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Section 1: 10-Q (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 March 31, 2018
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
393326595_chcologoa02a10.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 [   ]
 
 



Table of Contents

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 – 15,434,993 shares as of April 30, 2018.



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 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) 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; (12) 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; (13) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; and (14) 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, 2017.  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.


Table of Contents

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.
 
 
 
 



Table of Contents

Part I -
FINANCIAL INFORMATION

Item 1 -
Financial Statements


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Consolidated Balance Sheets
City Holding Company and Subsidiaries
(in thousands)
 
(Unaudited)
 
 
 
March 31, 2018
 
December 31, 2017
Assets
 
 
Cash and due from banks
$
97,495

 
$
54,450

Interest-bearing deposits in depository institutions
26,283

 
28,058

Cash and Cash Equivalents
123,778

 
82,508

 
 
 
 
Investment securities available for sale, at fair value
545,628

 
550,389

Investment securities held-to-maturity, at amortized cost (approximate fair value at March 31, 2018 and December 31, 2017 - $62,146 and $65,646, respectively)
62,277

 
64,449

Other securities
22,165

 
14,147

Total Investment Securities
630,070

 
628,985

 
 
 
 
Gross loans
3,137,681

 
3,127,410

Allowance for loan losses
(18,381
)
 
(18,836
)
Net Loans
3,119,300

 
3,108,574

 
 
 
 
Bank owned life insurance
104,052

 
103,440

Premises and equipment, net
72,920

 
72,682

Accrued interest receivable
9,528

 
9,223

Net deferred tax asset
14,467

 
11,913

Goodwill and other intangible assets, net
78,468

 
78,595

Other assets
47,432

 
36,361

Total Assets
$
4,200,015

 
$
4,132,281

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
703,209

 
$
666,639

Interest-bearing:
 

 
 

   Demand deposits
816,976

 
769,245

   Savings deposits
816,245

 
796,275

   Time deposits
1,110,532

 
1,083,475

Total Deposits
3,446,962

 
3,315,634

 
 
 
 
Short term borrowings:
 
 
 
   Federal funds purchased

 
54,000

   Customer repurchase agreements
195,375

 
198,219

Long-term debt
16,495

 
16,495

Other liabilities
49,306

 
45,426

Total Liabilities
3,708,138

 
3,629,774

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 issued at March 31, 2018 and December 31, 2017, less 3,608,051 and 3,429,519 shares in treasury, respectively
47,619

 
47,619

Capital surplus
140,547

 
140,960

Retained earnings
457,650

 
444,481

Cost of common stock in treasury
(137,420
)
 
(124,909
)
Accumulated other comprehensive income (loss):
 

 
 

Unrealized (loss) on securities available-for-sale
(11,486
)
 
(611
)
Underfunded pension liability
(5,033
)
 
(5,033
)
Total Accumulated Other Comprehensive Income (Loss)
(16,519
)
 
(5,644
)
Total Shareholders’ Equity
491,877

 
502,507

Total Liabilities and Shareholders’ Equity
$
4,200,015

 
$
4,132,281

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 March 31,
2018
2017
 
 
Interest and fees on loans
$
32,918

$
30,104

Interest and dividends on investment securities:
 
 
Taxable
3,981

3,444

Tax-exempt
703

663

Interest on deposits in depository institutions
42

3

Total Interest Income
37,644

34,214

 
 
 
Interest Expense
 
 
Interest on deposits
4,326

3,429

Interest on short-term borrowings
460

157

Interest on long-term debt
211

181

Total Interest Expense
4,997

3,767

Net Interest Income
32,647

30,447

Provision for loan losses
181

681

Net Interest Income After Provision for Loan Losses
32,466

29,766

 
 
 
Non-Interest Income
 
 
Net gains on sale of investment securities

4,276

Service charges
6,862

6,730

Bankcard revenue
4,334

4,140

Trust and investment management fee income
1,568

1,386

Bank owned  life insurance
821

1,229

Other income
907

746

Total Non-Interest Income
14,492

18,507

 
 
 
Non-Interest Expense
 
 
Salaries and employee benefits
13,151

12,948

Occupancy related expense
2,404

2,473

Equipment and software related expense
1,831

1,890

FDIC insurance expense
315

375

Advertising
787

733

Bankcard expenses
1,076

943

Postage, delivery, and statement mailings
578

555

Office supplies
313

361

Legal and professional fees
450

449

Telecommunications
500

484

Repossessed asset losses, net of expenses
370

336

Other expenses
3,162

3,053

Total Non-Interest Expense
24,937

24,600

Income Before Income Taxes
22,021

23,673

Income tax expense
4,405

7,647

Net Income Available to Common Shareholders
$
17,616

$
16,026

 
 
 
Total Comprehensive Income
$
9,398

$
16,899

 
 
 

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Average shares outstanding, basic
15,414

15,252

Effect of dilutive securities
22

25

Average shares outstanding, diluted
15,436

15,277

 
 
 
Basic earnings per common share
$
1.13

$
1.04

Diluted earnings per common share
$
1.13

$
1.04

Dividends declared per common share
$
0.46

$
0.44


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
 
March 31,
 
2018
2017
 
 
 
Net income
$
17,616

$
16,026

 
 
 
Unrealized (losses) gains on available-for-sale securities arising during the period
(10,712
)
5,660

Reclassification adjustment for gains

(4,276
)
   Other comprehensive (loss) income before income taxes
(10,712
)
1,384

Tax effect
2,494

(511
)
   Other comprehensive income (loss), net of tax
(8,218
)
873

 
 
 
    Comprehensive Income, Net of Tax
$
9,398

$
16,899


See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
City Holding Company and Subsidiaries
Three Months Ended March 31, 2018 and 2017
(in thousands)

 
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

 

 
16,026

 

 

 
16,026

Other comprehensive income

 

 

 

 
873

 
873

Cash dividends declared ($0.44 per share)

 

 
(6,917
)
 

 

 
(6,917
)
Stock-based compensation expense

 
780

 

 

 

 
780

Restricted awards granted

 
(638
)
 

 
638

 

 

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

 
27,307

 

 

 

 
28,408

Exercise of 1,250 stock options

 
(17
)
 

 
55

 

 
38

Balance at March 31, 2017
$
47,619

 
$
140,305

 
$
426,126

 
$
(126,265
)
 
$
(6,139
)
 
$
481,646



 
Common Stock
 
Capital Surplus
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders’ Equity
Balance at December 31, 2017
$
47,619

 
$
140,960

 
$
444,481

 
$
(124,909
)
 
$
(5,644
)
 
$
502,507

Net income

 

 
17,616

 

 

 
17,616

Other comprehensive income

 

 

 

 
(8,218
)
 
(8,218
)
Adoption of new accounting pronouncement (see Note B)
 
 
 
 
2,657

 
 
 
(2,657
)
 

Cash dividends declared ($0.46 per share)

 

 
(7,104
)
 

 

 
(7,104
)
Stock-based compensation expense

 
793

 

 

 

 
793

Restricted awards granted

 
(1,135
)
 

 
1,135

 

 

Exercise of 7,388 stock options

 
(71
)
 

 
351

 

 
280

Purchase of 204,327 treasury shares

 

 

 
(13,997
)
 

 
(13,997
)
Balance at March 31, 2018
$
47,619

 
$
140,547

 
$
457,650

 
$
(137,420
)
 
$
(16,519
)
 
$
491,877


See notes to consolidated financial statements.


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

 
Three months ended March 31,
2018
 
2017
Net income
$
17,616

 
$
16,026

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

 
 

Accretion and amortization
410

 
361

Provision for loan losses
181

 
681

Depreciation of premises and equipment
1,270

 
1,525

Deferred income tax expense
287

 
2,931

Net periodic employee benefit cost
111

 
114

Realized investment securities gains

 
(4,276
)
Stock-compensation expense
793

 
780

Excess tax benefit from stock-compensation expense
(155
)
 
(189
)
Proceeds from life insurance
210

 
1,137

Increase in value of bank-owned life insurance
(612
)
 
(749
)
Loans originated for sale
(2,606
)
 
(3,951
)
Proceeds from the sale of loans originated for sale
2,874

 
6,118

Gain on sale of loans
(79
)
 
(167
)
Change in accrued interest receivable
(305
)
 
(236
)
Change in other assets
(11,128
)
 
(131
)
Change in other liabilities
3,504

 
383

Net Cash Provided by Operating Activities
12,371

 
20,357

 
 
 
 
Proceeds from sales of securities available-for-sale

 
5,576

Proceeds from maturities and calls of securities available-for-sale
21,230

 
23,390

Proceeds from maturities and calls of securities held-to-maturity
2,142

 
2,823

Purchases of securities available-for-sale
(35,721
)
 
(39,747
)
Net increase in loans
(10,827
)
 
(30,826
)
Purchases of premises and equipment
(1,561
)
 
(2,111
)
Disposals of premises and equipment
55

 
1,781

Net Cash (Used in) Investing Activities
(24,682
)
 
(39,114
)
 
 
 
 
Net increase in non-interest-bearing deposits
36,570

 
42,505

Net increase in interest-bearing deposits
94,758

 
118,616

Net (decrease) in short-term borrowings
(56,844
)
 
(61,619
)
Proceeds from issuance of common stock

 
28,408

Purchases of treasury stock
(13,997
)
 

Proceeds from exercise of stock options
280

 
38

Dividends paid
(7,186
)
 
(6,518
)
Net Cash Provided by Financing Activities
53,581

 
121,430

Increase in Cash and Cash Equivalents
41,270

 
102,673

Cash and cash equivalents at beginning of period
82,508

 
88,139

Cash and Cash Equivalents at End of Period
$
123,778

 
$
190,812


See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)
March 31, 2018

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 southeastern Ohio (3). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities including Charleston (WV), Huntington (WV), Martinsburg (WV), Winchester (VA), Staunton (VA), Virginia Beach (VA), Ashland (KY) and Lexington (KY). In addition to its branch network, City National's delivery channels include automated-teller-machines ("ATMs"), interactive-teller machines ("ITMs"), 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 three months ended March 31, 2018 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2018. 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, 2017 has been derived from audited financial statements included in the Company’s 2017 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 2017 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

Recently Adopted:
 
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This standard clarifies 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) identifying the contract or 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. The FASB also issued several amendments to the standard, including clarifications relating to performance obligations and licensing implementation guidance and reporting gross versus net revenue. The Company adopted the standard effective January 1, 2018 using the modified retrospective approach, but did not record a cumulative effect adjustment to opening retained earnings given the immaterial impact. As part of the adoption, the Company evaluated the terms of the contracts that supported each of the revenue streams that were within the scope of ASU 2014-09 and determined that the adoption did not significantly change the way the Company recognizes revenue from each stream.

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 became effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-01 did not have a

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material impact on the Company's financial statements. During the three months ended March 31, 2018, a $0.2 million gain was recognized in other income in the consolidated statements of income as a result of the change in the fair value of equity and perpetual preferred securities due to the adoption of ASU 2016-01.  Additionally, $2.7 million, net of deferred taxes, was reclassified from other comprehensive income to retained earnings on the consolidated balance sheets to recognize the prior period unrealized gain position of these securities (see Note C Investments and Note J Accumulated Other Comprehensive Loss).

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 became effective for the Company on January 1, 2018. The adoption of ASU No. 2017-01 did not 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 became effective for the Company on January 1, 2018. The adoption of ASU No. 2017-07 did not 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 became effective for the Company on January 1, 2018. The adoption of ASU No. 2017-09 did not have a material impact on the Company’s financial statements.

In September 2017, the FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)." This amendment provides modifications to previously issued ASUs 2014-09 and 2016-02. The adoption of ASU No. 2017-13 did not have a material impact on the Company's financial statements.

In November 2017, the FASB issued ASU No. 2017-14, "Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)." This amendment supersedes various SEC paragraphs and amends an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 116. The adoption of ASU No. 2017-14 did not have a material impact on the Company's financial statements.

Pending Adoption:

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 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 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 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 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.

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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 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.

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." This amendment permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act ("TCJA") to retained earnings. The guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permissible. The Company elected to early adopt this amendment as of December 31, 2017 and the December 31, 2017 balance sheet reflects this adoption.



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Note C –Investments

The amortized cost and estimated fair values of the Company's securities are shown in the following table (in thousands):
 
March 31, 2018
December 31, 2017
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
$
1

$

$

$
1

$
2

$

$

$
2

Obligations of states and
 
 
 
 

 

 

 

 

political subdivisions
94,474

709

1,010

94,173

94,552

2,051

407

96,196

Mortgage-backed securities:
 
 
 
 

 

 

 

 

U.S. government agencies
442,044

462

15,112

427,394

425,559

1,093

7,305

419,347

Private label
599

3


602

649

3


652

Trust preferred securities
4,767

26


4,793

4,764

26

54

4,736

Corporate securities(1)
17,102

98


17,200

21,916

475

123

22,268

Total Debt Securities
558,987

1,298

16,122

544,163

547,442

3,648

7,889

543,201

Marketable equity  securities




2,136

3,563


5,699

Investment funds
1,525


60

1,465

1,525


36

1,489

Total Securities
 

 

 

 

 

 

 

 

Available-for-Sale
$
560,512

$
1,298

$
16,182

$
545,628

$
551,103

$
7,211

$
7,925

$
550,389

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
U.S. government agencies
$
58,277

$
88

$
219

$
58,146

$
60,449

$
1,222

$
25

$
61,646

Trust preferred securities
4,000



4,000

4,000



4,000

Total Securities
 

 

 

 

 

 

 

 

Held-to-Maturity
$
62,277

$
88

$
219

$
62,146

$
64,449

$
1,222

$
25

$
65,646

Other investment securities:
 

 

 

 

 

 

 

 

Non-marketable equity securities
$
11,581

$

$

$
11,581

$
14,147

$

$

$
14,147

Marketable equity securities(1)
6,947



10,584





Total Other Investment
 

 

 

 

 

 

 

 

   Securities
$
18,528

$

$

$
22,165

$
14,147

$

$

$
14,147

 
 
 
 
 
 
 
 
 
(1) Effective January 1, 2018, the Company's equity and perpetual preferred securities are measured at fair value through net income.

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):

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March 31, 2018
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
$
24,204

$
211

$
18,955

$
799

$
43,159

$
1,010

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
266,824

7,208

134,047

7,904

400,871

15,112

Corporate securities






Investment funds
1,500

60



1,500

60

Total available-for-sale
$
292,528

$
7,479

$
153,002

$
8,703

$
445,530

$
16,182

 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
       U.S. Government Agencies
$
39,433

$
219

$

$

$
39,433

$
219

Total held-to-maturity
$
39,433

$
219

$

$

$
39,433

$
219



 
December 31, 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
$
4,913

$
28

$
19,440

$
379

$
24,353

$
407

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
172,807

1,887

140,226

5,418

313,033

7,305

Trust preferred securities
4,475

54



4,475

54

Corporate securities
3,357

49

2,350

74

5,707

123

Investment funds
1,500

36



1,500

36

Total available-for-sale
$
187,052

$
2,054

$
162,016

$
5,871

$
349,068

$
7,925

 
 
 
 
 
 
 
Securities held-to-maturity
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
       U.S. Government agencies
$
7,182

$
25

$

$

$
7,182

$
25

Total held-to-maturity
$
7,182

$
25

$

$

$
7,182

$
25



During the three months ended March 31, 2018 and 2017, the Company had no investment impairment losses. At March 31, 2018, the 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 $1.8 million ($0.2 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

12

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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 March 31, 2018, 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 March 31, 2018, 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 March 31, 2018, 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
$
2,715

$
2,715

Due after one year through five years
13,888

13,850

Due after five years through ten years
76,197

73,698

Due after ten years
470,998

458,604

Total
$
563,798

$
548,867

 
 
 
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
62,277

62,146

Total
$
62,277

$
62,146


Gross gains and gross losses realized by the Company from investment security transactions are summarized in the table below (in thousands).
 
Three months ended March 31,
 
2018
2017
 
 
 
Equity and perpetual preferred security unrealized gains recognized
$
180

$

 
 
 
Gross realized gains on securities sold

4,276

Gross realized losses on securities sold


Net investment security gains
$

$
4,276


During the three months ended March 31, 2018 a $0.2 million unrealized gain was recognized in other income in the consolidated statements of income as a result of the change in the fair value of equity and perpetual preferred securities due to the adoption of ASU 2016-01.  Additionally, $2.7 million, net of deferred taxes, was reclassified from other comprehensive income to retained earnings on the consolidated balance sheets to recognize the prior period fair value impact of these securities.

During the three months ended March 31, 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.

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Table of Contents


The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $448 million and $429 million at March 31, 2018 and December 31, 2017, respectively.

 
Note D –Loans

The following summarizes the Company’s major classifications for loans (in thousands):
 
March 31, 2018
December 31, 2017
Residential real estate
$
1,465,215

$
1,468,278

Home equity
138,477

139,499

Commercial and industrial
204,592

208,484

Commercial real estate
1,296,304

1,277,576

Consumer
29,570

29,162

DDA overdrafts
3,523

4,411

Gross loans
3,137,681

3,127,410

Allowance for loan losses
(18,381
)
(18,836
)
Net loans
$
3,119,300

$
3,108,574


Construction loans of $26.6 million and $25.3 million are included within residential real estate loans at March 31, 2018 and December 31, 2017, respectively.  Construction loans of $30.9 million and $28.9 million are included within commercial real estate loans at March 31, 2018 and December 31, 2017, 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 loan classification, for the three months ended March 31, 2018 and 2017 (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 March 31, 2018 and December 31, 2017 (in thousands).
 
 
Commercial and
Commercial
Residential
 
 
DDA
 
 
Industrial
Real Estate
Real Estate
Home Equity
Consumer
Overdrafts
Total
Three months ended March 31, 2018
 
 
 
 
 
 
 
Allowance for loan loss
Beginning balance
$
4,571

$
6,183

$
5,212

$
1,138

$
62

$
1,670

$
18,836

Charge-offs
(339
)
(157
)
(131
)
(71
)
(99
)
(636
)
(1,433
)
Recoveries
2

223

106


46

420

797

Provision for acquired loans








14

Table of Contents

Provision
529

(480
)
(244
)
133

203

40

181

Ending balance
$
4,763

$
5,769

$
4,943

$
1,200

$
212

$
1,494

$
18,381

 
 
 
 
 
 
 
 
Three months ended March 31, 2017
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Beginning balance
$
4,206

$
6,573

$
6,680

$
1,417

$
82

$
772

$
19,730

Charge-offs
(53
)
(180
)
(626
)
(121
)
(6
)
(636
)
(1,622
)
Recoveries
2

11

25


11

371

420

Provision for acquired loans

(19
)




(19
)
Provision
128

(381
)
644

3

(23
)
329

700

Ending balance
$
4,283

$
6,004

$
6,723

$
1,299

$
64

$
836

$
19,209

 
 
 
 
 
 
 
 
As of March 31, 2018
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
172

$

$

$

$

$
172

Collectively
4,759

5,530

4,843

1,200

208

1,494

18,034

Acquired with deteriorated credit quality
4

67

100


4


175

Total
$
4,763

$
5,769

$
4,943

$
1,200

$
212

$
1,494

$
18,381

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
849

$
8,757

$

$

$

$

$
9,606

Collectively
203,537

1,282,064

1,462,622

138,477

29,454

3,523

3,119,677

Acquired with deteriorated credit quality
206

5,483

2,593


116


8,398

Total
$
204,592

$
1,296,304

$
1,465,215

$
138,477

$
29,570

$
3,523

$
3,137,681

 
 
 
 
 
 
 
 
As of December 31, 2017
 

 

 

 

 

 

 

Allowance for loan loss
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
647

$

$

$

$

$
647

Collectively
4,567

5,313

5,112

1,138

58

1,670

17,858

Acquired with deteriorated credit quality
4

223

100


4


331

Total
$
4,571

$
6,183

$
5,212

$
1,138

$
62

$
1,670

$
18,836

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
849

$
8,818

$

$

$

$

$
9,667

Collectively
207,429

1,263,076

1,465,685

139,499

29,046

4,411

3,109,146

Acquired with deteriorated credit quality
206

5,682

2,593


116


8,597

Total
$
208,484

$
1,277,576

$
1,468,278

$
139,499

$
29,162

$
4,411

$
3,127,410


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

15

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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. 











16

Table of Contents



The following table presents the Company’s commercial loans by credit quality indicators, by portfolio loan classification (in thousands):
 
Commercial and Industrial
Commercial Real Estate
Total
March 31, 2018
 
 
 
Pass
$
171,815

$
1,252,937

$
1,424,752

Special mention
25,524

7,078

32,602

Substandard
7,253

36,289

43,542

Doubtful



Total
$
204,592

$
1,296,304

$
1,500,896

 
 
 
 
December 31, 2017
 

 

 

Pass
$
175,951

$
1,231,256

$
1,407,207

Special mention
25,872

8,068

33,940

Substandard
6,661

38,252

44,913

Doubtful



Total
$
208,484

$
1,277,576

$
1,486,060

     
The following table presents the Company's non-commercial loans by payment performance, by portfolio loan classification (in thousands):
 
Performing
Non-Performing
Total
March 31, 2018
 
 
 
Residential real estate
$
1,461,802

$
3,413

$
1,465,215

Home equity
138,341

136

138,477

Consumer
29,570


29,570

DDA overdrafts
3,523


3,523

Total
$
1,633,236

$
3,549

$
1,636,785

 
 
 
 
December 31, 2017
 
 
 
Residential real estate
$
1,465,445

$
2,833

$
1,468,278

Home equity
139,239

260

139,499

Consumer
29,162


29,162

DDA overdrafts
4,411


4,411

Total
$
1,638,257

$
3,093

$
1,641,350


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 status 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 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

17

Table of Contents

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 portfolio loan classification (in thousands):
 
 
March 31, 2018
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,456,243

$
4,353

$
1,206

$
82

$
3,331

$
1,465,215

Home equity
137,727

458

157

1

134

138,477

Commercial and industrial
203,468

61



1,063

204,592

Commercial real estate
1,289,722

1,520



5,062

1,296,304

Consumer
29,549

21




29,570

DDA overdrafts
3,092

422

1

8


3,523

Total
$
3,119,801

$
6,835

$
1,364

$
91

$
9,590

$
3,137,681

 
 
 
 
 
 
 
 
December 31, 2017
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,458,746

$
5,990

$
709

$
19

$
2,814

$
1,468,278

Home equity
138,480

671

88

92

168

139,499

Commercial and industrial
206,447

549

1

142

1,345

208,484

Commercial real estate
1,269,520

1,841

245


5,970

1,277,576

Consumer
29,108

39

13

2


29,162

DDA overdrafts
3,849

541

14

7


4,411

Total
$
3,106,150

$
9,631

$
1,070

$
262

$
10,297

$
3,127,410



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.


18

Table of Contents

 
March 31, 2018
December 31, 2017
 
 
Unpaid
 
 
Unpaid
 
 
Recorded
Principal
Related
Recorded
Principal
Related
 
Investment
Balance
Allowance
Investment
Balance
Allowance
With no related allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$
849

$
3,013

$

$
849

$
3,013

$

Commercial real estate
5,782

7,607


3,036

4,861


Total
$
6,631

$
10,620

$

$
3,885

$
7,874

$

 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$

$

$

$

$

$

Commercial real estate
2,975

2,975

172

5,782

5,782

647

Total
$
2,975

$
2,975

$
172

$
5,782

$
5,782

$
647


     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):
 
Three months ended March 31,
 
2018
2017
 
Average
Interest
Average
Interest
 
Recorded
Income
Recorded
Income
 
Investment
Recognized
Investment
Recognized
With no related allowance recorded:
 
 
 
 
Commercial and industrial
$
774


$
1,365

$

Commercial real estate
3,008

3

3,118

5

Total
$
3,782

$
3

$
4,483

$
5

 
 
 
 
 
With an allowance recorded:
 
 
 
 
Commercial and industrial
$

$

$

$

Commercial real estate
5,750

52

2,832

19

Total
$
5,750

$
52

$
2,832

$
19


     Approximately $0.1 million and $0.2 million of interest income would have been recognized during the three months ended March 31, 2018 and 2017, 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 March 31, 2018.

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 2011-02, 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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Table of Contents

 
March 31, 2018
December 31, 2017
 
Non-
 
 
Non-
 
Accruing
Accruing
Total
Accruing
Accruing
Total
Commercial and industrial
$
125

$

$
125

$
135

$

$
135

Commercial real estate
8,324


8,324

8,381


8,381

Residential real estate
20,786

256

21,042

21,005

84

21,089

Home equity
3,015

40

3,055

3,047

50

3,097

Consumer






Total
$
32,250

$
296

$
32,546

$
32,568

$
134

$
32,702

 
 
New TDRs
 
Three months ended March 31,
 
2018
2017
 
Pre
Post
 
Pre
Post
 
Modification
Modification
 
Modification
Modification
 
Outstanding
Outstanding
 
Outstanding
Outstanding
Number of
Recorded
Recorded
Number of
Recorded
Recorded
Contracts
Investment
Investment
Contracts
Investment
Investment
Commercial and industrial

$

$


$

$

Commercial real estate



1

3,015

3,015

Residential real estate
7

412

412

9

1,130

1,130

Home equity
4

77

77

2

58

58

Consumer






Total
11

$
489

$
489

12

$
4,203

$
4,203

    
Note F –    Long-Term Debt

The components of long-term debt are summarized below (in thousands):
 
March 31, 2018
December 31, 2017
Junior subordinated debentures owed to City Holding Capital Trust III, due 2038, interest at a rate of 5.62% and 5.09%, respectively
$
16,495

$
16,495

 
The Company formed a statutory business trust, City Holding Capital Trust III (“Capital Trust III”), under the laws of Delaware.  Capital Trust III was created for the exclusive purpose of (i) issuing trust-preferred capital securities (“Capital Securities”), which represent preferred undivided beneficial interests in the assets of the trust, (ii) using the proceeds from the sale of the Capital Securities to acquire junior subordinated debentures (“Debentures”) issued by the Company, and (iii) engaging in only those activities necessary or incidental thereto.  The trust is considered a variable interest entity for which the Company is not the primary beneficiary.  Accordingly, the accounts of the trust are not included in the Company’s consolidated financial statements.

Distributions on the Debentures are cumulative and will be payable quarterly at an interest rate of 3.50% over the three month LIBOR rate, reset quarterly.  Interest payments are due in March, June, September and December each year until maturity.  The Debentures are redeemable prior to maturity at the option of the Company (i) in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain predefined events.

Payments of distributions on the Capital Securities and payments on redemption of the Capital Securities are guaranteed by the Company.  The Company also entered into an agreement as to expenses and liabilities with the trust pursuant to which it agreed, on a subordinated basis, to pay any cost, expenses or liabilities of the trust other than those arising under the Capital Securities.  The obligations of the Company under the Debentures, the related indentures, the trust agreement establishing the trust, the guarantees and the agreements as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the trust’s obligations under the Capital Securities.  The Capital Securities issued by the statutory business trust qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.


20

Table of Contents


Note G –Derivative Instruments

The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities on future cash flows. As of March 31, 2018 and December 31, 2017, the Company has derivative financial instruments not included in hedge relationships.  These derivatives consist of interest rate swaps and floors used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For the majority of these instruments the Company acts as an intermediary for its customers. Changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations. The Company also has an interest rate swap that serves as a fair value hedge for changes in long term fixed interest rates related to commercial real estate loans. Hedge ineffectiveness is assessed quarterly and any ineffectiveness is recorded as non-interest expense. For the three months ended March 31, 2018 and 2017, hedge ineffectiveness was less than $0.1 million and the change in fair value was less than $0.1 million, for each respective period.

The following table summarizes the notional and fair value of these derivative instruments (in thousands):
 
March 31, 2018
December 31, 2017
 
Notional Amount
Fair Value
Notional Amount
Fair Value
 
 
 
 
 
Non-hedging interest rate derivatives: