
	Chief Financial Officer
	(principal financial officer)


Date: August 5, 2020	/s/ Brok A. Lahrman
	Brok A. Lahrman – Senior Vice President and Chief Accounting Officer
	(principal accounting officer)

Exhibit 31.1

I, David M. Findlay, Chief Executive Officer of Lakeland Financial Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lakeland Financial Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
---	---
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
---	---
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
---	---
a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
---	---
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---


Date: August 5, 2020	/s/ David M. Findlay
	David M. Findlay
	Chief Executive Officer

Exhibit 31.2

I, Lisa M. O’Neill, Chief Financial Officer of Lakeland Financial Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lakeland Financial Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
---	---
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
---	---
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
---	---
a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
---	---
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---


Date: August 5, 2020	/s/ Lisa M. O’Neill
	Lisa M. O’Neill
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lakeland Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David M. Findlay, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ David M. Findlay

David M. Findlay

Chief Executive Officer

August 5, 2020

A signed original of this written statement required by Section 906 has been provided to Lakeland Financial Corporation and will be retained by Lakeland Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lakeland Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa M. O’Neill, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Lisa M. O’Neill

Lisa M. O’Neill

Chief Financial Officer

August 5, 2020