What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 226 added, 181 removed, 384 unchanged (51% of the section changed)

11 unchanged sentences

Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2020 and December 31, 2019 and the consolidated results of operations for the three and six months ended June 30, 2020 and 2019.

This section presents an analysis of the consolidated financial condition of the Company as of September 30, 2020 and December 31, 2019 and the consolidated results of operations for the three and nine months ended September 30, 2020 and 2019.

This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

17 unchanged sentences

Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion.

The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act.

For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the

loan to five years.

The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the

maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act.

For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years.

The vast majority of the Company's PPP loans have two-year maturities.

PPP loans earn interest at a fixed rate of 1%.

The Bank is actively participating in assisting its customers with applications for resources through the program.

The Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of June 30, 2020, the Bank has committed approximately $349.5 million, on 2,998 loan relationships, under this program with processing fees estimated to total approximately $12.6 million ($12.0 million net of processing costs).

Under the terms of the PPP program, the loans are fully guaranteed by the U.S.

PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S.

As of September 30, 2020, the Company had approximately $351.3 million outstanding, on 3,070 PPP loan relationships, under this program.

The net processing fees related to the PPP, which total approximately $12.0 million, are being recognized over the life of the loans.

As of September 30, 2020, $9.5 million of such fees remain deferred.

The Company anticipates that the majority of the PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of October 31, 2020, 603 of our loans totaling $113 million have been submitted to the SBA for forgiveness.

Paycheck Protection Program Liquidity Facility

1 unchanged sentence

Under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions such as the Bank to fund loans guaranteed by the SBA under the PPP.

The Bank has until September 30, 2020 to access funds under the PPPL Facility, unless otherwise extended by the FRB and the Department of the Treasury.

The Bank has until December 31, 2020 to access funds under the PPPL Facility, unless otherwise further extended by the FRB and the Department of the Treasury.

The Company is continuing to assess the PPPL Facility and whether it will utilize the facility as a source of liquidity for its PPP lending.

3 unchanged sentences

In response to requests from borrowers who have experienced pandemic-related business or personal cash flow interruptions, and in accordance with the recently issued regulatory guidance, the Company has made short-term loan modifications involving both interest-only and full payment deferrals.

As of June 30, 2020 the following payment modifications have been made:

As of September 30, 2020 the following active payment modifications are still in effect.

These payment modifications are significantly reduced from the level of active modifications as of June 30, 2020.

% of Loan Category

(Excludes PPP Loans)

Type of Loans

Number of Loans

% of Loan Type (excludes PPP Loans)

(dollars in thousands)

(dollars in thousands) Number of Loans Outstanding Balance

As of 9/30/2020

As of 6/30/2020

Commercial & Industrial Loans 24 $ 6,154 1.2 % 10.8 %

1 unchanged sentence

Agricultural Loans — — — % 0.3 %

Consumer Loans

Consumer Loans 1 3 n/m (1)

Residential Mortgage Loans 12 1,275 0.5 % 8.2 %

To date, the Company has not experienced significant customer requests for additional loan modifications, within the commercial and industrial loan and commercial real estate loan portfolios, after the initial short-term modifications granted for those customers during the second quarter of 2020.

Total 81 $ 90,418 3.1 % 10.4 %

(1) n/m = not meaningful

Lending Exposure to Potentially Impacted Industry Segments

1 unchanged sentence

As a result of the COVID-19 pandemic, the Company has initially identified loan segments that could represent a potentially higher level of credit risk, as many of these customers may have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders and travel restrictions.

At June 30, 2020, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments:

At September 30, 2020, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments:

Industry Segment

Number of Loans

Outstanding Balance

% of Total Loans

(dollars in thousands)

(dollars in thousands) Number of Loans Outstanding Balance % of Total Loans (excludes PPP Loans) % of Industry Segment Under Deferral

Lodging / Hotels 49 $ 133,063 4.6 % 39.1 %

1 unchanged sentence

Retail Shopping / Strip Centers 64 92,996 3.2 % 17.5 %

Restaurants 189 49,402 1.7 % 8.6 %

Regulatory Capital

17 unchanged sentences

It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

6 unchanged sentences

This updated discussion should be read in conjunction with the Management Overview that was included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Net income for the quarter ended June 30, 2020 totaled $14,255,000, or $0.54 per share, a decline of 11% on a per share basis compared with the second quarter 2019 net income of $15,271,000, or $0.61 per share.

Net income for the six months ended June 30, 2020 totaled $26,727,000, or $1.01 per share, a decline of 17% on a per share basis compared with the first half of 2019 net income of $30,338,000, or $1.21 per share.

The decline in net income and earnings per share during the second quarter of 2020 and first six months of 2020 was largely attributable to an increased level of provision for credit losses related to economic uncertainties and stress related to the COVID-19 pandemic.

Net income for the quarter ended September 30, 2020 totaled $14,593,000, or $0.55 per share, an increase of 12% on a per share basis compared with the third quarter 2019 net income of $13,064,000, or $0.49 per share.

Net income for the nine months ended September 30, 2020 totaled $41,320,000, or $1.56 per share, a decline of 8% on a per share basis compared with the first nine months of 2019 net income of $43,402,000, or $1.70 per share.

The Company adopted ASU No.

51 unchanged sentences

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

No allowance for credit losses for available-for-sale debt securities was needed at June 30, 2020.

No allowance for credit losses for available-for-sale debt securities was needed at September 30, 2020.

Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses.

As of June 30, 2020, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $40,506,000 and gross unrealized losses totaled approximately $126,000 net of applicable taxes is included in other comprehensive income.

As of September 30, 2020, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $40,885,000 and gross unrealized losses totaled approximately $1,049,000 net of applicable taxes is included in other comprehensive income.

Equity securities that do not have readily determinable fair values are carried at cost, less impairment with observable price changes being recognized in earnings.

11 unchanged sentences

Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.

Based on recent economic developments related to the COVID-19 pandemic, the Company tested Goodwill for impairment as of the June 30, 2020 balance sheet date.

Based on recent economic developments related to the COVID-19 pandemic, the Company tested Goodwill for impairment as of the September 30, 2020 balance sheet date.

No impairment to Goodwill was indicated based on this interim period testing.

3 unchanged sentences

RESULTS OF OPERATIONS

The improvement in the net income during the third quarter of 2020 was largely attributable to improved non-interest income and lower operating expenses partially mitigated by a higher level of provision for credit losses.

The decline in net income and earnings per share during the first nine months of 2020 was largely attributable to an increased level of provision for credit losses related to economic uncertainties and stress related to the COVID-19 pandemic.

Net Interest Income:

3 unchanged sentences

Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

The following table summarizes net interest income (on a tax-equivalent basis) for the three months ended June 30, 2020 and 2019.

The following table summarizes net interest income (on a tax-equivalent basis) for the three months ended September 30, 2020 and 2019.

For tax-equivalent adjustments, an effective tax rate of 21% was used for both periods (1) .

2 unchanged sentences

Three Months Ended

June 30, 2020

Three Months Ended

June 30, 2019

Principal Balance

Income / Expense

Principal Balance

Income / Expense

September 30, 2020 Three Months Ended

September 30, 2019

Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate

Federal Funds Sold and Other

Short-term Investments

$ 197,203 $ 45 0.09 % $ 31,230 $ 163 2.07 %

Taxable 559,488 2,350 1.68 % 554,901 3,400 2.45 %

Non-taxable 461,623 4,019 3.48 % 315,468 3,072 3.90 %

Total Loans and Leases (2)

3,260,435 36,612 4.47 % 3,076,931 41,008 5.29 %

TOTAL INTEREST EARNING ASSETS 4,478,749 43,026 3.83 % 3,978,530 47,643 4.76 %

Other Assets 399,138 392,849

Allowance for Credit Losses (42,933) (16,268)

TOTAL ASSETS $ 4,834,954 $ 4,355,111

LIABILITIES AND SHAREHOLDERS’ EQUITY

1 unchanged sentence

and Money Market Deposits

$ 2,279,517 $ 813 0.14 % $ 1,946,219 $ 3,189 0.65 %

Time Deposits 540,248 1,679 1.24 % 725,347 3,210 1.75 %

5 unchanged sentences

Shareholders’ Equity 603,155 557,447

TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY

TOTAL LIBABILITIES AND

SHAREHOLDERS' EQUITY $ 4,834,954 $ 4,355,111

COST OF FUNDS 0.33 % 0.83 %

3 unchanged sentences

(2) Loans held-for-sale and non-accruing loans have been included in average loans.

During the second quarter of 2020, net interest income totaled $38,459,000, an increase of $4,818,000, or 14%, compared to the second quarter of 2019 net interest income of $33,641,000.

The increase in net interest income during the second quarter of 2020 compared with the second quarter of 2019 was largely attributable to acquisition of Citizens First and an increased level of loans related to the PPP, with a corresponding increase in interest income and fees.

The average balance of PPP loans during the second quarter of 2020 was approximately $276 million while the net fees recognized through interest income on those loans totaled approximately $1.1 million.

During the third quarter of 2020, net interest income totaled $38,388,000, a decline of $190,000, or less than 1%, compared to the third quarter of 2019 net interest income of $38,578,000.

The relative stability in net interest income during the third quarter of 2020 compared with the third quarter of 2019 was largely attributable to an increased level of average earning assets driven by participation in the PPP and a larger investment portfolio driven by significant deposit growth during the second quarter of 2020.

The average balance of PPP loans during the third quarter of 2020 was $351 million while net fees recognized through interest income on these loans totaled $1.5 million.

Also contributing to the relatively stable net interest income was a significantly reduced cost of funds and a corresponding decline in the interest cost of interest bearing liabilities.

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets.

The tax equivalent net interest margin was 3.59% for the second quarter of 2020 compared to 3.84% during the second quarter of 2019.

The tax equivalent yield on earning assets was 4.06% during the quarter ended June 30, 2020 compared to 4.67% in the same period of 2019, while the cost of funds (expressed as a percentage of average earning assets) was 0.47% during the quarter ended June 30, 2020 compared to 0.83% in the same period of 2019.

The lower net interest margin during the second quarter of 2020 compared with the second quarter of 2019 was attributable to lower market interest rates, excess liquidity on the balance sheet that resulted from significant deposit growth during the second quarter of 2020 and the 1% interest rate applicable to the PPP loans.

Accretion of loan discounts on acquired loans contributed approximately 19 basis points to the net interest margin on an annualized basis in the second quarter of 2020 and 12 basis points in the second quarter of 2019.

The following table summarizes net interest income (on a tax-equivalent basis) for the six months ended June 30, 2020 and 2019.

The tax equivalent net interest margin was 3.50% for the third quarter of 2020 compared to 3.93% during the third quarter of 2019.

The tax equivalent yield on earning assets was 3.83% during the quarter ended September 30, 2020 compared to 4.76% in the same period of 2019, while the cost of funds (expressed as a percentage of average earning assets) was 0.33% during the quarter ended September 30, 2020 compared to 0.83% in the same period of 2019.

The decline in the tax equivalent net interest margin during the third quarter of 2020 compared with the third quarter of 2019 was attributable to lower market interest rates, excess liquidity on the balance sheet, the 1% interest rate applicable to the PPP loans and a lower level of accretion on acquired loans.

Accretion of loan discounts on acquired loans contributed approximately 11 basis points to the net interest margin on an annualized basis in the third quarter of 2020 and 20 basis points in the third quarter of 2019.

The following table summarizes net interest income (on a tax-equivalent basis) for the nine months ended September 30, 2020 and 2019.

For tax-equivalent adjustments, an effective tax rate of 21% was used for both periods (1) .

1 unchanged sentence

(Tax-equivalent basis / dollars in thousands)

Six Months Ended

June 30, 2020

Six Months Ended

June 30, 2019

Principal Balance

Income / Expense

Principal Balance

Income / Expense

Nine Months Ended

September 30, 2020 Nine Months Ended

September 30, 2019

Principal Balance Income / Expense Yield / Rate Principal Balance Income / Expense Yield / Rate

Federal Funds Sold and Other

Short-term Investments $ 160,818 $ 287 0.24 % $ 25,699 $ 389 2.03 %

Taxable 548,229 8,166 1.99 % 546,319 10,554 2.58 %

Non-taxable 381,530 10,495 3.67 % 299,937 8,996 4.00 %

Total Loans and Leases (2)

3,191,254 112,702 4.72 % 2,840,435 111,350 5.24 %

TOTAL INTEREST EARNING ASSETS 4,281,831 131,650 4.10 % 3,712,390 131,289 4.73 %

Other Assets 397,224 355,759

Allowance for Credit Losses (37,492) (16,265)

TOTAL ASSETS $ 4,641,563 $ 4,051,884

LIABILITIES AND SHAREHOLDERS’ EQUITY

8 unchanged sentences

Shareholders’ Equity 588,925 502,532

TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY

TOTAL LIBABILITIES AND

SHAREHOLDERS' EQUITY $ 4,641,563 $ 4,051,884

COST OF FUNDS 0.50 % 0.84 %

3 unchanged sentences

(2) Loans held-for-sale and non-accruing loans have been included in average loans.

Net interest income increased $7,483,000, or 11%, for the six months ended June 30, 2020 compared with the same period of 2019.

The increased level of net interest income during the first half of 2020 compared with the first half of 2019 was driven primarily by a higher level of average earning assets resulting from the acquisition of Citizens First.

The tax equivalent net interest margin was 3.66% during the first half of 2020 compared to 3.86% during the first half of 2019.

The tax equivalent yield on earning assets was 4.26% during the six months ended June 30, 2020 compared to 4.71% in the same period of 2019, while the cost of funds was 0.60% during the first half of 2020 compared to 0.85% in the same period of 2019.

The lower net interest margin during the first half of 2020 compared with the first half of 2019 was attributable to lower market interest rates, excess liquidity on the balance sheet that resulted from significant deposit growth during the second quarter of 2020 and the 1% interest rate applicable to the PPP loans.

Accretion of loan discounts on acquired loans contributed approximately 17 basis points to the net interest margin on an annualized basis in the six months ended June 30, 2020 and 14 basis points in the same period of 2019.

Net interest income increased $7,293,000, or 7%, for the nine months ended September 30, 2020 compared with the same period of 2019.

The increased level of net interest income during the first nine months of 2020 compared with the same period of 2019 was driven primarily by a higher level of average earning assets resulting from the acquisition of Citizens First, participation in the PPP and a larger investment portfolio driven by significant deposit growth during 2020.

The tax equivalent net interest margin was 3.60% during the first nine months of 2020 compared to 3.89% during the first nine months of 2019.

The tax equivalent yield on earning assets was 4.10% during the nine months ended September 30, 2020 compared to 4.73% in the same period of 2019, while the cost of funds was 0.50% during the first nine months of 2020 compared to 0.84% in the same period of 2019.

The lower net interest margin during the nine months of 2020 compared with the first nine months of 2019 was attributable to lower market interest rates, excess liquidity on the balance sheet that resulted from significant deposit growth during the second quarter of 2020 and the 1% interest rate applicable to the PPP loans.

Accretion of loan discounts on acquired loans contributed approximately 15 basis points to the net interest margin on an annualized basis in the nine months ended September 30, 2020 and 16 basis points in the same period of 2019.

Provision for Credit Losses:

1 unchanged sentence

The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance.

During the quarter ended June 30, 2020, the provision for credit losses totaled $5,900,000 under the CECL methodology adopted during the first quarter of 2020 compared with a $250,000 provision for loan losses during the second quarter of 2019 under the incurred loss model.

The provision for credit losses losses represented approximately 73 basis points of average loans on an annualized basis in the second quarter of 2020 compared a provision for loan losses of 4 basis points of average loans on an annualized basis in the second quarter of 2019.

During the six months ended June 30, 2020, the provision for credit losses totaled $11,050,000 under the CECL methodology compared with a $925,000 provision for loan losses during the same period of 2019 under the incurred loss model.

The provision for credit losses losses represented approximately 70 basis points of average loans on an annualized basis in the first six months of 2020 compared a provision for loan losses of 7 basis points of average loans on an annualized basis in the same period of 2019.

The increase in the provision for credit losses during the three and six months ended June 30, 2020 compared to the provision for loan losses during the same periods of 2019 was primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the Company's CECL model.

Net charge-offs totaled $110,000 or 1 basis point on an annualized basis of average loans outstanding during the three months ended June 30, 2020, compared with $254,000 or 4 basis points on an annualized basis of average loans outstanding during the same period of 2019.

Net charge-offs totaled $550,000 or 3 basis point on an annualized basis of average loans outstanding during the first half of 2020, compared with $509,000 or 4 basis points on an annualized basis of average loans outstanding during the same period of 2019.

The provision for credit losses losses made during the three and six months ended June 30, 2020 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

During the quarter ended September 30, 2020, the provision for credit losses totaled $4,500,000 under the CECL methodology adopted during the first quarter of 2020 compared with a $2,800,000 provision for loan losses during the third quarter of 2019 under the incurred loss model.

The provision for credit losses losses represented approximately 55 basis points of average loans on an annualized basis in the third quarter of 2020 compared to a provision for loan losses of 36 basis points of average loans on an annualized basis in the third quarter of 2019.

During the nine months ended September 30, 2020, the provision for credit losses totaled $15,550,000 under the CECL methodology compared with a $3,725,000 provision for loan losses during the same period of 2019 under the incurred loss model.

The provision for credit losses losses represented approximately 65 basis points of average loans on an annualized basis in the first nine months of 2020 compared to a provision for loan losses of 17 basis points of average loans on an annualized basis in the same period of 2019.

The increase in the provision for credit losses during the three and nine months ended September 30, 2020 compared to the provision for loan losses during the same periods of 2019 was primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the Company's CECL model.

Net charge-offs totaled $163,000 or 2 basis points on an annualized basis of average loans outstanding during the three months ended September 30, 2020, compared with $3,170,000 or 41 basis points on an annualized basis of average loans outstanding during the same period of 2019.

Net charge-offs totaled $713,000 or 3 basis points on an annualized basis of average loans outstanding during the first nine months of 2020, compared with $3,679,000 or 17 basis points on an annualized basis of average loans outstanding during the same period of 2019.

The higher level of net charge-offs during the three and nine months ended September 30, 2019 was primarily attributable to a partial charge-off on a single adversely classified commercial lending relationship in the third quarter of 2019.

The provision for credit losses losses made during the three and nine months ended September 30, 2020 was made at a level deemed necessary by management to absorb estimated losses in the loan portfolio.

A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses.

1 unchanged sentence

Non-interest Income:

During the quarter ended June 30, 2020, non-interest income totaled $12,423,000, an increase of $1,914,000, or 18%, compared with the second quarter of 2019.

During the quarter ended September 30, 2020, non-interest income totaled $13,279,000, an increase of $1,223,000, or 10%, compared with the third quarter of 2019.

Non-interest Income

(dollars in thousands)

Ended June 30,

(dollars in thousands) Three Months

Ended September 30, Change From

Amount Percent

2020 2019 Change Change

Trust and Investment Product Fees $ 1,957 $ 1,885 $ 72 4 %

4 unchanged sentences

Other Operating Income 942 1,029 (87) (8)

Subtotal 9,811 10,094 (283) (3)

Net Gains on Sales of Loans 2,861 1,649 1,212 73

1 unchanged sentence

Total Non-interest Income $ 13,279 $ 12,056 $ 1,223 10

Service charges on deposit accounts declined $659,000, or 33%, during the second quarter of 2020 compared with the second quarter of 2019.

The decline during the second quarter of 2020 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity.

Other operating income increased $421,000, or 91%, during the quarter ended June 30, 2020 compared with the second quarter of 2019.

The increase during the second quarter of 2020 was largely attributable to lower fair value adjustments on interest rate swap transactions and the acquisition of Citizens First.

Net gains on sales of loans increased $1,624,000, or 158%, during the second quarter of 2020 compared with the second quarter of 2019.

The increase during the second quarter of 2020 was generally attributable to a higher sales volume, higher pricing levels on loans sold and an increased level of commitments to originate loans which resulted in a higher fair value adjustment on those commitments.

Loan sales totaled $79.7 million during the second quarter of 2020, compared with $39.6 million during the second quarter of 2019.

The Company realized $993,000 in gains on sales of securities during the second quarter of 2020 compared with $516,000 during the second quarter of 2019.

The sales of securities in both periods was done as part of modest shifts in the allocations within the securities portfolio.

During the six months ended June 30, 2020, non-interest income totaled $26,504,000, an increase of $4,337,000, or 20%, compared with the first half of 2019.

Service charges on deposit accounts declined $622,000, or 26%, during the third quarter of 2020 compared with the third quarter of 2019.

The decline during the third quarter of 2020 compared with the third quarter of 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity.

Interchange fee income increased $257,000, or 10%, during the quarter ended September 30, 2020 compared with the third quarter of 2019.

The increased level of fees during the third quarter of 2020 compared with the third quarter of 2019 was due to increased card utilization by customers.

Net gains on sales of loans increased $1,212,000, or 73%, during the third quarter of 2020 compared with the third quarter of 2019.

The increase during the third quarter of 2020 compared with the third quarter of 2019 was generally attributable to a higher sales volume and higher pricing levels on loans sold.

Loan sales totaled $83.5 million during the third quarter of 2020, compared with $60.4 million during the third quarter of 2019.

The Company realized $607,000 in gains on sales of securities during the third quarter of 2020 compared with $313,000 during the third quarter of 2019.

The sales of securities in all periods were done as part of modest shifts in the allocations within the securities portfolio.

During the nine months ended September 30, 2020, non-interest income totaled $39,783,000, an increase of $5,560,000, or 16%, compared with the first nine months of 2019.

Non-interest Income

(dollars in thousands)

Ended June 30,

(dollars in thousands) Nine Months

Ended September 30, Change From

Amount Percent

2020 2019 Change Change

Trust and Investment Product Fees $ 5,855 $ 5,365 $ 490 9 %

4 unchanged sentences

Other Operating Income 2,251 2,361 (110) (5)

Subtotal 30,215 29,579 636 2

Net Gains on Sales of Loans 7,378 3,660 3,718 102

1 unchanged sentence

Total Non-interest Income $ 39,783 $ 34,223 $ 5,560 16

Trust and investment product fees increased $418,000, or 12%, during the first half of 2020 compared with the first half of 2019.

Trust and investment product fees increased $490,000, or 9%, during the first nine months of 2020 compared with the first nine months of 2019.

The increase was primarily attributable to fees generated from increased assets under management in the Company's wealth management group.

Service charges on deposit accounts declined $322,000, or 8%, during the first quarter of 2020 compared with the first half of 2019.

The decline during the the first half of 2020 compared with first half of 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity, partially mitigated by the acquisition of Citizens First.

Company owned life insurance revenue increased $390,000, or 33%, during the six months ended June 30, 2020, compared with the first half of 2019.

Service charges on deposit accounts declined $944,000, or 15%, during the nine months ended September 30, 2020 compared with the same period of 2019.

The decline during 2020 compared with 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity, partially mitigated by the acquisition of Citizens First.

Company owned life insurance revenue increased $381,000, or 25%, during the nine months ended September 30, 2020, compared with the first nine months of 2019.

The increase was largely related to death benefits received from life insurance policies.

Interchange fees increased $531,000, or 12%, during the first half of 2020 compared with the first half of 2019.

The increase during the first half of 2020 compared with the first half of 2019 was largely attributable to the acquisition of Citizens First and increased card utilization by customers.

Net gains on sales of loans increased $2,506,000, or 125%, during the first half of 2020 compared with the first half of 2019.

The increase in the net gain on sales of loans during the first half of 2020 compared with 2019 was generally attributable to a higher sales volume, higher pricing levels on loans sold and an increased level of commitments to originate loans which resulted in a higher fair value adjustment on those commitments.

Loan sales totaled $136.0 million during the first half of 2020 and $68.4 million during the first half of 2019.

The Company realized $1,583,000 in gains on sales of securities during first six months of 2020 compared with $671,000 during the same period of 2019.

The sales of securities in both periods was done as part of modest shifts in the allocations within the securities portfolio.

Interchange fees increased $788,000, or 11%, during the nine months ended September 30, 2020 compared with the first nine months of 2019.

The increase during 2020 compared with 2019 was largely attributable to the acquisition of Citizens First and increased card utilization by customers.

Net gains on sales of loans increased $3,718,000, or 102%, during the first nine months of 2020 compared with the same period of 2019.

The increase in the net gains on sales of loans during 2020 compared with 2019 was generally attributable to a higher sales volume and higher pricing levels on loans sold.

Loan sales totaled $219.4 million during the first nine months of 2020 and $128.8 million during the same period of 2019.

The Company realized $2,190,000 in gains on sales of securities during first nine months of 2020 compared with $984,000 during the same period of 2019.

The sales of securities in both periods were done as part of modest shifts in the allocations within the securities portfolio.

Non-interest Expense:

During the quarter ended June 30, 2020, non-interest expense totaled $28,088,000, an increase of $2,470,000, or 10%, compared with the second quarter of 2019.

During the quarter ended September 30, 2020, non-interest expense totaled $29,420,000, a decline of $2,541,000, or 8%, compared with the third quarter of 2019.

The third quarter of 2019 non-interest expense included $2,258,000 in acquisition related expenses related to the acquisition of Citizens First Corporation on July 1, 2019.

Non-interest Expense

(dollars in thousands)

Ended June 30,

(dollars in thousands) Three Months

Ended September 30, Change From

Amount Percent

2020 2019 Change Change

Salaries and Employee Benefits $ 17,409 $ 17,579 $ (170) (1) %

Occupancy, Furniture and Equipment Expense 3,362 3,751 (389) (10)

FDIC Premiums

FDIC Premiums 326 — 326 n/m (1)

Data Processing Fees 1,693 2,860 (1,167) (41)

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Total Non-interest Expense $ 29,420 $ 31,961 $ (2,541) (8)

Salaries and benefits increased $1,765,000, or 13%, during the quarter ended June 30, 2020 compared with the second quarter of 2019.

The increase in salaries and benefits during the second quarter of 2020 compared with the second quarter of 2019 was primarily attributable to the acquisition of Citizens First.

Occupancy, furniture and equipment expense increased $269,000, or 8%, during the second quarter of 2020 compared with the second quarter of 2019.

The increase during the second quarter of 2020 compared with the second quarter of 2019 was primarily due to the operating costs of the Citizens First branch network.

FDIC premiums declined $122,000, or 50%, during the second quarter of 2020 compared with the second quarter of 2019.

The decline in FDIC premiums is attributable to credits received from the FDIC during the second quarter of 2020.

(1) n/m = not meaningful

Salaries and benefits declined $170,000, or 1%, during the quarter ended September 30, 2020 compared with the third quarter of 2019.

The decline in salaries and benefits during the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $695,000 during the third quarter of 2019.

Occupancy, furniture and equipment expense declined $389,000, or 10%, during the third quarter of 2020 compared with the third quarter of 2019.

The decline during the third quarter of 2020 compared with the third quarter of 2019 was primarily due to the consolidation of three branch office facilities during 2020 and the timing of expenses for normal repairs and maintenance across the Company's branch office network.

FDIC premiums increased $326,000, or 100%, during the third quarter of 2020 compared with the third quarter of 2019.

The increase during the third quarter of 2020 to the third quarter of 2019 was related to credits received from the FDIC during the third quarter of 2019.

There were no credits received during the third quarter of 2020.

The credits received were due to the reserve ratio of the deposit insurance fund exceeding the FDIC targeted levels.

Intangible amortization increased $107,000, or 13%, during the quarter ended June 30, 2020 compared with the second quarter of 2019.

The increase in intangible amortization in the second quarter of 2020 was attributable to the Citizens First acquisition completed during 2019.

Other operating expenses increased $637,000, or 19%, during the second quarter of 2020 compared with the second quarter of 2019.

The increase in the second quarter of 2020 compared with second quarter of 2019 was largely attributable to the Citizens First acquisition.

During the six months ended June 30, 2020, non-interest expense totaled $58,416,000, an increase of $6,039,000, or 12%, compared with the first half of 2019.

The increase in the first half of 2019 was largely impacted by the inclusion of operating expenses related to the acquisition of Citizens First.

Data processing fees declined $1,167,000, or 41%, in the third quarter of 2020 compared with the the third quarter of 2019.

The decline in the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $999,000 during the third quarter of 2019.

Professional fees declined $449,000, or 34%, in the third quarter of 2020 compared with the third quarter of 2019.

The decline in the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $401,000 during the third quarter of 2019.

Advertising and promotion expense declined $346,000, or 33%, in the third quarter of 2020 compared with the third quarter of 2019.

The decline in the third quarter of 2020 compared with the third quarter of 2019 was largely attributable to a decline in advertising expense due in part to the COVID-19 pandemic.

During the nine months ended September 30, 2020, non-interest expense totaled $87,836,000, an increase of $3,498,000, or 4%, compared with the first nine months of 2019.

The increase in the first nine months of 2020 was largely impacted by the inclusion of operating expenses related to the acquisition of Citizens First.

Non-interest Expense

(dollars in thousands)

Ended June 30,

(dollars in thousands) Nine Months

Ended September 30, Change From

Amount Percent

2020 2019 Change Change

Salaries and Employee Benefits $ 50,691 $ 46,740 $ 3,951 8 %

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Total Non-interest Expense $ 87,836 $ 84,338 $ 3,498 4

Salaries and benefits increased $4,121,000, or 14%, during the six months ended June 30, 2020 compared with the first half of 2019.

The increase in salaries and benefits during the first half of 2020 compared with the first half of 2019 was largely attributable to an increased number of full-time equivalent employees due in part to the acquisition of Citizens First.

Occupancy, furniture and equipment expense increased $631,000, or 10%, during the first half of 2020 compared with the first half of 2019.

The increase during the first half of 2020 compared with the first half of 2019 was primarily due to operating costs related to the Citizens First acquisition.

FDIC premiums declined $410,000, or 77%, during the first half of 2020 compared with the first half of 2019.

The decline in FDIC premiums is attributable to credits received from the FDIC during the first half of 2020.

The credits received were due to the reserve ratio of the deposit insurance fund exceeding the FDIC targeted levels.

Professional fees declined $335,000, or 13%, during the first half of 2020 compared with the first half of 2019.

The first half of 2019 included significant acquisition professional fees related to the Citizens First acquisition which resulted in the overall decline in professional fees when comparing the first half of 2020 with the first half of 2019.

Intangible amortization increased $224,000, or 14%, during the six months ended June 30, 2020 compared with the first half of 2019.

The increase in intangible amortization was attributable to the previously discussed Citizens First acquisition.

Other operating expenses increased $1,598,000, or 23%, during the first half of 2020 compared with the first half of 2019.

The increase during the first half of 2020 compared with the first half of 2019 was largely impacted by the recent acquisition activity.

Salaries and benefits increased $3,951,000, or 8%, during the nine months ended September 30, 2020 compared with the same period of 2019.

The increase in salaries and benefits during the first nine months of 2020 compared with the first nine months of 2019 was largely attributable to an increased number of full-time equivalent employees due in part to the acquisition of Citizens First.

Occupancy, furniture and equipment expense increased $242,000, or 2%, during the first nine months of 2020 compared with the same period of 2019.

The increase during 2020 compared with 2019 was primarily due to operating costs related to the Citizens First acquisition.

Data processing fees declined $1,104,000, or 18%, during the nine months ended September 30, 2020 compared with the same period of 2019.

The decline in data processing fees during the first nine months of 2020 compared with 2019 was largely due to acquisition related costs during 2019 which totaled $1,233,000.

Professional fees declined $784,000, or 20%, during the first nine moths of 2020 compared with the first nine months of 2019.

The first nine months of 2019 included $1,115,000 of professional fees related to the Citizens First acquisition which resulted in the overall decline in professional fees when comparing the nine months ended September 30, 2020 with the same period of 2019.

Other operating expenses increased $1,456,000, or 13%, during the nine months ended September 30, 2020 compared with the same period of 2019.

The increase during 2020 compared with 2019 was largely impacted by the recent acquisition activity.

Income Taxes:

The Company’s effective income tax rate was 15.6% and 16.5%, respectively, during the three months ended June 30, 2020 and 2019.

The Company’s effective income tax rate was 15.8% and 16.0%, respectively, during the six months ended June 30, 2020 and 2019.

The Company’s effective income tax rate was 17.8% and 17.7%, respectively, during the three months ended September 30, 2020 and 2019.

The Company’s effective income tax rate was 16.5% during the nine months ended September 30, 2020 and 2019.

The effective tax rate in all periods presented was lower than the blended statutory rate resulting primarily from the Company’s tax-exempt investment income on securities, loans and company-owned life insurance, income tax credits generated from affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

FINANCIAL CONDITION

Total assets for the Company totaled $4.851 billion at June 30, 2020, representing an increase of $453.4 million, or 21% on an annualized basis, compared with December 31, 2019.

The increase in total assets during the first half of 2020 has been impacted by the Company's participation in the PPP and by significant growth of deposits during the second quarter of 2020.

As of June 30, 2020 compared with December 31, 2019, federal funds sold and other short-term investments increased by $181.4 million and the Company's securities available for sale portfolio increased by $107.4 million.

These increases were largely driven by the increased level of deposits during the second quarter of 2020.

In addition, loans increased $189.0 million as of the end of June 30, 2020 compared with December 31, 2019 impacted primarily by the Company's participation in the PPP.

June 30, 2020 total loans increased $189.0 million, or 12% on an annualized basis, compared with December 31, 2019.

The increase in loans during the first half of 2020 compared with year-end 2019 was primarily the result in the Company's participation in the PPP.

Excluding the $349.5 million in PPP loans ($338.7 million net of deferred fees) at June 30, 2020, total loans declined by $149.7 million, or 10% on an annualized basis, during the first half of 2020 compared with year-end 2019.

The decline in total loans, excluding the PPP loans, was impacted by continued elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio partially attributable to the PPP loan originations during the second quarter of 2020, and continued pay-downs in the Company's residential and home equity loan portfolios related to the current interest rate environment.

Total assets for the Company totaled $4.853 billion at September 30, 2020, representing an increase of $455.2 million, or 14% on an annualized basis, compared with December 31, 2019.

The increase in total assets during the first nine months of 2020 has been impacted by the Company's participation in the PPP and by significant growth of deposits.

As of September 30, 2020 compared with December 31, 2019, federal funds sold and other short-term investments increased by $149.1 million and the Company's securities available for sale portfolio increased by $182.1 million.

These increases were largely driven by the increased level of deposits.

In addition, loans increased $143.3 million as of the end of September 30, 2020 compared with December 31, 2019 impacted primarily by the Company's participation in the PPP.

September 30, 2020 total loans increased $143.3 million, or 6% on an annualized basis, compared with December 31, 2019.

The increase in loans during the first nine months of 2020 compared with year-end 2019 was primarily the result in the Company's participation in the PPP.

Excluding the $351.3 million in PPP loans ($341.8 million net of deferred fees) at September 30, 2020, total loans declined by $198.5 million, or 6% on an annualized basis, during the first nine months of 2020 compared with year-end 2019.

The decline in total loans, excluding the PPP loans, was impacted by continued elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio partially attributable to the PPP loan originations during 2020, and continued pay-downs in the Company's residential and home equity loan portfolios related to the current interest rate environment.

End of Period Loan Balances:

(dollars in thousands)

(dollars in thousands) September 30,

2020 December 31,

2019 Current Period Change

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Residential Mortgage Loans 262,439 304,855 (42,416)

Total Loans $ 3,225,232 $ 3,081,973 $ 143,259

The following table indicates the breakdown of the allowance for credit losses for the periods indicated (dollars in thousands):

September 30,

2020 December 31,

Commercial and Industrial Loans and Leases $ 7,906 $ 4,799

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Residential Mortgage Loans 2,141 333

Unallocated — 505

Total Allowance for Credit Losses $ 46,768 $ 16,278

The Company’s allowance for credit losses totaled $42.4 million at June 30, 2020 compared to $16.3 million at December 31, 2019.

The allowance for credit losses represented 1.30% of period-end loans at June 30, 2020 compared with 0.53% of period-end loans at December 31, 2019.

Total PPP loans included in the Commercial and Industrial Loan category totaled $349.5 million at June 30, 2020.

The Company’s allowance for credit losses totaled $46.8 million at September 30, 2020 compared to $16.3 million at December 31, 2019.

The allowance for credit losses represented 1.45% of period-end loans at September 30, 2020 compared with 0.53% of period-end loans at December 31, 2019.

Total PPP loans included in the Commercial and Industrial Loan category totaled $351.3 million at September 30, 2020.

These loans are guaranteed by the SBA and have minimal impact on the allowance for credit losses.

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Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses.

As of June 30, 2020, the Company held net discounts on acquired loans of $9.8 million.

In addition, the allowance for credit losses increased during the six months ended June 30, 2020, as a result of the Company recording an $11.1 million provision for credit losses while recording net charge-offs of approximately $550,000.

The provision for credit losses was elevated in the first half of 2020 primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.

The following is an analysis of the Company’s non-performing assets at June 30, 2020 and December 31, 2019:

As of September 30, 2020, the Company held net discounts on acquired loans of $8.6 million.

In addition, the allowance for credit losses increased during the nine months ended September 30, 2020, as a result of the Company recording a $15.6 million provision for credit losses while recording net charge-offs of approximately $713,000.

The provision for credit losses was elevated in the first nine months of 2020 primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.

The following is an analysis of the Company’s non-performing assets at September 30, 2020 and December 31, 2019:

Non-performing Assets:

(dollars in thousands)

(dollars in thousands) September 30,

2020 December 31,

Non-accrual Loans $ 22,878 $ 13,802

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The following table presents non-accrual loans and loans past due 90 days or more still on accrual by class of loans:

Non-Accrual Loans

Loans Past Due 90 Days

Non-Accrual Loans Loans Past Due 90 Days

or More & Still Accruing

June 30, 2020

September 30,

2020 December 31,

2019 September 30,

2020 December 31,

Commercial and Industrial Loans and Leases $ 8,519 $ 4,940 $ — $ 190

4 unchanged sentences

Residential Mortgage Loans 1,063 2,496 — —

Non-performing assets totaled $19.6 million at June 30, 2020 compared to $14.4 million at December 31, 2019.

Non-performing assets represented 0.40% of total assets at June 30, 2020 and 0.33% at December 31, 2019.

Non-performing loans totaled $19.1 million at June 30, 2020 compared to $14.0 million at December 31, 2019.

Non-performing loans represented 0.59% of total loans at June 30, 2020 compared to 0.45% at December 31, 2019.

The increase in the level of non-performing assets and non-performing loans at June 30, 2020 compared with year-end 2019 was attributable to the $6.9 million gross-up of purchase credit deteriorated loans upon the adoption of the CECL standard.

June 30, 2020 total deposits increased $549.4 million, or 32% on an annualized basis, compared to December 31, 2019.

The increase in total deposits at June 30, 2020 compared with year-end 2019 was partially attributable the Company's participation in the PPP and a seasonal increase in public fund operating deposits as well as an overall inflow of customer deposits during the second quarter of 2020.

Total $ 22,878 $ 13,802 $ — $ 190

Non-performing assets totaled $23.3 million at September 30, 2020 compared to $14.4 million at December 31, 2019.

Non-performing assets represented 0.48% of total assets at September 30, 2020 and 0.33% at December 31, 2019.

Non-performing loans totaled $22.9 million at September 30, 2020 compared to $14.0 million at December 31, 2019.

Non-performing loans represented 0.71% of total loans at September 30, 2020 compared to 0.45% at December 31, 2019.

The increase in the level of non-performing assets and non-performing loans at September 30, 2020 compared with year-end 2019 was largely attributable to the $6.9 million gross-up of purchase credit deteriorated loans upon the adoption of the CECL standard.

Also contributing to the increase in the level of non-performing assets and non-performing loans at September 30, 2020 compared with year-end 2019 was the movement of a single commercial real estate credit relationship in the lodging industry to non-accrual status during the third quarter of 2020.

September 30, 2020 total deposits increased $549.7 million, or 21% on an annualized basis, compared to December 31, 2019.

The increase in total deposits at September 30, 2020 compared with year-end 2019 was partially attributable to the Company's participation in the PPP as well as an overall inflow of customer deposits since the start of the COVID-19 pandemic.

End of Period Deposit Balances:

(dollars in thousands)

(dollars in thousands) September 30,

2020 December 31,

2019 Current Period Change

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On a share basis, the amount of common stock subject to the repurchase plan represents approximately 4% of the Company’s outstanding shares.

The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time.

The Company is not obligated to purchase any shares under the plan,

and the plan may be discontinued at any time.

The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements.

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At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program.

The Company repurchased 44,166 shares of common stock under the 2020 repurchase plan during the second quarter of 2020 at an average price of $26.46 per share.

The Company repurchased 217,255 shares of common stock under the 2020 repurchase plan during the first half of 2020 at an average price of $26.07 per share.

As of June 30, 2020, shareholders’ equity increased by $20.9 million to $594.7 million compared with $573.8 million at year-end 2019.

The increase in shareholders' equity was largely attributable to an increase of $16.0 million in accumulated other comprehensive income primarily related to the increase in value of the Company's available-for-sale securities portfolio.

In addition, retained earnings increased $9.9 million due to first half of 2020 net income of $26.7 which was partially offset by the payment of $10.1 million in shareholder dividends and a $6.7 million charge relating to the implementation of CECL on January 1, 2020.

Also impacting total shareholders' equity was the repurchase of common stock under the Company's share repurchase plan which totaled $5.7 million during the first half of 2020.

Shareholders’ equity represented 12.3% of total assets at June 30, 2020 and 13.0% of total assets at December 31, 2019.

Shareholders’ equity included $132.7 million of goodwill and other intangible assets at June 30, 2020 compared to $134.0 million of goodwill and other intangible assets at December 31, 2019.

The Company repurchased 4,047 shares of common stock under the 2020 repurchase plan during the third quarter of 2020 at an average price of $26.93 per share.

The Company repurchased 221,302 shares of common stock under the 2020 repurchase plan during the first nine months of 2020 at an average price of $26.09 per share.

As of September 30, 2020, shareholders’ equity increased by $30.2 million to $604.0 million compared with $573.8 million at year-end 2019.

The increase in shareholders' equity was in part attributable to an increase of $15.6 million in accumulated other comprehensive income primarily related to the increase in value of the Company's available-for-sale securities portfolio.

In addition, retained earnings increased $19.5 million due to the first nine months of 2020 net income of $41.3 million which was partially offset by the payment of $15.1 million in shareholder dividends and a $6.7 million charge relating to the implementation of CECL on January 1, 2020.

Also impacting total shareholders' equity was the repurchase of common stock under the Company's share repurchase plan which totaled $5.8 million during the first nine months of 2020.

Shareholders’ equity represented 12.4% of total assets at September 30, 2020 and 13.0% of total assets at December 31, 2019.

Shareholders’ equity included $131.8 million of goodwill and other intangible assets at September 30, 2020 compared to $134.0 million of goodwill and other intangible assets at December 31, 2019.

Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks.

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The capital conservation buffer was phased in from 0.00% in 2015 to 2.50% in 2019.

For both June 30, 2020 and December 31, 2019, the capital conservation buffer was 2.50%.

At June 30, 2020, the capital levels for the Company and its subsidiary bank remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank's capital levels met the necessary requirements to be considered well-capitalized.

For both September 30, 2020 and December 31, 2019, the capital conservation buffer was 2.50%.

At September 30, 2020, the capital levels for the Company and its subsidiary bank remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank's capital levels met the necessary requirements to be considered well-capitalized.

The table below presents the Company’s consolidated and the subsidiary bank's capital ratios under regulatory guidelines:

Minimum for Capital Adequacy Purposes (1)

Ratio 12/31/2019

Ratio Minimum for Capital Adequacy Purposes (1)

Well-Capitalized Guidelines

Total Capital (to Risk Weighted Assets)

Consolidated 15.62 % 14.28 % 8.00 % N/A

Bank 13.60 % 12.82 % 8.00 % 10.00 %

Tier 1 (Core) Capital (to Risk Weighted Assets)

Common Tier 1, (CET 1) Capital Ratio (to Risk Weighted Assets)

Consolidated 13.66 % 12.67 % 6.00 % N/A

Bank 12.80 % 12.35 % 6.00 % 8.00 %

Common Tier 1, (CET 1) Capital Ratio

(to Risk Weighted Assets)

Consolidated 13.21 % 12.23 % 4.50 % N/A

Bank 12.80 % 12.35 % 4.50 % 6.50 %

Tier 1 Capital (to Average Assets)

Consolidated 10.05 % 10.53 % 4.00 % N/A

Bank 9.42 % 10.27 % 4.00 % 5.00 %

(1) Excludes capital conservation buffer.

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The first of the April 2020 interim final rules provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework.

It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR

requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.

The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.

The federal banking regulators adopted the two interim rules as final, without any changes, on October 9, 2020.

Notwithstanding these changes, the Company intends to continue with the existing layered ratio structure.

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The Consolidated Statement of Cash Flows details the elements of changes in the Company’s consolidated cash and cash equivalents.

Total cash and cash equivalents increased $174.5 million during the six months ended June 30, 2020 ending at $278.4 million.

During the six months ended June 30, 2020, operating activities resulted in net cash inflows of $42.7 million.

Investing activities resulted in net cash outflows of $272.0 million during the six months months ended June 30, 2020 primarily resulting from the investment of excess liquidity into the available for sale securities portfolio and loan portfolio growth resulting from the Company's participation in the PPP.

Financing activities resulted in net cash inflows for the six months ended June 30, 2020 of $403.8 million primarily related to growth in the Company's deposit portfolio.

Total cash and cash equivalents increased $145.8 million during the nine months ended September 30, 2020 ending at $249.7 million.

During the nine months ended September 30, 2020, operating activities resulted in net cash inflows of $56.2 million.

Investing activities resulted in net cash outflows of $304.1 million during the nine months months ended September 30, 2020 primarily resulting from the investment of excess liquidity into the available for sale securities portfolio and loan portfolio growth resulting from the Company's participation in the PPP.

Financing activities resulted in net cash inflows for the nine months ended September 30, 2020 of $393.7 million primarily related to growth in the Company's deposit portfolio.

The parent company is a corporation separate and distinct from its bank and other subsidiaries.

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The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings.

As of June 30, 2020, the parent company had approximately $65.1 million of cash and cash equivalents available to meet its cash flow needs.

As of September 30, 2020, the parent company had approximately $57.9 million of cash and cash equivalents available to meet its cash flow needs.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future.

These types of statements are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

These types of statements are considered “forward-looking statements” within the meaning of the Private Securities

Litigation Reform Act of 1995.

The Company may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-Q, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others.

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The discussions in this Item 2 list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statements.

Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any

forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

changes in competitive conditions;

22 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis