UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

LAKELAND FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Indiana	0-11487	35-1559596
(State or Other Jurisdiction	(Commission File Number)	(IRS Employer
of Incorporation or Organization)		Identification No.)

202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581‑1387

(Address of Principal Executive Offices)(Zip Code)

(574) 267‑6144

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically 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 [X] No [  ]

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

Large accelerated filer [X]   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 [X]

Number of shares of common stock outstanding at October 31, 2018:  25,301,732

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — September 30, 2018 and December 31, 2017	1
	Consolidated Statements of Income — three months and nine months ended September 30, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income — three months and nine months ended September 30, 2018 and 2017	3
	Consolidated Statements of Shareholders' Equity — nine months ended September 30, 2018 and 2017	4
	Consolidated Statements of Cash Flows — nine months ended September 30, 2018 and 2017	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
SIGNATURES		56

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (in thousands except share data)
	September 30,	December 31,
	2018	2017
	(Unaudited)
ASSETS
Cash and due from banks	$151,127	$140,402
Short-term investments	31,193	35,778
Total cash and cash equivalents	182,320	176,180
Securities available for sale (carried at fair value)	570,568	538,493
Real estate mortgage loans held for sale	3,488	3,346
Loans, net of allowance for loan losses of $48,343 and $47,121	3,794,782	3,771,338
Land, premises and equipment, net	57,644	56,466
Bank owned life insurance	76,998	75,879
Federal Reserve and Federal Home Loan Bank stock	13,772	13,772
Accrued interest receivable	15,802	14,093
Goodwill	4,970	4,970
Other assets	37,275	28,439
Total assets	$4,757,619	$4,682,976
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing deposits	$880,363	$885,622
Interest bearing deposits	3,135,561	3,123,033
Total deposits	4,015,924	4,008,655
Borrowings
Federal funds purchased	20,000	0
Securities sold under agreements to repurchase	77,352	70,652
Federal Home Loan Bank advances	80,000	80,030
Subordinated debentures	30,928	30,928
Total borrowings	208,280	181,610
Accrued interest payable	8,742	6,311
Other liabilities	26,132	17,733
Total liabilities	4,259,078	4,214,309
STOCKHOLDERS' EQUITY
Common stock:  90,000,000 shares authorized, no par value
25,301,732 shares issued and 25,129,796 outstanding as of September 30, 2018
25,194,903 shares issued and 25,025,933 outstanding as of December 31, 2017	111,045	108,862
Retained earnings	404,394	363,794
Accumulated other comprehensive income/(loss)	(13,276)	(670)
Treasury stock, at cost (2018 - 171,936 shares, 2017 - 168,970 shares)	(3,711)	(3,408)
Total stockholders' equity	498,452	468,578
Noncontrolling interest	89	89
Total equity	498,541	468,667
Total liabilities and equity	$4,757,619	$4,682,976

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

1

CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands except share and per share data)
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
NET INTEREST INCOME
Interest and fees on loans
Taxable	$46,127	$38,630	$132,360	$110,044
Tax exempt	208	205	627	517
Interest and dividends on securities
Taxable	2,275	2,349	7,201	7,033
Tax exempt	1,570	1,309	4,367	3,745
Other interest income	199	96	687	198
Total interest income	50,379	42,589	145,242	121,537
Interest on deposits	11,473	7,037	31,488	18,722
Interest on borrowings
Short-term	555	588	861	1,329
Long-term	426	344	1,212	986
Total interest expense	12,454	7,969	33,561	21,037
NET INTEREST INCOME	37,925	34,620	111,681	100,500
Provision for loan losses	1,100	450	6,100	1,150
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES	36,825	34,170	105,581	99,350
NONINTEREST INCOME
Wealth advisory fees	1,627	1,471	4,676	4,005
Investment brokerage fees	376	330	1,043	950
Service charges on deposit accounts	4,114	3,631	11,542	10,027
Loan and service fees	2,327	2,060	6,925	5,850
Merchant card fee income	643	588	1,834	1,696
Bank owned life insurance income	466	397	1,177	1,270
Other income	561	718	1,816	1,886
Mortgage banking income	319	302	998	811
Net securities gains/(losses)	0	0	(6)	52
Total noninterest income	10,433	9,497	30,005	26,547
NONINTEREST EXPENSE
Salaries and employee benefits	12,755	11,678	36,267	34,062
Net occupancy expense	1,229	1,131	3,892	3,405
Equipment costs	1,316	1,182	3,840	3,413
Data processing fees and supplies	2,489	2,032	7,292	6,022
Corporate and business development	891	1,245	3,070	3,943
FDIC insurance and other regulatory fees	412	443	1,282	1,296
Professional fees	934	962	2,716	2,717
Other expense	1,983	1,596	5,126	4,811
Total noninterest expense	22,009	20,269	63,485	59,669
INCOME BEFORE INCOME TAX EXPENSE	25,249	23,398	72,101	66,228
Income tax expense	4,679	7,573	13,053	20,525
NET INCOME	$20,570	$15,825	$59,048	$45,703
BASIC WEIGHTED AVERAGE COMMON SHARES	25,301,033	25,193,894	25,284,085	25,176,593
BASIC EARNINGS PER COMMON SHARE	$0.81	$0.63	$2.33	$1.82
DILUTED WEIGHTED AVERAGE COMMON SHARES	25,745,151	25,656,403	25,719,693	25,640,742
DILUTED EARNINGS PER COMMON SHARE	$0.80	$0.62	$2.30	$1.78

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

2

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)
			Three months ended September 30,		Nine months ended September 30,
			2018	2017	2018	2017
Net income			$               20,570	$                 15,825	$               59,048	$                 45,703
Other comprehensive income (loss)
	Change in securities available for sale:
		Unrealized holding gain (loss) on securities available for sale
		arising during the period	(4,576)	56	(15,978)	4,127
		Reclassification adjustment for (gains)/losses included in net income	0	0	6	(52)
		Net securities gain (loss) activity during the period	(4,576)	56	(15,972)	4,075
		Tax effect	960	(13)	3,459	(1,357)
		Net of tax amount	(3,616)	43	(12,513)	2,718
	Defined benefit pension plans:
		Amortization of net actuarial loss	67	66	200	199
		Tax effect	(17)	(26)	(52)	(78)
		Net of tax amount	50	40	148	121
		Total other comprehensive income (loss), net of tax	(3,566)	83	(12,365)	2,839
Comprehensive income			$               17,004	$                 15,908	$               46,683	$                 48,542

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

3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited - in thousands except share and per share data)
				Accumulated
				Other		Total
	Common Stock		Retained	Comprehensive	Treasury	Stockholders'
	Shares	Stock	Earnings	Income (Loss)	Stock	Equity
Balance at January 1, 2017	24,937,865	$104,405	$327,873	$(2,387)	$(2,913)	$426,978
Comprehensive income:
Net income			45,703			45,703
Other comprehensive income (loss), net of tax				2,839		2,839
Cash dividends declared, $0.63 per share			(15,866)			(15,866)
Treasury shares purchased under deferred
directors' plan	(9,992)	458			(458)	0
Stock activity under equity compensation plans	98,816	(1,736)				(1,736)
Stock based compensation expense		4,509				4,509
Balance at September 30, 2017	25,026,689	$107,636	$357,710	$452	$(3,371)	$462,427
Balance at January 1, 2018	25,025,933	$108,862	$363,794	$(670)	$(3,408)	$468,578
Adoption of ASU 2018-02 (See Note 1)			173	(173)		0
Adoption of ASU 2014-09 (See Note 1)			24			24
Adoption of ASU 2016-01 (See Note 1)			68	(68)		0
Comprehensive income:
Net income			59,048			59,048
Other comprehensive income (loss), net of tax				(12,365)		(12,365)
Cash dividends declared, $0.74 per share			(18,713)			(18,713)
Treasury shares purchased under deferred
directors' plan	(8,602)	418			(418)	0
Treasury shares sold and distributed under deferred
directors' plan	5,636	(115)			115	0
Stock activity under equity compensation plans	106,829	(2,435)				(2,435)
Stock based compensation expense		4,315				4,315
Balance at September 30, 2018	25,129,796	$111,045	$404,394	$(13,276)	$(3,711)	$498,452

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

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Nine Months Ended September 30	2018	2017
Cash flows from operating activities:
Net income	$     59,048	$             45,703
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation	4,199	3,712
Provision for loan losses	6,100	1,150
Net loss on sale and write down of other real estate owned	16	21
Amortization of loan servicing rights	379	454
Loans originated for sale	(38,926)	(41,472)
Net gain on sales of loans	(1,333)	(1,318)
Proceeds from sale of loans	39,448	43,601
Net loss on sales of premises and equipment	24	77
Net loss (gain) on sales and calls of securities available for sale	6	(52)
Net securities amortization	2,463	2,261
Stock based compensation expense	4,315	4,509
Earnings on life insurance	(1,177)	(1,270)
Gain on life insurance	(206)	0
Tax benefit of stock award issuances	(761)	(964)
Net change:
Interest receivable and other assets	(4,607)	(2,770)
Interest payable and other liabilities	6,180	(505)
Total adjustments	16,120	7,434
Net cash from operating activities	75,168	53,137
Cash flows from investing activities:
Proceeds from sale of securities available for sale	12,322	35,845
Proceeds from maturities, calls and principal paydowns of
securities available for sale	42,021	48,237
Purchases of securities available for sale	(100,702)	(114,239)
Purchase of life insurance	(371)	(540)
Net increase in total loans	(29,860)	(163,784)
Proceeds from sales of land, premises and equipment	29	10
Purchases of land, premises and equipment	(5,430)	(8,096)
Proceeds from sales of other real estate	21	124
Proceeds from life insurance	569	0
Net cash from investing activities	(81,401)	(202,443)
Cash flows from financing activities:
Net increase in total deposits	7,269	296,078
Net increase in short-term borrowings	106,700	13,843
Payments on long-term borrowings	(80,030)	(180,002)
Common dividends paid	(18,700)	(15,853)
Preferred dividends paid	(13)	(13)
Payments related to equity incentive plans	(2,435)	(1,736)
Purchase of treasury stock	(418)	(458)
Net cash from financing activities	12,373	111,859
Net change in cash and cash equivalents	6,140	(37,447)
Cash and cash equivalents at beginning of the period	176,180	167,280
Cash and cash equivalents at end of the period	$    182,320	$           129,833
Cash paid during the period for:
Interest	$       31,130	$              21,274
Income taxes	13,033	19,818
Supplemental non-cash disclosures:
Loans transferred to other real estate owned	316	88
Securities purchases payable	4,018	1,793

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

5

NOTE 1. BASIS OF PRESENTATION

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

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2018. The Company's 2017 Annual Report on Form 10-K should be read in conjunction with these statements.

Adoption of New Accounting Standards

The Company accounts for revenue in accordance with ASU No. 2014-09, "Revenue from Contracts with Customers" and all the subsequent amendments to the ASU (collectively "ASC 606"), which the Company adopted on January 1, 2018, using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to opening retained earnings of $24,000 as of January 1, 2018 due to the cumulative impact of adopting ASC 606. Revenue is split between net interest income and noninterest income at a ratio of approximately 80% to 20%, respectively. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Company's services that fall within ASC 606 are presented in noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. The majority of the Company's revenue is from the business of banking and the Company's assigned regions have similar economic characteristics, products, services and customers. Accordingly, all of the Company's operations are considered by management to be aggregated in one reportable operating segment.

The income statement impact of adopting ASC 606 for the three- and nine-month periods ended September 30, 2018 is outlined below:

	For the three months ended September 30, 2018			For the nine months ended September 30, 2018
	As reported	Under legacy GAAP	Impact of ASC 606	As reported	Under legacy GAAP	Impact of ASC 606
Noninterest  income
Loan and service fees	$2,327	$2,135	$192	$6,925	$6,349	$576
Other income	561	623	(62)	1,816	2,006	(190)
Total	$2,888	$2,758	$130	$8,741	$8,355	$386
Noninterest expense
Data processing fees and supplies	2,489	2,359	130	7,292	6,906	386
Total	$2,489	$2,359	$130	$7,292	$6,906	$386
Net Impact	$399	$399	$0	$1,449	$1,449	$0
Net income	$20,142	$20,142	$0	$38,478	$38,478	$0
Comprehensive income	18,420	18,420	0	29,679	29,679	0
Basic earnings per share	$0.80	$0.80	$0	$1.52	$1.52	$0
Diluted earnings per share	0.78	0.78	0	1.50	1.50	0

6

In January 2016, the Financial Accounting Standards Board (the "FASB") amended existing accounting guidance related to the recognition and measurement of financial assets and financial liabilities. These amendments make targeted improvements to U.S. GAAP as follows:  (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. (3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. (5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. (6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. (7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. (8) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This guidance was effective beginning January 1, 2018. Adopting this standard resulted in a credit to retained earnings for the reclassification in the amount of $68,000.

In August 2016, the FASB issued guidance related to the classification of certain cash receipts and cash payments in the statement of cash flow. This standard provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. This guidance was effective beginning January 1, 2018. Adopting this standard did not have a significant impact on the Company's financial condition or results of operations.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item that includes the service cost. The guidance was effective beginning January 1, 2018. As a result of the applicable plans being frozen April 1, 2000, there was no service cost recognized for the nine-month periods ending September 30, 2018 and 2017. All other components of cost were recorded in other expense under noninterest expenses on the Consolidated Statements of Income for all periods presented. Adopting this standard did not have a significant impact on the Company's financial condition or results of operations.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The ASU required a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the Tax Cuts and Jobs Act of 2017. The amount reclassified was the difference between the historical corporate income tax rate and the new 21% federal corporate income tax rate. The new guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the guidance during the first quarter of 2018, and recorded a credit to retained earnings for the reclassification in the amount of $173,000 during the first quarter.

Newly Issued But Not Yet Effective Accounting Standards

In February 2016, the FASB issued new accounting guidance related to leases. This update, effective for the Company beginning January 1, 2019, will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company currently has approximately $5.6 million of lease obligations that would come on balance sheet as both assets and liabilities upon adoption of this accounting standard.

7

In June 2016, the FASB issued guidance related to credit losses on financial instruments. This update will change the accounting for credit losses on loans and debt securities. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. In addition, the guidance will modify the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which will allow for reversal of credit impairments in future periods. This guidance is effective for public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. The Company has formed a cross-functional committee that has evaluated existing technology and other solutions for calculating losses under this new standard, selected a vendor to validate data currently loaded in the technology solution selected, and reviewed the validation assessment report. The committee is currently evaluating the various methods available for calculating the credit losses, including but not limited to discounted cash flows, migration, and vintage. Management expects to recognize credit losses earlier upon adoption of this accounting standard and the expected credit loss model than it has historically done under the current incurred credit loss model and is evaluating the impact of adopting this new accounting standard on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment." These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. Management does not expect the adoption of this new accounting standard to have a material impact on our financial statements.

In March 2017, the FASB issued ASU No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities." This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Management is evaluating the impact of adopting the new guidance on our consolidated financial statements on a quarterly basis, and plans to adopt on January 1, 2019.  The Company estimates the impact of this standard as of September 30, 2018, would be a reduction to retained earnings of approximately $940,000, net of tax, to reflect the acceleration of amortization of premiums on debt securities.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities". The purpose of this updated guidance is to better align a company's financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

Reclassifications

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

8

NOTE 2. SECURITIES

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

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
(dollars in thousands)	Cost	Gain	Losses	Value
September 30, 2018
U.S. Treasury securities	$993	$0	$(20)	$973
U.S. government sponsored agencies	4,649	0	(189)	4,460
Mortgage-backed securities: residential	327,270	814	(10,069)	318,015
Mortgage-backed securities: commercial	39,050	0	(959)	38,091
State and municipal securities	213,361	584	(4,916)	209,029
Total	$585,323	$1,398	$(16,153)	$570,568
December 31, 2017
U.S. Treasury securities	$992	$5	$0	$997
U.S. government sponsored agencies	5,191	0	(69)	5,122
Mortgage-backed securities: residential	314,650	2,099	(2,975)	313,774
Mortgage-backed securities: commercial	44,208	75	(72)	44,211
State and municipal securities	172,375	2,990	(976)	174,389
Total	$537,416	$5,169	$(4,092)	$538,493

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of September 30, 2018 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.

	Amortized	Fair
(dollars in thousands)	Cost	Value
Due in one year or less	$2,548	$2,558
Due after one year through five years	23,823	23,868
Due after five years through ten years	35,378	34,968
Due after ten years	157,254	153,068
	219,003	214,462
Mortgage-backed securities	366,320	356,106
Total debt securities	$585,323	$570,568

Securities proceeds, gross gains and gross losses are presented below.

	Nine months ended September 30,
(dollars in thousands)	2018	2017
Sales of securities available for sale
Proceeds	$12,322	$35,845
Gross gains	21	256
Gross losses	(27)	(204)
Number of securities	22	35

Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

9

Securities with carrying values of $166.9 million and $171.1 million were pledged as of September 30, 2018 and December 31, 2017, respectively, as collateral for securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of September 30, 2018 and December 31, 2017 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	Value	Losses	Value	Losses	Value	Losses
September 30, 2018
U.S. Treasury	$973	$20	$0	$0	$973	$20
U.S. government sponsored agencies	1,958	58	2,502	131	4,460	189
Mortgage-backed securities: residential	146,933	3,103	145,962	6,966	292,895	10,069
Mortgage-backed securities: commercial	38,091	959	0	0	38,091	959
State and municipal securities	106,622	2,114	50,845	2,802	157,467	4,916
Total temporarily impaired	$294,577	$6,254	$199,309	$9,899	$493,886	$16,153
December 31, 2017
U.S. government sponsored agencies	$2,353	$6	$2,769	$63	$5,122	$69
Mortgage-backed securities: residential	142,834	1,412	59,024	1,563	201,858	2,975
Mortgage-backed securities: commercial	23,505	72	0	0	23,505	72
State and municipal securities	8,585	47	49,552	929	58,137	976
Total temporarily impaired	$177,277	$1,537	$111,345	$2,555	$288,622	$4,092

The total number of securities with unrealized losses as of September 30, 2018 and December 31, 2017 is presented below.

	Less than	12 months
	12 months	or more	Total
September 30, 2018
U.S. Treasury	1	0	1
U.S. government sponsored agencies	1	1	2
Mortgage-backed securities: residential	56	54	110
Mortgage-backed securities: commercial	9	0	9
State and municipal securities	129	68	197
Total temporarily impaired	196	123	319
December 31, 2017
U.S. government sponsored agencies	1	1	2
Mortgage-backed securities: residential	46	21	67
Mortgage-backed securities: commercial	5	0	5
State and municipal securities	17	62	79
Total temporarily impaired	69	84	153

The following factors are considered in determining whether or not the impairment of these securities is other-than-temporary. In making this determination, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer, as well as the underlying fundamentals of the relevant market and the outlook for such market in the near future. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of September 30, 2018 and December 31, 2017, all of the securities in the Company's portfolio were backed by the U.S. government, government agencies, government sponsored entities or were A-rated or better, except for certain non-local or local municipal securities, which are not rated. For the government, government agency, government-sponsored entity and municipal securities, management did not believe that there would be credit losses or that full principal would not be received. Management considers the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

10

NOTE 3. LOANS

	September 30,			December 31,
(dollars in thousands)	2018			2017
Commercial and industrial loans:
Working capital lines of credit loans	$757,004	19.7	%	$743,609	19.4	%
Non-working capital loans	693,402	18.0		675,072	17.7
Total commercial and industrial loans	1,450,406	37.7		1,418,681	37.1
Commercial real estate and multi-family residential loans:
Construction and land development loans	231,795	6.0		224,474	5.9
Owner occupied loans	571,998	14.9		538,603	14.1
Nonowner occupied loans	520,414	13.5		508,121	13.3
Multifamily loans	192,218	5.0		173,715	4.5
Total commercial real estate and multi-family residential loans	1,516,425	39.4		1,444,913	37.8
Agri-business and agricultural loans:
Loans secured by farmland	159,256	4.2		186,437	4.9
Loans for agricultural production	134,773	3.5		196,404	5.1
Total agri-business and agricultural loans	294,029	7.7		382,841	10.0
Other commercial loans	114,350	3.0		124,076	3.3
Total commercial loans	3,375,210	87.8		3,370,511	88.2
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	185,212	4.8		179,302	4.7
Open end and junior lien loans	185,869	4.8		181,865	4.8
Residential construction and land development loans	15,128	0.4		13,478	0.3
Total consumer 1-4 family mortgage loans	386,209	10.0		374,645	9.8
Other consumer loans	83,203	2.2		74,369	2.0
Total consumer loans	469,412	12.2		449,014	11.8
Subtotal	3,844,622	100.0	%	3,819,525	100.0	%
Less:  Allowance for loan losses	(48,343)			(47,121)
Net deferred loan fees	(1,497)			(1,066)
Loans, net	$3,794,782			$3,771,338

The recorded investment in loans does not include accrued interest.

The Company had $614,000 in residential real estate loans in the process of foreclosure as of September 30, 2018, compared to $47,000 as of December 31, 2017.

11

NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended September 30, 2018 and 2017:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Three Months Ended September 30, 2018
Beginning balance, July 1	$22,524	$14,954	$4,585	$464	$1,953	$266	$2,960	$47,706
Provision for loan losses	952	140	(506)	(23)	321	62	154	1,100
Loans charged-off	(474)	0	0	0	(24)	(83)	0	(581)
Recoveries	69	7	5	0	6	31	0	118
Net loans charged-off	(405)	7	5	0	(18)	(52)	0	(463)
Ending balance	$23,071	$15,101	$4,084	$441	$2,256	$276	$3,114	$48,343

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Three Months Ended September 30, 2017
Beginning balance, July 1	$20,219	$13,775	$3,870	$568	$2,689	$389	$3,053	$44,563
Provision for loan losses	(612)	426	425	108	30	15	58	450
Loans charged-off	(44)	0	0	0	(40)	(86)	0	(170)
Recoveries	364	246	7	0	11	26	0	654
Net loans charged-off	320	246	7	0	(29)	(60)	0	484
Ending balance	$19,927	$14,447	$4,302	$676	$2,690	$344	$3,111	$45,497

The following tables present the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2018 and 2017:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Nine Months Ended September 30, 2018
Beginning balance, January 1	$21,097	$14,714	$4,920	$577	$2,768	$379	$2,666	$47,121
Provision for loan losses	6,246	855	(850)	(136)	(541)	78	448	6,100
Loans charged-off	(4,891)	(491)	0	0	(31)	(273)	0	(5,686)
Recoveries	619	23	14	0	60	92	0	808
Net loans charged-off	(4,272)	(468)	14	0	29	(181)	0	(4,878)
Ending balance	$23,071	$15,101	$4,084	$441	$2,256	$276	$3,114	$48,343

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Nine Months Ended September 30, 2017
Beginning balance, January 1	$20,272	$13,452	$3,532	$461	$2,827	$387	$2,787	$43,718
Provision for loan losses	(791)	744	753	215	(170)	75	324	1,150
Loans charged-off	(430)	(259)	0	0	(53)	(192)	0	(934)
Recoveries	876	510	17	0	86	74	0	1,563
Net loans charged-off	446	251	17	0	33	(118)	0	629
Ending balance	$19,927	$14,447	$4,302	$676	$2,690	$344	$3,111	$45,497

12

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2018 and December 31, 2017:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
September 30, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$4,798	$771	$0	$0	$439	$26	$0	$6,034
Collectively evaluated for impairment	18,273	14,330	4,084	441	1,817	250	3,114	42,309
Total ending allowance balance	$23,071	$15,101	$4,084	$441	$2,256	$276	$3,114	$48,343
Loans:
Loans individually evaluated for impairment	$14,280	$4,108	$283	$0	$2,193	$46	$0	$20,910
Loans collectively evaluated for impairment	1,436,066	1,509,970	293,836	114,211	385,215	82,917	0	3,822,215
Total ending loans balance	$1,450,346	$1,514,078	$294,119	$114,211	$387,408	$82,963	$0	$3,843,125

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$2,067	$795	$0	$0	$310	$44	$0	$3,216
Collectively evaluated for impairment	19,030	13,919	4,920	577	2,458	335	2,666	43,905
Total ending allowance balance	$21,097	$14,714	$4,920	$577	$2,768	$379	$2,666	$47,121
Loans:
Loans individually evaluated for impairment	$6,979	$4,802	$283	$0	$1,756	$50	$0	$13,870
Loans collectively evaluated for impairment	1,411,648	1,438,219	382,643	123,922	374,013	74,144	0	3,804,589
Total ending loans balance	$1,418,627	$1,443,021	$382,926	$123,922	$375,769	$74,194	$0	$3,818,459

13

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2018:

	Unpaid		Allowance for
	Principal	Recorded	Loan Losses
(dollars in thousands)	Balance	Investment	Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$3,483	$792	$0
Non-working capital loans	4,789	2,444	0
Commercial real estate and multi-family residential loans:
Construction and land development loans	18	18	0
Owner occupied loans	2,276	1,671	0
Agri-business and agricultural loans:
Loans secured by farmland	603	283	0
Consumer 1-4 family loans:
Closed end first mortgage loans	590	509	0
Open end and junior lien loans	243	244	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	3,649	3,653	897
Non-working capital loans	7,391	7,391	3,901
Commercial real estate and multi-family residential loans:
Construction and land development loans	303	303	154
Owner occupied loans	2,250	2,116	617
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,439	1,440	439
Other consumer loans	46	46	26
Total	$27,080	$20,910	$6,034

14

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017:

	Unpaid		Allowance for
	Principal	Recorded	Loan Losses
(dollars in thousands)	Balance	Investment	Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$491	$491	$0
Non-working capital loans	2,973	1,579	0
Commercial real estate and multi-family residential loans:
Construction and land development loans	88	88	0
Owner occupied loans	2,558	2,310	0
Agri-business and agricultural loans:
Loans secured by farmland	603	283	0
Consumer 1-4 family loans:
Closed end first mortgage loans	636	570	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	1,617	1,617	667
Non-working capital loans	3,292	3,292	1,400
Commercial real estate and multi-family residential loans:
Construction and land development loans	827	827	350
Owner occupied loans	1,577	1,577	445
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	950	950	269
Open end and junior lien loans	235	236	41
Other consumer loans	50	50	44
Total	$15,897	$13,870	$3,216

15

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2018:

			Cash Basis
	Average	Interest	Interest
	Recorded	Income	Income
(dollars in thousands)	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$955	$13	$7
Non-working capital loans	2,027	19	17
Commercial real estate and multi-family residential loans:
Construction and land development loans	41	1	1
Owner occupied loans	1,903	9	11
Agri-business and agricultural loans:
Loans secured by farmland	283	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	503	3	3
Open end and junior lien loans	244	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	4,019	6	6
Non-working capital loans	6,385	37	19
Commercial real estate and multi-family residential loans:
Construction and land development loans	307	5	8
Owner occupied loans	2,183	0	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,374	14	13
Other consumer loans	46	1	0
Total	$20,270	$108	$85

16

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2017:

			Cash Basis
	Average	Interest	Interest
	Recorded	Income	Income
(dollars in thousands)	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$315	$14	$11
Non-working capital loans	1,321	18	18
Commercial real estate and multi-family residential loans:
Construction and land development loans	100	3	3
Owner occupied loans	2,222	2	2
Nonowner occupied loans	2,784	152	152
Agri-business and agricultural loans:
Loans secured by farmland	301	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	342	3	3
Open end and junior lien loans	101	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,529	22	22
Non-working capital loans	5,700	74	74
Commercial real estate and multi-family residential loans:
Owner occupied loans	1,714	9	9
Agri-business and agricultural loans:
Loans secured by farmland	10	0	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	969	13	13
Open end and junior lien loans	81	0	0
Other consumer loans	52	1	1
Total	$18,541	$311	$308

17

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2018:

			Cash Basis
	Average	Interest	Interest
	Recorded	Income	Income
(dollars in thousands)	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$992	$26	$23
Non-working capital loans	1,831	50	48
Commercial real estate and multi-family residential loans:
Construction and land development loans	77	4	4
Owner occupied loans	2,443	25	25
Agri-business and agricultural loans:
Loans secured by farmland	283	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	526	7	7
Open end and junior lien loans	194	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,878	10	9
Non-working capital loans	4,371	42	25
Commercial real estate and multi-family residential loans:
Construction and land development loans	506	22	26
Owner occupied loans	1,473	1	1
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,112	29	27
Open end and junior lien loans	51	0	0
Other consumer loans	48	2	2
Total	$16,785	$218	$197

18

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2017:

			Cash Basis
	Average	Interest	Interest
	Recorded	Income	Income
(dollars in thousands)	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$485	$22	$19
Non-working capital loans	1,337	27	27
Commercial real estate and multi-family residential loans:
Construction and land development loans	117	4	4
Owner occupied loans	2,395	4	4
Nonowner occupied loans	3,397	222	222
Agri-business and agricultural loans:
Loans secured by farmland	289	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	249	5	5
Open end and junior lien loans	137	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,090	33	33
Non-working capital loans	6,418	116	116
Commercial real estate and multi-family residential loans:
Owner occupied loans	1,641	12	11
Agri-business and agricultural loans:
Loans secured by farmland	3	0	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,023	18	16
Open end and junior lien loans	27	0	0
Other consumer loans	53	2	2
Total	$19,661	$465	$459

19

The following table presents the ageing of the recorded investment in past due loans as of September 30, 2018 by class of loans:

		30-89	Greater than		Total Past
	Loans Not	Days	90 Days		Due and
(dollars in thousands)	Past Due	Past Due	Past Due	Nonaccrual	Nonaccrual	Total
Commercial and industrial loans:
Working capital lines of credit loans	$748,308	$4,853	$0	$3,954	$8,807	$757,115
Non-working capital loans	681,687	7,443	0	4,101	11,544	693,231
Commercial real estate and multi-family
residential loans:
Construction and land development loans	230,522		0	0	0	230,522
Owner occupied loans	568,463	0	0	3,173	3,173	571,636
Nonowner occupied loans	520,077	0	0	0	0	520,077
Multifamily loans	191,843	0	0	0	0	191,843
Agri-business and agricultural loans:
Loans secured by farmland	158,979	0	0	283	283	159,262
Loans for agricultural production	134,845	12	0	0	12	134,857
Other commercial loans	114,211	0	0	0	0	114,211
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	183,328	941	0	586	1,527	184,855
Open end and junior lien loans	187,113	96	0	244	340	187,453
Residential construction loans	15,100	0	0	0	0	15,100
Other consumer loans	82,826	137	0	0	137	82,963
Total	$3,817,302	$13,482	$0	$12,341	$25,823	$3,843,125

The following table presents the ageing of the recorded investment in past due loans as of December 31, 2017 by class of loans:

		30-89	Greater than		Total Past
	Loans Not	Days	90 Days		Due and
(dollars in thousands)	Past Due	Past Due	Past Due	Nonaccrual	Nonaccrual	Total
Commercial and industrial loans:
Working capital lines of credit loans	$742,205	$11	$0	$1,459	$1,470	$743,675
Non-working capital loans	671,490	0	0	3,462	3,462	674,952
Commercial real estate and multi-family
residential loans:
Construction and land development loans	215,713	8,000	0	0	8,000	223,713
Owner occupied loans	534,648	0	0	3,620	3,620	538,268
Nonowner occupied loans	507,696	0	0	0	0	507,696
Multifamily loans	173,100	244	0	0	244	173,344
Agri-business and agricultural loans:
Loans secured by farmland	186,160	0	0	283	283	186,443
Loans for agricultural production	196,483	0	0	0	0	196,483
Other commercial loans	123,922	0	0	0	0	123,922
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	177,410	1,183	6	342	1,531	178,941
Open end and junior lien loans	183,056	89	0	236	325	183,381
Residential construction loans	13,447	0	0	0	0	13,447
Other consumer loans	74,102	92	0	0	92	74,194
Total	$3,799,432	$9,619	$6	$9,402	$19,027	$3,818,459

20

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.1 million and $2.3 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2018 and December 31, 2017, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.

	September 30	December 31
(dollars in thousands)	2018	2017
Accruing troubled debt restructured loans	$3,512	$2,893
Nonaccrual troubled debt restructured loans	7,313	7,750
Total troubled debt restructured loans	$10,825	$10,643

During the three months ending September 30, 2018, two commercial and industrial loans were modified as troubled debt restructurings due to a modification of the repayment terms which delays principal repayment for an extended period of time. These concessions are included in the table below.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended September 30, 2018.  The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the company occupying the building do not support the loan with a recorded investment of $852,000.  The loan to another one of the borrowers is for a vacant commercial real estate building that does not generate cash flow to support the loan with a recorded investment of $321,000.  The other loans are to a borrower for an investment in land for residential development which has not had sales activity to support loans with a recorded investment of $109,000.  These troubled debt restructured loans with additional concessions decreased the allowance by $7,000 as a result of payments received during the period and resulted in no charge-offs for the three-month period ending September 30, 2018. These concessions are not included in the table below.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended September 30, 2018:

				Modified Repayment Terms
		Pre-Modification	Post-Modification		Extension
		Outstanding	Outstanding		Period or
	Number of	Recorded	Recorded	Number of	Range
(dollars in thousands)	Loans	Investment	Investment	Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Non-working capital loans	2	$824	$824	2	0-6
Total	2	$824	$824	2	0-6

For the three month period ending September 30, 2018, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded.

During the nine months ended September 30, 2018, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. These concessions are included in the table below.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the nine-month period ended September 30, 2018.  There were three commercial real estate loans with recorded investments totaling $1.3 million and three commercial and industrial loans with recorded investments totaling $1.4 million where the collateral value and/or cash flows do not support those loans. The other three loans are to borrowers for investments in land for residential development which have not had sales activity to support loans with a recorded investments totaling $593,000. These troubled debt restructured loans with additional concessions increased the allowance by $255,000 and resulted in no charge-offs for the nine-month period ending September 30, 2018. These concessions are not included in the table below.

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The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2018:

				Modified Repayment Terms
		Pre-Modification	Post-Modification		Extension
		Outstanding	Outstanding		Period or
	Number of	Recorded	Recorded	Number of	Range
(dollars in thousands)	Loans	Investment	Investment	Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans	1	$600	$600	1	0
Non-working capital loans	4	2,244	2,244	4	0-6
Commercial real estate and multi-
family residential loans:
Construction and land
development loans	1	824	824	1	12
Owner occupied loans	1	387	387	1	12
Consumer 1-4 family loans:
Closed end first mortgage loans	1	198	197	1	239
Total	8	$4,253	$4,252	8	0-239

For the nine-month period ending September 30, 2018, the commercial real estate and multi-family residential troubled debt restructurings described above decreased the allowance for loan losses by $196,000, and resulted in charge-offs of $1.6 million.  All other troubled debt restructurings described above had no impact to the allowance and no charge-offs were recorded for the nine month period ending September 30, 2018.

During the three months ended September 30, 2017, certain loans were modified as troubled debt restructurings due to a modification of the repayment terms which delays principal repayment for an extended period of time. These concessions are included in the table below.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period.  The loans to two of the borrowers are for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $1.4 million.  The loans to three other borrowers are for commercial and industrial non-working capital loans with recorded investments of $1.8 million. These troubled debt restructured loans with additional concessions decreased the allowance by $7,000 as a result of payments received during the period and resulted in no charge-offs for the three-month period ending September 30, 2017. These concessions are not included in the table below.

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The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended September 30, 2017:

				Modified Repayment Terms
		Pre-Modification	Post-Modification                                                                         Extension
		Outstanding	Outstanding		Period or
	Number of	Recorded	Recorded	Number of	Range
(dollars in thousands)	Loans	Investment	Investment	Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans	1	$                         1,324	$                         1,324	1	9
Non-working capital loans	2	210	210	2	0-6
Consumer 1-4 family loans:
Closed end first mortgage loans	1	76	76	1	198
Total	4	$                         1,610	$                         1,610	4	0-198

For the three month period ending September 30, 2017, the commercial and industrial troubled debt restructurings described above decreased the allowance for loan losses by $77,000 and the consumer troubled debt restructuring described above did not impact the allowance. No charge-offs were recorded on the troubled debt restructurings described above for the three-month period ending September 30, 2017.

During the nine months ended September 30, 2017, certain loans were modified as troubled debt restructurings and are reflected in the table presented below. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. These concessions are included in the table below.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the nine months ended September 30, 2017.  Three of the loans are for commercial real estate properties where the collateral value and/or cash flows from the companies occupying the buildings do not support the loans with recorded investments of $821,000.  The other four loans are commercial and industrial non-working capital loans with recorded investments of $1.7 million. These troubled debt restructured loans with additional concessions increased the allowance by $80,000 and resulted in no charge-offs for the nine-month period ending September 30, 2017. These concessions are not included in the table below.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2017:

				Modified Repayment Terms
		Pre-Modification	Post-Modification		Extension
		Outstanding	Outstanding		Period or
	Number of	Recorded	Recorded	Number of	Range
(dollars in thousands)	Loans	Investment	Investment	Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans	1	$1,324	$1,324	1	9
Non-working capital loans	4	1,922	1,922	4	0-6
Commercial real estate and multi-
family residential loans:
Owner occupied loans	1	486	486	1	6
Consumer 1-4 family loans:
Closed end first mortgage loans	2	120	122	2	198-350
Total	8	$3,852	$3,854	8	0-350

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For the nine-month period ended September 30, 2017, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $583,000, the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $36,000, and the consumer troubled debt restructurings described above had no impact on the allowance.  No charge-offs resulted from any troubled debt restructurings described above during the nine-month period ended September 30, 2017.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

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

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

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

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Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of September 30, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

		Special			Not
(dollars in thousands)	Pass	Mention	Substandard	Doubtful	Rated	Total
Commercial and industrial loans:
Working capital lines of credit loans	$673,013	$56,578	$27,165	$0	$359	$757,115
Non-working capital loans	642,700	22,853	22,376	0	5,302	693,231
Commercial real estate and multi-
family residential loans:
Construction and land development loans	229,848	371	303	0	0	230,522
Owner occupied loans	527,154	22,374	22,108	0	0	571,636
Nonowner occupied loans	517,558	1,865	654	0	0	520,077
Multifamily loans	191,620	223	0	0	0	191,843
Agri-business and agricultural loans:
Loans secured by farmland	150,769	6,684	1,809	0	0	159,262
Loans for agricultural production	125,769	7,288	1,800	0	0	134,857
Other commercial loans	114,207	0	0	0	4	114,211
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	58,166	0	1,949	0	124,740	184,855
Open end and junior lien loans	8,730	0	243	0	178,480	187,453
Residential construction loans	0	0	0	0	15,100	15,100
Other consumer loans	12,211	0	46	0	70,706	82,963
Total	$3,251,745	$118,236	$78,453	$0	$394,691	$3,843,125

As of December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

		Special			Not
(dollars in thousands)	Pass	Mention	Substandard	Doubtful	Rated	Total
Commercial and industrial loans:
Working capital lines of credit loans	$688,748	$33,337	$21,350	$0	$240	$743,675
Non-working capital loans	624,275	20,171	25,834	0	4,672	674,952
Commercial real estate and multi-
family residential loans:
Construction and land development loans	222,445	441	827	0	0	223,713
Owner occupied loans	496,231	19,361	22,676	0	0	538,268
Nonowner occupied loans	505,033	1,970	693	0	0	507,696
Multifamily loans	173,100	244	0	0	0	173,344
Agri-business and agricultural loans:
Loans secured by farmland	174,118	7,988	4,337	0	0	186,443
Loans for agricultural production	185,772	9,716	995	0	0	196,483
Other commercial loans	123,917	0	0	0	5	123,922
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	52,301	0	1,520	0	125,120	178,941
Open end and junior lien loans	8,259	0	236	0	174,886	183,381
Residential construction loans	0	0	0	0	13,447	13,447
Other consumer loans	18,642	0	50	0	55,502	74,194
Total	$3,272,841	$93,228	$78,518	$0	$373,872	$3,818,459

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NOTE 5. FAIR VALUE DISCLOSURES

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

Level 1	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3	Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Securities:  Securities available for sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying e