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Section 1: 10-Q (CHCO 09-30-2017 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2017
OR
[  ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ____________To_____________.

Commission File Number 0-11733
390938457_chcologoa02a09.jpg
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia
55-0619957
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
25 Gatewater Road
 
Charleston, West Virginia
25313
(Address of principal executive offices)
(Zip Code)
(304) 769-1100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
[X]
No
[   ]
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
[X]
No
[   ]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
 
Accelerated filer [ ]
 
 
 
 
 
Non-accelerated filer [   ]
 
Smaller reporting company [   ]
 
 
 
 
 
 
 
Emerging growth company [   ]
 
 


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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]
 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common stock, $2.50 Par Value – 15,618,029 shares as of November 1, 2017.

2


FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company's actual results differing materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company could have adverse legal actions of a material nature; (4) the Company may face competitive loss of customers; (5) the Company may be unable to manage its expense levels; (6) the Company may have difficulty retaining key employees; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balances; (11) the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; (12) deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments; (13) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject the Company and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; (14) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; and (15) other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those risk factors included in the disclosures under the heading “Item 1A Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.  Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

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Index
City Holding Company and Subsidiaries

Pages
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 


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Part I -
FINANCIAL INFORMATION

Item 1 -
Financial Statements

Consolidated Balance Sheets
City Holding Company and Subsidiaries
(in thousands)
 
(Unaudited)
 
 
 
September 30, 2017
 
December 31, 2016
Assets
 
 
Cash and due from banks
$
54,281

 
$
62,263

Interest-bearing deposits in depository institutions
28,884

 
25,876

Cash and Cash Equivalents
83,165

 
88,139

 
 
 
 
Investment securities available for sale, at fair value
525,633

 
450,083

Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2017 and December 31, 2016 - $68,478 and $76,445, respectively)
66,989

 
75,169

Other securities
15,988

 
14,352

Total Investment Securities
608,610

 
539,604

 
 
 
 
Gross loans
3,105,912

 
3,046,226

Allowance for loan losses
(19,554
)
 
(19,730
)
Net Loans
3,086,358

 
3,026,496

 
 
 
 
Bank owned life insurance
102,706

 
100,732

Premises and equipment, net
72,334

 
75,165

Accrued interest receivable
9,236

 
8,408

Net deferred tax asset
22,355

 
28,043

Goodwill and other intangible assets, net
78,730

 
79,135

Other assets
36,060

 
38,681

Total Assets
$
4,099,554

 
$
3,984,403

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
669,876

 
$
672,286

Interest-bearing:
 

 
 

   Demand deposits
711,121

 
695,891

   Savings deposits
799,592

 
822,057

   Time deposits
1,075,945

 
1,041,419

Total Deposits
3,256,534

 
3,231,653

 
 
 
 
Short term borrowings:
 
 
 
   Federal funds purchased
79,800

 
64,100

   Customer repurchase agreements
201,664

 
184,205

Long-term debt
16,495

 
16,495

Other liabilities
44,746

 
45,512

Total Liabilities
3,599,239

 
3,541,965

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Shareholders’ Equity
 

 
 

Preferred stock, par value $25 per share: 500,000 shares authorized; none issued

 

Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares and 18,606,944 shares issued at September 30, 2017 and December 31, 2017, less 3,429,519 and 3,478,511 shares in treasury, respectively
47,619

 
46,518

Capital surplus
140,381

 
112,873

Retained earnings
441,001

 
417,017

Cost of common stock in treasury
(124,909
)
 
(126,958
)
Accumulated other comprehensive income (loss):
 

 
 

Unrealized gain (loss) on securities available-for-sale
883

 
(2,352
)
Underfunded pension liability
(4,660
)
 
(4,660
)
Total Accumulated Other Comprehensive Income (Loss)
(3,777
)
 
(7,012
)
Total Shareholders’ Equity
500,315

 
442,438

Total Liabilities and Shareholders’ Equity
$
4,099,554

 
$
3,984,403


See notes to consolidated financial statements.


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Consolidated Statements of Income (Unaudited)
City Holding Company and Subsidiaries
(in thousands, except earnings per share data)
Interest Income
Three months ended September 30,
 
Nine months ended September 30,
2017
2016
 
2017
2016
 
 
 
 
 
Interest and fees on loans
$
32,004

$
29,444

 
$
93,223

$
88,011

Interest and dividends on investment securities:
 

 

 
 
 
Taxable
3,666

3,183

 
10,591

9,115

Tax-exempt
665

419

 
2,014

1,141

Interest on deposits in depository institutions
31


 
51


Total Interest Income
36,366

33,046

 
105,879

98,267

 
 
 
 
 
 
Interest Expense
 

 

 
 
 
Interest on deposits
3,796

3,006

 
10,885

8,915

Interest on short-term borrowings
349

90

 
693

283

Interest on long-term debt
195

172

 
565

503

Total Interest Expense
4,340

3,268

 
12,143

9,701

Net Interest Income
32,026

29,778

 
93,736

88,566

Provision for loan losses
1,393

1,432

 
2,584

3,093

Net Interest Income After Provision for Loan Losses
30,633

28,346

 
91,152

85,473

 
 
 
 
 
 
Non-Interest Income
 

 

 
 
 
Net gains on sale of investment securities

2,668

 
4,276

3,513

Service charges
7,415

6,842

 
21,219

19,709

Bankcard revenue
4,291

4,216

 
12,804

12,373

Trust and investment management fee income
1,471

1,329

 
4,469

3,976

Bank owned  life insurance
774

846

 
2,972

2,374

Other income
660

846

 
2,303

2,510

Total Non-Interest Income
14,611

16,747

 
48,043

44,455

 
 
 
 
 
 
Non-Interest Expense
 

 

 
 
 
Salaries and employee benefits
12,876

12,993

 
38,899

38,456

Occupancy and equipment
2,916

2,759

 
8,710

8,303

Depreciation
1,450

1,585

 
4,486

4,719

FDIC insurance expense
328

508

 
1,031

1,485

Advertising
689

667

 
2,203

2,161

Bankcard expenses
1,051

1,188

 
2,964

3,143

Postage, delivery, and statement mailings
517

517

 
1,576

1,588

Office supplies
377

325

 
1,082

1,044

Legal and professional fees
504

869

 
1,393

1,671

Telecommunications
494

459

 
1,470

1,318

Repossessed asset losses, net of expenses
107

305

 
589

646

Other expenses
3,000

3,109

 
8,683

9,173

Total Non-Interest Expense
24,309

25,284

 
73,086

73,707

Income Before Income Taxes
20,935

19,809

 
66,109

56,221

Income tax expense
7,003

6,577

 
21,463

18,745

Net Income Available to Common Shareholders
$
13,932

$
13,232

 
$
44,646

$
37,476

 
 
 
 
 
 

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Total Comprehensive Income
$
14,240

$
12,449

 
$
47,881

$
42,562

 
 
 
 
 
 
Average shares outstanding, basic
15,485

14,899

 
15,391

14,902

Effect of dilutive securities
20

11

 
24

11

Average shares outstanding, diluted
15,505

14,910

 
15,415

14,913

 
 
 
 
 
 
Basic earnings per common share
$
0.89

$
0.88

 
$
2.87

$
2.48

Diluted earnings per common share
$
0.89

$
0.88

 
$
2.86

$
2.48

Dividends declared per common share
$
0.44

$
0.43

 
$
1.32

$
1.29


See notes to consolidated financial statements.


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Consolidated Statements of Comprehensive Income (Unaudited)
City Holding Company and Subsidiaries
(in thousands)

 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2017
2016
2017
2016
 
 
 
 
 
Net income
$
13,932

$
13,232

$
44,646

$
37,476

 
 
 
 
 
Unrealized gains on available-for-sale securities arising during the period
488

1,427

9,404

11,575

Reclassification adjustment for gains

(2,668
)
(4,276
)
(3,513
)
   Other comprehensive income before income taxes
488

(1,241
)
5,128

8,062

Tax effect
(180
)
458

(1,893
)
(2,976
)
   Other comprehensive income (loss), net of tax
308

(783
)
3,235

5,086

 
 
 
 
 
    Comprehensive Income, Net of Tax
$
14,240

$
12,449

$
47,881

$
42,562


See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
City Holding Company and Subsidiaries
Nine Months Ended September 30, 2017 and 2016
(in thousands)

 
Common Stock
 
Capital Surplus
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’ Equity
Balance at December 31, 2015
$
46,249

 
$
106,269

 
$
390,690

 
$
(120,104
)
 
$
(3,832
)
 
$
419,272

Net income

 

 
37,476

 

 

 
37,476

Other comprehensive income

 

 

 

 
5,086

 
5,086

Cash dividends declared ($1.29 per share)

 

 
(19,343
)
 

 

 
(19,343
)
Stock-based compensation expense

 
1,568

 

 

 

 
1,568

Restricted awards granted

 
(1,627
)
 

 
1,665

 

 
38

Exercise of 21,000 stock options

 
(214
)
 

 
919

 

 
705

Purchase of 231,132 treasury shares

 

 

 
(10,018
)
 

 
(10,018
)
Balance at September 30, 2016
$
46,249

 
$
105,996

 
$
408,823

 
$
(127,538
)
 
$
1,254

 
$
434,784



 
Common Stock
 
Capital Surplus
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’ Equity
Balance at December 31, 2016
$
46,518

 
$
112,873

 
$
417,017

 
$
(126,958
)
 
$
(7,012
)
 
$
442,438

Net income

 

 
44,646

 

 

 
44,646

Other comprehensive income

 

 

 

 
3,235

 
3,235

Cash dividends declared ($1.32 per share)

 

 
(20,662
)
 

 

 
(20,662
)
Stock-based compensation expense

 
1,653

 

 

 

 
1,653

Restricted awards granted

 
(1,351
)
 

 
1,351

 

 

Issuance of 440,604 shares of common stock
1,101

 
27,307

 

 

 

 
28,408

Exercise of 16,639 stock options

 
(101
)
 

 
698

 

 
597

Balance at September 30, 2017
$
47,619

 
$
140,381

 
$
441,001

 
$
(124,909
)
 
$
(3,777
)
 
$
500,315


See notes to consolidated financial statements.


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Consolidated Statements of Cash Flows (Unaudited)
City Holding Company and Subsidiaries
(in thousands)

 
Nine months ended September 30,
2017
 
2016
Net income
$
44,646

 
$
37,476

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Accretion and amortization
836

 
436

Provision for loan losses
2,584

 
3,093

Depreciation of premises and equipment
4,486

 
4,719

Deferred income tax expense
3,810

 
3,998

Net periodic employee benefit cost
337

 
386

Realized investment securities gains
(4,276
)
 
(3,978
)
Investment securities impairment losses

 
465

Stock-compensation expense
1,653

 
1,606

Excess tax benefit from stock-compensation expense
(550
)
 

Proceeds from life insurance
1,717

 

Increase in value of bank-owned life insurance
(1,974
)
 
(2,374
)
Loans originated for sale
(13,858
)
 
(11,537
)
Proceeds from the sale of loans originated for sale
16,315

 
11,637

Gain on sale of loans
(437
)
 
(268
)
Change in accrued interest receivable
(828
)
 
(554
)
Asset write down

 
444

Change in other assets
1,562

 
(14,068
)
Change in other liabilities
(1,505
)
 
16,338

Net Cash Provided by Operating Activities
54,518

 
47,819

 
 
 
 
Proceeds from sales of securities available-for-sale
5,576

 
30,850

Proceeds from maturities and calls of securities available-for-sale
61,367

 
55,565

Proceeds from maturities and calls of securities held-to-maturity
8,072

 
9,194

Purchases of securities available-for-sale
(136,418
)
 
(141,271
)
Net increase in loans
(63,139
)
 
(96,007
)
Purchases of premises and equipment
(4,262
)
 
(3,553
)
Disposals of premises and equipment
2,500

 
408

Net Cash (Used in) Investing Activities
(126,304
)
 
(144,814
)
 
 
 
 
Net (decrease) increase in non-interest-bearing deposits
(2,410
)
 
48,792

Net increase in interest-bearing deposits
27,307

 
46,963

Net increase in short-term borrowings
33,159

 
24,515

Proceeds from issuance of common stock
28,408

 

Purchases of treasury stock

 
(10,018
)
Proceeds from exercise of stock options
597

 
705

Dividends paid
(20,249
)
 
(19,266
)
Net Cash Provided by Financing Activities
66,812

 
91,691

(Decrease) in Cash and Cash Equivalents
(4,974
)
 
(5,304
)
Cash and cash equivalents at beginning of period
88,139

 
70,113

Cash and Cash Equivalents at End of Period
$
83,165

 
$
64,809


See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)
September 30, 2017

Note A –Background and Basis of Presentation

City Holding Company ("City Holding"), a West Virginia corporation headquartered in Charleston, West Virginia, is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 86 banking offices in West Virginia (57), Virginia (14), Kentucky (12) and Ohio (3). City National provides credit, deposit, and trust and investment management services to its customers. In addition to its branch network, City National's delivery channels include ATMs, mobile banking, debit cards, interactive voice response systems, and Internet technology. The Company’s business activities are currently limited to one reportable business segment, which is community banking.

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding Company and its wholly-owned subsidiaries (collectively, the "Company"). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2017. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management’s estimates.

The consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements included in the Company’s 2016 Annual Report to Shareholders.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2016 Annual Report of the Company.

Certain amounts in the financial statements have been reclassified.  Such reclassifications had no impact on shareholders’ equity or net income for any period.

Note B - Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This standard clarified the principles for recognizing revenue and developed a common revenue standard. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: (i) identify the contracts with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU will become effective for the Company on January 1, 2018. The Company's revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. ASU 2014-09 may require the Company to change how it recognizes certain components of non-interest income, but the Company does not believe it will have a material impact on the Company's financial statements or disclosures. The Company anticipates adopting this standard with a cumulative effect adjustment to opening retained earnings (the modified retrospective approach), if such adjustment is deemed to be material.    

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This standard makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principals. This ASU will become

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effective for the Company for interim and annual periods on January 1, 2019. The Company's preliminary evaluation indicates that the adoption of ASU 2016-02 will have an immaterial impact on the Company's consolidated balance sheet. However, the Company continues to evaluate the extent of the potential impact the new guidance will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting.” This standard makes several modifications to the accounting for share-based payment transactions, including the income tax consequences when awards are exercised or vest, classification of awards as either equity
or liabilities, and classification on the statement of cash flows. This ASU became effective for the Company for interim and annual periods beginning on January 1, 2017. This ASU requires the Company to record all excess tax benefits and tax deficiencies in the income statement and treat excess tax benefits as discrete items in the calculation of income tax expense in the period in which they occur. Under this standard, the Company also elected to account for forfeitures of share-based payments as they occur. The adoption of ASU No. 2016-09 did not have a material impact on the Company’s financial statements.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The standard was issued to clarify Revenue from Contracts with Customers (Topic 606) related to: (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date is the same as the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," as discussed above. ASU 2016-10 is not expected to have a significant impact on the Company's financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (CECL) will apply to the allowance for loan losses, available-for-sale and held to maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. This ASU will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently evaluating the potential impact of ASU No. 2016-13 on the Company's financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This amendment addresses existing diversity in practice regarding how certain receipts and payments are presented in the statement of cash flows. Issues addressed in this amendment include debt prepayment and extinguishment costs, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies, and separately identifiable cash flows and application of the predominance principle and their classifications in the statement of cash flows. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Issues addressed in this amendment include the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company's financial statements.    

In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." This amendment provides clarification for multiple aspects of Update 2014-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting”, including the scope of guarantee fees, impairment testing of contract costs and the accrual of advertising costs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-20 is not expected to have a material impact on the Company's financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." This amendment clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company's financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This amendment simplifies the measurement of goodwill by eliminating Step 2 from the goodwill

13

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impairment test. This ASU will become effective for the Company on January 1, 2020. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company's financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This amendment requires that an employer disaggregate the service cost component from the other components of net benefit cost and also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-07 is not expected to have a material impact on the Company's financial statements.

In March 2017, the FASB issued ASU No. 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The amendments in this update shorten the amortization period for certain callable debt securities held at a premium and require the premium to be amortized to the earliest call date. This ASU will become effective for the Company on January 1, 2019. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting." This amendment provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASU No. 2016-09. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company’s financial statements.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This amendment expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU will become effective for the Company on January 1, 2019. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's financial statements.

Note C –Investments

The amortized cost and estimated fair values of the Company's securities are shown in the following table (in thousands):
 
September 30, 2017
December 31, 2016
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. Treasuries and U.S.
 
 
 
 
 
 
 
 
government agencies
$
2

$

$

$
2

$
3

$

$

$
3

Obligations of states and
 
 
 
 

 

 

 

 

political subdivisions
95,907

1,835

574

97,168

83,248

594

1,474

82,368

Mortgage-backed securities:
 
 
 
 

 

 

 

 

U.S. government agencies
397,192

1,931

5,136

393,987

335,867

1,507

6,560

330,814

Private label
687

3


690

941

1


942

Trust preferred securities
4,761

183


4,944

6,052

1,164

554

6,662

Corporate securities
21,918

562

154

22,326

23,925

127

478

23,574

Total Debt Securities
520,467

4,514

5,864

519,117

450,036

3,393

9,066

444,363

Marketable equity  securities
2,136

2,881


5,017

2,136

2,095


4,231

Investment funds
1,525


26

1,499

1,525


36

1,489

Total Securities
 

 

 

 

 

 

 

 

Available-for-Sale
$
524,128

$
7,395

$
5,890

$
525,633

$
453,697

$
5,488

$
9,102

$
450,083

 

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September 30, 2017
December 31, 2016
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
U.S. government agencies
$
62,989

$
1,489

$

$
64,478

$
71,169

$
1,346

$
70

$
72,445

Trust preferred securities
4,000



4,000

4,000



4,000

Total Securities
 

 

 

 

 

 

 

 

Held-to-Maturity
$
66,989

$
1,489

$

$
68,478

$
75,169

$
1,346

$
70

$
76,445

 
 
 
 
 
 
 
 
 
Other investment securities:
 

 

 

 

 

 

 

 

Non-marketable equity securities
$
15,988

$

$

$
15,988

$
14,352

$

$

$
14,352

Total Other Investment
 

 

 

 

 

 

 

 

   Securities
$
15,988

$

$

$
15,988

$
14,352

$

$

$
14,352

 
Marketable equity securities consist of investments made by the Company in equity positions of various regional community banks. Included within this portfolio are ownership positions in the following community bank holding companies: First National Corporation (FXNC) (4%) and Eagle Financial Services, Inc. (EFSI) (1.5%). Securities with limited marketability, such as stock in the Federal Reserve Bank ("Federal Reserve") and the Federal Home Loan Bank ("FHLB"), are carried at cost and are reported as non-marketable equity securities in the table above.

Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities).  The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
 
September 30, 2017
Less Than Twelve Months
Twelve Months or Greater
Total
Estimated Fair Value
Unrealized Loss
Estimated Fair Value
Unrealized Loss
Estimated Fair Value
Unrealized Loss
Securities available-for-sale:
 
 
 
 
 
 
Obligations of states and political subdivisions
$
8,291

$
146

$
11,859

$
428

$
20,150

$
574

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
160,312

3,214

57,814

1,922

218,126

5,136

Corporate securities


2,265

154

2,265

154

Investment funds
1,500

26



1,500

26

Total
$
170,103

$
3,386

$
71,938

$
2,504

$
242,041

$
5,890



 
December 31, 2016
Less Than Twelve Months
Twelve Months or Greater
Total
Estimated Fair Value
Unrealized Loss
Estimated Fair Value
Unrealized Loss
Estimated Fair Value
Unrealized Loss
Securities available-for-sale:
 
 
 
 
 
 
Obligations of states and political subdivisions
$
35,108

$
1,474

$

$

$
35,108

$
1,474

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
225,530

6,099

8,527

461

234,057

6,560

Trust preferred securities


4,971

554

4,971

554

Corporate securities
14,306

478



14,306

478

Investment funds
1,500

36



1,500

36

Total
$
276,444

$
8,087

$
13,498

$
1,015

$
289,942

$
9,102



During the nine months ended September 30, 2017 and 2016, the Company had no investment impairment losses. During the year ended December 31, 2016, the Company had $0.5 million in investment impairment losses. At September 30, 2017, the

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cumulative amount of credit-related investment impairment losses that have been recognized by the Company on investments that remain in the Company's investment portfolio as of that date was $3.7 million ($2.1 million related to the Company's debt securities and $1.6 million related to the Company's equity securities).

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition, capital strength, and near-term (within 12 months) prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (iii) the historical volatility in the market value of the investment and/or the liquidity or illiquidity of the investment; (iv) adverse conditions specifically related to the security, an industry, or a geographic area; and (v) the intent to sell the investment security and if it’s more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, management also employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings. Although the regional community bank stocks that are owned by the Company are publicly traded, the trading activity for these stocks is minimal, with trading volumes of less than 0.4% of each respective company being traded on a daily basis. As part of management’s review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.

Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of September 30, 2017, management does not intend to sell an impaired security and it is not more than likely that it will be required to sell the security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of September 30, 2017, management believes the unrealized losses detailed in the table above are temporary and no additional impairment loss has been recognized in the Company’s consolidated income statement. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

The amortized cost and estimated fair value of debt securities at September 30, 2017, by contractual maturity, are shown in the following table (in thousands).  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.  Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.
 
Amortized Cost
Estimated Fair Value
Securities Available-for-Sale
 
 
Due in one year or less
$
2,939

$
2,951

Due after one year through five years
12,388

14,839

Due after five years through ten years
80,329

77,039

Due after ten years
424,811

424,288

Total
$
520,467

$
519,117

 
 
 
Securities Held-to-Maturity
 

 

Due in one year or less
$

$

Due after one year through five years


Due after five years through ten years


Due after ten years
66,989

68,478

Total
$
66,989

$
68,478


Gross gains and gross losses realized by the Company from investment security transactions are summarized in the table below (in thousands).

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Three months ended September 30,
Nine months ended September 30,
 
2017
2016
2017
2016
 
 
 
 
 
Gross realized gains
$

$
2,722

$
4,276

$
3,978

Gross realized losses

(54
)

(465
)
Net investment security gains
$

$
2,668

$
4,276

$
3,513

    
During the nine months ended September 30, 2017 the Company realized $4.3 million of investment gains. These gains represented partial recoveries of impairment charges previously recognized on pooled trust preferred securities. As a result of these sales, the Company no longer holds any pooled trust preferred securities in its investment portfolio.

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $364 million and $337 million at September 30, 2017 and December 31, 2016, respectively.

 
Note D –Loans

The following summarizes the Company’s major classifications for loans (in thousands):
 
September 30, 2017
December 31, 2016
Residential real estate
$
1,465,942

$
1,451,462

Home equity
139,702

141,965

Commercial and industrial
204,722

185,667

Commercial real estate
1,260,906

1,229,516

Consumer
30,323

32,545

DDA overdrafts
4,317

5,071

Gross loans
3,105,912

3,046,226

Allowance for loan losses
(19,554
)
(19,730
)
Net loans
$
3,086,358

$
3,026,496


Construction loans of $19.8 million and $14.2 million are included within residential real estate loans at September 30, 2017 and December 31, 2016, respectively.  Construction loans of $24.3 million and $12.8 million are included within commercial real estate loans at September 30, 2017 and December 31, 2016, respectively.  The Company’s commercial and residential real estate construction loans are primarily secured by real estate within the Company’s principal markets.  These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of residential and commercial real estate lending, including specific risks related to construction lending.  Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.

Note E – Allowance For Loan Losses
 
Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio.  Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.
 
Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance.  Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.
 
The following table summarizes the activity in the allowance for loan loss, by portfolio segment, for the nine months ended September 30, 2017 and 2016 (in thousands).  The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. The following table also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of September 30, 2017 and December 31, 2016 (in thousands).
 

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Commercial &
Commercial
Residential
 
 
DDA
 
 
Industrial
Real Estate
Real Estate
Home Equity
Consumer
Overdrafts
Total
Nine months ended September 30, 2017
 
 
 
 
 
 
 
Allowance for loan loss
Beginning balance
$
4,206

$
6,573

$
6,680

$
1,417

$
82

$
772

$
19,730

Charge-offs
(150
)
(564
)
(1,295
)
(256
)
(47
)
(1,989
)
(4,301
)
Recoveries
57

92

286

45

46

1,015

1,541

Provision for acquired loans

39





39

Provision
946

166

218

68

(25
)
1,172

2,545

Ending balance
$
5,059

$
6,306

$
5,889

$
1,274

$
56

$
970

$
19,554

 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Beginning balance
$
3,271

$
6,985

$
6,778

$
1,463

$
97

$
657

$
19,251

Charge-offs
(148
)
(1,213
)
(1,281
)
(300
)
(102
)
(1,017
)
(4,061
)
Recoveries
13

447

113


109

585

1,267

Provision for acquired loans

164





164

Provision
918

(112
)
1,414

284

(29
)
454

2,929

Ending balance
$
4,054

$
6,271

$
7,024

$
1,447

$
75

$
679

$
19,550

 
 
 
 
 
 
 
 
As of September 30, 2017
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
705

$

$

$

$

$
705

Collectively
5,057

5,424

5,861

1,274

54

970

18,640

Acquired with deteriorated
 
 

 

 

 

 

 

credit quality
2

177

28


2


209

Total
$
5,059

$
6,306

$
5,889

$
1,274

$
56

$
970

$
19,554

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
1,095

$
8,866

$

$

$

$

$
9,961

Collectively
203,588

1,245,347

1,463,344

139,702

30,206

4,317

3,086,504

Acquired with deteriorated
 
 
 
 
 
 
 

credit quality
39

6,693

2,598


117


9,447

Total
$
204,722

$
1,260,906

$
1,465,942

$
139,702

$
30,323

$
4,317

$
3,105,912

 
 
 
 
 
 
 
 
As of December 31, 2016
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
665

$

$

$

$

$
665

Collectively
4,200

5,788

6,589

1,417

82

772

18,848

Acquired with deteriorated
 
 
 
 
 
 
 
  credit quality
6

120

91




217

Total
$
4,206

$
6,573

$
6,680

$
1,417

$
82

$
772

$
19,730

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
1,611

$
5,970

$

$

$

$

$
7,581

Collectively
183,741

1,216,050

1,448,830

141,965

32,545

5,071

3,028,202

Acquired with deteriorated
 
 
 
 
 
 
 

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Table of Contents

  credit quality
315

7,496

2,632




10,443

Total
$
185,667

$
1,229,516

$
1,451,462

$
141,965

$
32,545

$
5,071

$
3,046,226


Credit Quality Indicators
 
All commercial loans within the portfolio are subject to internal risk grading.  All non-commercial loans are evaluated based on payment history.  The Company’s internal risk ratings for commercial loans are:  Pass, Special Mention, Substandard and Doubtful.  Each internal risk rating is defined in the loan policy using the following criteria:  balance sheet yields; ratios and leverage; cash flow spread and coverage; prior history; capability of management; market position/industry; potential impact of changing economic, legal, regulatory or environmental conditions; purpose; structure; collateral support; and guarantor support.  Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process.  Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
 
The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance.  The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review and credit administration departments, or the loan becomes delinquent or impaired.  The risk grades are updated a minimum of annually for loans rated exceptional, good, acceptable, or pass/watch.  Loans rated special mention, substandard or doubtful are reviewed at least quarterly.  The Company uses the following definitions for its risk ratings:

Risk Rating
Description
Pass ratings:
 
   (a) Exceptional
Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy.  Loans rated within this category pose minimal risk of loss to the bank. 
   (b) Good
Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans in this category generally have a low chance of loss to the bank.
   (c) Acceptable
Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles.  Loans within this category generally have a low risk of loss to the bank. 
   (d) Pass/watch
Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk.  A borrower in this category poses a low to moderate risk of loss to the bank. 
Special mention
Loans classified as special mention have a potential weakness(es) that deserves management’s close attention.  The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date.  A loan rated in this category poses a moderate loss risk to the bank. 
Substandard
Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt.  Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower. 
Doubtful
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable.  Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position. 











19

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The following table presents the Company’s commercial loans by credit quality indicators, by class (in thousands):
 
Commercial and Industrial
Commercial Real Estate
Total
September 30, 2017
 
 
 
Pass
$
166,408

$
1,214,526

$
1,380,934

Special mention
26,228

12,680

38,908

Substandard
12,086

33,700

45,786

Doubtful



Total
$
204,722

$
1,260,906

$
1,465,628

 
 
 
 
December 31, 2016
 

 

 

Pass
$
176,823

$
1,178,288

$
1,355,111

Special mention
2,427

16,031

18,458

Substandard
6,417

35,197

41,614

Doubtful



Total
$
185,667

$
1,229,516

$
1,415,183

     
The Company's special mention balance for its commercial and industrial loan portfolio as of September 30, 2017 is primarily composed of a shared national credit ("SNC"), in which the Company is a participant, with a balance of $25.8 million. SNCs are credit facilities greater than $20 million that are shared by three or more federally supervised financial institutions and are reviewed annually by regulatory authorities at the agent bank level. This special mention loan balance reflects the rating assigned to this SNC as a result of the current year review by the Office of the Comptroller of the Currency ("OCC"). As of September 30, 2017, the SNC is performing in accordance to terms and debt service coverage ratios are acceptable.    

The following table presents the Company's non-commercial loans by payment performance, by class (in thousands):
 
Performing
Non-Performing
Total
September 30, 2017
 
 
 
Residential real estate
$
1,463,386

$
2,556

$
1,465,942

Home equity
139,610

92

139,702

Consumer
30,323


30,323

DDA overdrafts
4,317


4,317

Total
$
1,637,636

$
2,648

$
1,640,284

 
 
 
 
December 31, 2016
 
 
 
Residential real estate
$
1,447,087

$
4,375

$
1,451,462

Home equity
141,834

131

141,965

Consumer
32,545


32,545

DDA overdrafts
5,071


5,071

Total
$
1,626,537

$
4,506

$
1,631,043


Aging Analysis of Accruing and Non-Accruing Loans
 
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return.  Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan.  The accrual of interest generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types.  However, any loan may be placed on non-accrual if the Company receives information that indicates a borrower is unable to meet the contractual terms of its respective loan agreement.  Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable.  When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses.  Management may elect to continue the accrual of interest

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when the net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in the process of collection.

Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured.  Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid.  Generally, loans are restored to accrual status when the obligation is brought current, the borrower has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
 
Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment.  Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance.  Commercial loans are generally charged off when the loan becomes 120 days past due.  Open-end consumer loans are generally charged off when the loan becomes 180 days past due.
 
The following table presents an aging analysis of the Company’s accruing and non-accruing loans, by class (in thousands):
 
 
September 30, 2017
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Purchased-Credit Impaired
Non-accrual
Total
Residential real estate
$
1,458,091

$
4,684

$
611

$

$

$
2,556

$
1,465,942

Home equity
138,737

797

57

19


92

139,702

Commercial and industrial
203,093

304




1,325

204,722

Commercial real estate
1,253,686

240

133


147

6,700

1,260,906

Consumer
30,298

23

2




30,323

DDA overdrafts
3,765

542

7

3



4,317

Total
$
3,087,670

$
6,590

$
810

$
22

$
147

$
10,673

$
3,105,912

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Purchased-Credit Impaired
Non-accrual
Total
Residential real estate
$
1,441,086

$
5,364

$
637

$
73

$

$
4,302

$
1,451,462

Home equity
141,192

423

219

31


100

141,965

Commercial and industrial
183,615

94




1,958

185,667

Commercial real estate
1,221,344

553


278


7,341

1,229,516

Consumer
32,506

38

1




32,545

DDA overdrafts
4,472

595

4




5,071

Total
$
3,024,215

$
7,067

$
861

$
382

$

$
13,701

$
3,046,226



The following table presents the Company’s impaired loans, by class (in thousands). The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off. There are no impaired residential, home equity, or consumer loans.


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September 30, 2017
December 31, 2016
 
 
Unpaid
 
 
Unpaid
 
 
Recorded
Principal
Related
Recorded
Principal
Related
 
Investment
Balance
Allowance
Investment
Balance
Allowance
With no related allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$
1,095

$
3,259

$

$
1,611

$
3,775

$

Commercial real estate
3,062

4,887


3,138

4,963


Total
$
4,157

$
8,146

$

$
4,749

$
8,738

$

 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$

$

$

$

$

$

Commercial real estate
5,804

5,804

705

2,832

2,832

665

Total
$
5,804

$
5,804

$
705

$
2,832

$
2,832

$
665


     The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class (in thousands):
 
Nine months ended September 30,
 
2017
2016
 
Average
Interest
Average
Interest
 
Recorded
Income
Recorded
Income
 
Investment
Recognized
Investment
Recognized
With no related allowance recorded:
 
 
 
 
Commercial and industrial
$
1,165


$
2,234

$

Commercial real estate
5,035

64

4,286

9

Total
$
6,200

$
64

$
6,520

$
9

 
 
 
 
 
With an allowance recorded:
 
 
 
 
Commercial and industrial
$

$

$

$

Commercial real estate
3,821

83



Total
$
3,821

$
83

$

$


     Less than $0.2 million of interest income would have been recognized during the nine months ended September 30, 2017 and 2016, respectively, if such loans had been current in accordance with their original terms.  There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at September 30, 2017.

Loan Modifications

The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company.  However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-2, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession.  When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the borrower is currently in payment default on any of its debt or whether it is probable that the borrower would be in payment default in the foreseeable future without the modification.  Other indicators of financial difficulty include whether the borrower has declared or is in the process of declaring bankruptcy, the borrower’s ability to continue as a going concern, and the borrower’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

Regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court, and the borrower has not reaffirmed the debt. The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of the debt by the bankruptcy court is deemed to be a concession granted to the borrower.

The following tables set forth the Company’s TDRs (in thousands):


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September 30, 2017
December 31, 2016
 
Non-
 
 
Non-
 
Accruing
Accruing
Total