UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June 30, 2019~~

March 31, 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 001-36895

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

~~Tennessee~~	~~20-8839445~~
Tennessee		20-8839445
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~722 Columbia Avenue~~ ~~Franklin, Tennessee~~	~~37064~~
~~(Address of principal executive offices)~~	~~(Zip Code)~~

722 Columbia Avenue, Franklin, Tennessee 37064

(Address of principal executive offices) (Zip Code)

615-236-2265

(Registrant’s telephone number, including area code)

~~N/A~~

~~(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)~~

Securities registered pursuant to Section 12(b) of the ~~Act.~~

Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	FSB	New York Stock Exchange

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, a 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 ☒

The number of shares outstanding of the registrant’s common stock, no par value per share, as of ~~August 1, 2019,~~April 29, 2020, was ~~14,624,960.~~

14,919,433.

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TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements			1
Item 1. Consolidated Financial Statements (unaudited)			2 4
Consolidated Balance Sheets			2 4
Consolidated Statements of Income			3 5
Consolidated Statements of Comprehensive Income			4 6
Consolidated Statement of Changes in Equity			5 7
Consolidated Statements of Cash Flows			7 8
Notes to Consolidated Financial Statements			8 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			53
Item 4. Controls and Procedures			53 54

PART II OTHER INFORMATION

Item 1. Legal Proceedings			54 55
Item 1A. Risk Factors			54 55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54 56
Item 3. Defaults Upon Senior Securities			54 57
Item 4. Mine Safety Disclosures			54 57
Item 5. Other Information			54 57
Item 6. Exhibits			55 57

SIGNATURES

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This ~~Quarterly Report on~~ Form 10-Q contains ~~“forward-looking statements” as defined under U.S. federal securities laws. These~~forward-looking statements regarding, among other things, our anticipated financial and operating results, the transaction with FB Financial Corporation, the impact of the COVID-19 pandemic, our plans regarding reductions in non-core banking activities and our Corporate and Healthcare loan portfolio. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our management’s current ~~knowledge,~~ assumptions, beliefs, ~~estimates,~~ and ~~expectations and express management’s current views of future performance, results, and trends and may be identified by their use of terms~~expectations. Words such as ~~“may,~~“anticipate,” ~~“likely,~~“believe,” ~~“would,” “could,” “should,” “will,~~“estimate,” “expect,~~” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,~~” “intend,” “plan,” ~~“forecast,~~“objective,” ~~“goal,~~“may,” “could,” “would,” “should,” “hope,” “pursue,” “seek,” and ~~“estimate,” and other~~ similar ~~terms.~~expressions are intended to identify forward-looking statements. While we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove correct. Forward-looking statements are subject to ~~a number of~~ risks and uncertainties that could cause our actual results to differ materially from ~~those described~~the future results, performance, or achievements expressed in or implied by any forward-looking statement we make. Some of the relevant risks and uncertainties that could cause our actual performance to differ materially from the forward-looking ~~statements.~~statements contained in this report are discussed under the heading “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020, and in this Form 10-Q. We caution readers that these discussions of important risks and uncertainties are not exclusive, and our business may be subject to other risks and uncertainties which are not detailed there. Readers ~~should~~are cautioned not to place undue reliance on our forward-looking statements. ~~Such~~We make forward-looking statements ~~are made~~ as of the date ofon which this ~~Quarterly Report on~~ Form 10-Q is filed with the SEC, and we ~~undertake~~assume no obligation to update ~~such~~the forward-looking statements after ~~this~~the date ~~unless~~hereof whether as a result of new information or events, changed circumstances, or otherwise, except as required by law.

~~Risks and uncertainties~~

There are or will be important factors that could cause our actual results to differ materially from those ~~described~~indicated in these forward-looking statements, ~~include those discussed~~including, but not limited to, the following:

•the risk that the cost savings and any revenue synergies from the proposed merger with FB Financial Corporation may not be realized or may take longer than anticipated to be realized;

•disruption from the proposed merger with customer, supplier, or employee relationships;

•the occurrence of any event, change, or other circumstances that could give rise to the termination of the merger agreement with FB Financial Corporation;

•the failure to obtain necessary regulatory approvals for the proposed merger with FB Financial Corporation;

•the failure to obtain the approval of the Company’s and FB Financial Corporation’s shareholders in connection with the proposed merger;

•the possibility that the costs, fees, expenses, and charges related to the proposed merger with FB Financial Corporation may be greater than anticipated, including as a result of unexpected or unknown factors, events, or liabilities;

•the failure of the conditions to the proposed merger to be satisfied;

•the risks related to the integration of the combined businesses (as well as FB Financial Corporation’s acquisition of FNB Financial Corp completed February 14, 2020, and any future acquisitions), including the risk that the integration will be materially delayed or will be more costly or difficult than expected;

•the diversion of management time on merger-related issues;

•the ability of FB Financial Corporation to effectively manage the larger and more complex operations of the combined company following the proposed merger with the Company;

•reputational risk and the reaction of the Company’s and FB Financial Corporation’s customers to the proposed merger;

•the risk of potential litigation or regulatory action related to the proposed merger;

•business and economic conditions nationally, regionally and in our ~~filings~~target markets, particularly in Middle Tennessee and the geographic areas in which we operate;

•the concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;

•the concentration of our business within our geographic areas of operation in Middle Tennessee;

•credit and lending risks associated with our commercial real estate, residential real estate, commercial and industrial, and construction and land development portfolios;

•adverse trends or events affecting business industry groups, reduction in real estate values or markets, business closings or layoffs, inclement weather, natural disasters, pandemic crises, and international instability;

•increased competition in the banking and mortgage banking industry, nationally, regionally and locally;

•our ability to execute our business strategy to achieve profitable growth;

•the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;

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•risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;

•our ability to increase our operating efficiency;

•failure to keep pace with technological change or difficulties when implementing new technologies;

•risks related to our acquisition, disposition, growth and other strategic opportunities and initiatives;

•negative impact on our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation;

•our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;

•our ability to attract sufficient loans that meet prudent credit standards, including in our commercial and industrial and commercial real estate loan categories;

•failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;

•inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;

•failure to develop new, and grow our existing, streams of non-interest income;

•our ability to maintain expenses in line with our current projections;

•our dependence on our management team and our ability to motivate and retain our management team;

•risks related to management transition;

•risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;

•inability to find acquisition candidates that will be accretive to our financial condition and results of operations;

•system failures, data security breaches (including as a result of cyber-attacks), or failures to prevent breaches of our network security;

•data processing system failures and errors;

•fraudulent and negligent acts by individuals and entities that are beyond our control;

•fluctuations in our market value and its impact on the securities held in our securities portfolio;

•changes in the level of nonperforming assets and other credit quality measures, and their impact on the adequacy of our allowance for loan losses;

•further deterioration in the credits that we are presently monitoring could result in future losses;

•the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology for calculating such reserves;

•the makeup of our asset mix and investments;

•our focus on small and mid-sized businesses;

•an inability to raise necessary capital to fund our growth strategy or operations, or to meet increased minimum regulatory capital levels;

•the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or required;

•interest rate shifts and its impact on our financial condition and results of operation;

•the expenses that we incur to operate as a public company;

•the institution and outcome of litigation and other legal proceeding against us or to which we become subject;

•changes in accounting standards;

•the impact of recent and future legislative and regulatory changes;

•governmental monetary and fiscal policies;

•changes in the scope and cost of Federal Deposit Insurance Corporation, or FDIC, insurance and other coverage; and

•future equity issuances under our Amended and Restated 2017 Omnibus Equity Incentive Plan and future sales of our common stock by us or our executive officers or directors;

•the continuation of the disruption to the global and national economy caused by COVID-19, which could affect our capital and liquidity position, impair the ability of borrowers to repay outstanding loans and increase our allowance for loan and lease losses, impair the collateral values, cause an outflow of deposits, result in lost revenue or additional expenses, result in goodwill impairment charges, and increase our cost of capital;

•natural or other disasters, including acts of terrorism and pandemics, could have an adverse effect on us, including a material disruption of our operations or the ability or willingness of clients to access our products and services;

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•widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties could adversely impact our financial condition and results of operations; and

•depressed market values for our stock and adverse economic conditions sustained over a period of time may require a write down to goodwill.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the ~~Securities~~sections entitled “Risk Factors” and ~~Exchange Commission (“SEC”), including those described~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in ~~Item 1A of Part I of~~ our Annual Report on Form 10-K filed March 16, 2020 with the SEC, as well as the section below entitled “Statement Regarding the Impact of the COVID-19 Pandemic” and the section entitled “Risk Factors” in this Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

Statement Regarding the ~~year ended December 31, 2018.~~

Impact of the COVID-19 Pandemic

The Company prioritizes the health and safety of its employees and customers, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves. Lastly, the Company is actively participating in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") in an effort to continue to serve its customers and the communities it serves.

Throughout this Form 10-Q, the Company has sought to describe the historical and future impact of the COVID-19 pandemic on the Company's operations, including the discussions of our loan loss provision and allowance for loan and lease losses. Although the Company believes that the statements that pertain to future events, results and trends and their impact on the Company's business are reasonable at the present time, those statements are not historical facts and are based upon current assumptions, expectations, estimates and projections, many of which, by their nature, are beyond the Company's control. Accordingly, all discussions regarding future events, results and trends and their impact on the Company's business, even in the near term, are necessarily uncertain given the fluid and evolving nature of the pandemic.

If the health, logistical or economic effects of the pandemic worsen, or if the assumptions, expectations, estimates or projections that underlie the Company's statements regarding future effects or trends prove to be incorrect, then the Company's operations may be materially and adversely impacted in ways that the Company cannot reasonably forecast.

Therefore, when reading this Form 10-Q, undue reliance should not be placed upon any statement pertaining to future events, results and trends and their impact on the Company's business in future periods.

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PART I ~~FINANCIA~~LFINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)


	June 30, 2019			December 31, 2018				March 31, 2020		December 31, 2019
	(Unaudited)							(Unaudited)
ASSETS							ASSETS
Cash and due from financial institutions	$	150,721		$	280,212		Cash and due from financial institutions	$	173,482	$	234,991
Certificates of deposit at other financial institutions		3,840			3,594		Certificates of deposit at other financial institutions	3,345		3,590
Securities available for sale		715,132			1,030,668		Securities available for sale	543,225		652,132
Securities held to maturity (fair value 2019—$120,809 and 2018—$118,955)		118,963			121,617
Loans held for sale, at fair value		27,093			11,103		Loans held for sale, at fair value	42,682		43,162
Loans held for investment		2,880,433			2,665,399		Loans held for investment	2,855,768		2,812,444
Allowance for loan losses		(27,443	)		(23,451	)	Allowance for loan losses	(38,403)		(45,436)
Net loans		2,852,990			2,641,948		Net loans	2,817,365		2,767,008
Restricted equity securities, at cost		24,842			21,831		Restricted equity securities, at cost	24,844		24,802
Premises and equipment, net		12,948			12,371		Premises and equipment, net	48,470		12,141
Accrued interest receivable		14,281			13,337		Accrued interest receivable	12,043		12,362
Bank owned life insurance		55,989			55,239		Bank owned life insurance	57,082		56,726
Deferred tax asset		10,451			13,189		Deferred tax asset	12,846		14,229
Servicing rights, net		3,299			3,403		Servicing rights, net	3,057		3,246
Goodwill		18,176			18,176		Goodwill	18,176		18,176
Core deposit intangible, net		675			952		Core deposit intangible, net	354		448
Other assets		62,571			21,799		Other assets	34,630		53,149
Total assets	$	4,071,971		$	4,249,439		Total assets	$	3,791,601	$	3,896,162
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Deposits							Deposits
Non-interest bearing	$	334,802		$	290,580		Non-interest bearing	$	387,195	$	319,373
Interest bearing		2,811,843			3,141,227		Interest bearing	2,750,276		2,888,211
Total deposits		3,146,645			3,431,807		Total deposits	3,137,471		3,207,584
Federal Home Loan Bank advances		396,500			368,500		Federal Home Loan Bank advances	135,000		155,000
Subordinated notes, net		58,782			58,693		Subordinated notes, net	58,916		58,872
Accrued interest payable		4,312			4,700		Accrued interest payable	3,179		4,201
Other liabilities		72,123			12,906		Other liabilities	48,187		60,079
Total liabilities		3,678,362			3,876,606		Total liabilities	3,382,753		3,485,736
Commitments and Contingencies (Note 9)							Commitments and Contingencies (Note 9)
Equity							Equity
Preferred stock, no par value: 1.0 million shares authorized; no shares outstanding at June 30, 2019 and December 31, 2018		—			—
Common stock, no par value: 30.0 million authorized; 14.6 million and 14.5 million issued and outstanding at June 30, 2019 and December 31, 2018, respectively		268,505			264,905
Preferred stock, no par value: 1.0 million shares authorized; 0 shares outstanding at March 31, 2020 and December 31, 2019							Preferred stock, no par value: 1.0 million shares authorized; 0 shares outstanding at March 31, 2020 and December 31, 2019	—		—
Common stock, no par value: 30.0 million authorized; 14.9 million issued and outstanding at March 31, 2020 and 14.8 million issued and outstanding December 31, 2019, respectively							Common stock, no par value: 30.0 million authorized; 14.9 million issued and outstanding at March 31, 2020 and 14.8 million issued and outstanding December 31, 2019, respectively	277,341		275,412
Retained earnings		127,840			123,176		Retained earnings	131,061		133,102
Accumulated other comprehensive loss		(2,829	)		(15,341	)
Accumulated other comprehensive income							Accumulated other comprehensive income	353		1,819
Total shareholders’ equity		393,516			372,740		Total shareholders’ equity	408,755		410,333
Non-controlling interest in consolidated subsidiary		93			93		Non-controlling interest in consolidated subsidiary	93		93
Total equity		393,609			372,833		Total equity	408,848		410,426
Total liabilities and equity	$	4,071,971		$	4,249,439		Total liabilities and equity	$	3,791,601	$	3,896,162

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except share and per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,									Three Months Ended March 31,
	2019			2018			2019			2018				2020		2019
Interest income and dividends													Interest income and dividends
Loans, including fees	$	40,202		$	32,312		$	78,540		$	61,105		Loans, including fees	$	37,038	$	38,338
Securities:													Securities:
Taxable		4,614			6,905			11,008			13,016		Taxable	2,424		6,394
Tax-Exempt		1,410			1,929			2,880			3,844		Tax-Exempt	1,383		1,470
Dividends on restricted equity securities		350			329			684			603		Dividends on restricted equity securities	162		334
Federal funds sold and other		877			661			1,864			1,615		Federal funds sold and other	600		987
Total interest income		47,453			42,136			94,976			80,183		Total interest income	41,607		47,523
Interest expense													Interest expense
Deposits		16,679			12,604			33,669			23,247		Deposits	12,246		16,990
Federal funds purchased and repurchase agreements		90			131			162			227		Federal funds purchased and repurchase agreements	14		72
Federal Home Loan Bank advances and other borrowings		2,237			1,414			4,196			2,524		Federal Home Loan Bank advances and other borrowings	801		1,959
Subordinated notes		1,082			1,082			2,164			2,164		Subordinated notes	1,082		1,082
Total interest expense		20,088			15,231			40,191			28,162		Total interest expense	14,143		20,103
Net interest income		27,365			26,905			54,785			52,021		Net interest income	27,464		27,420
Provision for loan losses		7,031			570			12,086			1,143		Provision for loan losses	13,022		5,055
Net interest income after provision for loan losses		20,334			26,335			42,699			50,878		Net interest income after provision for loan losses	14,442		22,365
Noninterest income													Noninterest income
Service charges on deposit accounts		77			51			151			93		Service charges on deposit accounts	92		74
Other service charges and fees		903			823			1,660			1,574		Other service charges and fees	897		757
Mortgage banking revenue		2,473			2,044			4,145			3,602		Mortgage banking revenue	2,685		1,672
Wealth management		673			789			1,300			1,493		Wealth management	814		627
Gain on sale or call of securities		367			1			517			1		Gain on sale or call of securities	1,396		149
Net (loss) gain on sale of loans		3			—			(214	)		—
Net loss on sale of loans held for investment													Net loss on sale of loans held for investment	(416)		(217)
Net gain on sale of foreclosed assets		3			3			7			6		Net gain on sale of foreclosed assets	2		4
Other		424			436			844			834		Other	423		420
Total noninterest income		4,923			4,147			8,410			7,603		Total noninterest income	5,893		3,486
Noninterest expense													Noninterest expense
Salaries and employee benefits		11,365			10,268			26,108			19,456		Salaries and employee benefits	12,580		14,743
Occupancy and equipment		3,283			2,885			6,396			5,479		Occupancy and equipment	3,086		3,113
FDIC assessment expense		660			778			1,650			1,438
FDIC assessment (income) expense													FDIC assessment (income) expense	450		990
Marketing		301			269			620			549		Marketing	245		319
Professional fees		1,073			1,362			1,996			2,231		Professional fees	3,068		923
Amortization of core deposit intangible		132			182			277			286		Amortization of core deposit intangible	94		145
Other		2,556			2,306			4,939			4,099		Other	2,898		2,383
Total noninterest expense		19,370			18,050			41,986			33,538		Total noninterest expense	22,421		22,616
Income before income tax expense		5,887			12,432			9,123			24,943
Income tax expense		706			2,263			1,040			4,722
Net income		5,181			10,169			8,083			20,221
(Loss) income before income tax expense													(Loss) income before income tax expense	(2,086)		3,235
Income tax (benefit) expense													Income tax (benefit) expense	(938)		334
Net (loss) income													Net (loss) income	(1,148)		2,901
Earnings attributable to noncontrolling interest		(8	)		(8	)		(8	)		(8	)	Earnings attributable to noncontrolling interest	—		—
Net income available to common shareholders	$	5,173		$	10,161		$	8,075		$	20,213
Earnings per share:
Net (loss) income available to common shareholders													Net (loss) income available to common shareholders	$	(1,148)	$	2,901
(Loss) earnings per share:													(Loss) earnings per share:
Basic	$	0.35		$	0.71		$	0.55		$	1.46		Basic	$	(0.08)	$	0.20
Diluted		0.34			0.68			0.54			1.41		Diluted	(0.08)		0.19

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Net income

$
5,181

$
10,169

$
8,083

$
20,221

Other comprehensive income (loss):

Unrealized gains/losses on securities:

Unrealized holding gain (loss) arising during the period

7,116

(3,774
)

19,109

(18,351
)
Reclassification adjustment for losses (gains) included in net income

(367
)

(1
)

(517
)

(1
)
Tax effect

(1,760
)

988

(4,849
)

4,796

Net of tax

4,989

(2,787
)

13,743

(13,556
)
Unrealized gain/loss on cash flow hedge:

Unrealized holding gain (loss)

(1,667
)

—

(1,667
)

—

Tax effect

436

—

436

—

Net of tax

(1,231
)

—

(1,231
)

—

Total other comprehensive income (loss)

3,758

(2,787
)

12,512

(13,556
)
Comprehensive income

$
8,939

$
7,382

$
20,595

$
6,665


			Three Months Ended March 31,
	2020		2019
Net (loss) income	$	(1,148)	$	2,901
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities:
Unrealized holding gains (losses) arising during the period	1,739		13,111
Reclassification adjustment for losses (gains) on sales, calls, and prepayments of securities included in net income	(1,396)		(149)
Tax effect, includes $365 and $58, respectively, income tax (benefit) expense from sales of securities	(80)		(4,208)
Net unrealized gains (losses) on securities	263		8,754
Unrealized gain/loss on cash flow hedge:
Unrealized holding gain (loss) arising during the period	(2,341)		—
Tax effect	612		—
Net unrealized gains (losses) on cash flow hedge	(1,729)		—
Total other comprehensive (loss) income	(1,466)		8,754
Comprehensive (loss) income	$	(2,614)	$	11,655

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Shareholders’ Equity

Preferred

Common Stock

Retained

Accumulated
Other
Comprehensive

Noncontrolling

Total

Stock

Shares

Amount

Earnings

Loss

Interest

Equity

Balance at April 1, 2018

$
—

13,258,142

$
223,594

$
98,723

$
(17,555
)

$
103

$
304,865

Exercise of common stock options,
     includes net settlement of shares

—

135,883

1,717

—

—

—

1,717

Stock based compensation expense, net
     of restricted share forfeitures

—

—

1,319

—

—

—

1,319

Stock issued in conjunction with 401(k)
     employer match, net of distributions

—

(2,481
)

(45
)

—

—

—

(45
)
Issuance of restricted stock, net of
     forfeitures

—

118,306

—

—

—

—

—

Stock issued for acquisition (net of
     issuance costs)

—

970,390

32,932

—

—

—

32,932

Noncontrolling interest distributions

—

—

—

(8
)

—

—

(8
)
Net income

—

—

—

10,169

—

—

10,169

Other comprehensive loss

—

—

—

—

(2,787
)

—

(2,787
)
Balance at June 30, 2018

$
—

14,480,240

$
259,517

$
108,884

$
(20,342
)

$
103

$
348,162

Balance at April 1, 2019

$
—

14,574,339

$
266,758

$
123,250

$
(6,587
)

$
93

$
383,514

Exercise of common stock options,
     includes net settlement of shares

—

74,116

753

—

—

—

753

Stock based compensation expense, net
     of restricted share forfeitures

—

—

1,513

—

—

—

1,513

Issuance of restricted stock, net of
     forfeitures

—

(988
)

—

—

—

—

—

Purchase of treasury stock

—

(19,180
)

(519
)

—

—

—

(519
)
Cash dividends - common stock
     ($0.04 per share)

—

—

—

(583
)

—

—

(583
)
Noncontrolling interest distributions

—

—

—

(8
)

—

—

(8
)
Net income

—

—

—

5,181

—

—

5,181

Other comprehensive income

—

—

—

—

3,758

—

3,758

Balance at June 30, 2019

$
—

14,628,287

$
268,505

$
127,840

$
(2,829
)

$
93

$
393,609


	Shareholders’ Equity
	Preferred Stock		Common Stock					Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interest		Total Equity
				Shares		Amount
Balance at January 1, 2019	$	—	14,538,085	$	264,905	$	123,176	$	(15,341)	$	93	$	372,833
Cumulative effect of accounting change related to adoption of ASU 2017-08						(2,244)						(2,244)
Exercise of common stock options, includes net settlement of shares	—		35,046	524		—		—		—		524
Stock based compensation expense, net of restricted share forfeitures	—		—	1,329		—		—		—		1,329
Issuance of restricted stock awards, net of forfeitures	—		1,208	—		—		—		—		—
Cash Dividends - common stock ($0.04 per share)						(583)						(583)
Net income	—		—	—		2,901		—		—		2,901
Other comprehensive income	—		—	—		—		8,754		—		8,754
Balance at March 31, 2019	$	—	14,574,339	$	266,758	$	123,250	$	(6,587)	$	93	$	383,514


Balance at January 1, 2020	$	—	14,821,594	$	275,412	$	133,102	$	1,819	$	93	$	410,426
Exercise of common stock options, includes net settlement of shares	—		37,416	417		—		—		—		417
Stock based compensation expense, net of restricted share forfeitures	—		—	1,512		—		—		—		1,512
Issuance of restricted stock awards, net of forfeitures, and vesting of restricted stock units	—		694	—		—		—		—		—
Cash dividends - common stock ($0.06 per share)	—		—	—		(893)		—		—		(893)
Net loss	—		—	—		(1,148)		—		—		(1,148)
Other comprehensive loss	—		—	—		—		(1,466)		—		(1,466)
Balance at March 31, 2020	$	—	14,859,704	$	277,341	$	131,061	$	353	$	93	$	408,848

See accompanying notes to consolidated financial statements.

Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN EQUITY~~

~~Six Months Ended June 30, 2019 and June 30, 2018~~

CASH FLOWS

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Shareholders’ Equity

Preferred

Common Stock

Retained

Accumulated
Other
Comprehensive

Noncontrolling

Total

Stock

Shares

Amount

Earnings

Loss

Interest

Equity

Balance at January 1, 2018

$
—

13,237,128

$
222,665

$
88,671

$
(6,786
)

$
103

$
304,653

Exercise of common stock options,
     includes net settlement of shares

—

157,231

1,937

—

—

—

1,937

Stock based compensation expense, net
     of restricted share forfeitures

—

—

2,078

—

—

—

2,078

Stock issued in conjunction with 401(k)
     employer match, net of distributions

—

(2,815
)

(95
)

—

—

—

(95
)
Issuance of restricted stock, net of
     forfeitures

—

118,306

—

—

—

—

—

Stock issued for acquisition (net of
     issuance costs)

—

970,390

32,932

—

—

—

32,932

Noncontrolling interest distributions

—

—

—

(8
)

—

—

(8
)
Net income

—

—

—

20,221

—

—

20,221

Other comprehensive loss

—

—

—

—

(13,556
)

—

(13,556
)
Balance at June 30, 2018

$
—

14,480,240

$
259,517

$
108,884

$
(20,342
)

$
103

$
348,162

Balance at January 1, 2019

$
—

14,538,085

$
264,905

$
123,176

$
(15,341
)

$
93

$
372,833

Cumulative-effect of accounting change

—

—

—

$
(2,244
)

—

—

(2,244
)
Balance at January 1, 2019, adjusted

$
—

14,538,085

$
264,905

$
120,932

$
(15,341
)

$
93

$
370,589

Exercise of common stock options,
     includes net settlement of shares

—

109,162

1,277

—

—

—

1,277

Stock based compensation expense, net
     of restricted share forfeitures

—

—

2,842

—

—

—

2,842

Issuance of restricted stock, net of
     forfeitures

—

220

—

—

—

—

—

Purchase of treasury stock

—

(19,180
)

(519
)

—

—

—

(519
)
Cash dividends - common stock
     ($0.08 per share)

—

—

—

(1,167
)

—

—

(1,167
)
Noncontrolling interest distributions

—

—

—

(8
)

—

—

(8
)
Net income

—

—

—

8,083

—

—

8,083

Other comprehensive income

—

—

—

—

12,512

—

12,512

Balance at June 30, 2019

$
—

14,628,287

$
268,505

$
127,840

$
(2,829
)

$
93

$
393,609


	Three Months Ended March 31,
	2020		2019
Cash flows from operating activities
Net income	$	(1,148)	$	2,901
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment	585		410
Accretion of purchase accounting adjustments	(108)		(172)
Net amortization of securities	1,335		1,212
Amortization of loan servicing right asset	358		225
Amortization of core deposit intangible	94		145
Amortization of debt issuance costs	44		45
Provision for loan losses	13,022		5,055
Impairment charges on loan servicing right asset	225		—
Deferred income tax benefit	1,914		(2,115)
Excess tax benefit related to stock compensation	(210)		(113)
Origination of loans held for sale	(186,974)		(85,008)
Proceeds from sale of loans held for sale	188,952		75,791
Net gain on sale of loans held for sale	(1,892)		(1,598)
(Gain) Loss on sale of loans held for investment	416		223
Gain on sale of available for sale securities	(1,396)		(149)
Income from bank owned life insurance	(356)		(375)
Stock-based compensation	1,512		1,329
Deferred gain on sale of loans	(4)		(4)
Deferred gain on sale of foreclosed assets	(2)		(4)
Net change in:
Accrued interest receivable and other assets	(361)		(12,900)
Accrued interest payable and other liabilities	(4,248)		3,646
Net cash from operating activities	$	11,758	(11,456)
Cash flows from investing activities
Securities available for sale :
Sales and calls	102,426		259,613
Purchases	(369)		(80,360)
Maturities and prepayments	15,663		62,050
Securities held to maturity :
Maturities, prepayments and calls	—		2,448
Net change in loans	(87,662)		(142,678)
Proceeds from sale of loans held for investment	23,975		—
Purchase of restricted equity securities	(42)		(972)
Purchases of premises and equipment, net	(36,914)		(721)
Decrease in certificates of deposits at other financial institutions	245		—
Net cash from investing activities	$	17,322	$	99,380
Cash flows from financing activities
(Decrease) increase in deposits	(70,113)		(115,964)
Proceeds from Federal Home Loan Bank advances	95,000		190,000
Repayment of Federal Home Loan Bank advances	(115,000)		(142,000)
Proceeds from exercise of common stock options	417		524
Dividends paid on common stock	(893)		(583)
Net cash from financing activities	(90,589)		(68,023)
Net change in cash and cash equivalents	(61,509)		19,901
Cash and cash equivalents at beginning of period	234,991		280,212
Cash and cash equivalents at end of period	$	173,482	$	300,113
Supplemental information:
Interest paid	$	15,166	$	19,762
Income taxes paid	—		1,428
Non-cash supplemental information:
Establishment and extinguishment of lease liability and right-of use asset	$	(20,243)	$	43,723
Transfers from securities held to maturity to securities available for sale	$	—	$	1,206

See accompanying notes to consolidated financial statements.

Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~OF CASH FLOWS~~

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Six Months Ended
June 30,

2019

2018

Cash flows from operating activities

Net income

$
8,083

$
20,221

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization on premises and equipment

850

841

Accretion of purchase accounting adjustments

(346
)

(610
)
Net amortization of securities

3,078

4,073

Amortization of loan servicing right asset

487

441

Amortization of core deposit intangible

277

286

Amortization of debt issuance costs

89

89

Provision for loan losses

12,086

1,143

Deferred income tax benefit

(2,121
)

(216
)
Excess tax benefit related to stock compensation

(205
)

—

Origination of loans held for sale

(208,009
)

(184,835
)
Proceeds from sale of loans held for sale

197,230

183,113

Loss (gain) on sale of loans held for investment

227

—

Net gain on sale of loans held for sale

(5,594
)

(3,380
)
Gain on sale of available for sale securities

(517
)

(1
)
Income from bank owned life insurance

(750
)

(762
)
Stock-based compensation

2,842

2,078

Deferred gain on sale of loans

(7
)

(8
)
Deferred gain on sale of foreclosed assets

(7
)

(6
)
Net change in:

Accrued interest receivable and other assets

4,478

(2,153
)
Accrued interest payable and other liabilities

6,875

(3,327
)
Net cash from operating activities

19,046

16,987

Cash flows from investing activities

Securities available for sale :

Sales and calls

347,037

—

Purchases

(94,860
)

(226,362
)
Maturities and prepayments

82,556

87,779

Securities held to maturity :

Purchases

(3,284
)

(1,676
)
Maturities, prepayments and calls

5,261

6,393

Net change in loans

(241,477
)

(118,539
)
Proceeds from sale of loans held for investment

18,468

—

Purchase of restricted equity securities

(3,011
)

(1,165
)
Purchases of premises and equipment, net

(1,427
)

(885
)
Increase in certificates of deposits at other financial institutions

(246
)

—

Purchase of bank owned life insurance

—

(119
)
Net cash acquired from acquisition

—

24,660

Net cash from investing activities

109,017

(229,914
)
Cash flows from financing activities

(Decrease) increase in deposits

(285,162
)

107,635

Increase (decrease) in federal funds purchased and repurchase agreements

—

(30,659
)
Proceeds from Federal Home Loan Bank advances

340,000

250,000

Repayment of Federal Home Loan Bank advances

(312,000
)

(182,000
)
Proceeds from issuance of common stock, net of offering costs

—

(242
)
Proceeds from exercise of common stock options

1,277

1,937

Divestment of common stock issued to 401(k) plan

—

(95
)
Purchase of treasury stock

(494
)

—

Dividends paid on common stock

(1,167
)

—

Noncontrolling interest distributions

(8
)

(8
)
Net cash from financing activities

(257,554
)

146,568

Net change in cash and cash equivalents

(129,491
)

(66,359
)
Cash and cash equivalents at beginning of period

280,212

251,543

Cash and cash equivalents at end of period

$
150,721

$
185,184

Supplemental information:

Interest paid

$
40,579

$
27,004

Income taxes paid

6,043

6,632

Non-cash supplemental information:

Fair value of stock and stock options issued related to Civic Bank acquisition

$
-

$
33,174

Transfers from loans to foreclosed assets

—

350

Establishment of lease liability and right-of use asset

43,723

—

Transfers from securities available for sale to securities held to maturity

$
1,206

$
—

~~See accompanying notes to consolidated financial statements.~~

~~FRANKLIN FINANCIAL NETWORK, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Dollar amounts in thousands, except share and per share data)~~

~~(Unaudited)~~

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by Regulation S-X, Rule 10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2019.

These consolidated financial statements include the accounts of Franklin Financial Network, Inc. (“FFN”), and its wholly-owned subsidiaries, Franklin Synergy Bank (“Franklin Synergy” or the “Bank”) and Franklin Synergy Risk Management, Inc. (collectively, the “Company”). Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of the Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

~~Recently Adopted Accounting Pronouncements~~

~~In February 2016, the FASB issued~~ ~~Accounting Standards Update (ASU) 2016-02, Leases~~ ~~which requires recognition~~

The Company provides financial services through its offices in ~~the statement~~Franklin, Brentwood, Spring Hill, Murfreesboro, Nashville, Nolensville, and Smyrna, Tennessee, as well as through its loan and deposit production location in Mt. Juliet, Tennessee. Its primary deposit products are checking, savings, and certificate of ~~financial position~~deposit accounts, and its primary lending products are commercial and residential construction, commercial, installment loans and lines secured by home equity. Substantially all loans are secured by specific items of ~~lease~~collateral including commercial and residential real estate, business assets, and ~~lease liabilities~~consumer assets. Commercial loans are expected to be repaid by ~~lessees for those leases classified~~cash flow from operations of businesses. The Company also focuses on electronic banking products such as ~~operating leases under previous GAAP.~~

internet banking, remote deposit capture and lockbox services.

Principles of Consolidation and Basis of Presentation

The ~~guidance requires that a lessee should now recognize lease assets and lease liabilities for operating leases. In July 2016, the FASB issued~~ ~~Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases~~ ~~which provides technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued~~ ~~Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements~~ ~~which provides an optional transition method to adopt the new requirements of ASU 2016-02 as~~accompanying unaudited condensed consolidated financial statements of the ~~adoption date~~Company have been prepared in accordance with ~~no adjustment to~~United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the ~~presentation or disclosure~~Securities and Exchange Commission. Accordingly, the condensed financial statements do not include all of ~~comparative prior periods included in~~ the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the ~~period of adoption.~~ ~~In March 2019, the FASB issued ASU No. 2019-01,~~ ~~“Leases: Codification Improvements”~~ ~~whichaddresses lessors and clarifies the transition guidance related to certain interim disclosures provided~~amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of ~~adoption.~~ the results that may be expected for the year ending December 31, 2020. On January 21, 2020, the Company announced a strategic merger with FB Financial Corporation that is projected to close in the third quarter of 2020.

Risks and Uncertainties

The ~~Company adopted ASU 2016-02 on January 1, 2019, elected~~outbreak of COVID-19 has adversely impacted a broad range of industries in which the ~~optional transition method,~~Company’s customers operate and ~~subsequently adopted ASU 2019-01. The Company recorded a~~ ~~right~~could impair their ability to fulfill their financial obligations to the Company. During the first quarter of ~~use asset and lease liability of $43,723. See Note 5 - Leases for more information.~~

~~In March 2017,~~2020, the ~~FASB issued ASU 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium to require such premiums~~World Health Organization declared COVID-19 to be ~~amortized~~a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the ~~earliest call~~Company’s employees to date, unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance became effectiveCOVID-19 could also potentially create widespread business continuity issues for the ~~Company on January 1, 2019, and using a modified retrospective transition adoption approach, we recognized a cumulative effect reduction to retained earnings totaling $2,244.~~

~~In October 2018,~~Company.

The United States Congress, the ~~FASB issued~~ ~~ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion~~President of the ~~Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.”~~ This update expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on the SOFR. Due to concerns about the sustainability of the London Interbank Offered Rate (“LIBOR”), a committee convened by the Federal Reserve BoardUnited States, and the Federal Reserve ~~Bank of New York initiated an effort~~have taken several actions designed to ~~introduce an alternative reference rate in~~cushion the ~~U.S. The committee identified SOFR as~~economic fallout. Most notably, the ~~preferred alternative reference rate to LIBOR. The OIS rate based~~Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on ~~SOFR was added~~March 27, 2020 as a ~~U.S. benchmark interest rate~~$2.2 trillion legislative relief package. The goal of the CARES Act is to ~~facilitate broader use in~~limit the ~~marketplace~~impact of a potentially severe economic downturn through various measures, including direct financial aid to American families and ~~provide sufficient lead time~~economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for ~~entities~~hospitals and medical providers. In addition to ~~prepare for changes to interest rate risk hedging strategies. The Company adopted~~ the general impact of COVID-19, certain provisions of ~~ASU No. 2018-16 on January 1, 2019,~~the CARES Act as well as other recent legislative and ~~it did not~~regulatory relief efforts are expected to have a material impact on ~~our consolidated financial statements.~~

the Company’s operations.

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In June 2016, FASB issued~~ ~~ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement~~

Table of ~~Credit Losses on Financial Instruments~~. Contents

The ~~ASU requires~~Company’s business is dependent upon the ~~measurement~~willingness and ability of ~~all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,~~its employees and ~~reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information~~customers to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investorsconduct banking and other financial ~~statement users better understand significant estimates~~transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and ~~judgments used~~cash flows. While it is not possible to know the full extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware in ~~estimating credit losses,~~this Form 10-Q.

Financial position and results of operations

The Company’s fee income could be reduced due to the impacts of COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, ~~well as~~but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the ~~credit quality~~length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to the impacts of COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and ~~underwriting standards of an organization’s portfolio. These disclosures include qualitative~~fees. While interest and ~~quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the~~fees will still accrue to income, through normal GAAP accounting, ~~for~~should eventual credit losses on ~~available-for-sale debt securities~~these deferred payments emerge, interest income and ~~purchased financial assets with credit deterioration. The ASU is effective for~~fees accrued may need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018; however,is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Positively, the Company ~~does not currently plan~~could see a near-term, non-recurring benefit to ~~early adopt this ASU. The following amendments~~interest income due to ~~ASU 2016-13~~ ~~are also in consideration~~the origination fees paid by the ~~Company:~~ ~~ASU No. 2018-19~~, ~~Codification Improvements~~SBA related to ~~Topic 326~~, ~~Financial Instruments—Credit Losses~~, ~~ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives~~PPP loans that are originated and ~~Hedging, and Topic 825, Financial Instruments, and ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326)~~: ~~Targeted Transition Relief~~. ~~The~~funded by the Company.At this time, the Company is ~~currently gathering information~~unable to project the materiality of such an impact.

Lending operations and ~~working~~accommodations to ~~determine~~borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the ~~methodology to be used. The~~CARES Act, the Company is ~~gathering as much data as possible to enable review scenarios and to determine which calculations will produce~~executing a payment deferral program for its eligible clients that are adversely affected by the ~~most reliable results. The~~pandemic. Depending on the demonstrated need of the client, the Company is ~~still evaluating~~deferring either the ~~impact of this new guidance on our financial statements; however an increase in~~full loan payment or the ~~overall ALLL is likely upon adoption to provide for expected credit losses over the life~~principal component of the loan ~~portfolio.~~

payment, typically for 90 days. As of April 30, 2020, the Company has executed over 420 of these deferrals on outstanding loan balances of approximately $644,000. During the period ending March 31, 2020, interagency guidance and the CARES Act rules provided clarity to accounting for modifications whereby under certain circumstances, such modifications would not be considered troubled debt restructurings ("TDRs"). As such, the aforementioned modified loans have not been classified as TDRs.

With the passage of the PPP, administered by the SBA, the Company is actively participating in assisting its customers with applications for these SBA-guaranteed loans through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company has closed or approved with the SBA over 325 PPP loans representing approximately $50,000 in funding. The Company continues to work with eligible customers to originate and fund PPP loans. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan and lease losses through additional provision expense charged to earnings.

Credit

Pertaining to the Company’s March 31, 2020 financial condition and results of operations, COVID-19 had an impact on the Company’s allowance for loan and lease losses (“ALLL”) and resulting provision for loan losses are impacted by changes in economic conditions. The execution of the payment deferral program discussed previously improved our ratio of past due loans to total loans.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or equity.

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Recently Adopted and Effective Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance ~~will remain~~remains largely unchanged. ASU 2017-04 isbecame effective for ~~interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after~~us on January 1, ~~2017. Adoption of ASU 2017-04 is~~2020, and it did not ~~expected to~~ have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 isbecame effective for ~~interim~~us on January 1, 2020, and ~~annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13~~ only revises disclosure ~~requirements, it will~~requirements. It did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issuedASU 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.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, ~~“Customer’s~~“Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract 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). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 ~~will be~~became effective for the Company on January 1, 2020, ~~with early adoption permitted,~~ and isit did not ~~expected to~~ have a significant impact on our financial statements.

Status of New Accounting Standard for Accounting for Allowance for Credit Losses

On January 1, 2020, ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, became effective for the Company which replaces the existing incurred loss impairment methodology ("ILM") for loans that are collectively evaluated for impairment with a methodology that reflects management’s best estimate of lifetime expected credit losses and requires consideration of reasonable and supportable economic forecasts to develop a lifetime credit loss estimate. Topic 326 requires additional qualitative and quantitative disclosure to allow users to better understand the credit risk within the portfolio and the methodologies for determining the allowance for credit losses ("ACL"). The Cumulative Expected Credit Loss ("CECL") standard also simplifies the accounting model for purchased credit impaired loans. Additionally, Topic 326 requires expected credit losses on available-for-sale ("AFS") debt securities be recorded as an ACL. For certain types of debt securities, such as U.S. Treasuries and other securities with government guarantees, entities may utilize an assumption of zero credit losses.

In accordance with Section 4014 of theCARES Act, the Company deferred implementation of CECL and thus elected to continue to utilize the ILM to calculate loan loss reserves in the first quarter 2020.

The temporary deferral of CECL will remain effective until the earlier of the termination of the national emergency declaration concerning the COVID-19 pandemic or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.There is increased uncertainty on the local, regional, and national economy as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level.The Company has taken actions to mitigate the impact or potential prospective credit losses including permitting short-term payment deferrals to current customers, as well as actively participating in the SBA’s PPP.These conditions significantly impact management’s determination of a reasonable and supportable forecast, an essential requirement in the calculation of expected credit losses under CECL methodology.The Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. Management will continue to measure and monitor the estimated impacts of CECL adoption through continued parallel testing of model simulations based on our portfolio composition and current expectations of future economic conditions.

The Company’s CECL implementation efforts will remain in process in order to adequately comply with the provisions of CECL once the deferral period ceases.Management will continue to measure and monitor the estimated impacts of CECL

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adoption through continued parallel testing of model simulations based on our portfolio composition and current expectations of future economic conditions.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities ~~available for sale~~available-for-sale portfolio at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2019
U.S. government sponsored entities and agencies	$	1,695		1		(8	)	$	1,688
											Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2020										March 31, 2020
Mortgage-backed securities: residential		476,378		1,417		(3,744	)		474,051	Mortgage-backed securities: residential	$	286,307	$	8,369	$	(4)	$	294,672
Mortgage-backed securities: commercial		18,544		275		(120	)		18,699	Mortgage-backed securities: commercial	17,445		336		(86)		17,695
Asset-backed securities		25,746		27		(565	)		25,208
Corporate notes		22,360		356		—			22,716	Corporate notes	4,500		108		(85)		4,523
State and political subdivisions		172,585		279		(94	)		172,770	State and political subdivisions	230,728		3,447		(7,840)		226,335
Total	$	717,308	$	2,355	$	(4,531	)	$	715,132	Total	$	538,980	$	12,260	$	(8,015)	$	543,225

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

December 31, 2018

U.S. Treasury securities

$
253,015

$
59

$
(60
)

$
253,014

U.S. government sponsored entities and agencies

21,999

1

(112
)

21,888

Mortgage-backed securities: residential

596,766

27

(16,094
)

580,699

Asset-backed securities

25,744

—

(900
)

24,844

Corporate notes

12,480

21

(77
)

12,424

State and political subdivisions

141,432

863

(4,496
)

137,799

Total

$
1,051,436

$
971

$
(21,739
)

$
1,030,668

~~The amortized cost and fair value of the~~


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2019
Mortgage-backed securities: residential	$	374,923	$	1,876	$	(856)	$	375,943
Mortgage-backed securities: commercial	17,858		56		(134)		17,780
Corporate notes	32,825		539		(3)		33,361
State and political subdivisions	222,624		2,566		(142)		225,048
Total	$	648,230	$	5,037	$	(1,135)	$	652,132

There were 0 securities ~~held to maturity portfolio~~held-to-maturity at ~~June 30, 2019 and~~March 31, 2020 or December 31, ~~2018 and the corresponding amounts of gross unrecognized gains and losses were as follows:~~

2019.

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Fair
Value

June 30, 2019

Mortgage backed securities: residential

$
74,163

$
198

$
(1,029
)

$
73,332

State and political subdivisions

44,800

2,677

—

47,477

Total

$
118,963

$
2,875

$
(1,029
)

$
120,809

December 31, 2018

Mortgage backed securities: residential

$
75,944

$
34

$
(3,072
)

$
72,906

State and political subdivisions

45,673

466

(90
)

46,049

Total

$
121,617

$
500

$
(3,162
)

$
118,955

The proceeds from sales, calls, and ~~calls~~prepayments of ~~securities~~ available for sale securities and the associated gains and losses were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,								Three Months Ended March 31,
	2019		2018		2019			2018			2020		2019
Proceeds	$	87,424	$	1	$	347,037		$	1	Proceeds	$	102,426	$	259,613
Gross gains		367		1		2,168			1	Gross gains	1,424		1,801
Gross losses		—		—		(1,651	)		—	Gross losses	(28)		(1,652)

The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	June 30, 2019
	Amortized Cost		Fair Value			March 31, 2020
Available for sale
One year or less	$	10,502	$	10,498
Over one year through five years		697		697
Over five years through ten years		27,586		28,033
Over ten years		157,855		157,946
Asset-backed securities		25,746		25,208
Mortgage-backed securities: residential		476,378		474,051
Mortgage-backed securities: commercial		18,544		18,699
Total	$	717,308	$	715,132
Held to maturity
						Amortized Cost		Fair Value
Available-for-sale					Available-for-sale
Over one year through five years		1,106		1,138	Over one year through five years	$	1,606	$	1,642
Over five years through ten years		1,034		1,076	Over five years through ten years	8,959		8,821
Over ten years		42,660		45,263	Over ten years	224,663		220,395
Mortgage-backed securities: residential		74,163		73,332	Mortgage-backed securities: residential	286,307		294,672
Mortgage-backed securities: commercial					Mortgage-backed securities: commercial	17,445		17,695
Total	$	118,963	$	120,809	Total	$	538,980	$	543,225

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Securities pledged at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018~~2019 had a carrying amount of ~~$468,429~~$287,371 and ~~$939,440,~~$294,585, respectively, ~~and~~that were pledged to secure public deposits.

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the securities with unrealized and unrecognized losses at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, aggregated by major security type and length of time in a continuous unrealized loss position:

Less Than 12 Months

12 Months or Longer

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

June 30, 2019

Available for sale

U.S. government sponsored entities and agencies

$
48

$
—

$
483

$
(8
)

$
531

$
(8
)
Mortgage-backed securities: residential

8,385

(44
)

329,225

(3,700
)

337,610

(3,744
)
Mortgage-backed securities: commercial

—

—

7,532

(120
)

7,532

(120
)
Asset-backed securities

22,713

(565
)

—

—

22,713

(565
)
State and political subdivisions

9,996

(4
)

30,152

(90
)

40,148

(94
)
Total available for sale

$
41,142

$
(613
)

$
367,392

$
(3,918
)

$
408,534

$
(4,531
)

Less Than 12 Months

12 Months or Longer

Total

Fair
Value

Unrecognized
Losses

Fair
Value

Unrecognized
Losses

Fair
Value

Unrecognized
Losses

Held to maturity

Mortgage-backed securities: residential

$
1,639

$
(6
)

$
59,548

$
(1,023
)

$
61,187

$
(1,029
)
Total held to maturity

$
1,639

$
(6
)

$
59,548

$
(1,023
)

$
61,187

$
(1,029
)

Less Than 12 Months

12 Months or Longer

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

December 31, 2018

Available for sale

U.S. Treasury securities

$
163,722

$
(60
)

$
—

$
—

$
163,722

$
(60
)
U.S. government sponsored entities and agencies

1,355

(12
)

19,937

(100
)

21,292

(112
)
Mortgage-backed securities: residential

83,203

(755
)

490,752

(15,339
)

573,955

(16,094
)
Asset-backed securities

24,845

(900
)

—

—

24,845

(900
)
Corporate

9,839

(77
)

—

—

9,839

(77
)
State and political subdivisions

10,446

(106
)

69,238

(4,390
)

79,684

(4,496
)
Total available for sale

$
293,410

$
(1,910
)

$
579,927

$
(19,829
)

$
873,337

$
(21,739
)


	Less Than 12 Months						12 Months or Longer						Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2020
Available-for-sale
Mortgage-backed securities: residential	$	349	$	(3)	$	1,246	$	(1)	$	1,595	$	(4)
Mortgage-backed securities: commercial	—		—		3,193		(86)		3,193		(86)
Corporate notes	1,915		(85)		—		—		1,915		(85)
State and political subdivisions	121,212		(7,840)		—		—		121,212		(7,840)
Total available-for-sale	$	123,476	$	(7,928)	$	4,439	$	(87)	$	127,915	$	(8,015)

Less Than 12 Months

12 Months or Longer

Total

Fair
Value

Unrecognized
Losses

Fair
Value

Unrecognized
Losses

Fair
Value

Unrecognized
Losses

Held to maturity

Mortgage-backed securities: residential

$
2,239

$
(40
)

$
68,067

$
(3,032
)

$
70,306

$
(3,072
)
State and political subdivisions

8,362

(39
)

3,675

(51
)

12,037

(90
)
Total held to maturity

$
10,601

$
(79
)

$
71,742

$
(3,083
)

$
82,343

$
(3,162
)


	Less Than 12 Months						12 Months or Longer						Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2019
Available-for-sale
Mortgage-backed securities: residential	$	49,390	$	(172)	$	91,644	$	(684)	$	141,034	$	(856)
Asset-backed securities	4,436		(29)		7,286		(105)		11,722		(134)
Corporate notes	997		(3)		—		—		997		(3)
State and political subdivisions	29,843		(142)		—		—		29,843		(142)
Total available-for-sale	$	84,666	$	(346)	$	98,930	$	(789)	$	183,596	$	(1,135)

Unrealized losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit ~~quality (rated AA or higher).~~quality. As of ~~June 30, 2019,~~March 31, 2020, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

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NOTE 3—LOANS

Loans at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:


	June 30, 2019			December 31, 2018				March 31, 2020		December 31, 2019
Loans							Loans
Construction and land development	$	584,599		$	584,440		Construction and land development	$	627,178	$	591,541
Commercial real estate:							Commercial real estate:
Nonfarm, nonresidential		894,910			754,243		Nonfarm, nonresidential	955,348		944,021
Other		37,845			48,017		Other	42,610		49,891
Residential real estate:							Residential real estate:
Closed-end 1-4 family		496,597			493,065		Closed-end 1-4 family	456,610		455,920
Other		197,549			189,817		Other	191,976		187,681
Commercial and industrial		668,065			592,793		Commercial and industrial	581,598		582,641
Consumer and other		4,945			5,568		Consumer and other	4,454		4,769
Loans before net deferred loan fees		2,884,510			2,667,943		Loans before net deferred loan fees	2,859,774		2,816,464
Deferred loan fees, net		(4,077	)		(2,544	)	Deferred loan fees, net	(4,006)		(4,020)
Total loans		2,880,433			2,665,399		Total loans	2,855,768		2,812,444
Allowance for loan losses		(27,443	)		(23,451	)	Allowance for loan losses	(38,403)		(45,436)
Total loans, net of allowance for loan losses	$	2,852,990		$	2,641,948		Total loans, net of allowance for loan losses	$	2,817,365	$	2,767,008

The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month periods ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~

2019:

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial			Consumer and Other			Total
Three Months Ended June 30, 2019
																	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Three Months Ended March 31, 2020																Three Months Ended March 31, 2020
Allowance for loan losses:																Allowance for loan losses:
Beginning balance	$	4,742	$	7,027	$	4,810	$	11,229		$	49		$	27,857		Beginning balance	$	4,847	$	8,113	$	4,462	$	27,957	$	57	$	45,436
Provision for loan losses		42		614		18		6,382			(25	)		7,031		Provision for loan losses	1,570		905		312		10,222		13		13,022
Loans charged-off		—		—		—		(7,563	)		(29	)		(7,592	)	Loans charged-off	—		—		(8)		(20,501)		(21)		(20,530)
Recoveries		—		—		16		70			61			147		Recoveries	—		—		1		468		6		475
Total ending allowance balance	$	4,784	$	7,641	$	4,844	$	10,118		$	56		$	27,443		Total ending allowance balance	$	6,417	$	9,018	$	4,767	$	18,146	$	55	$	38,403
Three Months Ended June 30, 2018
Three Months Ended March 31, 2019																Three Months Ended March 31, 2019
Allowance for loan losses:																Allowance for loan losses:
Beginning balance	$	4,345	$	5,875	$	3,605	$	7,866		$	47		$	21,738		Beginning balance	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451
Provision for loan losses		267		288		909		(900	)		6			570		Provision for loan losses	(1)		302		80		4,631		43		5,055
Loans charged-off		—		—		—		—			(5	)		(5	)	Loans charged-off	—		—		(15)		(568)		(70)		(653)
Recoveries		1		—		19		10			8			38		Recoveries	—		—		2		—		2		4
Total ending allowance balance	$	4,613	$	6,163	$	4,533	$	6,976		$	56		$	22,341		Total ending allowance balance	$	4,742	$	7,027	$	4,810	$	11,229	$	49	$	27,857

~~The following table presents the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 2019 and 2018.~~

Construction
and Land
Development

Commercial
Real
Estate

Residential
Real
Estate

Commercial
and
Industrial

Consumer
and
Other

Total

Six Months Ended June 30, 2019

Allowance for loan losses:

Beginning balance

$
4,743

$
6,725

$
4,743

$
7,166

$
74

$
23,451

Provision for loan losses

41

916

101

11,012

16

12,086

Loans charged-off

—

—

(15
)

(8,131
)

(99
)

(8,245
)
Recoveries

—

—

15

71

65

151

Total ending allowance balance

$
4,784

$
7,641

$
4,844

$
10,118

$
56

$
27,443

Six Months Ended June 30, 2018

Allowance for loan losses:

Beginning balance

$
3,802

$
5,981

$
3,834

$
7,587

$
43

$
21,247

Provision for loan losses

848

182

668

(572
)

17

1,143

Loans charged-off

(38
)

—

(7
)

(49
)

(17
)

(111
)
Recoveries

1

—

38

10

13

62

Total ending allowance balance

$
4,613

$
6,163

$
4,533

$
6,976

$
56

$
22,341

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The following table presents 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, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and net deferred loan fees due to immateriality.

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
June 30, 2019
														Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
March 31, 2020													March 31, 2020
Allowance for loan losses:													Allowance for loan losses:
Ending allowance balance attributable to loans:													Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	2,193	$	—	$	2,193	Individually evaluated for impairment	$	—	$	—	$	—	$	6,760	$	—	$	6,760
Collectively evaluated for impairment		4,784		7,641		4,844		7,925		56		25,250	Collectively evaluated for impairment	6,417		9,018		4,767		11,386		55		31,643
Total ending allowance balance	$	4,784	$	7,641	$	4,844	$	10,118	$	56	$	27,443	Total ending allowance balance	$	6,417	$	9,018	$	4,767	$	18,146	$	55	$	38,403
Loans:													Loans:
Individually evaluated for impairment	$	—	$	—	$	1,837	$	2,193	$	—	$	4,030	Individually evaluated for impairment	$	—	$	3,460	$	3,255	$	20,719	$	—	$	27,434
Collectively evaluated for impairment		584,599		932,755		692,309		665,872		4,945		2,880,480	Collectively evaluated for impairment	627,178		994,498		645,331		560,879		4,454		2,832,340
Total ending loans balance	$	584,599	$	932,755	$	694,146	$	668,065	$	4,945	$	2,884,510	Total ending loans balance	$	627,178	$	997,958	$	648,586	$	581,598	$	4,454	$	2,859,774
December 31, 2018
December 31, 2019													December 31, 2019
Allowance for loan losses:													Allowance for loan losses:
Ending allowance balance attributable to loans:													Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	17	$	—	$	17	Individually evaluated for impairment	$	—	$	—	$	17	$	20,754	$	—	$	20,771
Collectively evaluated for impairment		4,743		6,725		4,743		7,149		74		23,434	Collectively evaluated for impairment	4,847		8,113		4,445		7,203		57		24,665
Total ending allowance balance	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451	Total ending allowance balance	$	4,847	$	8,113	$	4,462	$	27,957	$	57	$	45,436
Loans:													Loans:
Individually evaluated for impairment	$	2,298	$	—	$	3,189	$	167	$	—	$	5,654	Individually evaluated for impairment	$	30	$	—	$	2,477	$	24,528	$	—	$	27,035
Collectively evaluated for impairment		582,142		802,260		679,693		592,626		5,568		2,662,289	Collectively evaluated for impairment	591,511		993,912		641,124		558,113		4,769		2,789,429
Total ending loans balance	$	584,440	$	802,260	$	682,882	$	592,793	$	5,568	$	2,667,943	Total ending loans balance	$	591,541	$	993,912	$	643,601	$	582,641	$	4,769	$	2,816,464

Loans collectively evaluated for impairment reported at ~~June 30, 2019~~March 31, 2020 include certain acquired loans. At ~~June 30, 2019,~~March 31, 2020, these ~~non-PCI~~non-purchased credit impaired (PCI) loans had a carrying value of ~~$72,774,~~$51,882, comprised of contractually unpaid principal totaling ~~$73,717~~$52,588 and discounts totaling ~~$943.~~$706. Management evaluated these loans for credit deterioration since acquisition and determined that an allowance for loan losses of ~~$115~~$56 was necessary at ~~June 30, 2019.~~

March 31, 2020.

Table of Contents

The following table presents information related to impaired loans by class of loans as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~

2019:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
June 30, 2019
								Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
March 31, 2020							March 31, 2020
With no allowance recorded:							With no allowance recorded:
Commercial real estate:							Commercial real estate:
Nonfarm, nonresidential							Nonfarm, nonresidential	$	3,460	$	3,460	$	—
Residential real estate:							Residential real estate:
Closed-end 1-4 family	$	491		484	$	—	Closed-end 1-4 family	950		942		—
Other		1,353		1,353		—	Other	2,313		2,313		—
Commercial and industrial		—		—		—	Commercial and industrial	13,391		13,391		—
Subtotal		1,844		1,837		—	Subtotal	20,114		20,106		—
With an allowance recorded:							With an allowance recorded:
Commercial and industrial		5,722		2,193		2,193	Commercial and industrial	7,328		7,328		6,760
Subtotal		5,722		2,193		2,193	Subtotal	7,328		7,328		6,760
Total	$	7,566	$	4,030	$	2,193	Total	$	27,442	$	27,434	$	6,760
December 31, 2018
December 31, 2019							December 31, 2019
With no allowance recorded:							With no allowance recorded:
Construction and land development	$	2,298	$	2,298	$	—	Construction and land development	$	30	$	30	$	—
Residential real estate:							Residential real estate:
Closed-end 1-4 family		1,280		1,272		—	Closed-end 1-4 family	319		311		—
Other		1,917		1,917		—	Other	1,523		1,523		—
Commercial and industrial							Commercial and industrial	11		11		—
Subtotal		5,495		5,487		—	Subtotal	1,883		1,875		—
With an allowance recorded:							With an allowance recorded:
Residential real estate:							Residential real estate:
Closed-end 1-4 family							Closed-end 1-4 family	643		643		17
Commercial and industrial		167		167		17	Commercial and industrial	24,517		24,517		20,754
Subtotal		167		167		17	Subtotal	25,160		25,160		20,771
Total	$	5,662	$	5,654	$	17	Total	$	27,043	$	27,035	$	20,771

Table of Contents

The following table presents the average recorded investment of impaired loans by class of loans for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~

2019:


	Three Months Ended June 30,				Six Months Ended June 30,							Three Months Ended March 31,
Average Recorded Investment	2019		2018		2019		2018		Average Recorded Investment	2020		2019
With no allowance recorded:									With no allowance recorded:
Construction and land development	$	—	$	—	$	384	$	100	Construction and land development	$	10	$	768
Commercial real estate:									Commercial real estate:
Nonfarm, nonresidential		—		—		25		—	Nonfarm, nonresidential	4,584		51
Residential real estate:									Residential real estate:
Closed-end 1-4 family		681		496		744		432	Closed-end 1-4 family	1,260		806
Other		1,086		112		1,174		192	Other	2,840		1,264
Commercial and industrial		2,638		883		1,319		867	Commercial and industrial	19,162		—
Subtotal		4,405		1,491		3,646		1,591	Subtotal	$	27,856	$	2,889
With an allowance recorded:									With an allowance recorded:
Construction and land development	$	—	$	—	$	91	$	—	Construction and land development	$	—	$	183
Commercial real estate:									Commercial real estate:
Nonfarm, nonresidential									Nonfarm, nonresidential	156		—
Residential real estate:									Residential real estate:
Closed-end 1-4 family									Closed-end 1-4 family	213		—
Commercial and industrial		4,404		1,638		3,787		1,785	Commercial and industrial	—		3,170
Subtotal		4,404		1,638		3,878		1,785	Subtotal	369		3,353
Total average recorded investment	$	8,809	$	3,129	$	7,524	$	3,376	Total average recorded investment	$	28,225	$	6,242

The impact on net interest income for these loans was not material to the Company’s results of operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~

2019.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~

2019:

	Nonaccrual		Loans Past Due Over 90 Days And Still Accruing Interest
June 30, 2019
						Nonaccrual		Loans Past Due Over 90 Days And Still Accruing Interest
March 31, 2020					March 31, 2020
Commercial real estate:					Commercial real estate:
Nonfarm, nonresidential					Nonfarm, nonresidential	$	3,460	$	—
Residential real estate:					Residential real estate:
Closed-end 1-4 family	$	484	$	—	Closed-end 1-4 family	942		—
Other		1,353		250	Other	2,313		—
Commercial and industrial		2,193		426	Commercial and industrial	20,719		—
Total	$	4,030	$	676	Total	$	27,434	$	—

December 31, 2018
December 31, 2019					December 31, 2019
Construction and land development	$	2,298	$	—	Construction and land development	$	30	$	—
Residential real estate:					Residential real estate:
Closed-end 1-4 family		1,273		—	Closed-end 1-4 family	954		—
Other		1,917		—	Other	1,523		—
Commercial and industrial		—		208	Commercial and industrial	24,528		654
Total	$	5,488	$	208	Total	$	27,035	$	654

Table of Contents

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 by class of loans:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
June 30, 2019
														30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
March 31, 2020													March 31, 2020
Construction and land development	$	—	$	380	$	—	$	380	$	584,219	$	584,599	Construction and land development	$	1,753	$	2,484	$	—	$	4,237	$	622,941	$	627,178
Commercial real estate:													Commercial real estate:
Nonfarm, nonresidential		—		—		—		—		894,910		894,910	Nonfarm, nonresidential	8,149		—		3,460		11,609		943,739		955,348
Other		—		—		—		—		37,845		37,845	Other	—		—		—		—		42,610		42,610
Residential real estate:													Residential real estate:
Closed-end 1-4 family		350		—		159		509		496,088		496,597	Closed-end 1-4 family	4,729		2		—		4,731		451,879		456,610
Other		218		404		609		1,231		196,318		197,549	Other	916		—		395		1,311		190,665		191,976
Commercial and industrial		601		289		2,619		3,509		664,556		668,065	Commercial and industrial	3,857		619		15,311		19,787		561,811		581,598
Consumer and other		33		—		—		33		4,912		4,945	Consumer and other	—		—		—		—		4,454		4,454
	$	1,202	$	1,073	$	3,387	$	5,662	$	2,878,848	$	2,884,510		$	19,404	$	3,105	$	19,166	$	41,675	$	2,818,099	$	2,859,774
December 31, 2018
December 31, 2019													December 31, 2019
Construction and land development	$	294	$	1,986	$	548	$	2,828	$	581,612	$	584,440	Construction and land development	$	508	$	—	$	30	$	538	$	591,003	$	591,541
Commercial real estate:													Commercial real estate:
Nonfarm, nonresidential		515		—		—		515		753,728		754,243	Nonfarm, nonresidential	3,981		—		—		3,981		940,040		944,021
Other		—		—		—		—		48,017		48,017	Other	—		—		—		—		49,891		49,891
Residential real estate:													Residential real estate:
Closed-end 1-4 family		2,390		404		228		3,022		490,043		493,065	Closed-end 1-4 family	2,688		224		8		2,920		453,000		455,920
Other		142		—		1,810		1,952		187,865		189,817	Other	85		961		555		1,601		186,080		187,681
Commercial and industrial		241		252		208		701		592,092		592,793	Commercial and industrial	663		7,156		735		8,554		574,087		582,641
Consumer and other		—		—		—		—		5,568		5,568	Consumer and other	—		—		—		—		4,769		4,769
	$	3,582	$	2,642	$	2,794	$	9,018	$	2,658,925	$	2,667,943		$	7,925	$	8,341	$	1,328	$	17,594	$	2,798,870	$	2,816,464

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 loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans as well as non-homogeneous residential real estate loans. This analysis is performed on a quarterly basis. 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 institution will sustain some loss if the deficiencies are not corrected.

COVID-19 Supplemental information. The loan modifications and payment deferrals established in accordance with the CARES Act and Interagency Statements disclosed in Note 1 did not result in immediate credit risk modifications. The impacted credits will continue to be monitored and assessed as the sustained impact of COVID-19 becomes better understood.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table excludes deferred loan fees and includes PCI loans, which are included in the ~~“Substandard”~~

Table of Contents

“Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~

2019:

	Pass		Special Mention		Substandard		Total
June 30, 2019
										Pass		Special Mention		Substandard		Total
March 31, 2020									March 31, 2020
Construction and land development	$	584,251		113		235	$	584,599	Construction and land development	$	627,178	$	—	$	—	$	627,178
Commercial real estate:									Commercial real estate:
Nonfarm, nonresidential		894,430		480		—		894,910	Nonfarm, nonresidential	946,120		4,012		5,216		955,348
Other		37,229		616		—		37,845	Other	42,610		—		—		42,610
Residential real estate:									Residential real estate:
Closed-end 1-4 family		494,306		—		2,291		496,597	Closed-end 1-4 family	453,892		819		1,899		456,610
Other		195,207		—		2,342		197,549	Other	188,830		—		3,146		191,976
Commercial and industrial		642,120		2,662		23,283		668,065	Commercial and industrial	543,565		600		37,433		581,598
Consumer and other		4,945		—		—		4,945	Consumer and other	4,454		—		—		4,454
	$	2,852,488	$	3,871	$	28,151	$	2,884,510		$	2,806,649	$	5,431	$	47,694	$	2,859,774

Pass

Special
Mention

Substandard

Total

December 31, 2018

Construction and land development

$
580,468

$
1,416

$
2,556

$
584,440

Commercial real estate:

Nonfarm, nonresidential

739,469

14,774

—

754,243

Other

48,017

—

—

48,017

Residential real estate:

Closed-end 1-4 family

489,781

948

2,336

493,065

Other

186,485

404

2,928

189,817

Commercial and industrial

553,589

8,313

30,891

592,793

Consumer and other

5,567

1

—

5,568

$
2,603,376

$
25,856

$
38,711

$
2,667,943


	Pass		Special Mention		Substandard		Total
December 31, 2019
Construction and land development	$	591,293	$	248	$	—	$	591,541
Commercial real estate:
Nonfarm, nonresidential	941,260		997		1,764		944,021
Other	49,891		—		—		49,891
Residential real estate:
Closed-end 1-4 family	452,363		825		2,732		455,920
Other	185,170		—		2,511		187,681
Commercial and industrial	539,442		943		42,256		582,641
Consumer and other	4,769		—		—		4,769
	$	2,764,188	$	3,013	$	49,263	$	2,816,464

Troubled Debt Restructurings

As of ~~June 30,~~March 31, 2020, the Company’s loan portfolio contains 2 loans that have been modified in troubled debt restructurings with a balance of $6,903. As of December 31, 2019, the Company’s loan portfolio ~~contains one loan that has been modified in a troubled debt restructuring with a balance of $316. As of December 31, 2018, the Company’s loan portfolio~~ contained ~~one~~1 loan that had been modified in a troubled debt restructuring with a balance of ~~$167.~~

$311. The above disclosed troubled debt restructurings were not related to COVID-19 modifications.

As of April 30, 2020, the Company has executed over 420 of these deferrals on outstanding loan balances of approximately $644,000 in connection with the COVID-19 relief provided by the CARES Act. Interagency guidance and the CARES Act provided clarity to accounting for modifications whereby under certain circumstances, such modifications would not be considered troubled debt restructurings ("TDRs"). As such, the aforementioned modified loans have not been classified as TDRs.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as follows:


	June 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Loan portfolios serviced for:					Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	491,388	$	492,761	Federal Home Loan Mortgage Corporation	$	498,705	$	488,790
Federal National Mortgage Association					Federal National Mortgage Association	17,146		10,221
Other		3,614		3,689	Other	3,455		3,504

Table of Contents

The related loan servicing rights activity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


			Three Months Ended March 31,
	2020		2019
Servicing rights:
Beginning of period	$	3,246	$	3,403
Additions	394		188
Amortized to expense	(358)		(225)
Change in impairment	(225)		—
End of period	$	3,057	$	3,366

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Servicing rights:

Beginning of period

$
3,366

$
3,602

$
3,403

$
3,620

Additions

196

161

383

357

Amortized to expense

(263
)

(227
)

(487
)

(441
)

Decrease in impairment

—

—

—

—

End of period

$
3,299

$
3,536

$
3,299

$
3,536

The components of net loan servicing fees for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,									Three Months Ended March 31,
	2019			2018			2019			2018				2020		2019
Loan servicing fees, net:													Loan servicing fees, net:
Loan servicing fees	$	312		$	330		$	618		$	663		Loan servicing fees	$	322	$	306
Amortization of loan servicing fees		(263	)		(227	)		(487	)		(441	)	Amortization of loan servicing fees	(358)		(225)
Change in impairment													Change in impairment	(225)		—
Total	$	49		$	103		$	131		$	222		Total	$	(261)	$	81

The fair value of servicing rights was estimated by management to be approximately ~~$3,905~~$3,057 at ~~June 30, 2019.~~March 31, 2020. Fair value for ~~June 30,~~March 31, 2020 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 22.3%. At December 31, 2019, the fair value of servicing rights was estimated by management to be approximately $3,922. Fair value for December 31, 2019 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of ~~16.4%~~16.8%. At December 31, 2018, the fair value of servicing rights was estimated by management to be approximately $4,836. Fair value for December 31, 2018 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 11.9%.

NOTE 5—LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 ~~“Leases” (Topic 842)~~ and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The leases are presented as of part of other assets and other liabilities on the consolidated balance sheet.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2033. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of condition. Upon adoption of FASB ASU 2016-02 ~~Leases~~ on January 1, 2019, the Company began recognizing right-of-use assets and lease liabilities related to its operating leases. Prior to ASU 2016-02, such assets and liabilities were recognized only for capital leases (referred to as finance leases under the amendments of ASU 2016-02). In accordance with the optional transition method allowed by ASU 2016-11, comparative prior period information included within this note is presented in accordance with guidance in effect during those periods.2034. The Company has one existing finance lease for additional office space with a lease term through 2033. ~~As this~~On February 5, 2020, the Company purchased the properties at Columbia Avenue and 120 9th Avenue in Franklin, Tennessee, therefore ending these lease ~~was previously required to be recorded on the Company’s consolidated statements of condition,~~agreements that represented approximately $19,000 and ~~was recorded~~$20,000 in ~~other assets and other liabilities, Topic 842 did not materially impact the accounting for this lease. During the six months ended June 30, 2019,~~ ~~one additional lease agreement has been executed and is scheduled to commence in 2020 relocating one branch in Williamson County, Tennessee.~~

The following table represents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition.

Lease right-of-use assets

Classification

June 30, 2019

Operating lease right-of-use assets

Other Assets

$
40,967

Finance lease right-of-use assets

Other Assets

2,919

Total lease right-of-use assets

$
43,886

Lease liabilities

Classification

June 30, 2019

Operating lease right-of-use assets

Other Liabilities

$
42,556

Finance lease right-of-use assets

Other Liabilities

2,996

Total lease liabilities

$
45,552

~~The calculated amount of the ROU~~right-of-use assets and lease liabilities, in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion, which will be determined within the timeframe of the lease agreement, and not included within the calculated ROU. The Company utilizes the discount rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company calculated a blended rate consisting of the Federal Home Loan Bank’s rate matching to the duration of the lease (over-collateralized borrowing rate) and the offering rate of the Company’s most recent subordinated debt offering in June of 2016. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019, was used. For the Company’s only finance lease that commenced December 2018, the Company utilized its blended rate calculation based on the term of the lease.

respectively.

~~Weighted-average remaining lease term (in years)~~	~~June 30, 2019~~
~~Operating leases~~		~~12.1~~
~~Finance lease~~		~~14.9~~

~~Weighted-average discount rate~~
~~Operating leases~~	~~5.48%~~
~~Finance lease~~	~~5.49%~~

The following table represents lease ~~costs~~assets and ~~other~~ lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Lease costs

Operating lease costs

$
2,527

Variable lease costs

181

Short-term lease costs

94

Finance lease costs

Interest on lease liabilities⁽¹⁾

82

Amortization of right-of-use asset

101

Total lease costs

$
2,985

⁽¹⁾

Included in interest expense on Federal Home Loan Advances and other borrowings in the Company's consolidated statement of income. All other lease costs in this table are included in occupancy and equipment expense.

~~Rent expense related to leases during the three and six months ended June 30, 2018, was $1,319 and $2,547, respectively.~~

Other supplemental cash flow information:

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

  Operating cash flows from operating leases

$
2,342

  Operating cash flows from finance leases

82

  Financing cash flows from finance leases

54

~~Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more~~liabilities as of ~~June 30, 2019 are as follows:~~

Twelve Months Ended:

Finance

Operating

2020

$
274

$
4,812

2021

278

4,869

2022

282

4,876

2023

286

4,850

2024

291

4,921

Thereafter

2,986

33,713

Total future minimum lease payments

$
4,397

$
58,041

Less: Imputed interest

(1,401
)

(15,485
)
Total lease liabilities

$
2,996

$
42,556

~~Future minimum payments for a finance lease~~March 31, 2020, and ~~operating leases with initial or remaining terms of one year of more as of~~ December 31, ~~2018 are as follows:~~

2019.

Twelve Months Ended:

Finance

Operating

2019

$
272

$
4,841

2020

276

4,849

2021

280

4,871

2022

284

4,856

2023

288

4,885

Thereafter

3,133

36,178

Total future minimum lease payments

$
4,533

$
60,480


Lease right-of-use assets	Classification	March 31, 2020		December 31, 2019
Operating lease right-of-use assets	Other Assets	$	19,579	39,594
Finance lease right-of-use assets	Other Assets	2,768		2,819
Total lease right-of-use assets		$	22,347	42,413

Lease liabilities	Classification	March 31, 2020		December 31, 2019
Operating lease right-of-use assets	Other Liabilities	$	20,509	41,308
Finance lease right-of-use assets	Other Liabilities	2,913		2,942
Total lease liabilities		$	23,422	44,250

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NOTE 6—SHARE-BASED PAYMENTS

The Company has ~~two~~2 share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was ~~$1,513 and $1,318, and $2,842 and $2,078~~$1,512, for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018, respectively.~~$1,329 for the three months ended March 31, 2019. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was ~~$92 and $205~~$210 for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and was ~~$220 and $283~~$113 for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, respectively.

Stock Options: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, provided for authorized shares up to 4,000,000. The 2007 Plan provided that no options intended to be ISOs may be granted after April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, an equity incentive plan, the 2017 Omnibus Equity Incentive Plan which the Company’s shareholders approved at the 2017 annual meeting of shareholders. On April 12, 2018, the Company’s Board of Directors approved the Amended and Restated 2017 Omnibus Equity Incentive Plan ~~(“Amended~~(the “Amended and Restated 2017 Plan”) to make certain changes in response to feedback received from ~~our~~the Company's shareholders. The terms of the Amended and Restated 2017 Plan are substantially similar to the terms of the 2007 Plan it was intended to replace. The Amended and Restated 2017 Plan provides for authorized shares up to 3,500,000. At ~~June 30, 2019,~~March 31, 2020, there were ~~2,421,000~~2,410,364 authorized shares available for issuance under the Amended and Restated 2017 Plan.

Employee, organizer and director stock option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have a ~~ten-year~~10 year contractual term with varying vesting requirements. The Company assigns discretion to its Compensation Committee to make grants either as qualified incentive stock options or as non-qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other grants are expected to be treated as non-qualified.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of the Company. The Company uses historical data to estimate option exercise and post-vesting termination behavior.

The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

There were 0 options granted during the three months ended March 31, 2020. The fair value of options granted during the three months ended March 31, 2019, was determined using the following weighted-average assumptions as of grant date.

June 30, 2019

June 30, 2018

Risk-free interest rate

2.47
%

2.96
%
Expected term

7 years

7.5 years

Expected stock price volatility

30.64
%

32.09
%
Dividend yield

0.57
%

0.00
%


	March 31, 2019
Risk-free interest rate	2.31	%
Expected term	7 years
Expected stock price volatility	30.44	%
Dividend yield	0.50	%

The weighted average fair value of options granted for the ~~six~~three months ended ~~June 30,~~March 31, 2019 ~~and 2018 were $9.78 and $12.03, respectively.~~

was $10.01.

A summary of the activity in the plans for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2018		1,807,922		$	24.68		6.41	$	9,581
											Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2020										Outstanding at January 1, 2020	1,502,070	$	22.39
Granted		91,823			27.83					Granted	—	—
Exercised		(128,125	)		14.14					Exercised	(37,416)	11.19
Forfeited, expired, or cancelled		(18,883	)		32.74					Forfeited, expired, or cancelled	(6,274)	25.24
Outstanding at period end		1,752,737		$	18.47		6.87	$	4,113	Outstanding at period end	1,458,380	$	26.24	6.30	$	2,921
Vested or expected to vest		1,666,525		$	25.52		6.13	$	3,908	Vested or expected to vest	1,385,461	$	26.24	5.77	$	2,775
Exercisable at period end		839,675		$	17.32		6.13	$	8,847	Exercisable at period end	335,225	$	11.68	5.77	$	2,921

For the Six Months Ended
June 30,

2019

2018

Stock options exercised:

Intrinsic value of options exercised

$
1,869

$
3,745

Cash received from options exercised

1,277

1,937

Tax benefit realized from option exercises

205

283

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	For the Three Months Ended March 31,
	2020		2019
Stock options exercised:
Intrinsic value of options exercised	$	943	$	623
Cash received from options exercised	417		524
Tax benefit realized from option exercises	210		113

As of ~~June 30, 2019,~~March 31, 2020, there was ~~$4,786~~$2,768 of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of ~~1.97~~1.36 years.

Restricted Stock and Restricted Stock Units: Additionally, the 2007 Plan and the Amended and Restated 2017 Plan each provides for the granting of restricted share awards and other performance related incentives. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. In April 2019, the Company began awarding restricted ~~share~~stock units which participants do not have voting rights or dividend rights until the restrictions have lapsed. These awards typically have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.

A summary of activity for non-vested restricted share awards for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 is as follows:


Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value		Non-vested Shares	Shares	Weighted- Average Grant- Date Fair Value
Non-vested at December 31, 2018		176,516		$	31.07
Non-vested at January 1, 2020						Non-vested at January 1, 2020	90,992	$	32.54
Granted		1,255			31.87	Granted	—	—
Vested		(70,069	)		30.33	Vested	(468)	28.52
Forfeited		(1,035	)		32.95	Forfeited	(122)	31.18
Non-vested at June 30, 2019		106,667
Non-vested at March 31, 2020						Non-vested at March 31, 2020	90,402

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of ~~June 30, 2019,~~March 31, 2020, there was ~~$1,713~~$595 of total unrecognized compensation cost related to non-vested shares granted under the 2007 Plan and Amended and Restated 2017 Plan. The cost is expected to be recognized over a weighted-average period of ~~1.30~~1.13 years.

The Company began granting restricted stock units in 2019. The following table outlines restricted stock units that were ~~granted,~~outstanding, grouped by similar vesting criteria, ~~during the six months ended June 30, 2019.~~

as of March 31, 2020:


Grant year	Units Awarded		Service period		Period in which units to be settled into shares of common stock		Grant year	Units Awarded	Service period in years	Period in which units to be settled into shares of common stock
2019		124,661		3.00		2022	2019	2,870	5.0	2024


2019							2019	152,048	3.0	2022
2020							2020	120,824	3.0	2023

Stock compensation expense related with the restricted ~~share~~stock units for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 was ~~$483 and $579, respectively.~~$678. There was no0 expense related to restricted ~~share~~stock units in ~~2018.~~2019. This stock compensation is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of ~~June 30, 2019,~~March 31, 2020, there was ~~$3,814~~$7,943 of total unrecognized compensation cost related to non-vested ~~shares~~restricted stock units granted under the ~~2007 Plan and~~ Amended and Restated 2017 Plan. The cost is expected to be recognized over a weighted-average period of ~~2.75~~2.25 years.

NOTE 7—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and

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classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) ~~became effective for the Company on January 1, 2016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in January 1, 2019.~~

~~The Basel III rules additionally~~ provide for ~~countercyclical~~counter cyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This ~~new~~ capital conservation buffer ~~requirement was phased in beginning~~ became fully effective for the Company as ofJanuary ~~2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% in January~~1, 2019.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~June 30, 2019,~~March 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes that, as of ~~June 30, 2019,~~March 31, 2020, the Company and Bank met all capital adequacy requirements to which they are subject. There are no conditions or events since that notification that management believes have changed the institution’s category.

~~Actual~~In October 2019, the federal bank regulatory agencies, or the Agencies, issued a final rule, the Community Bank Leverage Ratio Framework, the “Framework,” to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations and ~~required~~is consistent with Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ~~amounts~~ratios. Depository institutions and ~~ratios~~depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, are ~~presented~~considered qualifying community banking organizations and are eligible to opt into the Framework. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the quarter ended March 31, 2020. In April 2020, the Agencies announced two interim final rules to provide relief associated with Section 4012 of the CARES Act. For institutions that elect the Framework, the interim rules temporarily lower the leverage ratio requirement to 8% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year. An institution will have until January 1, 2022 before the 9% leverage ratio requirement is re-established. The Company and the Bank have elected to opt into the Framework and will file their regulatory capital reports in accordance with the Framework’s guidance.

For comparative purposes, the Company has included in the table below ~~as of June 30, 2019 and December 31, 2018~~estimated regulatory capital ratios for the Company and ~~Bank:~~

for the Bank as of March 31, 2020, and December 31, 2019, based on the Basel III Capital Rules discussed above.

Actual

Required
For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action Regulations

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2019

Company-Level

Company common equity Tier 1 capital to RWA

$
375,710

11.2
%

$
151,266

4.5
%

N/A

N/A

Company Total Capital to RWA

$
462,020

13.7
%

$
268,918

8.0
%

N/A

N/A

Company Tier 1 (Core) Capital to RWA

$
375,710

11.2
%

$
201,689

6.0
%

N/A

N/A

Company Tier 1 (Core) Capital to average assets

$
375,710

9.2
%

$
134,459

4.0
%

N/A

N/A

Bank-Level

Bank common equity Tier 1 capital to RWA

$
433,574

12.9
%

$
151,253

4.5
%

$
218,476

6.5
%
Bank Total Capital to RWA

$
461,102

13.7
%

$
268,894

8.0
%

$
336,117

10.0
%
Bank Tier 1 (Core) Capital to RWA

$
433,574

12.9
%

$
201,670

6.0
%

$
268,894

8.0
%
Bank Tier 1 (Core) Capital to average assets

$
433,574

10.6
%

$
163,420

4.0
%

$
204,274

5.0
%
December 31, 2018

Company-Level

Company common equity Tier 1 capital to RWA

$
367,096

12.2
%

$
135,598

4.5
%

N/A

N/A

Company Total Capital to RWA

$
449,325

14.9
%

$
241,064

8.0
%

N/A

N/A

Company Tier 1 (Core) Capital to RWA

$
367,096

12.2
%

$
180,798

6.0
%

N/A

N/A

Company Tier 1 (Core) Capital to average assets

$
367,096

8.8
%

$
167,553

4.0
%

N/A

N/A

Bank-Level

Bank common equity Tier 1 capital to RWA

$
421,335

14.0
%

$
135,613

4.5
%

$
195,886

6.5
%
Bank Total Capital to RWA

$
444,871

14.8
%

$
241,090

8.0
%

$
301,363

10.0
%
Bank Tier 1 (Core) Capital to RWA

$
421,335

14.0
%

$
180,818

6.0
%

$
241,090

8.0
%
Bank Tier 1 (Core) Capital to average assets

$
421,335

10.1
%

$
167,420

4.0
%

$
209,275

5.0
%

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	Actual						Required For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2020
Company-Level
Company common equity Tier 1 capital to RWA	$	388,222	12.0	%	$	146,134	4.5	%	N/A		N/A
Company Total Capital to RWA	$	485,625	15.0	%	$	259,793	8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	388,222	12.0	%	$	194,845	6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	388,222	10.1	%	$	154,131	4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	442,454	13.6	%	$	146,039	4.5	%	$	210,946	6.5	%
Bank Total Capital to RWA	$	480,940	14.8	%	$	259,626	8.0	%	$	324,532	10.0	%
Bank Tier 1 (Core) Capital to RWA	$	442,454	13.6	%	$	194,719	6.0	%	$	259,626	8.0	%
Bank Tier 1 (Core) Capital to average assets	$	442,454	11.5	%	$	153,905	4.0	%	$	192,381	5.0	%
December 31, 2019
Company-Level
Company common equity Tier 1 capital to RWA	$	388,199	11.9	%	$	146,711	4.5	%	N/A		N/A
Company Total Capital to RWA	$	487,966	15.0	%	$	260,819	8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	388,199	11.9	%	$	195,614	6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	388,199	10.3	%	$	151,456	4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	441,348	13.6	%	$	146,491	4.5	%	$	211,599	6.5	%
Bank Total Capital to RWA	$	482,183	14.8	%	$	260,429	8.0	%	$	325,536	10.0	%
Bank Tier 1 (Core) Capital to RWA	$	441,348	13.6	%	$	195,322	6.0	%	$	260,429	8.0	%
Bank Tier 1 (Core) Capital to average assets	$	441,348	11.7	%	$	151,255	4.0	%	$	189,069	5.0	%

Note: Minimum ratios presented exclude the capital conservation buffer

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above.

NOTE 8—DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities.

During 2019, the Company entered into ~~sixteen~~16 swap transactions with a notional amount of $101,205 designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities.

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A summary of the Company's fair value hedge relationships as of ~~June 30,~~March 31, 2020 and December 31, 2019 are as follows (in thousands):

June 30, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

March 31, 2020

December 31, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Liability derivative

Interest rate swap agreements - securities

Other liabilities

7.23

2.527%

3 month LIBOR

101,205

4,733

Interest rate swap agreements - securities

Other liabilities

6.55

2.527%

3 month LIBOR

101,205

13,362

101,205

4,954

~~There were no fair value hedge relationships as of December 31, 2018.~~

The effects of fair value hedge relationships reported in interest income on securities on the consolidated statements of income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,								Three Months Ended March 31,
Gain (loss) on fair value hedging relationship	2019			2018		2019			2018		Gain (loss) on fair value hedging relationship	2020		2019
Interest rate swap agreements - securities:											Interest rate swap agreements - securities:
Hedged items	$	3,615		$	—	$	4,733		$	—	Hedged items	$	13,362	$	1,118
Derivative designated as hedging instruments		(3,615	)		—		(4,733	)		—	Derivative designated as hedging instruments	(13,362)		(1,118)

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at ~~June 30, 2019:~~

March 31, 2020:

Carrying Amount of the Hedged Assets (in thousands)

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets

Carrying Amount of the Hedged Assets (in thousands)

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets

Line item on the balance sheet

June 30, 2019

Line item on the balance sheet

March 31, 2020

December 31, 2019

March 31, 2020

December 31, 2019

Securities available-for-sale

101,205

4,733

Securities available-for-sale

$101,205

$13,362

$4,954

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company uses cash flow hedge relationships in an effort to manage future interest rate exposure. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability. A summary of the Company's cash flow hedge relationships as of ~~June 30,~~March 31, 2020 and December 31, 2019 are as follows (in thousands):

June 30, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

March 31, 2020

December 31, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Liability derivatives

Interest rate swap agreements

Other liabilities

2.232%

3 month LIBOR

100,000

1,667

Interest rate swap agreements

Other liabilities

2.1

2.232%

1 month LIBOR

100,000

3,933

100,000

1,592

~~There were no cash flow hedge relationships as of December 31, 2018.~~

The effects of the Company's cash flow hedge relationships on the statement of comprehensive income (loss) during the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Amount of Gain Recognized in Other Comprehensive Income (Loss)					Amount of Gain Recognized in Other Comprehensive Income (Loss)								Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
	Three Months Ended June 30,					Six Months Ended June 30,								Three Months Ended March 31,
	2019			2018		2019			2018			2020		2019
Liability derivatives											Liability derivatives
Interest rate swap agreements	$	(1,231	)	$	—	$	(1,231	)	$	—	Interest rate swap agreements	$	(1,729)	$	—

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The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. The Company expects the hedges to continue to be highly effective and qualify for hedge accounting during the remaining terms of the swaps.

NOTE 9—COMMITMENTS AND CONTINGENCIES

We enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. Those agreements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. These off-balance sheet arrangements include commitments to make loans, credit lines and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept or use these commitments. A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our customers under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Actual borrowing needs of our customers may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from other sources. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our customers may have a material adverse effect on our business, financial condition, results of operations or reputation.

Commitments to make loans, credit lines and standby letters of credit involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

The contractual amounts of financial instruments with off-balance sheet risk were as follows:


						March 31, 2020										December 31, 2019
	June 30, 2019		December 31, 2018			Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Unused lines of credit	$	801,049	$	654,584	Unused lines of credit	$	88,571	$	649,618	$	738,189	$	89,040	$	701,326	$	790,366
Standby letters of credit		52,064		40,024	Standby letters of credit	7,098		46,165		53,263		7,119		48,750		55,869
Unfunded loan commitments		63,707		28,731

Mortgage loan commitments					Mortgage loan commitments	156,421		—		156,421		48,999		—		48,999

Commitments to make loans are generally made for periods of over 365 days. At March 31, 2020, our loan commitments have interest rates ranging from 0.00% to 12.00% and maturity terms ranging from less than 1 year to 25 years.

Of the $738,189 of unused lines of credit at March 31, 2020, the Company estimates approximately $273,300, or approximately 37%, are available to be drawn by customers without further approval by the Bank.

NOTE 10—FAIR VALUE

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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

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	Fair Value Measurements at March 31, 2020 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available-for-sale
Mortgage-backed securities-residential	—		294,672		—
Mortgage-backed securities-commercial	—		17,695		—
Corporate notes	—		4,523		—
State and political subdivisions	—		226,335		—
Total securities available-for-sale	$	—	$	543,225	$	—
Loans held for sale	$	—	$	42,682	$	—
Derivative assets	$	—	$	1,166	$	—
Financial Liabilities
Derivative liabilities	$	—	$	18,905	$	—


	Fair Value Measurements at December 31, 2019 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available-for-sale
Mortgage-backed securities-residential	—		375,943		—
Asset-backed securities	—		17,780		—
Corporate notes	—		33,361		—
State and political subdivisions	—		225,048��		—
Total securities available for sale	$	—	$	652,132	$	—
Loans held-for-sale	$	—	$	43,162	$	—
Derivative assets	$	—	$	225	$	—
Financial Liabilities
Derivative liabilities	$	—	$	6,619	$	—

The Company used the following methods and significant assumptions to estimate the fair value of financial instruments that are measured at fair value on a recurring basis:

Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, ~~and~~ values 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). Included in securities is interest rate swap agreements. The carrying amount of the interest rate swap agreements is based on pricing models that utilize observable market inputs (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

~~Other Assets~~

Derivative assets: Included in other assets are certain assets carried at fair value and interest rate locks associated with the mortgage loan pipeline. The fair value of the mortgage loan pipeline rate locks is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. These assets are valued using similar observable data that occurs in the ~~market.~~market (Level 2).

~~Impaired~~

Loans Held For Sale: These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices or similar transactions adjusted for specific attributes of that loan (Level 2).

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Derivative liabilities: The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on pricing models that utilize observable market inputs (Level 2).

There were no transfers between levels for the three months ended March 31, 2020, and December 31, 2019.

The following table presents assets measured at fair value on a non-recurring basis. There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2020, and December 31, 2019.


	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)		Total losses for the period ended
March 31, 2020
Impaired loans, net: ⁽¹⁾
Commercial and industrial	$	570	$	—	$	—	$	570	$	—
Servicing rights, net	3,057		—		—		3,057		225
Total	$	3,627	$	—	$	—	$	3,627	$	225

December 31, 2019
Impaired loans, net: ⁽¹⁾
Residential real estate:
Closed-end 1-4 family	$	626	$	—	$	—	$	626	$	—
Commercial and industrial	3,763		—		3,650		113		—
Total	$	4,389	$	—	$	3,650	$	739	$	—
⁽¹⁾Amount is net of a valuation allowance of $6,760 and $20,771 at March 31, 2020 and December 31, 2019, respectively, as required by ASC 310-10, "Receivables."

As of March 31, 2020 and December 31, 2019, the only Level 3 assets with material unobservable inputs are associated with impaired loans ~~with specific allocations~~and servicing rights. The table above includes those loans and servicing rights that are impaired and have a carrying balance as of March 31, 2020 and December 31, 2019.

Impaired Loans: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the ~~allowance for~~ loan ~~losses~~agreement. Impairment is ~~generally~~measured by estimating the fair value of the loan based on ~~recent~~the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan's collateral. For real estate appraisals. 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classificationloans, fair value of the impaired loan's collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for ~~determining~~appropriateness and adjusts the value downward to consider selling and closing costs, which typically is 10% of the appraised value. For non-real estate collateral loans, the unobservable inputs will vary depending on the credit. The fair ~~value. Non-real estate~~value of the impaired loan's collateral may be ~~valued~~determined using ana third party appraisal, ~~net book~~transactional values, discounted cash flows ("DCF"), sales comparisons, asset value, ~~per the borrower’s financial statements,~~ or aging reports, adjusted or ~~discounted~~discounted. As of March 31, 2020, the fair value of the non-real estate collateral loans was determined primarily based on ~~management’s historical knowledge, changes in market conditions from~~ the ~~time of the valuation, and management’s expertise and knowledge of the client and client’s business,~~DCF method, resulting in a Level 3 fair value classification. ~~Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently~~

Mortgage Servicing Rights: Fair value of mortgage servicing rights is based on ~~changing circumstances as part~~valuation models that calculate the present value of ~~the aforementioned quarterly evaluation.~~

estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 3 classification.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less

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estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

~~Loans Held For Sale~~:

The Company ~~has elected the~~measures certain assets at fair value ~~option for~~on a non-recurring basis including impaired loans (excluding PCI loans), loans held for sale, ~~to align with other accounting policies related to mortgage banking, such as mortgage banking derivatives.~~and OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure). These fair value adjustments result from impairments recognized during the period, application of the lower of cost or fair value on loans ~~are typically sold to an investor following loan origination~~held for sale, and the application of fair value ~~of such accounts are readily available based~~less cost to sell on ~~direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains~~OREO. The following tables present valuation techniques and ~~losses are recorded in current earnings. Fair value is determined by market prices~~unobservable inputs for ~~similar transactions adjusted for specific attributes of that loan (Level 2).~~

~~Other Liabilities~~: The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on pricing models that utilize observable market inputs (Level 2).

~~Assets and liabilities~~assets measured at fair value on a ~~recurring~~non-recurring basis ~~including financial assets and liabilities~~ for which the Company has ~~elected the~~utilized Level 3 inputs to determine fair ~~value option, are summarized below:~~

values at March 31, 2020 and December 31, 2019.

Financial Instruments Recorded Using Fair Value Option

Fair Value Measurements at
June 30, 2019 Using:

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Securities available for sale

U.S. government sponsored entities and agencies

$
—

1,688

$
—

Mortgage-backed securities-residential

—

474,051

—

Mortgage-backed securities-commercial

—

18,699

—

Asset-backed securities

—

25,208

—

Corporate notes

—

22,716

—

State and political subdivisions

—

172,770

—

Total securities available for sale

$
—

$
715,132

$
—

Loans held for sale

$
—

$
27,093

$
—

Other assets

$
—

$
278

$
—

Financial Liabilities

Other liabilities

$
—

$
6,580

$
—

Fair Value Measurements at
December 31, 2018 Using:

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Securities available for sale

U.S. Treasury securities

$
253,014

$
—

$
—

U.S. government sponsored entities and agencies

—

21,888

—

Mortgage-backed securities-residential

—

580,699

—

Asset-backed securities

—

24,844

—

Corporate notes

12,424

State and political subdivisions

—

137,799

—

Total securities available for sale

$
253,014

$
777,654

$
—

Loans held for sale

$
—

$
11,103

$
—

Other assets

$
—

$
206

$
—

Financial Liabilities

Other liabilities

$
—

$
129

$
—

As of ~~June 30,~~March 31, 2020, the unpaid principal balance of loans held for sale was $40,710 resulting in an unrealized gain of $1,972 included in gains on sale of loans. As of December 31, 2019, the unpaid principal balance of loans held for sale was ~~$26,118~~$42,152, resulting in an unrealized gain of ~~$975~~$1,010 included in ~~mortgage banking revenue. As~~gains on sale of loans. None of the loans as of March 31, 2020, or December 31, ~~2018, the unpaid principal balance of loans held for sale was $10,722, resulting in an unrealized gain of $381 included in mortgage banking revenue. For the three months ended June 30,~~ 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $324 and $220, respectively. For the six months ended June 30, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $594 and $194, respectively. None of these loans wereare 90 days or more past due or on ~~nonaccrual~~nonaccrual.


			Fair Value Measurements at March 31, 2020 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	173,482	$	173,482	$	—	$	—	$	173,482
Certificates of deposit held at other financial institutions	3,345		—		3,345		—		3,345
Securities available for sale	543,225		—		543,225		—		543,225
Loans held for sale	42,682		—		42,682		—		42,682
Net loans	2,817,365		—		—		2,736,626		2,736,626
Other assets	1,166		—		1,166		—		1,166
Accrued interest receivable	12,043		36		3,183		8,824		12,043
Financial liabilities
Deposits	$	3,137,471	$	2,506,175	$	638,714	$	—	$	3,144,889
Federal Home Loan Bank advances	135,000		—		135,080		—		135,080
Subordinated notes, net	58,916		—		—		58,716		58,716
Other liabilities	18,905		—		18,905		—		18,905
Accrued interest payable	3,179		127		2,702		350		3,179

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			Fair Value Measurements at December 31, 2019 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	234,991	$	234,991	$	—	$	—	$	234,991
Certificates of deposit held at other financial institutions	3,590		—		3,590		—		3,590
Securities available-for-sale	652,132		—		652,132		—		652,132
Loans held for sale	43,162		—		43,162		—		43,162
Net loans	2,767,008		—		—		2,753,761		2,753,761
Other assets	225		—		225		—		225
Accrued interest receivable	12,362		96		3,775		8,491		12,362
Financial liabilities
Deposits	$	3,207,584	$	2,458,555	$	749,656	$	—	$	3,208,211
Federal Home Loan Bank advances	155,000		—		155,090		—		155,090
Subordinated notes, net	58,872		—		—		60,922		60,922
Other liabilities	6,619		—		6,619		—		6,619
Accrued interest payable	4,201		154		687		3,360		4,201

There were 0 foreclosed assets as of ~~June 30,~~March 31, 2020, or December 31, 2019, and ~~December 31, 2018.~~

~~There were no transfers between Level 1 and 2 during 2019 or 2018.~~

~~Assets measured at fair value on a non-recurring basis are summarized below:~~

There was one collateral-dependent impaired loan carried at fair value of $0 as of June 30, 2019. For the three and six months ended June 30, 2019, an additional provision for loan losses of $6,304 and $9,759 was recorded related to impaired loans recorded at fair value of collateral. There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three and six months ended June 30, 2018, an additional provision for loan losses of $16 was recorded related to impaired loans recorded at fair value of collateral.

~~Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $0 as of June 30, 2019 and December 31, 2018. There~~accordingly, there were no properties at ~~June 30,~~March 31, 2020 or December 31, 2019 ~~or 2018~~ that ~~had~~ required write-downs to fair value.

~~The carrying amounts and estimated fair values of financial instruments at June 30, 2019 and December 31, 2018 are as follows:~~

Fair Value Measurements at
June 30, 2019 Using:

Carrying
Amount

Level 1

Level 2

Level 3

Total

Financial assets

Cash and cash equivalents

$
150,721

$
150,721

$
—

$
—

$
150,721

Certificates of deposit held at other financial
institutions

3,840

—

3,840

—

3,840

Securities available for sale

715,132

—

715,132

—

715,132

Securities held to maturity

118,963

—

120,809

—

120,809

Loans held for sale

27,093

—

27,093

—

27,093

Net loans

2,852,990

—

—

2,886,557

2,886,557

Servicing rights, net

3,299

—

—

3,905

3,905

Other assets

278

—

278

—

278

Accrued interest receivable

14,281

136

5,196

8,950

14,282

Financial liabilities

Deposits

$
3,146,645

$
2,182,888

$
965,228

$
—

$
3,148,116

Federal Home Loan Bank advances

396,500

—

396,624

—

396,624

Subordinated notes, net

58,782

—

—

61,438

61,438

Other liabilities

6,580

—

6,580

—

6,580

Accrued interest payable

4,312

179

687

3,446

4,312

Fair Value Measurements at
December 31, 2018 Using:

Carrying
Amount

Level 1

Level 2

Level 3

Total

Financial assets

Cash and cash equivalents

$
280,212

$
280,212

$
—

$
—

$
280,212

Certificates of deposit held at other financial
institutions

3,594

—

3,594

—

3,594

Securities available for sale

1,030,668

253,014

777,654

—

1,030,668

Securities held to maturity

121,617

—

118,955

—

118,955

Loans held for sale

11,103

—

11,103

—

11,103

Net loans

2,641,948

—

—

2,622,386

2,622,386

Servicing rights, net

3,403

—

—

4,836

4,836

Other assets

206

—

206

—

206

Accrued interest receivable

13,337

71

5,539

7,727

13,337

Financial liabilities

Deposits

$
3,431,807

$
2,105,951

$
1,319,326

$
—

$
3,425,277

Federal Home Loan Bank advances

368,500

—

366,786

—

366,786

Subordinated notes, net

58,693

—

—

59,852

59,852

Other liabilities

129

—

129

—

129

Accrued interest payable

4,700

146

3,866

688

4,700

The methods and assumptions not previously described used to estimate fair values are described as follows:

(a) Cash and Cash ~~Equivalents:~~ Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) ~~Loans:~~ Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using a cash flow projection methodology that relies on three primary assumptions: (1)the expected prepayment rate of loans; (2)the magnitude of future net losses based on expected default rate and severity of loss; and (3)the discount rate applicable to the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

~~(c) Mortgage Servicing Rights:~~ Fair value of mortgage servicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 3 classification.

~~(d)~~

(c) Deposits:The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

~~(e)~~

(d) Federal Funds Purchased and Repurchase Agreements:The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ~~ninety~~90 days, approximate their fair values resulting in a Level 2 classification.

~~(f)~~

(e) Federal Home Loan Bank Advances:The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

~~(g)~~

(f) Subordinated ~~Notes:~~Notes: The fair values of the Company’s subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

~~(h)~~

(g) Accrued Interest Receivable/~~Payable:~~Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

~~(i)~~

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(h) Off-balance Sheet ~~Instruments:~~Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

NOTE 11—EARNINGS PER SHARE

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
	2019			2018			2019			2018				2020		2019
Basic													Basic
Net income available to common shareholders	$	5,173		$	10,161		$	8,075		$	20,213		Net income available to common shareholders	$	(1,148)	$	2,901
Less: earnings allocated to participating securities		(41	)		(118	)		(79	)		(192	)	Less: earnings allocated to participating securities	(7)		(34)
Net income allocated to common shareholders	$	5,132		$	10,043		$	7,996		$	20,021		Net income allocated to common shareholders	$	(1,155)	$	2,867
Weighted average common shares outstanding including participating securities		14,599,407			14,383,493			14,580,370			13,819,742		Weighted average common shares outstanding including participating securities	14,849,535		14,561,721
Less: Participating securities		(117,063	)		(167,381	)		(143,043	)		(130,898	)	Less: Participating securities	(90,575)		(168,638)
Average shares		14,482,344			14,216,112			14,437,327			13,688,844		Average shares	14,758,960		14,393,083
Basic earnings per common share	$	0.35		$	0.71		$	0.55		$	1.46		Basic earnings per common share	$	(0.08)	$	0.20

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Diluted

Net income allocated to common shareholders

$
5,132

$
10,043

$
7,996

$
20,021

Weighted average common shares outstanding for
basic earnings per common share

14,482,344

14,216,112

14,437,327

13,688,844

Add: Dilutive effects of assumed exercises of stock
options

341,777

597,947

376,762

557,307

Add: Dilutive effects of assumed restricted stock units

70,019

—

35,203

—

Average shares and dilutive potential common shares

14,894,140

14,814,059

14,849,292

14,246,151

Dilutive earnings per common share

$
0.34

$
0.68

$
0.54

$
1.41


	Three Months Ended March 31,
	2020		2019
Diluted
Net income allocated to common shareholders	$	(1,155)	$	2,867
Weighted average common shares outstanding for basic earnings per common share	14,758,960		14,393,083
Add: Dilutive effects of assumed exercises of stock options	—		411,747
Add: Dilutive effects of assumed restricted stock units	—		—
Average shares and dilutive potential common shares	14,758,960		14,804,830
Dilutive earnings per common share	$	(0.08)	$	0.19

For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ stock options for ~~980,099~~988,504 and ~~659,291~~768,458 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive. ~~Stock options~~For the three months ended March 31, 2020 restricted stock units for ~~874,279 and 535,285~~254,498 shares of common stock were not considered in computing diluted earnings per common share ~~for the six months ended June 30, 2019 and 2018, respectively,~~ because they were antidilutive.

NOTE 12—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled ~~$58,782~~$58,916 and ~~$58,693~~$58,872 at ~~June 30, 2019~~March 31, 2020 and at December 31, ~~2018,~~2019, respectively. For regulatory capital purposes, the subordinated notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.

~~The~~

During 2016, the Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875% fixed-to-floating rate subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional investors, and in June 2016, $20,000 of ~~7.00%~~7% fixed-to-floating rate subordinated notes (the “June 2016 Subordinated Notes”) were issued to certain accredited institutional investors in a private offering. The subordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The subordinated notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the

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case of the Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the subordinated notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over the ~~ten-year~~ten-year term of the March 2016 Subordinated Notes. The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over the ~~ten-year~~ten-year term of the June 2016 Subordinated Notes. For the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ amortization of issuance costs remained consistent at ~~$89.~~

$44 and $45, respectively.

The following table summarizes the terms of each subordinated note offering:

March 2016

Subordinated

Notes

June 2016

Subordinated

Notes

March 2016
Subordinated
Notes

June 2016
Subordinated
Notes

Principal amount issued

$40,000

$20,000

Principal amount issued

$40,000

$20,000

Maturity date

March 30, 2026

July 1, 2026

Maturity date

March 30, 2026

July 1, 2026

Initial fixed interest rate

6.875%

7.00%

Initial fixed interest rate

6.875%

7.00%

Initial interest rate period

5 years

Initial interest rate period

5 years

First interest rate change date

March 30, 2021

July 1, 2021

First interest rate change date

March 30, 2021

July 1, 2021

Interest payment frequency through year five*

Semiannually

Interest payment frequency after five years*

Quarterly

Interest payment frequency through year five

Semiannually

Interest payment frequency after five years

Quarterly

Interest repricing index and margin

3-month LIBOR

plus 5.636%

3-month LIBOR

plus 6.04%

Interest repricing index and margin

3-month LIBOR plus 5.636%

3-month LIBOR plus 6.04%

Repricing frequency after five years

Quarterly

Repricing frequency after five years

Quarterly

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All dollar values in this section are in thousands.)

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March ~~19, 2019,~~16, 2020, which includes additional information about critical accounting policies and practices and risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.

Company Overview

We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly-owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 15 branches ~~and a loan production office~~ in the growing Williamson, Rutherford and Davidson Counties and one loan production and deposit production office in Wilson County, all within the Nashville ~~metropolitan area.~~MSA. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our Company,” “the Company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy Bank), any reference to “FFN” refers to Franklin Financial Network, Inc. only and any reference to “Franklin Synergy” or the “Bank” refers to our banking subsidiary, Franklin Synergy Bank.

As of ~~June 30, 2019,~~March 31, 2020, we had consolidated total assets of ~~$4,071,971,~~$3,791,601, total loans, including loans held for sale, of ~~$2,907,526,~~$2,898,450, total deposits of ~~$3,146,645~~$3,137,471 and total equity of ~~$393,609.~~

$408,848.

Our principal executive office is located at 722 Columbia Avenue, Franklin, Tennessee 37064-2828, and our telephone number is (615) 236-2265. Our website is www.franklinsynergybank.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein.

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Recent Developments:

Merger with FB Financial Corporation

On January 21, 2020, the Company announced a strategic merger with FB Financial Corporation that is projected to close in the third quarter of 2020.

COVID-19 and the CARES Act

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. During the first quarter of 2020, the World Health Organization declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

The United States Congress, the President of the United States, and the Federal Reserve have taken a multitude of actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020 as a $2.2 trillion legislative relief package. The goal of the CARES Act is to limit the impact of a potentially severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and medical providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware in this Form 10-Q.

Financial position and results of operations

Pertaining to our March 31, 2020 financial condition and results of operations, COVID-19 had an impact on our allowance for loan and lease losses (“ALLL”) and resulting provision for loan losses are impacted by changes in economic conditions. Should economic conditions worsen, we could experience further increases in our ALLL and record additional provision expense. The execution of the payment deferral program discussed in the following commentary assisted our ratio of past due loans to total loans. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued may need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Positively, the Company could see a near-term, non-recurring benefit to interest income due to the origination fees paid by the SBA related to PPP loans that are originated and funded by the Company.At this time, the Company is unable to project the materiality of such an impact.

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Capital and liquidity

As of March 31, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of March 31, 2020, our goodwill was not impaired. While our stock was trading above book value for most of the first quarter of 2020, at quarter-end our stock was trading below book value, and it is possible that subsequent impacts of COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020 we had goodwill of $18,176, representing approximately 4.4% of equity.

Our processes, controls and business continuity plan

We implemented our business continuity plans in the aftermath of the early March 2020 tornadoes that severely impacted communities across Middle Tennessee and as COVID-19 was declared a global pandemic. Shortly after invoking those plans, we deployed a successful remote working strategy, provided timely communication to employees and customers, implemented protocols for employee safety, and initiated strategies for monitoring and responding to local COVID-19 impacts – including customer relief efforts. Our preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. Prior technology planning resulted in the successful deployment of the majority of our operational teams to a remote environment. Due to the nature of their functions, a portion of our employees continue to operate from physical Company locations, while effectively employing social distancing standards. As of April 30, 2020, approximately 60% of the Company’s 324 employees continued to work remotely.As our local communities begin to gradually lift workplace and social distancing restrictions, the Company plans to slowly bring employees back to their physical workplaces, in a conservative and methodical phased approach.

To achieve implementation of the remote working strategy, during the first quarter of 2020, we did not incur significant costs to effectively provide for proper equipment to team members who were required to work remotely. We do not anticipate incurring material costs related to our continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. To prepare for potential staffing shortages resulting from an anticipated peak in COVID-19 cases, we have assessed critical team members and determined appropriate contingency and succession plans are in place to ensure continued operations. Our COVID-19 Response Team continues to meet regularly to anticipate and respond to any future COVID-19 interruptions or developments. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. We do not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, we are executing a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the

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demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for typically90 days. As of April 30, 2020, the Company has executed over 420 of these deferrals on outstanding loan balances of approximately $644,000. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

With the passage of the PPP, administered by the SBA, we are actively participating in assisting our customers with applications forthese SBA-guaranteed loans through the program. PPP loans have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, we have closed or approved with the SBA over 325 PPP loans representing approximately $50,000. It is our understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for loan and lease losses through additional provision expense charged to earnings.


	April 30, 2020
COVID-19 Loan Deferrals	Principal Balance		Number of loans
Total Loans Booked	$	644,229	422

Credit

We are working with customers directly affected by COVID-19. We are prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan and lease losses and record additional loan loss provision expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

While all industries have and will continue to experience adverse impacts as a result of COVID-19 virus, we had exposures (on balance sheet loans and commitments to lend) in the following loan categories considered to be “at-risk” of significant impact as of March 31, 2020.Our exposure to the retail industry at March 31, 2020 equated to approximately $279,187, or 9.8% of total loans HFI. Our exposure to the health care industry at March 31, 2020 equated to $352,013, or 12.3% of total loans HFI. We have approximately 9.6% of the loans in the health care industry segment risk rated as substandard or worse. Our exposure to hotels at March 31, 2020 equated to approximately $142,520, or 5.0% of total loans HFI, and the majority of the our hotel borrowers have historically exhibited strong operating cash flows. Our exposure to restaurants at March 31, 2020 equated to approximately $75,452, or 2.6% of total loans HFI. At March 31, 2020, our exposure to the transportation and warehousing industry was $24,768, or 0.9% of total loans HFI. These "at-risk" loan categories as of March 31, 2020 totaled $873,939, or 30.6% of total loans HFI.


Industries	Commercial and industrial		Commercial real estate owner occupied		Commercial real estate non-owner occupied real estate		Total		% of Total Loans HFI
Retail	$	6,488	$	33,787	$	238,912	$	279,187	9.8	%
Healthcare - institutional	306,343		—		—		306,343		10.7	%
Healthcare - non-institutional	18,666		5,702		21,302		45,670		1.6	%
Total healthcare	325,009		5,702		21,302		352,013		12.3	%
Hotels	200		—		142,320		142,520		5.0	%
Restaurants	4,437		40,762		30,253		75,452		2.6	%
Transportation and warehousing	19,492		—		5,276		24,768		0.9	%
Total	$	355,626	$	80,250	$	438,063	$	873,939	30.6	%

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Risk Rating	Retail		Healthcare - Institutional		Healthcare - Non-Institutional		Total Healthcare		Hotels		Restaurants		Transportation and Warehousing
Pass	93.2	%	86.5	%	95.9	%	87.7	%	100.0	%	99.8	%	93.5	%
Watch	5.2	%	2.5	%	4.1	%	2.7	%	—	%	—	%	6.3	%
Special mention	0.4	%	—	%	—	%	—	%	—	%	—	%	0.2	%
Substandard or worse	1.2	%	11.0	%	—	%	9.6	%	—	%	0.2	%	—	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

As of March 31, 2020, our average loan exposure is approximately $162 with the average exposure within our largest segment, commercial real estate, approximately $934 and the average exposure within our top 10 customers is approximately $29,560.

Retail operations

We are committed to assisting our customers and communities in this time of need. As of April 30, 2020, the Bank was utilizing four of its 15 branches per normal operating procedures, while the other 11 branches were available to customers on a drive-thru basis only. Further, we also continues to temporarily reduce, suspend, or eliminate certain fees for customers eligible for relief under regulatory guidance who have been adversely affected, and we have temporarily suspended adverse credit bureau reporting for customers eligible for such relief under applicable regulatory guidelines.

We continue to serve our customers through our branch and drive-thru operations, as well as through the use of our mobile banking operations, all of which are supported by our Customer Call Center, which has been operating under extended hours for much of the recent crises. We have been able to conduct the vast majority of customer business with minimal disruption to date, and our bankers and entire customer service team are proactively and successfully managing the volume of customer requests and issues.

The Company continues to monitor the safety of our employees, customers and communities. At this time, our staffing is adequate to address the requests for time off by any of our employees who are impacted by health or child care issues.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

~~The Company’s~~

Our accounting policies are integral to understanding the results reported. Accounting policies are described in Note 1 of the notes to the consolidated financial statements ~~in the Company’s Annual Report~~(unaudited) which begins on ~~Form 10-K that was filed with the SEC on March 19, 2019.~~page 9. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Allowance for Loan Losses (ALLL)

The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan balance has become uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that ~~the Company~~we will be unable

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to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDR” or “TDRs”) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All loans classified by management as substandard or worse are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, ~~the Company determines~~we determine the amount of reserve in accordance with the accounting policy for the ALLL.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history from the Bank’s peer group over the past three years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, 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.

Status of New Accounting Standard for Allowance for Credit Losses

On January 1, 2020, ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, became effective for the Company which replaces the existing incurred loss impairment methodology for loans that are collectively evaluated for impairment with a methodology that reflects management’s best estimate of lifetime expected credit losses and requires consideration of reasonable and supportable economic forecasts to develop a lifetime credit loss estimate. Topic 326 requires additional qualitative and quantitative disclosure to allow users to better understand the credit risk within the portfolio and the methodologies for determining the ACL. The CECL standard also simplifies the accounting model for purchased credit impaired loans. Additionally, Topic 326 requires expected credit losses on AFS debt securities be recorded as an ACL. For certain types of debt securities, such as U.S. Treasuries and other securities with government guarantees, entities may expect zero credit losses.

In accordance with Section 4014 of the CARES Act that was signed into law on March 27, 2020, we deferred implementation of CECL and thus elected to continue to utilize the ILM to calculate loan loss reserves in the first quarter 2020.

The temporary deferral of CECL will remain effective until the earlier of the termination of the national emergency declaration concerning the COVID-19 pandemic or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.There is increased uncertainty on the local, regional, and national economy as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level.We have taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as actively participating in the SBA’s PPP.These conditions significantly impact management’s determination of a reasonable and supportable forecast, an essential requirement in the calculation of expected credit losses under CECL methodology.We believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses.

Our CECL implementation efforts will remain in process in order to adequately comply with the provisions of CECL once the deferral period ceases.Management will continue to measure and monitor the estimated impacts of CECL adoption through continued parallel testing of model simulations based on our portfolio composition and current expectations of future economic conditions.

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Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were completing our CECL implementation plan, under the direction of our Chief Financial Officer, Chief Credit Officer, Chief Operating Officer, and Controller. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; Board approval of a CECL Policy; and system configuration, among other things. Additionally, a third-party vendor remains under contract to assist us in the implementation of CECL.

We are unable as of the date of this report to provide an estimate of our allowance for loan losses under the CECL model as of March 31, 2020 and the provision for loan losses for the three months then ended.

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COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2019 and ~~2018~~

2019

(Dollar Amounts in ~~Thousands~~)

Thousands)

Overview

~~The Company reported~~

We incurred a net income of $5,181 and $8,083 for the three and six months ended June 30, 2019, respectively, compared to $10,169 and $20,221 for the three and six months ended June 30, 2018, respectively. After earnings attributable to noncontrolling interest, the Company’s net earningsloss available to common shareholders of $1,148 for the three ~~and six~~ months ended ~~June 30, 2019, was $5,173 and $8,075, respectively,~~March 31, 2020 compared to ~~$10,161 and $20,213~~a net income of $2,901 for the three ~~and six~~ months ended ~~June 30, 2018, respectively. Net income available to common shareholders decreased by $4,988 and $12,138 for the three and six months ended June 30,~~March 31, 2019, ~~compared to June 30, 2018,~~a decrease of $4,049. The decrease was primarily related to a ~~specific~~ loan loss provision ~~on a shared national credit relationship (“SNC”)~~ of ~~$6,304 and $9,759~~$13,022 for the ~~three and six months ended June 30, 2019, respectively, and $4,143 related to post-employment and retirement expense recorded in the first quarter of 2019.~~

quarter.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income remained consistent for the three ~~and six~~ months ended ~~June 30, 2019, totaled $27,365 and $54,785, respectively,~~March 31, 2020 with a total of $27,464 compared to ~~$26,905 and $52,021~~$27,420 for the same ~~periods~~period in ~~2018,~~2019, a $44 increase.

The net interest margin for the first quarter of 2020 was 3.02%, compared to 2.80% in the same period in 2019, an increase of ~~$460~~22 basis points, which was primarily driven by the 2019 balance sheet rotation and ~~$2,764, or 1.7%~~optimization strategies that have focused on the reduction in non-core assets and ~~5.3%, between~~liabilities.

Tax-equivalent interest income was $42,143 for the ~~respective periods.~~first quarter of 2020, when compared to $48,058 for the same period last year, a 12.3% decrease. The yield on average interest earning assets, adjusted for tax equivalent yield, decreased 27 basis points to 4.55% from 4.82% when comparing the three months ended March 31, 2020 to the same period during 2019. For the three ~~and six~~ months ended ~~June 30, 2019, interest income increased $5,317 and $14,793, or 12.6% and 18.4%~~March 31, 2020, the tax equivalent yield on loans held for investment was 5.21%, ~~respectively,~~ compared ~~with~~to 5.61% during the same ~~periods~~period in ~~2018, due to growth~~2019. The primary driver for the decrease in ~~both~~yields on loans was the ~~loan and investment securities portfolios. For the three and six months ended June 30, 2019, interest expense increased $4,857 and~~

~~$12,029, or 31.9% and 42.7%, respectively, primarily due to increases~~decrease in ~~interest-bearing deposits combined with an increase in~~market interest rates ~~for deposits and Federal Home Loan Bank (“FHLB”) advances.~~

when compared to the same quarter in the previous year.

Interest-earning assets averaged ~~$3,940,266~~$3,726,844 and ~~$4,046,709~~$4,044,231 during the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, a decrease of ~~$106,443,~~$317,387, or ~~2.6%~~7.8%. This decrease was due to the strategically planned asset rotation and decrease in the total investment securities. Average ~~total loans increased $420,711, or 17.1%, and~~ investment securities decreased ~~$528,315,~~$480,923, or ~~37.5%~~43.7%, and average loans held for investment increased $69,762, or 2.5% when comparing the three months ended ~~June 30, 2019,~~March 31, 2020 with the same period in ~~2018.~~

~~When comparing~~2019.

Interest-bearing liabilities averaged $3,076,269 and $3,493,260 and during the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, the yield on~~respectively, a decrease of $416,991, or 11.9%. Total average ~~interest earning assets, adjusted for tax equivalent yield,~~money market deposits increased ~~64 basis points in 2019, to 4.89% compared to 4.25% for the same period during 2018. For the three months ended June 30, 2019, the tax equivalent yield on loans held for investment was 5.61%~~$248,245, or 25.0%, and average time deposits decreased $447,372, or 38.4% for the three months ended June 30, 2018, the tax equivalent yield on loans held for investment was 5.27%. The primary driver for the increase in yields on loans was the increase in market interest rates when compared to the same quarter in the previous year.

Interest-bearing liabilities averaged $3,340,033 during the three months ended June 30, 2019, compared to $3,518,299 for the same period in 2018, a decrease of $178,266, or 5.1%. Total average interest-bearing deposits decreased $179,800, or 5.8%, including a decline in average interest checking of $44,806 and average time deposits of $380,237 for the three months ended June 30, 2019,March 31, 2020, as compared to the same period during ~~2018. Total average money market deposits increased $254,168, or 32.9% for~~2019. Average FHLB advances decreased $230,425 when comparing the three months ended ~~June 30, 2019.~~ March 31, 2020 with the same period in 2019 with the organic growth in the loan portfolio. For the three months ended March 31, 2020 and 2019, the cost of average interest-bearing liabilities decreased 48 basis points to 1.85% from 2.33%.

Total non-interest deposits averaged ~~$313,104,~~$333,883, an increase of ~~$14,979,~~$42,707, or ~~5.0%~~14.7%, during the three months ended ~~June 30, 2019,~~March 31, 2020, compared to the same period during ~~2018. The growth in the loan portfolio contributed to an increase in average FHLB advances of $18,857 for the three months ended June 30,~~ 2019.

When comparing the three months ended June 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 67 basis points to 2.41% from 1.74%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and federal funds purchased.

Interest-earning assets averaged $3,991,962 and $3,958,127 during the six months ended June 30, 2019 and 2018, respectively, an increase of $33,835, or 0.9%. This increase was due to growth in the loan portfolio over the past year. Average loans held for investment increased $437,608, or 18.4%, for the six months ended June 30, 2019, as compared to the same period for 2018. Investment securities decreased $359,071, or 26.6%, when comparing the six months ended June 30, 2019, with the same period in 2018. When comparing the six months ended June 30, 2019 and 2018, the yield on average interest-earning assets, adjusted for tax equivalent yield, increased approximately 69 basis points to 4.85% in 2019 compared to 4.16% for the same period during 2018.

For the six months ended June 30, 2019 and 2018, the tax equivalent yield on loans held for investment was 5.61% and 5.17% respectively. The primary driver for the increase in yield on loans held for investment for the six months ended June 30, 2019 was the increase in market interest rates during the past year.

For the six months ended June 30, 2019, the tax equivalent yield on taxable securities was 2.79%, and for the six months ended June 30, 2018, the tax equivalent yield on taxable securities was 2.34%. For the six months ended June 30, 2019, the tax equivalent yield on tax-exempt securities was 4.03%, and for the six months ended June 30, 2018, the tax equivalent yield on tax-exempt securities was 4.56%. The primary driver for the yield decreases in both taxable and tax-exempt securities was the decrease in volume due to the strategically-planned balance sheet rotation focused on core loan growth.

Interest-bearing liabilities averaged $3,416,223 during the six months ended June 30, 2019, compared to $3,444,835 for the same period in 2018, a decrease of $28,612, or 0.8%. Total average interest-bearing deposits decreased $54,259, including decreases in interest-bearing checking of $52,975 and average time deposits of $243,823 for the six months ended June 30, 2019, as compared to the same period during 2018. Total non-interest deposits averaged $302,200, an increase of $9,647, or 3.3%, during the six months ended June 30, 2019, compared to the same period in 2018. The growth in the loan portfolio also contributed to an increase in average FHLB advances of $44,824 during the six months ended June 30, 2019.

When comparing the six months ended June 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 72 basis points from 1.65% to 2.37%. The increase was due to rate increases for interest-bearing deposits, FHLB advances and federal funds purchased.

The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~

2019:

Table of Contents

Average Balances—Yields & Rates ⁽⁷⁾

(Dollars are in thousands)

Three Months Ended June 30,

2019

2018

Average
Balance

Interest
Inc / Exp

Average
Yield /
Rate

Average
Balance

Interest
Inc / Exp

Average
Yield /
Rate

ASSETS:

Loans⁽¹⁾⁽⁶⁾

$
2,858,713

$
40,003

5.61
%

$
2,448,646

$
32,187

5.27
%
Loans held for sale

24,118

256

4.26

13,474

$
152

4.52

Securities:

Taxable

673,386

4,614

2.75

1,179,000

6,905

2.35

Tax-exempt⁽⁶⁾

208,417

1,909

3.67

231,118

2,613

4.53

Restricted equity securities

24,641

350

5.70

20,619

329

6.40

Certificates of deposit at other financial institutions

3,759

22

2.35

3,459

19

2.20

Federal funds sold and other⁽²⁾

147,232

855

2.33

150,393

642

1.71

TOTAL INTEREST EARNING ASSETS

$
3,940,266

$
48,009

4.89
%

$
4,046,709

$
42,847

4.25
%
Allowance for loan and lease losses

(28,007
)

(21,994
)

All other assets

192,843

144,738

TOTAL ASSETS

$
4,105,102

$
4,169,453

LIABILITIES & EQUITY

Deposits:

Interest checking

$
816,429

$
4,357

2.14
%

$
861,235

$
3,329

1.55
%
Money market

1,026,200

6,103

2.39

772,032

3,048

1.58

Savings

38,882

27

0.28

47,807

38

0.32

Time deposits

1,036,904

6,192

2.40

1,417,141

6,189

1.75

Federal Home Loan Bank advances and other ⁽⁸⁾

349,615

2,237

2.57

330,758

1,414

1.71

Federal funds purchased and other⁽³⁾

13,249

90

2.72

30,750

131

1.71

Subordinated notes

58,754

1,082

7.39

58,576

1,082

7.41

TOTAL INTEREST BEARING LIABILITIES

$
3,340,033

$
20,088

2.41
%

$
3,518,299

$
15,231

1.74
%
Demand deposits

313,104

298,125

Other liabilities

63,505

12,854

Total equity

388,460

340,175

TOTAL LIABILITIES AND EQUITY

$
4,105,102

$
4,169,453

NET INTEREST SPREAD⁽⁴⁾

2.48
%

2.51
%
NET INTEREST INCOME

$
27,921

$
27,616

NET INTEREST MARGIN⁽⁵⁾

2.84
%

2.74
%

⁽¹⁾	~~Loan balances include loans held in the Bank’s portfolio and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.~~


	Three Months Ended March 31,
	2020										2019
	Average Balance		Interest Inc / Exp		Average Yield / Rate		Average Balance		Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	2,834,437	$	36,707	5.21	%	$	2,764,675	$	38,238	5.61	%
Loans held for sale	36,668		379		4.16		9,438		115		4.94
Securities:
Taxable	399,135		2,424		2.44		919,549		6,394		2.82
Tax-exempt⁽⁶⁾	221,190		1,872		3.40		181,699		1,990		4.44
Restricted equity securities	24,824		162		2.62		22,082		332		6.10
Certificates of deposit at other financial institutions	3,426		20		2.35		3,592		20		2.26
Federal funds sold and other⁽²⁾	207,164		579		1.12		143,196		969		2.74
TOTAL INTEREST EARNING ASSETS	$	3,726,844	$	42,143	4.55	%	$	4,044,231	$	48,058	4.82	%
Allowance for loan and lease losses	(45,100)						(24,054)
All other assets	198,380						200,078
TOTAL ASSETS	$	3,880,124					$	4,220,255
LIABILITIES & EQUITY
Deposits:
Interest checking	$	877,751	$	3,400	1.56	%	$	857,096	$	4,420	2.09	%
Money market	1,241,087		4,930		1.60		992,842		5,979		2.44
Savings	40,055		27		0.27		40,609		28		0.28
Time deposits	718,294		3,889		2.18		1,165,666		6,563		2.28
Federal Home Loan Bank advances and other ⁽⁸⁾	137,319		801		2.35		367,744		1,959		2.16
Federal funds purchased and other⁽³⁾	2,876		14		1.96		10,594		72		2.76
Subordinated notes	58,887		1,082		7.39		58,709		1,082		7.47
TOTAL INTEREST BEARING LIABILITIES	$	3,076,269	$	14,143	1.85	%	$	3,493,260	$	20,103	2.33	%
Demand deposits	333,883						291,176
Other liabilities	53,454						58,703
Total equity	416,518						377,116
TOTAL LIABILITIES AND EQUITY	$	3,880,124					$	4,220,255
NET INTEREST SPREAD⁽⁴⁾					2.70	%					2.49	%
NET INTEREST INCOME			$	28,000					$	27,955
NET INTEREST MARGIN⁽⁵⁾					3.02	%					2.80	%

⁽²⁾	~~Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial institutions.~~

⁽¹⁾Loan balances include loans held in the Bank’s portfolio and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.

⁽³⁾	~~Includes repurchase agreements.~~

⁽²⁾Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial institutions.

⁽⁴⁾	~~Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.~~

⁽³⁾Includes repurchase agreements.

⁽⁵⁾	~~Represents net interest income (annualized) divided by total average earning assets.~~

⁽⁴⁾Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

⁽⁶⁾	~~Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.~~

⁽⁵⁾Represents net interest income (annualized) divided by total average earning assets.

⁽⁷⁾	~~Average balances are average daily balances.~~

⁽⁶⁾Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

⁽⁸⁾	~~Includes finance lease.~~

Six Months Ended June 30,

2019

2018

Average
Balance

Interest
Inc / Exp

Average
Yield /
Rate

Average
Balance

Interest
Inc / Exp

Average
Yield /
Rate

ASSETS:

Loans⁽¹⁾⁽⁶⁾

$
2,811,954

$
78,241

5.61
%

$
2,374,346

$
60,911

5.17
%
Loans held for sale

16,818

371

4.45

11,090

$
233

4.24

Securities:

Taxable

795,788

11,008

2.79

1,119,823

13,017

2.34

Tax-exempt⁽⁶⁾

195,132

3,899

4.03

230,168

5,205

4.56

Restricted equity securities

23,514

684

5.87

19,644

603

6.19

Certificates of deposit at other financial institutions

3,676

42

2.30

3,138

31

1.99

Federal funds sold and other⁽²⁾

145,080

1,822

2.53

199,918

1,584

1.60

TOTAL INTEREST EARNING ASSETS

$
3,991,962

$
96,067

4.85
%

$
3,958,127

$
81,584

4.16
%
Allowance for loan and lease losses

(26,041
)

(21,840
)

All other assets

196,446

134,877

TOTAL ASSETS

$
4,162,367

$
4,071,164

LIABILITIES & EQUITY

Deposits:

Interest checking

$
836,650

$
8,777

2.12
%

$
889,625

$
6,495

1.47
%
Money market

1,009,613

12,082

2.41

757,698

5,648

1.50

Savings

39,741

55

0.28

49,117

76

0.31

Time deposits

1,100,929

12,755

2.34

1,344,752

11,028

1.65

Federal Home Loan Bank advances and other ⁽⁸⁾

358,630

4,196

2.36

313,806

2,524

1.62

Federal funds purchased and other⁽³⁾

11,929

162

2.74

31,283

227

1.46

Subordinated notes

58,731

2,164

7.43

58,554

2,164

7.45

TOTAL INTEREST BEARING LIABILITIES

$
3,416,223

$
40,191

2.37
%

$
3,444,835

$
28,162

1.65
%
Demand deposits

302,200

292,553

Other liabilities

61,133

13,657

Total equity

382,811

320,119

TOTAL LIABILITIES AND EQUITY

$
4,162,367

$
4,071,164

NET INTEREST SPREAD⁽⁴⁾

2.48
%

2.51
%
NET INTEREST INCOME

$
55,876

$
53,422

NET INTEREST MARGIN⁽⁵⁾

2.82
%

2.72
%
⁽⁷⁾Average balances are average daily balances.

⁽¹⁾	~~Loan balances include loans held in the Bank’s portfolio and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.~~

⁽⁸⁾Includes finance lease.

⁽²⁾	~~Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial institutions.~~

Table of Contents

⁽³⁾	~~Includes repurchase agreements.~~

⁽⁴⁾	~~Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.~~

⁽⁵⁾	~~Represents net interest income (annualized) divided by total average earning assets.~~

⁽⁶⁾	~~Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.~~

⁽⁷⁾	~~Average balances are average daily balances.~~

⁽⁸⁾	~~Includes finance lease.~~

Analysis of Changes in Interest Income and Expenses


	Net change three months ended June 30, 2019 versus June 30, 2018										Net change three months ended March 31, 2020 versus March 31, 2019
	Volume			Rate			Net Change				Volume		Rate		Net Change
INTEREST INCOME										INTEREST INCOME
Loans	$	5,390		$	2,426		$	7,816		Loans	$	802	$	(2,333)	$	(1,531)
Loans held for sale		120			(16	)		104		Loans held for sale	349		(85)		264
Securities										Securities
Taxable		(2,961	)		670			(2,291	)	Taxable	(3,600)		(370)		(3,970)
Tax-exempt		(257	)		(447	)		(704	)	Tax-exempt	381		(499)		(118)
Restricted equity securities		64			(43	)		21		Restricted equity securities	40		(211)		(171)
Certificates of deposit at other financial institutions		2			1			3		Certificates of deposit at other financial institutions	(1)		1		—
Federal funds sold and other		(13	)		226			213		Federal funds sold and other	426		(816)		(390)
TOTAL INTEREST INCOME	$	2,345		$	2,817		$	5,162		TOTAL INTEREST INCOME	$	(1,603)	$	(4,313)	$	(5,916)
INTEREST EXPENSE										INTEREST EXPENSE
Deposits										Deposits
Interest checking	$	(173	)	$	1,201		$	1,028		Interest checking	$	103	$	(1,123)	$	(1,020)
Money market accounts		1,003		$	2,052			3,055		Money market accounts	1,438		(2,487)		(1,049)
Savings		(7	)	$	(4	)		(11	)	Savings	—		(1)		(1)
Time deposits		(1,661	)	$	1,664			3		Time deposits	(2,489)		(185)		(2,674)
Federal Home Loan Bank advances and other⁽¹⁾		81		$	742			823
Federal funds purchased and other⁽²⁾		(75	)	$	34			(41	)
Federal Home Loan Bank advances										Federal Home Loan Bank advances	(1,220)		62		(1,158)
Federal funds purchased and other⁽¹⁾										Federal funds purchased and other⁽¹⁾	(52)		(6)		(58)
Subordinated notes		3		$	(3	)		-		Subordinated notes	—		—		—
TOTAL INTEREST EXPENSE	$	(829	)	$	5,686		$	4,857		TOTAL INTEREST EXPENSE	$	(2,220)	$	(3,740)	$	(5,960)
NET INTEREST INCOME	$	3,174		$	(2,869	)	$	305		NET INTEREST INCOME	$	617	$	(573)	$	44

Net change six months ended
June 30, 2019 versus June 30, 2018

Volume

Rate

Net Change

INTEREST INCOME

Loans

$
11,226

$
6,104

$
17,330

Loans held for sale

120

18

138

Securities

$
-

$
-

Taxable

(3,767
)

1,758

(2,009
)
Tax-exempt

(792
)

(514
)

(1,306
)
Restricted equity securities

119

(38
)

81

Certificates of deposit at other financial institutions

5

6

11

Federal funds sold and other

(434
)

672

238

TOTAL INTEREST INCOME

$
6,477

$
8,006

$
14,483

INTEREST EXPENSE

Deposits

Interest checking

$
(387
)

$
2,669

$
2,282

Money market accounts

1,878

4,556

6,434

Savings

(15
)

(6
)

(21
)
Time deposits

(2,000
)

3,727

1,727

Federal Home Loan Bank advances and other⁽¹⁾

361

1,311

1,672

Fed funds purchased and other⁽²⁾

(140
)

75

(65
)
Subordinated Notes

7

(7
)

-

TOTAL INTEREST EXPENSE

$
(296
)

$
12,325

$
12,029

NET INTEREST INCOME

$
6,773

$
(4,319
)

$
2,454

⁽¹⁾Includes finance lease.

⁽²⁾~~Includes repurchase agreements.~~

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an ALLL that, in management’s evaluation, should be adequate to provide coverage for the probable losses incurred in the loan portfolio. The allowance is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

The provision for loan losses was ~~$7,031~~$13,022 and ~~$570~~$5,055 for the three months ended ~~June 30,~~March 31, 2020 and 2019, respectively. Management determined the need to record an additional loan loss provision of $6,600 to provide specific reserves for one banking relationship, which was on nonaccrual status and ~~2018, respectively,~~was included in a portion of our classified assets, in our Healthcare and ~~$12,086~~Corporate loan portfolios, as of December 31, 2019. Our determination to record this additional provision was primarily the result of certain developments and ~~$1,143 for~~circumstances regarding the ~~six months ended June 30, 2019~~collectability of this relationship that arose during the first quarter of 2020, and ~~2018, respectively.~~these developments were amplified by various macroeconomic factors. The ~~higher~~balance of this banking relationship was fully charged-off as of March 31, 2020. The remainder of the loan loss provision for the three ~~and six~~ months ended ~~June 30, 2019 compared to the same periods in 2018 is based on the Company’s analysis of its ALLL which is based on the loan portfolio’s risk profile and~~March 31, 2020 was ~~primarily driven by a specific reserve of $6,304 and $9,759 for the three and six months ended June 30, 2019, related~~attributable to a ~~SNC relationship. The Company allocated the specific reserve for this credit relationship (and estimated the amount~~combination of the relationship to be charged-off) based on information currently available to the Company. The circumstances related to the SNC defaults are fluid, and the Company intends to address events related to the SNC as they develop. In addition, comparatively higher loan growth ~~resulted~~and increased quantitative loss factors, as well as an increase in ~~more provision being recorded. Nonperforming loans at June 30, 2019 totaled $4,705 compared~~qualitative risk factors due to ~~$5,696 at December 31, 2018, representing 0.16% and 0.21% of total loans for the respective periods.~~

COVID-19.

Non-Interest Income

Non-interest income for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 was ~~$4,923 and $8,410,~~$5,893 compared to ~~$4,147 and $7,603~~$3,486 for the same ~~period~~periods in ~~2018, respectively.~~ 2019. The $2,407 increase was primarily the result of strong mortgage banking revenue, driven by the lower interest rates present during the quarter.

Table of Contents

The following is a summary of the components of non-interest income (in thousands):


	Three Months Ended June 30,				$ Increase			% Increase					Three Months Ended March 31,						$ Increase (Decrease)		% Increase (Decrease)
	2019		2018		(Decrease)			(Decrease)					2020		2019				$ Increase (Decrease)		% Increase (Decrease)
Service charges on deposit accounts	$	77	$	51	$	26			51.0		%	Service charges on deposit accounts	$	92	$	74	$	18	24.3	%
Other service charges and fees		903		823		80			9.7			Other service charges and fees	897		757		140		18.5	%
Mortgage banking revenue		2,473		2,044		429			21.0			Mortgage banking revenue	2,685		1,672		1,013		60.6	%
Wealth management		673		789		(116	)		(14.7	)		Wealth management	814		627		187		29.8	%
Gain on sale or call of securities		367		1		366		NM				Gain on sale or call of securities	1,396		149		1,247		NM
Net (loss) gain on sale of loans		3		—		3		NM
Net loss on sale of loans												Net loss on sale of loans	(416)		(217)		(199)		91.7	%
Net gain on sale of foreclosed assets		3		3		—			—			Net gain on sale of foreclosed assets	2		4		(2)		(50.0)	%
Other		424		436		(12	)		(2.8	)		Other	423		420		3		0.7	%
Total non-interest income	$	4,923	$	4,147	$	776			18.7		%	Total non-interest income	$	5,893	$	3,486	$	2,407	69.0	%

Six Months Ended
June 30,

$
Increase

%
Increase

2019

2018

(Decrease)

(Decrease)

Service charges on deposit accounts

$
151

$
93

$
58

62.4

%
Other service charges and fees

1,660

1,574

86

5.5

Mortgage banking revenue

4,145

3,602

543

15.1

Wealth management

1,300

1,493

(193
)

(12.9
)

Gain on sale or call of securities

517

1

516

NM

Net (loss) gain on sale of loans

(214
)

—

(214
)

NM

Net gain on sale of foreclosed assets

7

6

1

16.7

Other

844

834

10

1.2

Total noninterest income

$
8,410

$
7,603

$
807

10.6

%

Mortgage banking revenue increased ~~$429 and $543~~$1,013, or 60.6% for the three ~~and six~~ months ended ~~June 30, 2019, respectively.~~March 31, 2020, compared to the same period in 2019. The increase was due to the volume of mortgage loans originated, the sales related to those loans and more favorable market rates in ~~2019,~~2020, which resulted in favorable fair value adjustments on mortgage derivatives.

The Federal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then decreased rates by an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points.

~~Non-Interest Expense~~

~~Non-interest expense~~Gain (loss) on sale or call of securities increased $1,247 for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020, when compared with the same periods in 2019. The increase was ~~$19,370 and $18,050 and $41,986 and $33,538~~due to the Company’s election to sell certain securities to take advantage of the market conditions that existed during that period, at which time, management elected to sell certain of its securities as part of its balance sheet management initiatives.

Net loss on sale of loans was $416, an increase of $199 during the period ended March 31, 2020, when compared with the same periods in 2019. The loss for the three months ended March 31, 2020 was attributed to sales of SNC relationships during the first quarter of 2020.

Non-Interest Expense

Non-interest expense remained relatively consistent for the three months ended March 31, 2020 at $22,421 compared to $22,616 for the same period in ~~2018, respectively.~~2019. The increases and decreases were the result of the following components listed in the table below (in thousands):


	Three Months Ended June 30,				$ Increase			% Increase					Three Months Ended March 31,						$ Increase (Decrease)		% Increase (Decrease)
	2019		2018		(Decrease)			(Decrease)					2020		2019				$ Increase (Decrease)		% Increase (Decrease)
Salaries and employee benefits	$	11,365	$	10,268	$	1,097			10.7		%	Salaries and employee benefits	$	12,580	$	14,743	$	(2,163)	(14.7)	%
Occupancy and equipment		3,283		2,885		398			13.8			Occupancy and equipment	3,086		3,113		(27)		(0.9)	%
FDIC assessment expense		660		778		(118	)		(15.2	)		FDIC assessment expense	450		990		(540)		(54.5)	%
Marketing		301		269		32			11.9			Marketing	245		319		(74)		(23.2)	%
Professional fees		1,073		1,362		(289	)		(21.2	)		Professional fees	3,068		923		2,145		232.4	%
Amortization of core deposit intangible		132		182		(50	)		(27.5	)		Amortization of core deposit intangible	94		145		(51)		(35.2)	%
Other		2,556		2,306		250			10.8			Other	2,898		2,383		515		21.6	%
Total non-interest expense	$	19,370	$	18,050	$	1,320			7.3		%	Total non-interest expense	$	22,421	$	22,616	$	(195)	(0.9)	%

Six Months Ended
June 30,

$
Increase

%
Increase

2019

2018

(Decrease)

(Decrease)

Salaries and employee benefits

$
26,108

$
19,456

$
6,652

34.2

%
Occupancy and equipment

6,396

5,479

917

16.7

FDIC assessment expense

1,650

1,438

212

14.7

Marketing

620

549

71

12.9

Professional fees

1,996

2,231

(235
)

(10.5
)

Amortization of core deposit intangible

277

286

(9
)

(3.1
)

Other

4,939

4,099

840

20.5

Total non-interest expense

$
41,986

$
33,538

$
8,448

25.2

%

The increase in non-interest expense noted in the table above is related to the Company’s overall growth. The Company’s largest increases for the three and six months ended June 30, 2019, in comparison with the same periods of 2018, were in salaries and employee benefits, occupancy and equipment, and other non-interest expense.

Salaries and employee benefits increased $1,097 and $6,652, or 10.7% and 34.2%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from 326 full-time equivalent employees as of June 30, 2018, to 343 as of June 30, 2019, many of which were officer level positions as the Company has worked to enhance its management team to properly oversee the Company’s growth. Stock-based compensation expense also increased $195 and $764, respectively, for the three and six months ended June 30, 2019 in comparison with the same periods in 2018.

Occupancy and equipment expense increased $398 and $917, or 13.8% and 16.7%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The variance for the three months ended June 30, 2019 versus the three months ended June 30, 2018 is primarily attributable to increases in building rent expense of $202 and software maintenance fees of $113. The variance when comparing the six months ended June 30, 2019 with the six months ended June 30, 2018 is attributable to increases in building rent expense of $360, software maintenance fees of $357 and other furniture, fixture & equipment expense of $57.

~~The Company’s FDIC assessment expense~~ decreased ~~$118, or 15.2%, and increased $212,~~$2,163, or 14.7%, respectively, when comparing the three and six months ended June 30, 2019, with the same periods in 2018. The increase in comparing the six months ended June 30, 2019 to June 30, 2018 is due to loan growth and change in loan mix.

~~Professional~~while professional fees ~~decreased $289 and $235,~~increased $2,145, or ~~21.2% and 10.5%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The decrease~~232.4% when comparing the three months ended ~~June 30, 2019~~March 31, 2020 with the same period in ~~2018 is~~2019. Theses variations are attributable to employee-related adjustments occurring due to ~~changes~~our pending strategic merger with FB Financial Corporation projected to close in ~~other professional fees~~third quarter 2020.

Table of $140, legal fees of $154, and merger-related expense of $356. The decrease, when comparing the six months ended June 30, 2019 and 2018, is due to changes in merger-related expenses of $377, other professional fees of $132, and legal fees of $240.

Contents

~~For the three and six months ended June 30, 2019, other non-interest expense increased~~ $250 and $840, or 10.8% and 20.5%, respectively, when compared to the three and six months ended June 30, 2018. The increase in other non-interest expense for the six months ended June 30, 2019 versus June 30, 2018 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: ATM network expense of $121 and CDARS fee expense of $194.

Income Tax Expense

~~The Company~~

We recognized income tax ~~expense~~benefit for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 of ~~$706 and $1,040~~$938 compared to ~~$2,263 and $4,722~~income tax expense of $334 for the three ~~and six~~ months ended ~~June 30, 2018. The Company’s~~March 31, 2019. Our quarter-to-date income tax ~~expense~~benefit for the period ended ~~June 30, 2019~~March 31, 2020 reflects an effective income tax rate of ~~12.0%. The Company’s year-to-date income tax expense for the period ended June 30, 2019 reflects an effective income tax rate of 11.4%~~45.0% which is ~~a significant decrease~~an increase compared to ~~18.9%~~10.3% for the same period in ~~2018 resulting~~2019. The primary drivers are from ~~the Company’s participation in Tennessee’s Community Investment Tax Credit (CITC) program and due~~pre-tax income decreasing $5,321 compared to the ~~first quarter’s $4,143 related~~same quarter in 2019 as a result of recognizing $7,967 more in provision for loan losses when compared to ~~post-employment and retirement expenses, along with $9,759 related to a specific loan loss provision on a SNC relationship during~~ the ~~first six months of~~same period in 2019.

COMPARISON OF BALANCE SHEETS AT ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~

2019

Overview

~~The Company’s~~

Our total assets decreased by ~~$177,468,~~$104,561, or ~~4.2%,~~a 10.8% annualized rate, from December 31, ~~2018~~2019 to ~~June 30, 2019.~~March 31, 2020. The decrease in total assets has primarily been the result of the continued balance sheet rotation and optimization strategies and the planned sales of investment securities during the ~~six~~twelve months ~~ended June 30,~~between March 31, 2020 and March 31, 2019, and a planned offset by organic growth in the loan portfolio.

Loans

Lending-related income is the most important component of ~~the Company’s~~our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.

The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~$2,880,433~~$2,855,768 and ~~$2,665,399,~~$2,812,444, respectively, an increase of ~~$215,034~~$43,324 or ~~8.1%.~~6.2% annualized. As a percentage of total assets, total loans, net of deferred fees, at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~70.7%~~75.3% and ~~62.7%~~72.2%, respectively. Growth in the loan portfolio is primarily due to increased market penetration ~~and a healthy~~within our local economy. The Company has also attracted a number of experienced commercial and mortgage lenders to develop new relationships and broaden its presence in its primary markets in Middle Tennessee which include, Williamson County, Davidson County and Rutherford County.

markets.

The table below provides a summary of the loan portfolio composition for the periods noted.


	June 30, 2019						December 31, 2018							March 31, 2020						December 31, 2019
Types of Loans	Amount			% of Total Loans			Amount			% of Total Loans			Types of Loans	Amount		% of Total Loans		Amount		% of Total Loans
Total loans													Total loans
Real estate:													Real estate:
Construction and land development	$	584,599			20.3	%	$	584,440			21.9	%	Construction and land development	$	627,178	21.9	%	$	591,541	21.0	%
Commercial		932,755			32.3			802,260			30.1		Commercial	997,958		34.9	%	993,912		35.3	%
Residential		694,146			24.1			682,882			25.6		Residential	648,586		22.7	%	643,601		22.9	%
Commercial and industrial		668,065			23.1			592,793			22.2		Commercial and industrial	581,598		20.3	%	582,641		20.7	%
Consumer and other		4,945			0.2			5,568			0.2		Consumer and other	4,454		0.2	%	4,769		0.2	%
Total gross loans		2,884,510			100.0	%		2,667,943			100.0	%	Total gross loans	2,859,774		100.0	%	2,816,464		100.0	%
Less: deferred loan fees, net		(4,077	)					(2,544	)				Less: deferred loan fees, net	(4,006)				(4,020)
allowance for loan losses		(27,443	)					(23,451	)
Total loans, net of deferred loan fees													Total loans, net of deferred loan fees	2,855,768				2,812,444
Less: allowance for loan losses													Less: allowance for loan losses	(38,403)				(45,436)
Total loans, net allowance for loan losses	$	2,852,990					$	2,641,948					Total loans, net allowance for loan losses	$	2,817,365			$	2,767,008

~~Total gross loans increased 8.1%~~

This net loan growth for the first quarter of 2020 occurred in spite of the $31,132 linked-quarter reduction in the SNC portfolio to a balance of $105,526, representing a 54.0% year-over-year and 91.6% annualized linked-quarter decrease. This is the lowest SNC balance held by the Company during the last six quarters, representing 3.7% of loans HFI, which is almost half of the Company’s concentration of 9.3% of loans HFI at the peak of the SNC portfolio at December 31, 2018. Non-SNC loan growth in the first ~~six months ended June 30, 2019,~~quarter was $74,456, representing annualized growth of 11.1% from the fourth quarter of 2019. The Company estimates approximately $32,000 of the loan growth was due to ~~organic growth as a result~~increased customer line of ~~continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans~~

~~of 6.9% with growth occurring in the residential real estate, 1.6%, and commercial real estate, 16.3%,segments. The Company also experienced an increase of 12.7% in the~~credit utilization, which was predominantly from commercial and industrial ~~segment during~~loan customers. Of the ~~six months ended June 30, 2019.~~

$738,189 unused lines of credit at March 31, 2020, the Company estimates approximately $273,300, or approximately 37%, are available to be drawn by customers without further approval by the Bank.

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Real estate loans comprised ~~76.7%~~79.5% of the loan portfolio at ~~June 30, 2019.~~March 31, 2020. The largest portion of the real estate segments as of ~~June 30, 2019,~~March 31, 2020, was commercial real estate loans, which totaled ~~42.2%~~43.9% of real estate loans. Commercial real estate loans totaled ~~$932,755~~$997,958 at ~~June 30, 2019,~~March 31, 2020, and comprised ~~32.3%~~34.9% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and other properties.

Construction and land development loans totaled ~~$584,599~~$627,178 at ~~June 30, 2019,~~March 31, 2020, and comprised ~~26.4%~~27.6% of total real estate loans and ~~20.3%~~21.9% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development. This portfolio has remained steady in absolute dollar terms since 2017, representing a lower corresponding portion of the loan portfolio.

The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled ~~$694,146~~$648,586 and comprised ~~31.4%~~28.5% of real estate loans and ~~24.1%~~22.7% of total loans at ~~June 30, 2019.~~

March 31, 2020.

Commercial and industrial loans totaled ~~$668,065~~$581,598 at ~~June 30, 2019.~~March 31, 2020. Loans in this classification comprised ~~23.1%~~20.3% of total loans at ~~June 30, 2019.~~March 31, 2020. The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and commercial healthcare loans.

The banking agencies define a “Shared National Credit” (“SNC”) as any loan extended to a borrower which aggregates $100 million or more and is shared by three or more banks. The SNC portfolio totaled $231,216 at June 30, 2019, increasing 4.7% annualized, from $228,538 at March 31, 2019, driven by funding of previously originated loans. All of the outstanding balance of SNCs was included in the commercial and industrial portfolio. SNC participations are originated in the normal course of business to meet the needs of our customers and are reviewed at least quarterly for credit quality.

~~The table~~tables below ~~provides~~provide a summary of the ~~SNC~~Corporate and Healthcare ~~portfolio~~portfolios for the periods noted:

SNC and Healthcare
   Portfolios

June 30, 2019

March 31, 2019

December 31, 2018

September 30, 2018

June 30, 2018

QoQ
Growth*

YoY
Growth

Total SNCs

$
231,216

$
228,538

$
249,033

$
162,588

$
155,798

4.7
%

48.4
%

% of Total loans
    held for investment

8.0
%

8.1
%

9.3
%

6.4
%

6.3
%

Healthcare

$
329,818

$
320,611

$
290,464

$
285,284

$
257,225

11.5
%

28.2
%
SNC

118,460

107,156

123,097

103,772

107,894

42.3
%

9.8
%
Non-SNC

211,358

213,455

167,367

181,512

149,331

(3.9
%)

41.5
%

  *Annualized


Corporate and Healthcare portfolios⁽¹⁾	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019			QoQ Change*		YoY Change
Corporate	$	102,370		$	139,840		$	133,386		$	170,125		$	174,731		(107.8	%)	(41.4	%)
Portion SNC	36,011			59,339			58,544			112,756			122,452			(158.1	%)	(70.6	%)
Portion not SNC	66,359			80,501			74,842			57,369			52,279			(70.7	%)	26.9	%
Healthcare	306,343			289,703			273,106			329,818			320,611			23.1	%	(4.5	%)
SNC	69,515			77,319			85,932			118,460			107,156			(40.6	%)	(35.1	%)
Non-SNC	236,828			212,384			187,174			211,358			213,455			46.3	%	10.9	%
Total institutional	$	408,713		$	429,543		$	406,492		$	499,943		$	495,342		(19.5	%)	(17.5	%)
Commercial and industrial⁽¹⁾	579,751			580,696			576,018			666,025			635,673			(0.7	%)	(8.8	%)
Percent of institutional within commercial and industrial	70		%	74		%	71		%	75		%	78		%
Total SNC	$	105,526		$	136,658		$	144,476		$	231,216		$	229,608		(91.6	%)	(54.0	%)
Percent of total loans HFI	3.7		%	4.9		%	5.2		%	8.0		%	8.1		%
*Annualized
⁽¹⁾ Loan balances are net of deferred loan fees and costs.

Table of Contents


Institutional loans asset quality	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Corporate loans	$	102,370		$	139,840		$	133,386		$	170,125		$	174,731
Loans classified as criticized or worse	—			17,608			17,598			—			—
Loans criticized or worse as % of corporate loans	—		%	12.6		%	13.2		%	—		%	—		%
Loans requiring specific reserve	$	—		$	17,608		$	—		$	—		$	—
Specific reserve	—			13,894			—			—			—
Specific reserve as % impaired corporate loans	—		%	78.9		%	—		%	—		%	—		%
Net (charge-offs) recoveries	$	(20,428)		$	—		$	—		$	—		$	—

Healthcare loans	$	306,343		$	289,703		$	273,106		$	329,818		$	320,611
Loans classified as criticized or worse	33,735			21,517			21,554			20,699			27,750
Loans criticized or worse as a % of healthcare loans	11.0		%	7.4		%	7.9		%	6.3		%	8.7		%
Loans requiring specific reserve	$	6,592		$	6,667		$	—		$	2,193		$	9,177
Specific reserve	6,544			6,667			—			2,193			3,455
Specific reserve as % of impaired healthcare loans	99.3		%	100.0		%	—		%	100.0		%	37.6		%
Net (charge-offs) recoveries	$	—		$	—		$	(1,691)		$	(7,563)		$	—

Total institutional	$	408,713		$	429,543		$	406,492		$	499,943		$	495,342

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at ~~June 30, 2019,~~March 31, 2020, excluding net unearned ~~net~~ fees and costs.

Loan Maturity Schedule


	June 30, 2019									March 31, 2020
	One year or less		Over one year to five years		Over five years		Total			One year or less		Over one year to five years		Over five years		Total
Real estate:									Real estate:
Construction and land development	$	277,743	$	169,809	$	137,047	$	584,599	Construction and land development	$	270,141	$	197,995	$	159,042	$	627,178
Commercial		57,818		267,808		607,129		932,755	Commercial	29,757		316,958		651,243		997,958
Residential		38,820		168,920		486,406		694,146	Residential	38,853		168,438		441,295		648,586
Commercial and industrial		95,734		427,062		145,269		668,065	Commercial and industrial	70,535		424,807		86,256		581,598
Consumer and other		2,714		1,926		305		4,945	Consumer and other	2,660		1,551		243		4,454
Total	$	472,829	$	1,035,525	$	1,376,156	$	2,884,510	Total	$	411,946	$	1,109,749	$	1,338,079	$	2,859,774
Fixed interest rate	$	136,666	$	442,992	$	417,713	$	997,371	Fixed interest rate	$	119,827	$	450,630	$	448,928	$	1,019,385
Variable interest rate		336,163		592,533		958,443		1,887,139	Variable interest rate	292,119		659,119		889,151		1,840,389
Total	$	472,829	$	1,035,525	$	1,376,156	$	2,884,510	Total	$	411,946	$	1,109,749	$	1,338,079	$	2,859,774

The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio.

Allowance for Loan Losses (ALLL)

The Company maintains an ALLL that management believes is adequate to absorb the probable incurred losses inherent in the Company’s loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased by loan charge-offs net of recoveries of prior period loan charge-offs. The level of the allowance is determined on a quarterly

Table of Contents

basis, although management is engaged in monitoring the adequacy of the allowance on a more frequent basis. In estimating the allowance balance, the following factors are considered:

•past loan experience;

•the nature and volume of the portfolio;

•risks known about specific borrowers;

•underlying estimated values of collateral securing loans;

•current and anticipated economic conditions; and

•other factors which may affect the allowance for probable incurred losses.

The ALLL consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired; and (2) a general component which covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group data over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

The following loan portfolio segments have been identified: (1) Construction and land development loans; (2) Commercial real estate loans; (3) Residential real estate loans; (4) Commercial and industrial loans; and (5) Consumer and other loans. Management evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions and the borrower’s cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available to provide for probable incurred loan losses in the entire portfolio.

In the table below, the components, as discussed above, of the ALLL are shown at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~

2019.


	June 30, 2019							December 31, 2018							Increase (Decrease)								March 31, 2020										December 31, 2019							Increase (Decrease)
	Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance			ALLL Balance					HFI Loan Balance⁽¹⁾		ALLL Balance		ALLL to % Total Loans HFI		HFI Loan Balance⁽¹⁾		ALLL Balance		ALLL to % Total Loans HFI		Loan Balance		ALLL Balance
Non impaired loans	$	2,807,728	$	25,135		0.87	%	$	2,568,930	$	23,249		0.87	%	$	238,798		$	1,886		0 bps	Non impaired loans	$	2,780,458	$	31,587	1.14	%	$	2,730,684	$	24,588	0.90	%	$	49,774	$	6,999	24 bps
Acquired loans ⁽¹⁾		72,752		115		0.00			91,344		185		0.01			(18,592	)		(70	)	-1 bps
Acquired loans ⁽²⁾																						Acquired loans ⁽²⁾	51,882		56		0.11	%	58,745		77		0.13	%	(6,863)		(21)		(2) bps
Impaired loans		4,030		2,193		0.08			7,669		17		0.00			(3,639	)		2,176		8 bps	Impaired loans	27,434		6,760		24.64	%	27,035		20,771		76.83	%	399		(14,011)		(5,219) bps
Total loans	$	2,884,510	$	27,443		0.95	%	$	2,667,943	$	23,451		0.88	%	$	216,567		$	3,992		0 bps	Total loans	$	2,859,774	$	38,403	1.34	%	$	2,816,464	$	45,436	1.61	%	$	43,310	$	(7,033)	(27) bps
⁽¹⁾ HFI loan balance is before net deferred loan fees and costs.																						⁽¹⁾ HFI loan balance is before net deferred loan fees and costs.
⁽²⁾ Acquired loans are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of March 31, 2020, $56 in ALLL was recorded at March 31, 2020 related to the loans acquired.																						⁽²⁾ Acquired loans are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of March 31, 2020, $56 in ALLL was recorded at March 31, 2020 related to the loans acquired.

⁽¹⁾ Acquired loans are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of June 30, 2019, $115 in ALLL was recorded at June 30, 2019 related to the loans acquired.

At ~~June 30, 2019,~~March 31, 2020, the ALLL was ~~$27,443,~~$38,403, compared to ~~$23,451~~$45,436 at December 31, ~~2018.~~2019. The ALLL as a percentage of total loans HFI was ~~0.95%~~1.34% at ~~June 30, 2019~~March 31, 2020 and ~~0.88%~~1.61% at December 31, ~~2018.~~2019. As of March 31, 2020, the Company’s total non-performing assets ("NPAs") were 0.72% of assets, or $27,434, a decrease of approximately $255 from December 31, 2019. The ~~Company’s loan growth~~NPA/ALLL coverage ratio was 1.40 at March 31, 2020, a decrease of 24 basis points from the 1.64 coverage present at December 31, 2019. Criticized and ~~management’s evaluation~~Classified Assets were $53,125 at March 31, 2020, representing 1.86% of loans HFI, consistent with 1.86% of loans HFI at December 31, 2019.

Potential problem loans, which are not included in nonperforming assets, amounted to $20,260, or 0.71% of total loans held for investment at March 31, 2020, compared to $22,228, or 0.79% of total loans held for investment at December 31, 2019. Potential problem loans represent those loans where information about possible credit problems of borrowers has caused management to have doubts about the ~~risk profile, combined~~borrower’s ability to comply with ~~developments during~~present repayment terms. This definition is for substandard loans, which are still accruing interest and excluding the ~~first and second quarters~~impact of ~~2019 in one SNC relationship, are the primary reasons for the increase in the allowance amount.~~

substandard nonaccrual loans.

Table of Contents

The table below sets forth the activity in the ALLL for the periods presented.


	Six Months Ended June 30, 2019			Six Months Ended June 30, 2018				Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Beginning balance	$	23,451		$	21,247		Beginning balance	$	45,436		$	23,451
Loans charged-off:							Loans charged-off:
Construction & land development		—			38
Residential real estate		15			7		Residential real estate	8			15
Commercial & industrial		8,131			49		Commercial & industrial	20,501			568
Consumer & other		99			17		Consumer & other	21			70
Total loans charged-off		8,245			111		Total loans charged-off	20,530			653
Recoveries on loans previously charged-off:							Recoveries on loans previously charged-off:
Construction & land development		—			1
Residential real estate		15			38		Residential real estate	1			2
Commercial & industrial		71			10		Commercial & industrial	468			—
Consumer & other		65			13		Consumer & other	6			2
Total loan recoveries		151			62		Total loan recoveries	475			4
Net charge-offs		(8,094	)		(49	)	Net charge-offs	(20,055)			(649)
Provision for loan losses charged to expense		12,086			1,143		Provision for loan losses charged to expense	13,022			5,055
Total allowance at end of period	$	27,443		$	22,341		Total allowance at end of period	$	38,403		$	27,857
Total loans, gross, at end of period⁽¹⁾	$	2,884,510		$	2,474,302		Total loans, gross, at end of period⁽¹⁾	$	2,859,774		$	2,810,905
Average gross loans⁽¹⁾	$	2,811,954		$	2,376,613		Average gross loans⁽¹⁾	$	2,838,437		$	2,764,675
Allowance to total loans		0.95	%		0.90	%	Allowance to total loans	1.34		%	0.99		%
Net charge-offs (recoveries) to average loans, annualized		0.58	%		0.00	%	Net charge-offs (recoveries) to average loans, annualized	2.84		%	0.10		%
⁽¹⁾Loan balances exclude loans held for sale							⁽¹⁾Loan balances exclude loans held for sale

⁽¹⁾ ~~Loan balances exclude loans held for sale~~

While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes the allocation of ALLL by loan category and loans in each category as a percentage of total loans, for the periods presented.


	June 30, 2019					December 31, 2018						March 31, 2020						December 31, 2019
	Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans				Amount		% of Loan Segment to Total Loans		Amount		% of Loan Segment to Total Loans
Real estate loans:											Real estate loans:
Construction and land development	$	4,784		20.3	%	$	4,743		21.9	%	Construction and land development	$	6,417	21.9	%	$	4,847	21.0	%
Commercial		7,641		32.3			6,725		30.1		Commercial	9,018		34.9		8,113		35.3
Residential		4,844		24.1			4,743		25.6		Residential	4,767		22.7		4,462		22.8
Total real estate		17,269		76.7			16,211		77.6		Total real estate	20,202		79.5		17,422		79.1
Commercial and industrial		10,118		23.1			7,166		22.2		Commercial and industrial	18,146		20.3		27,957		20.7
Consumer and other		56		0.2			74		0.2		Consumer and other	55		0.2		57		0.2
	$	27,443		100.0	%	$	23,451		100.0	%		$	38,403	100.0	%	$	45,436	100.0	%

Nonperforming Assets

Non-performing loans consist of non-accrual loans and loans that are past due 90 days or more and still accruing interest. Non-performing assets consist of non-performing loans plus ~~OREO (i.e.,~~foreclosed real ~~estate acquired through foreclosure or deed in lieu of foreclosure).~~estate. Loans are placed on non-accrual status when they are past due 90 days ~~and /~~ and/or management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease, and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The primary component of non-performing loans is non-accrual loans, which as of ~~June 30, 2019~~March 31, 2020 totaled ~~$4,030. The other component of non-performing loans are~~$27,434. At March 31, 2020, there were no loans past due greater than 90 days and still accruing interest which ~~totaled $676 at June 30, 2019.~~is the other component of non-performing loans. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection.

Table of Contents

The table below summarizes non-performing loans and assets for the periods presented.


	June 30, 2019			December 31, 2018				March 31, 2020			December 31, 2019
Non-accrual loans	$	4,030		$	5,488		Non-accrual loans	$	27,434		$	27,035
Past due loans 90 days or more and still accruing interest		676			208		Past due loans 90 days or more and still accruing interest	—			654
Total non-performing loans		4,706			5,696		Total non-performing loans	27,434			27,689
Foreclosed real estate and repossessed assets		-			-		Foreclosed real estate and repossessed assets	—			—
Total non-performing assets		4,706			5,696		Total non-performing assets	27,434			27,689
Total non-performing loans as a percentage of total loans		0.16	%		0.21	%	Total non-performing loans as a percentage of total loans	0.96		%	0.98		%
Total non-performing assets as a percentage of total assets		0.12	%		0.13	%	Total non-performing assets as a percentage of total assets	0.72		%	0.71		%
Allowance for loan losses as a percentage of non-performing loans		583	%		412	%	Allowance for loan losses as a percentage of non-performing loans	140		%	164		%

As of ~~June 30, 2019,~~March 31, 2020, there were ~~nine~~ 30loans on non-accrual status. The amount and number are further delineated by ~~collateral~~loan segment and number of loans in the table below.

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
									Total Amount		Percentage of Total Non-Accrual Loans		Number of Non-Accrual Loans
Commercial real estate								Commercial real estate	$	3,460	12.6	%	1
Residential real estate	$	1,837		45.6	%		8	Residential real estate	3,255		11.9		11
Commercial & industrial		2,193		54.4			1	Commercial & industrial	20,719		75.5		18
Total non-accrual loans	$	4,030		54.9	%		9	Total non-accrual loans	$	27,434	100.0	%	30

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of ~~both~~ securities classified as ~~available-for-sale and securities classified as held-to-maturity.~~AFS. All ~~available-for sale~~AFS securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities ~~available-for-sale,~~AFS, consisting primarily of ~~U.S. government sponsored enterprises and~~ mortgage-backed securities, totaled ~~$715,132~~$543,225 at ~~June 30, 2019,~~March 31, 2020, compared to ~~$1,030,668~~$652,132 at December 31, ~~2018,~~2019, a decrease of ~~$315,536,~~$108,907, or ~~30.6%~~16.7%. The decrease in ~~available-for-sale~~AFS securities was primarily attributed to security sales during the ~~first six~~three months ~~of 2019.~~

~~Held-to-maturity~~ended March 31, 2020.

There were no HTM securities ~~are carried~~ at ~~amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $118,963 at June 30, 2019, compared to $121,617 at~~March 31, 2020, or December 31, ~~2018, a decrease of $2,654, or 2.2%. The decrease is attributable to securities that matured or had principal pay downs during the first six months of~~ 2019.

The combined securities portfolios represented 20.5% and 27.1% of total assets at June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of ~~$24,842~~$24,844 and ~~$21,831~~$24,802 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, primarily consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank required as members of the Federal Reserve Bank System (“FRB”) and the Federal Home Loan Bank System (“FHLB”). The FHLB and FRB investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

Bank Premises and Equipment

Bank premises and equipment totaled ~~$12,948~~$48,470 at ~~June 30, 2019~~March 31, 2020 compared to ~~$12,371~~$12,141 at December 31, ~~2018,~~2019, an increase of ~~$577, or 4.7%. The increase is primarily attributed~~$36,329, due to ~~an increase of $1,182 in leasehold improvements, net of depreciation, related to several~~the purchase of the ~~Company’s locations.~~

properties at Columbia Avenue and 120 9th Avenue locations in Franklin, Tennessee, therefore ending the lease agreements by the Company on February 5, 2020.

Deposits

At ~~June 30, 2019,~~March 31, 2020, total deposits were ~~$3,146,645,~~$3,137,471, a decrease of ~~$285,162,~~$70,113, or ~~8.3%,~~8.8% annualized, compared to ~~$3,431,807~~$3,207,584 at December 31, ~~2018.~~2019. Included in the Company’s funding strategy are brokered deposits, public funds deposits and reciprocal deposits. Total brokered deposits decreased ~~$98,600,~~$97,866, or ~~12.4%,~~62.3% annualized, to ~~$699,195~~$534,375 at ~~June 30, 2019,~~March 31, 2020, when compared with ~~$797,795~~$632,241 at December 31, ~~2018,~~2019, which reflects the Company’s strategy to reduce its dependence on non-core funding. Public funds deposits decreased ~~$302,683,~~$58,734, or ~~38.7%,~~61.1% annualized, to ~~$480,206~~$328,169 at ~~June 30, 2019~~March 31, 2020 when compared with ~~$782,889~~$386,903 at December 31, ~~2018~~2019 due to the Company’s strategy to redirect some of the Company’s local government customers into the reciprocal account relationships, thereby decreasing the Company’s requirements to collateralize those public funds deposits. As a result, reciprocal deposits increased ~~$123,840,~~$67,099, or ~~39.6%,~~56.0% annualized, to ~~$436,522~~$548,840 at ~~June 30, 2019,~~March 31, 2020, compared to ~~$312,682~~$481,741 at December 31, ~~2018.~~

2019.

Table of Contents

Time deposits, excluding brokered deposits and public funds, as of ~~June 30, 2019,~~March 31, 2020, amounted to ~~$432,156,~~$384,178, compared to ~~$532,445~~$399,258 as of December 31, ~~2018,~~2019, a decrease of ~~$100,289,~~$15,080, or ~~18.8%.~~

15.2% annualized.

The following table shows time deposits in denominations of $100 or more based on time remaining until maturity:

June 30, 2019

Three months or less

$
141,700

Three through six months

96,030

Six through twelve months

87,272

Over twelve months

152,032

Total

$
477,034


	March 31, 2020
Three months or less	$	70,103
Three through six months	57,377
Six through twelve months	82,817
Over twelve months	119,611
Total	$	329,908

Federal Funds Purchased and Repurchase Agreements

The Company had no federal funds purchased from correspondent banks or repurchase agreements as of ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~

2019.

Federal Home Loan Bank Advances

The Company has established a line of credit with the FHLB of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages and home equity lines of credit. At ~~June 30, 2019~~March 31, 2020 and at December 31, ~~2018,~~2019 advances totaled ~~$396,500~~$135,000 and ~~$368,500,~~$155,000, respectively, and the scheduled maturities and interest rates of these advances were as follows:


Scheduled Maturities	Amount		Weighted Average Rates			Scheduled Maturities	Amount		Weighted Average Rates
2019	$	241,500		2.42	%
2020		155,000		2.41		2020	$	135,000	1.13	%
Total	$	396,500		2.41	%

Subordinated Notes

At ~~June 30, 2019,~~March 31, 2020, the Company’s subordinated notes, net of issuance costs, totaled ~~$58,782~~$58,916 compared with ~~$58,693~~$58,872 at December 31, ~~2018.~~2019. For more information related to the subordinated notes and the related issuance costs, please see Note 12 of the consolidated financial statements.

Liquidity

~~Liquidity~~

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the Company’s needs. Our source of funds to pay interest on our March 2016 Subordinated Notes and June 2016 Subordinated Notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash balances held by the Company. The Bank’s ability to pay a dividend may be restricted due to regulatory requirements as well as the Bank’s future earnings and capital needs.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as ~~available-for-sale,~~AFS, and sales of brokered deposits. As of ~~June 30, 2019, $715,132~~March 31, 2020, $543,225 of the investment securities portfolio was classified as ~~available-for-sale~~AFS and is reported at fair value on the consolidated balance sheet. ~~Another $118,963 of the portfolio was classified as held-to-maturity and is reported at amortized cost.~~ Approximately ~~$468,429~~$287,371 of the total ~~$834,095~~$543,225 investment securities portfolio on hand at ~~June 30, 2019,~~March 31, 2020, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank and the Federal Reserve Bank.

Table of Contents

Equity

As of ~~June 30, 2019,~~March 31, 2020, the Company’s equity was ~~$393,609,~~$408,848, as compared with ~~$372,833~~$410,426 as of December 31, ~~2018.~~2019. The ~~increase~~$1,578 decrease in equity was ~~due to~~mainly driven by the ~~Company’s earnings~~Company's net loss of ~~$8,075 in the six months ended June 30, 2019, the common stock increase of $3,600, less~~$1,148 and dividends paid of ~~$1,167 and the $2,244 decrease for the amortization of security premiums with the adoption of ASU 2017-08, plus the $12,512 increase~~$893 in the ~~valuation of available-for-sale securities.~~

three months ended March 31, 2020.

On January 23, 2019, ~~we announced that~~ our board of directors announced they had authorized a share repurchase program for up to $30,000 of our outstanding common stock. The repurchase program ~~is scheduled to expire upon the earlier of our repurchase of shares of our common stock having an aggregate purchase price of $30,000, or~~expired on January 23, ~~2020. For the three~~2020, and ~~six months ended June 30, 2019, we repurchased 19,180~~no additional shares ~~of our common stock at a weighted average price of $27.07 and an aggregate cost of $519.~~

were purchased after December 31, 2019.

Effects on Inflation and Changing Prices

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and ~~refinancings~~refinancing tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities.

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than ~~approved and unfunded loans and~~unused lines ~~and~~of credit, outstanding standby letters of credit, and outstanding mortgage loan commitments to customers in the ordinary course of business. At ~~June 30, 2019,~~March 31, 2020, the Company had ~~unfunded loan commitments outstanding of $63,707,~~ unused lines of credit of ~~$801,049, and~~$738,189, outstanding standby letters of credit of ~~$52,064.~~

$53,263, and outstanding mortgage loan commitments of $156,421.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial data included in our selected historical consolidated financial information are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance:

•“Common equity” is defined as total shareholders’ equity at end of period less the liquidation preference value of the preferred stock;

•“Tangible common equity” is common equity less goodwill and other intangible assets;

•“Tangible book value per share” is defined as tangible common equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets;

and

•“Return on Average Tangible Common Equity” is defined as net income available to common shareholders divided by average tangible common shareholders’ ~~equity;~~

equity.

~~“Efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income.~~

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

As of or for the Three Months Ended

(Amounts in thousands, except share/per share data and percentages)

June 30,
2019

March 31
2019

December 31,
2018

Sept 30,
2018

June 30,
2018

Total shareholders’ equity

$
393,516

$
383,421

$
372,740

$
356,074

$
348,059

Less: Preferred stock

—

—

—

—

—

Total common equity

393,516

383,421

372,740

356,074

348,059

Common shares outstanding

14,628,287

14,574,339

14,538,085

14,525,351

14,480,240

Book value per share

$
26.90

$
26.31

$
25.64

$
24.51

$
24.04

Total common equity

393,516

383,421

372,740

356,074

348,059

Less: Goodwill and other intangible assets

18,885

19,020

19,128

19,327

19,499

Tangible common equity

$
374,631

$
364,401

$
353,612

$
336,747

$
328,560

Common shares outstanding

14,628,287

14,574,339

14,538,085

14,525,351

14,480,240

Tangible book value per share

$
25.61

$
25.00

$
24.32

$
23.18

$
22.69

Average total common equity

388,460

377,116

299,840

351,293

340,175

Less: Average Preferred stock

—

—

—

—

—

Less: Average Goodwill and other intangible assets

18,971

19,109

19,268

19,433

19,860

Average tangible common shareholders’ equity

$
369,489

$
358,007

$
280,572

$
331,860

$
320,315

Net income available to common shareholders

5,173

2,901

3,743

10,549

10,161

Average tangible common equity

369,489

358,007

325,012

331,860

320,315

Return on average tangible common equity⁽¹⁾

5.6
%

3.3
%

4.6
%

12.6
%

12.7
%
Efficiency Ratio:

Net interest income

$
27,365

$
27,420

$
26,920

$
26,562

$
26,905

Noninterest income

4,923

3,486

(383
)

3,442

4,147

Operating revenue

32,288

30,906

26,537

30,004

31,052

Expense

Total noninterest expense

19,370

22,616

21,689

18,251

18,050

Efficiency ratio(2)

60.0
%

73.2
%

81.7
%

60.8
%

58.1
%

⁽¹⁾

~~Annualized~~

Table of Contents

⁽²⁾

~~Efficiency ratio (GAAP) is calculated by dividing reported noninterest expense by reported total revenue~~


	As of or for the Three Months Ended
(Amounts in thousands, except share/per share data and percentages)	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Total shareholders’ equity	$	408,755		$	410,333		$	408,168		$	393,516		$	383,421
Less: Preferred stock	—			—			—			—			—
Total common equity	408,755			410,333			408,168			393,516			383,421
Common shares outstanding	14,859,704			14,821,594			14,636,484			14,628,287			14,574,339
Book value per share	$	27.51		$	27.68		$	27.89		$	26.90		$	26.31
Total common equity	408,755			410,333			408,168			393,516			383,421
Less: Goodwill and other intangible assets	18,555			18,652			18,763			18,885			19,020
Tangible common equity	$	390,200		$	391,681		$	389,405		$	374,631		$	364,401
Common shares outstanding	14,859,704			14,821,591			14,636,484			14,628,287			14,574,339
Tangible book value per share	$	26.26		$	26.43		$	26.61		$	25.61		$	25.00
Average total common equity	416,518			414,251			399,096			388,460			377,116
Less: Average Preferred stock	—			—			—			—			—
Less: Average Goodwill and other intangible assets	18,615			18,809			18,763			18,971			19,109
Average tangible common shareholders’ equity	$	397,903		$	395,442		$	380,333		$	369,489		$	358,007
Net income available to common shareholders	(1,148)			(4,592)			11,324			5,173			2,901
Average tangible common equity	397,903			395,442			380,333			369,489			358,007
Return on average tangible common equity⁽¹⁾	(1.2)		%	(4.6)		%	11.8		%	5.6		%	3.3		%
Efficiency Ratio:
Net interest income	$	27,464		$	28,113		$	28,262		$	27,365		$	27,420
Noninterest income	5,893			4,573			4,793			4,923			3,486
Operating revenue	33,357			32,686			33,055			32,288			30,906
Expense
Total noninterest expense	22,421			21,279			18,614			19,370			22,616
Efficiency ratio⁽²⁾	67.2		%	65.1		%	56.3		%	60.0		%	73.2		%

⁽¹⁾Annualized

⁽²⁾Efficiency ratio (GAAP) is calculated by dividing reported noninterest expense by reported total revenue

Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

SUMMARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(Amounts in thousands, except per share data and percentages)

As of and for the three months ended

Jun 30, 2019

Mar 31, 2019

Dec 31, 2018

Sep 30, 2018

Jun 30, 2018

Income Statement Data ($):

Interest income

47,453

47,523

46,046

43,717

42,136

Interest expense

20,088

20,103

19,125

17,155

15,231

Net interest income

27,365

27,420

26,921

26,562

26,905

Provision for loan losses

7,031

5,055

975

136

570

Noninterest income (expense)

4,923

3,486

(384
)

3,442

4,147

Noninterest expense

19,370

22,616

21,689

18,251

18,050

Net income before taxes

5,887

3,235

3,873

11,617

12,432

Income tax expense

706

334

122

1,068

2,263

Net income

5,181

2,901

3,751

10,549

10,169

Pre-tax pre-provision profit

12,918

8,290

4,848

11,753

13,002

Earnings before interest and taxes

25,975

23,338

23,048

28,722

27,663

Net income available to common shareholders

5,173

2,901

3,743

10,549

10,161

Weighted average diluted common shares

14,894,140

14,804,830

14,821,540

14,903,751

14,814,059

Earnings per share, basic

0.35

0.20

0.26

0.73

0.71

Earnings per share, diluted

0.34

0.19

0.25

0.70

0.68

Dividend per share

0.04

0.04

—

—

—

Profitability (%)

Return on average assets

0.51

0.28

0.35

1.01

0.98

Return on average equity

5.3

3.1

4.1

11.9

12.0

Return on average tangible common equity⁽³⁾

5.6

3.3

4.3

12.6

12.7

Efficiency ratio⁽³⁾

60.0

73.2

81.7

60.8

58.1

Net interest margin⁽¹⁾

2.84

2.80

2.69

2.70

2.74

Balance Sheet Data ($):

Loans (including HFS)

2,907,526

2,829,107

2,676,502

2,564,684

2,488,862

Loan loss reserve

27,443

27,857

23,451

22,479

22,341

Cash

150,721

300,113

280,212

144,660

176,870

Securities

834,095

918,132

1,152,285

1,319,774

1,357,918

Goodwill

18,176

18,176

18,176

18,176

18,176

Intangible assets (Sum of core deposit intangible and
SBA servicing rights)

709

844

952

1,151

1,323

Assets

4,071,971

4,238,436

4,249,439

4,167,813

4,165,238

Deposits

3,146,645

3,315,843

3,431,807

3,371,550

3,398,025

Liabilities

3,678,362

3,854,922

3,876,606

3,811,636

3,817,076

Total shareholders' equity

393,516

383,421

372,740

356,074

348,059

Total equity

393,609

383,514

372,833

356,177

348,162

Tangible common equity⁽³⁾

374,631

364,401

353,612

336,747

328,560

Asset Quality (%)

Nonperforming loans/ total loans⁽²⁾

0.16

0.42

0.21

0.16

0.14

Nonperforming assets / (total loans⁽²⁾+ foreclosed assets)

0.16

0.42

0.21

0.23

0.21

Loan loss reserve / total loans⁽²⁾

0.95

0.99

0.88

0.88

0.90

Net charge-offs (recoveries) / average loans HFI⁽⁴⁾

1.04

0.10

0.00

0.00

0.00

Capital (%)

Tangible common equity to tangible assets⁽³⁾

9.2

8.6

8.4

8.1

7.9

Leverage ratio

9.2

8.8

8.8

8.7

8.3

Common Equity Tier 1 ratio

11.2

11.3

12.2

12.2

12.1

Tier 1 risk-based capital ratio

11.2

11.3

12.2

12.2

12.1

Total risk-based capital ratio

13.7

14.0

14.9

15.0

15.0

⁽¹⁾	~~Net interest margins shown in the table above include tax-equivalent adjustments to adjust interest income on tax-exempt loans and tax-exempt investment securities to a fully taxable basis.~~

⁽²⁾	~~Total loans in this ratio exclude loans held for sale.~~


	As of and for the three months ended
	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Income Statement Data:
Interest income	$	41,607		$	43,185		$	46,531		$	47,453		$	47,523
Interest expense	14,143			15,072			18,269			20,088			20,103
Net interest income	27,464			28,113			28,262			27,365			27,420
Provision for loan losses	13,022			18,961			1,000			7,031			5,055
Noninterest income	5,893			4,573			4,793			4,923			3,486
Noninterest expense	22,421			21,279			18,614			19,370			22,616
Net income (loss) before taxes	(2,086)			(7,554)			13,441			5,887			3,235
Income tax (benefit) expense	(938)			(2,970)			2,117			706			334
Net income (loss)	(1,148)			(4,584)			11,324			5,181			2,901
Pre-tax pre-provision profit	10,936			11,407			14,441			12,918			8,290
Earnings before interest and taxes	12,057			7,518			31,710			25,975			23,338
Net income (loss) available to common shareholders	(1,148)			(4,592)			11,324			5,173			2,901
Weighted average diluted common shares	14,758,960			14,633,399			14,991,363			14,894,140			14,804,830
Earnings per share, basic	(0.08)			(0.31)			0.77			0.35			0.20
Earnings per share, diluted	(0.08)			(0.31)			0.75			0.34			0.19
Dividend per share	0.06			0.06			0.04			0.04			0.04
Profitability (%)
Return on average assets	(0.12)		%	(0.48)		%	1.12		%	0.51		%	0.28		%
Return on average equity	(1.1)		%	(4.4)		%	11.3		%	5.3		%	3.1		%
Return on average tangible common equity⁽³⁾	(1.2)		%	(4.6)		%	11.8		%	5.6		%	3.3		%
Efficiency ratio	67.2		%	65.1		%	56.3		%	60.0		%	73.2		%
Net interest margin⁽¹⁾	3.0		%	2.8		%	3.0		%	2.8		%	2.8		%
Balance Sheet Data ($):
Loans (including HFS)	$	2,898,450		$	2,855,606		$	2,852,803		$	2,907,526		$	2,829,107
Loan loss reserve	38,403			45,436			26,474			27,443			27,857
Cash	173,482			234,991			178,747			150,721			300,113
Securities	543,225			652,132			612,371			834,095			918,132
Goodwill	18,176			18,176			18,176			18,176			18,176
Intangible assets (Sum of core deposit intangible and SBA servicing rights)	379			476			587			709			844
Assets	3,791,601			3,896,162			3,818,324			4,071,971			4,238,436
Deposits	3,137,471			3,207,584			3,061,950			3,146,645			3,315,843
Liabilities	3,382,753			3,485,736			3,410,063			3,678,362			3,854,922
Total shareholders' equity	408,755			410,333			408,168			393,516			383,421
Total equity	408,848			410,426			408,261			393,609			383,514
Tangible common equity⁽³⁾	390,200			391,681			374,631			374,631			364,401
Asset Quality (%)
Nonperforming loans/ total loans⁽²⁾	0.96		%	0.98		%	0.11		%	0.16		%	0.42		%
Nonperforming assets / (total loans⁽²⁾ and foreclosed assets)	0.96		%	0.98		%	0.11		%	0.16		%	0.42		%
Loan loss reserve / total loans⁽²⁾	1.34		%	1.61		%	0.95		%	0.95		%	0.99		%
Net charge-offs (recoveries) / average loans HFI⁽⁴⁾	2.84		%	0.00		%	0.27		%	1.04		%	0.10		%
Capital (%)
Tangible common equity to tangible assets⁽³⁾	10.3		%	10.1		%	10.2		%	9.2		%	8.6		%
Leverage ratio	10.1		%	10.3		%	9.8		%	9.2		%	8.8		%

⁽³⁾	~~See Non-GAAP table in the preceding pages.~~

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⁽⁴⁾	~~Annualized.~~


Common Equity Tier 1 ratio	12.0	%	11.9	%	12.0	%	11.2	%	11.3	%
Tier 1 risk-based capital ratio	12.0	%	11.9	%	12.0	%	11.2	%	11.3	%
Total risk-based capital ratio	15.0	%	15.0	%	14.7	%	13.7	%	14.0	%

⁽¹⁾Net interest margins shown in the table above include tax-equivalent adjustments to adjust interest income on tax-exempt loans and tax-exempt investment securities to a fully taxable basis.

⁽²⁾Total loans in this ratio exclude loans held for sale.

⁽³⁾See Non-GAAP table in the preceding pages.

⁽⁴⁾Annualized.

Termination of Emerging Growth Company Status

~~The Company is an “emerging growth company,”~~

Effective as ~~defined in the Jumpstart Our Business Startups Act~~ of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even ifDecember 31, 2019, the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continueceased to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities under our Registration Statement on Form S-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have $1.07 billion or more in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile. The Company will cease to be an emerging growth company as of December 31, 2019.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or revised standard. This election is irrevocable.

company.

ITEM 3. QUANTITATIVE AND ~~QUALITATI~~VEQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing interest rates using various rate change (shock) scenarios. The Company’s rate sensitivity position has an important impact on earnings. Senior management monitors the Company’s rate sensitivity position throughout each month, and the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.

Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a 12-month time period ended ~~June 30, 2019,~~March 31, 2020, net interest income was estimated to ~~increase 1.18%~~decrease 2.73% and ~~1.12%~~3.94% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to ~~decrease 1.38%~~increase 3.55% and 0.99% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of ~~June 30, 2019.~~

March 31, 2020.


Projected Interest Rate Change	Net Interest Income $		Net Interest Income $ Change from Base			% Change from Base			Projected Interest Rate Change	Net Interest Income $	Net Interest Income $ Change from Base	% Change from Base
-200		115,409		(1,149	)		(0.99	)%	-200	124,339	1,213	0.99	%
-100		114,948		(1,610	)		(1.38	)%	-100	127,503	4,377	3.55	%
Base		116,558		—			—		Base	123,126	—	—	%
+100		117,932		1,374			1.18	%	+100	119,767	(3,359)	(2.73)	%
+200		117,859		1,301			1.12	%	+200	118,276	(4,850)	(3.94)	%
+300		117,107		549			0.47	%	+300	117,799	(5,327)	(4.33)	%
+400		116,697		139			0.12	%	+400	117,546	(5,580)	(4.53)	%

The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences

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might change. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any management action that might be taken in responding to or anticipating changes in interest rates. Accordingly, the modeling analysis may not be an accurate indicator of how our net interest income will be affected by changes in interest rates as the inputs utilized by management may be inaccurate. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.

The model is a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s ~~chief executive officer~~Chief Executive Officer and ~~chief financial officer, have~~Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (the"Exchange Act")) as of ~~June 30, 2019,~~March 31, 2020, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that, ~~evaluation,~~due to the ongoing efforts to remediate the material weakness in its internal control over financial reporting identified in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as described in more detail below, the Company's disclosure controls and procedures were not effective as of the end of the period covered by this report in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management, including its chief executive officer and chief financial officer, ~~have concluded that~~as appropriate, to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the ~~Company’s disclosure controls~~time periods specified in the SEC's rules and ~~procedures are effective.~~

forms.

(b) Changes in Internal Controls. ~~There has been~~Other than as described below in regards to our ongoing efforts to fully remediate the material weakness identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, no change in our internal control over financial reporting ~~that~~ occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Previously Identified Material Weakness

Based on the assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, as described in our Annual Report on Form 10-K, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2019 due to a material weakness arising from certain control deficiencies existing during 2019 related to the Company’s precision of review regarding the valuation of impaired loans. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. As stated in the 2019 Annual Report on Form 10-K, management concluded that the existence of this material weakness did not result in a restatement of prior period financial statements and no change in previously issued financial results were required as a result of this material weakness in internal control.

Remediation of Material Weakness

The Company has made progress toward remediation of the underlying causes of the above-described material weakness in 2019. However, the identified material weakness in internal control over financial reporting will not be considered fully addressed until the internal controls over this area have been in operation for a sufficient period of time for the Company’s management to conclude that the material weakness has been fully remediated. The Company will continue to evaluate these internal controls throughout 2020 to ensure the remediation efforts are working as designed. As a result, the Company may alter its control structure to enhance these and other related controls in this area, but the Company’s evaluation as to full remediation will primarily involve an ongoing review of its current control structure to make sure the controls in this area are being performed as designed by the individuals responsible for performance of these controls. Once this evaluation is complete, the Company will make its final determination as to full remediation.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March ~~19,~~16, 2020, with the exception of:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

•credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;

•declines in collateral values;

•decreased demand for our products and services;

•third party disruptions, including outages at network providers and other suppliers;

•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

•operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

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There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

As a participating lender in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to potential risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted.

Since the initiation of the PPP, several larger banks have been subject to litigation regarding the protocols and procedures that they used in processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our policies and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to us, it could result in financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have an adverse impact on our business, financial condition and results of operations.

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

We may experience increases to, and volatility in, the balance of the allowance for credit losses and related provision expense due to the adoption of the current expected credit losses (“CECL”) methodology.

As permitted by the CARES Act, we have delayed adoption until the earlier of the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 31, 2020, related to the outbreak of COVID-19, and December 31, 2020. Relative to the incurred loss methodology that we currently use, the CECL methodology requires increased use of judgments and dependence on forward-looking information and forecasts, any of which may prove to be incorrect. For this reason, and due to the effects of the COVID-19 pandemic and the uncertain duration of the permitted delay referred to above, we are not able to estimate the amount of increase in our allowance for credit losses upon our compliance with this standard.

The CECL methodology differs substantially from the incurred loss methodology currently used in that it is forward looking, requiring measurement to occur when a financial asset is first added to the balance sheet and periodically thereafter. The measurements will require increased use of management judgments as well as forward-looking information and forecasts. Although every effort is made to ensure that the judgements are correct and the forecasts accurate, the future is uncertain, and there can be no guarantee that the judgments and forecasts will prove to be correct.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~(a)~~

~~Unregistered Sales of Equity Securities.N/A~~

~~(b)~~

~~Use of Proceeds. Not applicable.~~

(a)Unregistered Sales of Equity Securities. Not applicable.

~~(c)~~

~~Repurchase of Equity Securities~~

(b)Use of Proceeds. Not applicable.

(c)Repurchase of Equity Securities

The following table discloses shares of our common stock repurchased during the three months ended ~~June 30, 2019:~~

March 31, 2020:

Period

Total Number of Shares Purchased ⁽¹⁾

Average Price Paid Per Share

Total Number of Shares Purchased as part of Publicly Announced Plans or Programs ⁽¹⁾

Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
(in thousands)

April 1, 2019 to April 30, 2019

—

—

—

$
30,000

May 1, 2019 to May 31, 2019

—

—

—

30,000

June 1, 2019 to June 30, 2019

19,180

$
27.07

19,180

29,481

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Period	Total Number of Shares Purchased⁽¹⁾	Average Price paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plan or Programs⁽¹⁾	Maximum Number (or Approximate Dollar Value) of Shares That may Yet Be Purchased Under the Plans or Programs (in thousands)
January 1, 2020 to January 31, 2020	—	$	—	—	$	29,283
February 1, 2020 to February 29, 2020	—	—		—	—
March 1, 2020 to March 31, 2020	—	—		—	—

⁽¹⁾On January 23, 2019, wethe board of directors announced that ~~our board of directors~~they had authorized a share repurchase program for up to $30 million of our outstanding common stock. The repurchase program ~~is scheduled to expire upon the earlier of our repurchase of shares of our common stock having an aggregate purchase price of $30 million or~~expired on January 23, ~~2020.~~

2020, and no additional shares were purchased after December 31, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. E~~XHIBITS~~

EXHIBITS

~~Exhibit No.~~	~~Description~~
Exhibit No.		Description

~~10.1~~ 2.1		~~Triple Net Office Lease~~ Agreement and Plan of Merger, dated as of January 21, 2020, by and among Franklin Financial Network, Inc., FB Financial Corporation and Paisley Acquisition Corporation (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on January 24, 2020).

10.1		Voting and Support Agreement, dated as of January 21, 2020, by and between ~~Nolensville Real Estate Partners, LLC~~Franklin Financial Network, Inc. and James W. Ayers (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on January 24, 2020).

10.2		Form of Voting and Support Agreement, dated as of January 21, 2020, by and among FB Financial Corporation and the members of the board of directors of Franklin ~~Synergy Bank, on May 6, 2019~~Financial Network, Inc. (incorporated by reference to Exhibit 10.2 to the ~~Company’s Quarterly Report~~Company's Form 8-K filed on ~~Form 10-Q filed with the Securities and Exchange Commission on May 9, 2019)~~January 24, 2020).

~~10.2~~ 31.1*		Severance Agreement and General Release, by and between Franklin Synergy Bank and Sally Bowers, dated May 7, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2019).

31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

32**		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).

101* 101.INS*		XBRL Instance Document.-the instance document does not appear in the Interactive Data ~~Files.~~ File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

Table of Contents

*
*			Filed herewith

**			Furnished herewith

**	~~Furnished herewith~~

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.

~~Franklin Financial Network, INC.~~

FRANKLIN FINANCIAL NETWORK, INC.

~~August 6, 2019~~

~~By:~~

May 7, 2020

By:

/s/ Christopher J. Black

Christopher J. Black

Executive Vice President and Chief Financial Officer

On behalf of the registrant and as Chief Financial Officer

(Principal Financial Officer)

	Shareholders’ Equity
	Preferred		Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock		Shares			Amount			Earnings			Loss			Interest		Equity
Balance at April 1, 2018	$	—		13,258,142		$	223,594		$	98,723		$	(17,555	)	$	103	$	304,865
Exercise of common stock options, includes net settlement of shares		—		135,883			1,717			—			—			—		1,717
Stock based compensation expense, net of restricted share forfeitures		—		—			1,319			—			—			—		1,319
Stock issued in conjunction with 401(k) employer match, net of distributions		—		(2,481	)		(45	)		—			—			—		(45	)
Issuance of restricted stock, net of forfeitures		—		118,306			—			—			—			—		—
Stock issued for acquisition (net of issuance costs)		—		970,390			32,932			—			—			—		32,932
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			10,169			—			—		10,169
Other comprehensive loss		—		—			—			—			(2,787	)		—		(2,787	)
Balance at June 30, 2018	$	—		14,480,240		$	259,517		$	108,884		$	(20,342	)	$	103	$	348,162


Balance at April 1, 2019	$	—		14,574,339		$	266,758		$	123,250		$	(6,587	)	$	93	$	383,514
Exercise of common stock options, includes net settlement of shares		—		74,116			753			—			—			—		753
Stock based compensation expense, net of restricted share forfeitures		—		—			1,513			—			—			—		1,513
Issuance of restricted stock, net of forfeitures		—		(988	)		—			—			—			—		—
Purchase of treasury stock		—		(19,180	)		(519	)		—			—			—		(519	)
Cash dividends - common stock ($0.04 per share)		—		—			—			(583	)		—			—		(583	)
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			5,181			—			—		5,181
Other comprehensive income		—		—			—			—			3,758			—		3,758
Balance at June 30, 2019	$	—		14,628,287		$	268,505		$	127,840		$	(2,829	)	$	93	$	393,609

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
June 30, 2019
Mortgage backed securities: residential	$	74,163	$	198	$	(1,029	)	$	73,332
State and political subdivisions		44,800		2,677		—			47,477
Total	$	118,963	$	2,875	$	(1,029	)	$	120,809
December 31, 2018
Mortgage backed securities: residential	$	75,944	$	34	$	(3,072	)	$	72,906
State and political subdivisions		45,673		466		(90	)		46,049
Total	$	121,617	$	500	$	(3,162	)	$	118,955

Lease costs
Operating lease costs	$	2,527
Variable lease costs		181
Short-term lease costs		94
Finance lease costs
Interest on lease liabilities⁽¹⁾		82
Amortization of right-of-use asset		101
Total lease costs	$	2,985

Other supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,342
Operating cash flows from finance leases		82
Financing cash flows from finance leases		54

Twelve Months Ended:	Finance			Operating
2020	$	274		$	4,812
2021		278			4,869
2022		282			4,876
2023		286			4,850
2024		291			4,921
Thereafter		2,986			33,713
Total future minimum lease payments	$	4,397		$	58,041
Less: Imputed interest		(1,401	)		(15,485	)
Total lease liabilities	$	2,996		$	42,556

	June 30, 2019			June 30, 2018
Risk-free interest rate		2.47	%		2.96	%
Expected term	7 years			7.5 years
Expected stock price volatility		30.64	%		32.09	%
Dividend yield		0.57	%		0.00	%

	For the Six Months Ended June 30,
	2019		2018
Stock options exercised:
Intrinsic value of options exercised	$	1,869	$	3,745
Cash received from options exercised		1,277		1,937
Tax benefit realized from option exercises		205		283

SNC and Healthcare Portfolios	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			QoQ Growth*			YoY Growth
Total SNCs	$	231,216		$	228,538		$	249,033		$	162,588		$	155,798			4.7	%		48.4	%

% of Total loans held for investment		8.0	%		8.1	%		9.3	%		6.4	%		6.3	%

Healthcare	$	329,818		$	320,611		$	290,464		$	285,284		$	257,225			11.5	%		28.2	%
SNC		118,460			107,156			123,097			103,772			107,894			42.3	%		9.8	%
Non-SNC		211,358			213,455			167,367			181,512			149,331			(3.9	%)		41.5	%

*Annualized

	June 30, 2019
Three months or less	$	141,700
Three through six months		96,030
Six through twelve months		87,272
Over twelve months		152,032
Total	$	477,034

	As of and for the three months ended
	Jun 30, 2019		Mar 31, 2019		Dec 31, 2018			Sep 30, 2018		Jun 30, 2018
Income Statement Data ($):
Interest income		47,453		47,523		46,046			43,717		42,136
Interest expense		20,088		20,103		19,125			17,155		15,231
Net interest income		27,365		27,420		26,921			26,562		26,905
Provision for loan losses		7,031		5,055		975			136		570
Noninterest income (expense)		4,923		3,486		(384	)		3,442		4,147
Noninterest expense		19,370		22,616		21,689			18,251		18,050
Net income before taxes		5,887		3,235		3,873			11,617		12,432
Income tax expense		706		334		122			1,068		2,263
Net income		5,181		2,901		3,751			10,549		10,169
Pre-tax pre-provision profit		12,918		8,290		4,848			11,753		13,002
Earnings before interest and taxes		25,975		23,338		23,048			28,722		27,663
Net income available to common shareholders		5,173		2,901		3,743			10,549		10,161
Weighted average diluted common shares		14,894,140		14,804,830		14,821,540			14,903,751		14,814,059
Earnings per share, basic		0.35		0.20		0.26			0.73		0.71
Earnings per share, diluted		0.34		0.19		0.25			0.70		0.68
Dividend per share		0.04		0.04		—			—		—
Profitability (%)
Return on average assets		0.51		0.28		0.35			1.01		0.98
Return on average equity		5.3		3.1		4.1			11.9		12.0
Return on average tangible common equity⁽³⁾		5.6		3.3		4.3			12.6		12.7
Efficiency ratio⁽³⁾		60.0		73.2		81.7			60.8		58.1
Net interest margin⁽¹⁾		2.84		2.80		2.69			2.70		2.74
Balance Sheet Data ($):
Loans (including HFS)		2,907,526		2,829,107		2,676,502			2,564,684		2,488,862
Loan loss reserve		27,443		27,857		23,451			22,479		22,341
Cash		150,721		300,113		280,212			144,660		176,870
Securities		834,095		918,132		1,152,285			1,319,774		1,357,918
Goodwill		18,176		18,176		18,176			18,176		18,176
Intangible assets (Sum of core deposit intangible and SBA servicing rights)		709		844		952			1,151		1,323
Assets		4,071,971		4,238,436		4,249,439			4,167,813		4,165,238
Deposits		3,146,645		3,315,843		3,431,807			3,371,550		3,398,025
Liabilities		3,678,362		3,854,922		3,876,606			3,811,636		3,817,076
Total shareholders' equity		393,516		383,421		372,740			356,074		348,059
Total equity		393,609		383,514		372,833			356,177		348,162
Tangible common equity⁽³⁾		374,631		364,401		353,612			336,747		328,560
Asset Quality (%)
Nonperforming loans/ total loans⁽²⁾		0.16		0.42		0.21			0.16		0.14
Nonperforming assets / (total loans⁽²⁾+ foreclosed assets)		0.16		0.42		0.21			0.23		0.21
Loan loss reserve / total loans⁽²⁾		0.95		0.99		0.88			0.88		0.90
Net charge-offs (recoveries) / average loans HFI⁽⁴⁾		1.04		0.10		0.00			0.00		0.00
Capital (%)
Tangible common equity to tangible assets⁽³⁾		9.2		8.6		8.4			8.1		7.9
Leverage ratio		9.2		8.8		8.8			8.7		8.3
Common Equity Tier 1 ratio		11.2		11.3		12.2			12.2		12.1
Tier 1 risk-based capital ratio		11.2		11.3		12.2			12.2		12.1
Total risk-based capital ratio		13.7		14.0		14.9			15.0		15.0

Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs ⁽¹⁾		Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
April 1, 2019 to April 30, 2019		—		—		—	$	30,000
May 1, 2019 to May 31, 2019		—		—		—		30,000
June 1, 2019 to June 30, 2019		19,180	$	27.07		19,180		29,481