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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, 2019
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ____________To_____________.

Commission File Number 0-11733
397793578_chcologoa02a13.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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
[X]
No
[   ]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
 
Accelerated filer [ ]
 
 
 
 
 
Non-accelerated filer [   ]
 
Smaller reporting company [   ]
 
 
 
 
 
 
 
Emerging growth company [   ]
 
 



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 – 16,481,213 shares as of May 2, 2019.



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements express only management's beliefs regarding future results or events and are subject to inherent uncertainty, risks, and changes in circumstances, many of which are outside of management's control. Uncertainty, risks, changes in circumstances and other factors could cause the Company's actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under “ITEM 1A Risk Factors” and the following: (1) general economic conditions, especially in the communities and markets in which we conduct our business; (2) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for loan losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (3) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (4) changes in the interest rate environment; (5) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (6) changes in technology and increased competition, including competition from non-bank financial institutions; (7) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers' performance and creditworthiness; (8) difficulty growing loan and deposit balances; (9) our ability to effectively execute our business plan, including with respect to future acquisitions; (10) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (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; (12) regulatory enforcement actions and adverse legal actions; (13) difficulty attracting and retaining key employees; (14) the expected cost savings and any revenue synergies from the merger of City Holding Company, City National Bank of West Virginia, Poage Bankshares, Inc., Town Square Bank, Farmers Deposit Bancorp, Inc. and Farmers Deposit Bank may not be fully realized within the expected time frames; (15) the disruption from the merger of City Holding Company, City National Bank of West Virginia, Poage Bankshares, Inc., Town Square Bank, Farmers Deposit Bancorp, Inc. and Farmers Deposit Bank may make it more difficult to maintain relationships with clients, associates, or suppliers; and (16) other economic, competitive, technological, operational, governmental, regulatory, and market factors affecting our operations.  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, 2019
 
December 31, 2018
Assets
 
 
Cash and due from banks
$
50,522

 
$
55,016

Interest-bearing deposits in depository institutions
93,328

 
67,975

Cash and Cash Equivalents
143,850

 
122,991

 
 
 
 
Investment securities available for sale, at fair value
755,081

 
723,254

Investment securities held-to-maturity, at amortized cost (approximate fair value at March 31, 2019 and December 31, 2018 - $56,085 and $60,706, respectively)
55,326

 
60,827

Other securities
26,182

 
28,810

Total Investment Securities
836,589

 
812,891

 
 
 
 
Gross loans
3,559,322

 
3,587,608

Allowance for loan losses
(14,646
)
 
(15,966
)
Net Loans
3,544,676

 
3,571,642

 
 
 
 
Bank owned life insurance
114,256

 
113,544

Premises and equipment, net
78,747

 
78,383

Accrued interest receivable
13,657

 
12,424

Net deferred tax asset
12,734

 
17,338

Goodwill and other intangible assets, net
121,790

 
122,848

Other assets
51,309

 
46,951

Total Assets
$
4,917,608

 
$
4,899,012

 
 
 
 
Liabilities
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
793,633

 
$
789,119

Interest-bearing:
 

 
 

   Demand deposits
879,279

 
899,568

   Savings deposits
988,182

 
934,218

   Time deposits
1,381,913

 
1,352,654

Total Deposits
4,043,007

 
3,975,559

 
 
 
 
Short-term borrowings:
 
 
 
   Federal funds purchased

 
40,000

   Customer repurchase agreements
194,683

 
221,911

Long-term debt
4,053

 
4,053

Other liabilities
56,624

 
56,725

Total Liabilities
4,298,367

 
4,298,248

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, 2019 and December 31, 2018, less 2,563,553 and 2,492,403 shares in treasury, respectively
47,619

 
47,619

Capital surplus
170,215

 
169,555

Retained earnings
498,847

 
485,967

Cost of common stock in treasury
(91,589
)
 
(87,895
)
Accumulated other comprehensive income (loss):
 

 
 

    Unrealized gain (loss) on securities available-for-sale
20

 
(8,611
)
    Underfunded pension liability
(5,871
)
 
(5,871
)
Total Accumulated Other Comprehensive Income (Loss)
(5,851
)
 
(14,482
)
Total Shareholders’ Equity
619,241

 
600,764

Total Liabilities and Shareholders’ Equity
$
4,917,608

 
$
4,899,012

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,
2019
2018
 
 
Interest and fees on loans
$
42,279

$
32,918

Interest and dividends on investment securities:
 
 
Taxable
5,689

3,981

Tax-exempt
779

703

Interest on deposits in depository institutions
186

42

Total Interest Income
48,933

37,644

 
 
 
Interest Expense
 
 
Interest on deposits
7,767

4,326

Interest on short-term borrowings
1,052

460

Interest on long-term debt
48

211

Total Interest Expense
8,867

4,997

Net Interest Income
40,066

32,647

(Recovery of) provision for loan losses
(849
)
181

Net Interest Income After (Recovery of) Provision for Loan Losses
40,915

32,466

 
 
 
Non-Interest Income
 
 
Gains on sale of investment securities, net
88


Unrealized gains recognized on securities still held
75

280

Service charges
7,321

6,862

Bankcard revenue
4,969

4,334

Trust and investment management fee income
1,642

1,568

Bank owned  life insurance
1,016

821

Other income
814

627

Total Non-Interest Income
15,925

14,492

 
 
 
Non-Interest Expense
 
 
Salaries and employee benefits
15,243

13,241

Occupancy related expense
2,732

2,404

Equipment and software related expense
2,191

1,831

FDIC insurance expense
291

315

Advertising
869

787

Bankcard expenses
1,182

1,076

Postage, delivery, and statement mailings
624

578

Office supplies
386

313

Legal and professional fees
521

450

Telecommunications
726

500

Repossessed asset losses, net of expenses
216

370

Merger related costs
250


Other expenses
4,180

3,072

Total Non-Interest Expense
29,411

24,937

Income Before Income Taxes
27,429

22,021

Income tax expense
5,810

4,405

Net Income Available to Common Shareholders
$
21,619

$
17,616


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Table of Contents

 
 
 
Total Comprehensive Income
$
30,250

$
9,398

 
 
 
Average shares outstanding, basic
16,411

15,414

Effect of dilutive securities
18

22

Average shares outstanding, diluted
16,429

15,436

 
 
 
Basic earnings per common share
$
1.31

$
1.13

Diluted earnings per common share
$
1.30

$
1.13

Dividends declared per common share
$
0.53

$
0.46


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,
 
2019
2018
 
 
 
Net income available to common shareholders
$
21,619

$
17,616

 
 
 
Available-for-Sale Securities
 
 
Unrealized gains (losses) on available-for-sale securities arising during the period
11,362

(10,712
)
Reclassification adjustment for gains
(88
)

   Other comprehensive income (loss) before income taxes
11,274

(10,712
)
Tax effect
(2,643
)
2,494

   Other comprehensive income (loss), net of tax
8,631

(8,218
)
 
 
 
    Comprehensive Income, Net of Tax
$
30,250

$
9,398


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, 2019 and 2018
(in thousands)



 
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 (loss)




(8,218
)
(8,218
)
Adoption of ASU No. 2016-01


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


 
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Total Shareholders’ Equity
Balance at December 31, 2018
$
47,619

$
169,555

$
485,967

$
(87,895
)
$
(14,482
)
$
600,764

Net income


21,619



21,619

Other comprehensive income (loss)




8,631

8,631

Cash dividends declared ($0.53 per share)


(8,739
)


(8,739
)
Stock-based compensation expense

803




803

Restricted awards granted

(224
)

224



Exercise of 5,638 stock options

81


171


252

Purchase of 54,740 treasury shares



(4,089
)

(4,089
)
Balance at March 31, 2019
$
47,619

$
170,215

$
498,847

$
(91,589
)
$
(5,851
)
$
619,241


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,
2019
 
2018
Net income
$
21,619

 
$
17,616

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

 
 

Accretion and amortization
455

 
410

(Recovery of) provision for loan losses
(849
)
 
181

Depreciation of premises and equipment
1,209

 
1,270

Deferred income tax expense
1,922

 
287

Net periodic employee benefit cost
193

 
111

Unrealized and realized investment securities gains, net
(163
)
 
(280
)
Stock-compensation expense
803

 
793

Excess tax benefit from stock-compensation expense
(77
)
 
(155
)
Proceeds from life insurance
304

 
210

Increase in value of bank-owned life insurance
(1,016
)
 
(612
)
Loans originated for sale
(4,325
)
 
(2,606
)
Proceeds from the sale of loans originated for sale
5,939

 
2,874

Gain on sale of loans
(165
)
 
(79
)
Change in accrued interest receivable
(1,233
)
 
(305
)
Change in other assets
(4,193
)
 
(11,128
)
Change in other liabilities
(57
)
 
3,504

Net Cash Provided by Operating Activities
20,366

 
12,091

 
 
 
 
Net decrease (increase) in loans
26,920

 
(10,827
)
Securities available-for-sale
 
 
 
     Purchases
(61,432
)
 
(30,330
)
     Proceeds from sales
25,062

 

     Proceeds from maturities and calls
15,432

 
13,553

Securities held-to-maturity
 
 
 
     Proceeds from maturities and calls
5,484

 
2,142

Other investments
 
 
 
     Purchases
(9,006
)
 
(5,391
)
     Proceeds from sales
11,715

 
7,957

Purchases of premises and equipment
(1,576
)
 
(1,561
)
Disposals of premises and equipment
30

 
55

Net Cash Provided by (Used in) Investing Activities
12,629

 
(24,402
)
 
 
 
 
Net increase in non-interest-bearing deposits
4,514

 
36,570

Net increase in interest-bearing deposits
63,190

 
94,758

Net decrease in short-term borrowings
(67,228
)
 
(56,844
)
Purchases of treasury stock
(4,089
)
 
(13,997
)
Proceeds from exercise of stock options
252

 
280

Dividends paid
(8,775
)
 
(7,186
)
Net Cash (Used in) Provided by Financing Activities
(12,136
)
 
53,581

Increase in Cash and Cash Equivalents
20,859

 
41,270

Cash and cash equivalents at beginning of period
122,991

 
82,508

Cash and Cash Equivalents at End of Period
$
143,850

 
$
123,778


See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)
March 31, 2019

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 97 banking offices in West Virginia (58), Kentucky (21), Virginia (14) and southeastern Ohio (4). 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), Ashland (KY), Lexington (KY), Winchester (VA) and Staunton (VA). 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.

On January 30, 2019, the Company announced that it had signed a definitive agreement to sell its Virginia Beach, Virginia branch. The terms of the agreement provide for the acquirer to assume the majority of deposits and to acquire the equipment and other select assets associated with the branch, while the Company retains the loans. The transaction is subject to state and federal bank regulatory approvals and other customary closing conditions and is expected to close during the second quarter of 2019.

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, 2019 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2019. 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, 2018 has been derived from audited financial statements included in the Company’s 2018 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 2018 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:

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognize right-to-use ("ROU") 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 principles. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Topic 842 was subsequently amended by ASU No. 2018-01 "Land Easement Practical Expedient for Transition to Topic 842," ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," ASU No. 2018-11 "Targeted Improvements," ASU No. 2018-20 "Narrow-Scope Improvements for Lessors," and ASU No. 2019-01 "Codification Improvements." The Company adopted the new standard on January 1, 2019 and has chosen to use that date as the effective date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company has elected the "package of practical expedients," which permits it to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. As part of the adoption

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of this standard, the Company recognized lease liabilities, with corresponding ROU assets of approximately the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The adoption of this standard did not have a material impact on the Company's financial statements. Operating lease expense is recognized on a straight-line basis over the lease term.

Others

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 became effective for the Company on January 1, 2019. The adoption of ASU No. 2017-08 did not 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 became effective for the Company on January 1, 2019. The adoption of this ASU did not have a material impact on the Company's financial statements. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." This amendment clarifies the guidance in ASU No. 2017-12. This ASU will become effective for the Company on January 1, 2020. The adoption of ASU No. 2019-04 is not expected to have a material impact on the Company's financial statements.

In October 2018, the FASB issued ASU No. 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." This amendment permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Federal Funds Effective Rate, and the SIFMA Municipal Swap Rate. This ASU became effective for the Company on January 1, 2019. The adoption of ASU No. 2017-12 did not have a material impact on the Company's financial statements.

Pending Adoption:

CECL

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. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses." This amendment clarifies the scope of the guidance in ASU No. 2016-13. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." This amendment clarifies the guidance in ASU No. 2016-13. These ASUs will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently working through its implementation plan, including implementing a third-party vendor solution program. The adoption of these ASUs could result in a material increase to the allowance for loan losses. While we are currently unable to reasonably estimate the impact of adopting these ASUs, management expects that the impact of adoption will be significantly influenced by the loan portfolio's composition and quality, as well as the prevailing economic conditions and forecasts as of the adoption date.

Others

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.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement." This amendment removes, modifies, and clarifies the

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disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This ASU will become effective for the Company on January 1, 2020. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU No. 2018-14, "CompensationRetirement BenefitsDefined Benefit PlansGeneral (Subtopic 715-20): Disclosure FrameworkChanges to the Disclosure Requirements for Defined Benefit Plans." This amendment removes, modifies, and clarifies certain disclosure requirements for defined benefit plans and other post-employment benefit plans. This ASU will become effective for the Company on January 1, 2021. The adoption of ASU No. 2018-14 is not expected to have a material impact on the Company's financial statements.

In October 2018, the FASB issued ASU No. 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities." This amendment simplifies the analysis of fees paid to decision makers or service providers in determining variable interest entities. This ASU will become effective for the Company on January 1, 2020. The adoption of ASU No. 2018-17 is not expected to have a material impact on the Company's financial statements.

    







    











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Note C –Acquisitions and Preliminary Purchase Price Allocation

On December 7, 2018, the Company acquired 100% of the outstanding common stock of Poage Bankshares, Inc., the parent company of Town Square Bank (collectively, "Poage"). The acquisition of Poage was structured as a stock transaction in which the Company issued approximately 1.1 million shares, valued at approximately $82.6 million, or $24.22 per share of Poage common stock.

On December 7, 2018, the Company also acquired 100% of the outstanding common stock of Farmers Deposit Bancorp, Inc., the parent company of Farmers Deposit Bank (collectively, "Farmers Deposit"). The acquisition of Farmers Deposit was structured as a cash transaction valued at $24.9 million, or $1,174.14 per share of Farmers Deposit common stock.

The Company accounted for both acquisitions using the acquisition method pursuant to "Topic 805 Business Combinations" of the FASB Accounting Standards Codification. The acquisition method requires the acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
 
Farmers
 
 
 
Deposit
Poage
Total
Consideration
$
24,900

$
83,936

$
108,836

 
 
 
 
Identifiable assets:
 
 
 
   Cash and cash equivalents
4,173

34,325

38,498

   Investment securities
46,235

72,321

118,556

   Loans
58,516

304,359

362,875

   Bank owned life insurance

7,439

7,439

   Premises and equipment
768

4,547

5,315

   Deferred tax assets, net
(188
)
2,379

2,191

   Other assets
2,302

8,799

11,101

     Total identifiable assets
111,806

434,169

545,975

 
 
 
 
Identifiable liabilities:
 
 
 
   Deposits
92,241

379,285

471,526

   Short-term borrowings
2,025


2,025

   Long-term debt

4,053

4,053

   Other liabilities
651

3,054

3,705

     Total identifiable liabilities
94,917

386,392

481,309

 
 
 
 
Net identifiable assets
16,889

47,777

64,666

Goodwill
4,677

28,105

32,782

Core deposit intangible
3,334

8,054

11,388

 
$
24,900

$
83,936

$
108,836



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Table of Contents

Acquired Loans
The following table presents information regarding the purchased credit-impaired and noncredit-impaired loans acquired in conjunction with both acquisitions (in thousands):
 
At
As of
Acquired Credit-Impaired
Acquisition
March 31, 2019
Contractually required principal and interest
$
25,315

$
20,528

Contractual cash flows not expected to be collected (non-accretable difference)
(13,593
)
(10,115
)
Expected cash flows
11,722

10,413

Interest component of expected cash flows (accretable difference)
(2,375
)
(2,349
)
Carrying value of purchased credit-impaired loans acquired
$
9,347

$
8,064

 
 
 
Acquired Noncredit-Impaired
 
 
Outstanding balance
$
354,374

$
344,780

Less: fair value adjustment
(846
)
(653
)
Carrying value of acquired noncredit-impaired loans
$
353,528

$
344,127


Acquired Deposits
The fair values of non-time deposits approximated their carrying value at the acquisition date. For time deposits, the fair values were estimated based on discounted cash flows, using interest rates that are currently being offered compared to the contractual interest rates. Based on this analysis, management recorded a premium on time deposits acquired of $0.1 million and $1.7 million for the Farmers Deposit and Poage acquisitions, respectively, each of which is being amortized over 5 years.
Core Deposit Intangible
The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with the acquisitions, the Company recorded a core deposit intangible asset of $3.3 million and $8.1 million for Farmers Deposit and Poage, respectively. Each of the core deposit intangible assets represent the value that the acquiree had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered the type of deposit, deposit retention and the cost of the deposit base. The core deposit intangibles are being amortized over 10 years.
Goodwill
Under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair value of acquired assets and liabilities. The measurement period ends as soon as the Company receives information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. Any subsequent adjustments to the fair value of the acquired assets and liabilities, intangible assets or other purchase accounting adjustments will result in adjustments to the goodwill recorded. Among the items that are still preliminary at March 31, 2019, is the finalization of the final tax returns for both entities, which management anticipates completing during 2019. Given the form of the respective transactions, the $4.7 million goodwill preliminarily recorded in conjunction with the Farmers Deposit acquisition is expected to be deductible for tax purposes, while the $28.1 million goodwill preliminarily recorded in conjunction with the Poage acquisition is not expected to be deductible for tax purposes. The following table summarizes adjustments to goodwill subsequent to December 31, 2018 (in thousands):
 
Goodwill
 
 
Balance at December 31, 2018
$
109,567

Adjustment to goodwill acquired in conjunction with the acquisition of Poage
(529
)
Adjustment to goodwill acquired in conjunction with the acquisition of Farmers Deposit

(61
)
Balance at March 31, 2019
$
108,977



12

Table of Contents

Note D –Investments

The aggregate carrying and approximate market values of investment securities follow (in thousands).  Fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.

 
March 31, 2019
December 31, 2018
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
$
2,277

$
23

$

$
2,300

$
5,713

$
20

$

$
5,733

Obligations of states and
 
 
 
 

 

 

 

 

political subdivisions
123,293

2,632

285

125,640

128,089

1,033

1,052

128,070

Mortgage-backed securities:
 
 
 
 

 

 

 

 

U.S. government agencies
590,773

4,871

6,946

588,698

561,799

1,950

12,991

550,758

Private label
11,787

328


12,115

11,948

95


12,043

Trust preferred securities
4,776

31

569

4,238

4,774

25


4,799

Corporate securities
16,787

93

1

16,879

16,795

30

167

16,658

Total Debt Securities
749,693

7,978

7,801

749,870

729,118

3,153

14,210

718,061

Certificates of deposit held for investment
3,735



3,735

3,735



3,735

Investment funds
1,526


50

1,476

1,525


67

1,458

   Total Securities
 

 

 

 

 

 

 

 

Available-for-Sale
$
754,954

$
7,978

$
7,851

$
755,081

$
734,378

$
3,153

$
14,277

$
723,254

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
U.S. government agencies
$
55,326

$
858

$
99

$
56,085

$
56,827

$
173

$
294

$
56,706

Trust preferred securities




4,000



4,000

Total Securities
 

 

 

 

 

 

 

 

Held-to-Maturity
$
55,326

$
858

$
99

$
56,085

$
60,827

$
173

$
294

$
60,706


The Company's other investment securities include marketable and non-marketable equity securities. At March 31, 2019 and December 31, 2018, the Company held $10.4 million and $10.3 million, respectively, in marketable equity securities. Marketable equity securities consist of investments made by the Company in equity positions of various 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%). The Company's non-marketable securities consist of securities with limited marketability, such as stock in the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank ("FHLB"). At March 31, 2019 and December 31, 2018, the Company held $15.8 million and $18.5 million, respectively, in non-marketable equity securities. These securities are carried at cost due to the restrictions placed on their transferability.

The Company's mortgage-backed U.S. government agency securities consist of both residential and commercial securities, all of which are guaranteed by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), or Ginnie Mae (GNMA"). At March 31, 2019 and December 31, 2018 there were no securities of any non-governmental issuer whose aggregate carrying value or estimated fair value exceeded 10% of shareholders' equity. The Company's certificates of deposit consist of domestically issued certificates of deposits in denominations of less than the FDIC insurance limit of $250,000.


13

Table of Contents

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) as of March 31, 2019 and December 31, 2018.  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):

 
March 31, 2019
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
$
832

$
3

$
20,922

$
282

$
21,754

$
285

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
5,654

2

343,082

6,944

348,736

6,946

Trust preferred securities
3,972

569



3,972

569

Corporate securities
1,020

1



1,020

1

Investment funds
1,500

50



1,500

50

Total available-for-sale
$
12,978

$
625

$
364,004

$
7,226

$
376,982

$
7,851

 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
     U.S. Government agencies
$

$

$
5,896

$
99

$
5,896

$
99

Total held-to-maturity
$

$

$
5,896

$
99

$
5,896

$
99



 
December 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
$
11,837

$
272

$
22,068

$
780

$
33,905

$
1,052

Mortgage-backed securities:
 
 
 
 
 

 

U.S. Government agencies
84,975

1,593

282,560

11,398

367,535

12,991

Corporate securities
12,995

167



12,995

167

Investment funds
1,500

67



1,500

67

Total available-for-sale
$
111,307

$
2,099

$
304,628

$
12,178

$
415,935

$
14,277

 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
       U.S. Government agencies
$
28,274

$
126

$
5,960

$
168

$
34,234

$
294

Total held-to-maturity
$
28,274

$
126

$
5,960

$
168

$
34,234

$
294


During the three months ended March 31, 2019 and 2018, the Company had no credit-related net investment impairment losses. At March 31, 2019, the cumulative amount of credit-related investment impairment losses that have been recognized by the Company on its equity securities that remain in the Company's investment portfolio as of that date was $1.8 million.

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

14

Table of Contents

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 0.2% 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 March 31, 2019, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired 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, 2019, 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, 2019, 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
Available-for-Sale Debt Securities
 
 
Due in one year or less
$
3,238

$
3,241

Due after one year through five years
18,566

18,776

Due after five years through ten years
156,128

156,585

Due after ten years
571,761

571,268

Total
$
749,693

$
749,870

 
 
 
Held-to-Maturity Debt Securities
 

 

Due in one year or less
$

$

Due after one year through five years


Due after five years through ten years
4,929

5,230

Due after ten years
50,397

50,855

Total
$
55,326

$
56,085


Gross gains and gross losses recognized by the Company from investment security transactions are summarized in the table below (in thousands):
 
Three months ended March 31,
 
2019
2018
Gross unrealized gains recognized on securities still held
$
143

$
283

Gross unrealized losses recognized on securities still held
(68
)
(3
)
Net unrealized gains (losses) recognized on securities still held
$
75

$
280

 
 
 
Gross realized gains on securities sold
$
89

$

Gross realized losses on securities sold
(1
)

Net investment security gains
$
88

$

    
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $462 million and $510 million at March 31, 2019 and December 31, 2018, respectively.

 
Note E –Loans

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Table of Contents


The following summarizes the Company’s major classifications for loans (in thousands):
 
March 31, 2019
December 31, 2018
Residential real estate
$
1,625,647

$
1,635,338

Home equity
152,251

153,496

Commercial and industrial
289,327

286,314

Commercial real estate
1,436,190

1,454,942

Consumer
52,483

51,190

DDA overdrafts
3,424

6,328

Gross loans
3,559,322

3,587,608

Allowance for loan losses
(14,646
)
(15,966
)
Net loans
$
3,544,676

$
3,571,642

 
 
 
Construction loans included in:
 
 
  Residential real estate
$
22,635

$
21,834

  Commercial real estate
56,282

37,869


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 the loan portfolio, including construction loans. In the judgment of the Company's management, adequate consideration has been given to these loans in establishing the Company's allowance for loan losses.

Note F –     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 losses, by portfolio loan classification, for the three months ended March 31, 2019 and 2018 (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, 2019 and December 31, 2018 (in thousands).

16

Table of Contents

 
 
Commercial and
Commercial
Residential
 
 
DDA
 
 
Industrial
Real Estate
Real Estate
Home Equity
Consumer
Overdrafts
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
Allowance for loan losses
Beginning balance
$
4,060

$
4,495

$
4,116

$
1,268

$
319

$
1,708

$
15,966

Charge-offs

(45
)
(328
)
(46
)
(185
)
(625
)
(1,229
)
Recoveries
135

32

75


97

419

758

(Recovery of) provision
(1,225
)
158

(43
)
26

237

(2
)
(849
)
Ending balance
$
2,970

$
4,640

$
3,820

$
1,248

$
468

$
1,500

$
14,646

 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

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

(Recovery of) provision
529

(480
)
(244
)
133

203

40

181

Ending balance
$
4,763

$
5,769

$
4,943

$
1,200

$
212

$
1,494

$
18,381

 
 
 
 
 
 
 
 
As of March 31, 2019
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
503

$

$

$

$

$
503

Collectively
2,969

4,085

3,820

1,248

461

1,500

14,083

Acquired with deteriorated credit quality
1

52



7


60

Total
$
2,970

$
4,640

$
3,820

$
1,248

$
468

$
1,500

$
14,646

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
617

$
9,354

$

$

$

$

$
9,971

Collectively
287,172

1,415,938

1,623,550

152,251

52,370

3,424

3,534,705

Acquired with deteriorated credit quality
1,538

10,898

2,097


113


14,646

Total
$
289,327

$
1,436,190

$
1,625,647

$
152,251

$
52,483

$
3,424

$
3,559,322

 
 
 
 
 
 
 
 
As of December 31, 2018
 

 

 

 

 

 

 

Allowance for loan losses
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$

$
428

$

$

$

$

$
428

Collectively
4,059

4,015

4,116

1,268

312

1,708

15,478

Acquired with deteriorated credit quality
1

52



7


60

Total
$
4,060

$
4,495

$
4,116

$
1,268

$
319

$
1,708

$
15,966

 
 
 
 
 
 
 
 
Loans
 

 

 

 

 

 

 

Evaluated for impairment:
 

 

 

 

 

 

 

Individually
$
651

$
9,855

$

$

$

$

$
10,506

Collectively
284,018

1,433,674

1,633,241

153,496

51,077

6,328

3,561,834

Acquired with deteriorated credit quality
1,645

11,413

2,097


113


15,268

Total
$
286,314

$
1,454,942

$
1,635,338

$
153,496

$
51,190

$
6,328

$
3,587,608


17

Table of Contents


Credit Quality Indicators
 
All commercial loans within the portfolio are subject to internal risk rating.  All non-commercial loans are evaluated based on payment history.  The Company’s internal risk ratings for commercial loans are:  Exceptional, Good, Acceptable, Pass/Watch, 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 rating for each credit is 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. 











18

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, 2019
 
 
 
Pass
$
258,096

$
1,380,744

$
1,638,840

Special mention
25,457

10,242

35,699

Substandard
5,774

45,204

50,978

Doubtful



Total
$
289,327

$
1,436,190

$
1,725,517

 
 
 
 
December 31, 2018
 

 

 

Pass
$
250,856

$
1,402,821

$
1,653,677

Special mention
27,886

5,696

33,582

Substandard
7,572

46,425

53,997

Doubtful



Total
$
286,314

$
1,454,942

$
1,741,256

     
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, 2019
 
 
 
Residential real estate
$
1,622,370

$
3,277

$
1,625,647

Home equity
152,208

43

152,251

Consumer
52,429

54

52,483

DDA overdrafts
3,424


3,424

Total
$
1,830,431

$
3,374

$
1,833,805

 
 
 
 
December 31, 2018
 
 
 
Residential real estate
$
1,630,892

$
4,446

$
1,635,338

Home equity
153,334

162

153,496

Consumer
51,188

2

51,190

DDA overdrafts
6,322

6

6,328

Total
$
1,841,736

$
4,616

$
1,846,352


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

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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-accrual loans, by portfolio loan classification (in thousands):
 
 
March 31, 2019
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,614,413

$
7,245

$
713

$
13

$
3,263

$
1,625,647

Home equity
151,489

551

167

3

41

152,251

Commercial and industrial
287,700

101



1,526

289,327

Commercial real estate
1,427,494

1,377


37

7,282

1,436,190

Consumer
52,218

129

82

53

1

52,483

DDA overdrafts
2,889

533

2



3,424

Total
$
3,536,203

$
9,936

$
964

$
106

$
12,113

$
3,559,322

 
 
 
 
 
 
 
 
December 31, 2018
 
Accruing
 
 
 
Current
30-59 days
60-89 days
Over 90 days
Non-accrual
Total
Residential real estate
$
1,621,073

$
8,607

$
1,213

$
170

$
4,275

$
1,635,338

Home equity
152,083

1,240

11

24

138

153,496

Commercial and industrial
284,140

397

49

52

1,676

286,314

Commercial real estate
1,445,896

487

94

4

8,461

1,454,942

Consumer
50,894

253

41

1

1

51,190

DDA overdrafts
5,840

467

15

6


6,328

Total
$
3,559,926

$
11,451

$
1,423

$
257

$
14,551

$
3,587,608




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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.

 
March 31, 2019
December 31, 2018
 
 
Unpaid
 
 
Unpaid
 
 
Recorded
Principal
Related
Recorded
Principal
Related
 
Investment
Balance
Allowance
Investment
Balance
Allowance
With no related allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$
617

$
617

$

$
651

$
651

$

Commercial real estate
6,369

6,394


6,870

6,895


Total
$
6,986

$
7,011

$

$
7,521

$
7,546

$

 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Commercial and industrial
$

$

$

$

$

$

Commercial real estate
2,985

2,985

503

2,985

2,985

428

Total
$
2,985

$
2,985

$
503

$
2,985

$
2,985

$
428


     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,
 
2019
2018
 
Average
Interest
Average
Interest
 
Recorded
Income
Recorded
Income
 
Investment
Recognized
Investment
Recognized
With no related allowance recorded:
 
 
 
 
Commercial and industrial
$
618


$
774

$

Commercial real estate
6,521

36

3,008

3

Total
$
7,139

$
36

$
3,782

$
3

 
 
 
 
 
With an allowance recorded:
 
 
 
 
Commercial and industrial
$

$

$

$

Commercial real estate
2,985

30

5,750

52

Total
$
2,985

$
30

$
5,750

$
52


     Approximately $0.1 million of interest income would have been recognized during the three months ended March 31, 2019 and 2018, 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, 2019.

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

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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):

 
March 31, 2019
December 31, 2018
 
Non-
 
 
Non-
 
Accruing
Accruing
Total
Accruing
Accruing
Total
Commercial and industrial
$
89

$

$
89

$
98

$

$
98

Commercial real estate
8,164


8,164

8,205


8,205

Residential real estate
23,017

464

23,481

22,863

658

23,521

Home equity
3,013

5

3,018

3,025

5

3,030

Consumer






Total
$
34,283

$
469

$
34,752

$
34,191

$
663

$
34,854

 
 
New TDRs
 
Three months ended March 31,
 
2019
2018
 
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






Residential real estate
23

1,729

1,729

7