City Holding Earnings 2018-09-30

CHCO 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 chco09-30x201810q.htm 10-Q Document

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For The Quarterly Period Ended September 30, 2018

[ ] 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

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 [ ]

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes	[ ]	No	[X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common stock, $2.50 Par Value – 15,389,278 shares as of November 5, 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; (14) the businesses 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 integrate successfully or such integration may take longer to accomplish than expected (15) 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; (16) 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 (17) 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.

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Index

City Holding Company and Subsidiaries

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Part I -
FINANCIAL INFORMATION

Item 1 -
Financial Statements

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Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)



	(Unaudited)
	September 30, 2018			December 31, 2017
Assets
Cash and due from banks	$	49,806		$	54,450
Interest-bearing deposits in depository institutions	256,104			28,058
Cash and Cash Equivalents	305,910			82,508

Investment securities available for sale, at fair value	563,003			550,389
Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2018 and December 31, 2017 - $56,841 and $65,646, respectively)	57,812			64,449
Other securities	28,875			14,147
Total Investment Securities	649,690			628,985

Gross loans	3,146,697			3,127,410
Allowance for loan losses	(16,311		)	(18,836		)
Net Loans	3,130,386			3,108,574

Bank owned life insurance	105,372			103,440
Premises and equipment, net	72,484			72,682
Accrued interest receivable	11,449			9,223
Net deferred tax asset	15,653			11,913
Goodwill and other intangible assets, net	78,215			78,595
Other assets	51,643			36,361
Total Assets	$	4,420,802		$	4,132,281

Liabilities
Deposits:
Noninterest-bearing	$	672,042		$	666,639
Interest-bearing:
Demand deposits	802,490			769,245
Savings deposits	821,390			796,275
Time deposits	1,147,709			1,083,475
Total Deposits	3,443,631			3,315,634

Short-term borrowings:
Federal funds purchased	170,000			54,000
Customer repurchase agreements	220,124			198,219
Long-term debt	16,495			16,495
Other liabilities	58,526			45,426
Total Liabilities	3,908,776			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 September 30, 2018 and December 31, 2017, less 3,598,106 and 3,429,519 shares in treasury, respectively	47,619			47,619
Capital surplus	140,450			140,960
Retained earnings	484,017			444,481
Cost of common stock in treasury	(136,783		)	(124,909		)
Accumulated other comprehensive income (loss):
Unrealized (loss) on securities available-for-sale	(18,244		)	(611		)
Underfunded pension liability	(5,033		)	(5,033		)
Total Accumulated Other Comprehensive (Loss)	(23,277		)	(5,644		)
Total Shareholders’ Equity	512,026			502,507
Total Liabilities and Shareholders’ Equity	$	4,420,802		$	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 September 30,					Nine months ended September 30,
	2018			2017		2018			2017

Interest and fees on loans	$	36,872		$	32,004	$	104,082		$	93,223
Interest and dividends on investment securities:
Taxable	4,216			3,666		12,314			10,591
Tax-exempt	701			665		2,114			2,014
Interest on deposits in depository institutions	940			31		1,043			51
Total Interest Income	42,729			36,366		119,553			105,879

Interest Expense
Interest on deposits	5,497			3,796		14,741			10,885
Interest on short-term borrowings	1,435			349		2,354			693
Interest on long-term debt	239			195		680			565
Total Interest Expense	7,171			4,340		17,775			12,143
Net Interest Income	35,558			32,026		101,778			93,736
(Recovery of) provision for loan losses	(27		)	1,393		(1,910		)	2,584
Net Interest Income After (Recovery of) Provision for Loan Losses	35,585			30,633		103,688			91,152

Non-Interest Income
Net gains on sale of investment securities	—			—		—			4,276
Service charges	7,598			7,415		21,783			21,219
Bankcard revenue	4,677			4,291		13,543			12,804
Trust and investment management fee income	1,579			1,471		4,792			4,469
Bank owned life insurance	813			774		2,356			2,972
Other income	1,086			660		3,382			2,303
Total Non-Interest Income	15,753			14,611		45,856			48,043

Non-Interest Expense
Salaries and employee benefits	13,576			12,580		40,368			38,783
Occupancy related expense	2,323			2,426		7,073			7,361
Equipment and software related expense	1,965			1,940		5,691			5,835
FDIC insurance expense	315			328		943			1,031
Advertising	808			689		2,444			2,203
Bankcard expenses	1,134			1,051		3,274			2,964
Postage, delivery, and statement mailings	537			517		1,630			1,576
Office supplies	364			377		1,006			1,082
Legal and professional fees	453			504		1,378			1,393
Telecommunications	408			494		1,349			1,470
Repossessed asset losses, net of expenses	156			107		638			589
Other expenses	3,001			3,296		9,098			8,799
Total Non-Interest Expense	25,040			24,309		74,892			73,086
Income Before Income Taxes	26,298			20,935		74,652			66,109
Income tax expense	5,606			7,003		15,369			21,463
Net Income Available to Common Shareholders	$	20,692		$	13,932	$	59,283		$	44,646

Total Comprehensive Income	$	16,367		$	14,240	$	44,307		$	47,881

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Average shares outstanding, basic	15,340		15,485		15,360		15,391
Effect of dilutive securities	18		20		20		24
Average shares outstanding, diluted	15,358		15,505		15,380		15,415

Basic earnings per common share	$	1.34	$	0.89	$	3.82	$	2.87
Diluted earnings per common share	$	1.33	$	0.89	$	3.82	$	2.86
Dividends declared per common share	$	0.53	$	0.44	$	1.45	$	1.32

See notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017

Net income	$	20,692		$	13,932		$	59,283		$	44,646

Unrealized (losses) gains on available-for-sale securities arising during the period	(5,638		)	488			(19,520		)	9,404
Reclassification adjustment for gains	—			—			—			(4,276		)
Other comprehensive (loss) income before income taxes	(5,638		)	488			(19,520		)	5,128
Tax effect	1,313			(180		)	4,544			(1,893		)
Other comprehensive (loss) income, net of tax	(4,325		)	308			(14,976		)	3,235

Comprehensive Income, Net of Tax	$	16,367		$	14,240		$	44,307		$	47,881

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 September 30, 2018 and 2017

(in thousands)



	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at June 30, 2018	$	47,619	$	140,091		$	471,515		$	(136,520	)	$	(18,952	)	$	503,753
Net income	—		—			20,692			—			—			20,692
Other comprehensive income	—		—			—			—			(4,325		)	(4,325		)
Cash dividends declared ($0.53 per share)	—		—			(8,190		)	—			—			(8,190		)
Stock-based compensation expense	—		455			—			—			—			455
Exercise of 3,986 stock options	—		(96		)	—			277			—			181
Purchase of 7,000 treasury shares	—		—			—			(540		)	—			(540		)
Balance at September 30, 2018	$	47,619	$	140,450		$	484,017		$	(136,783	)	$	(23,277	)	$	512,026



	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at June 30, 2017	$	47,619	$	139,972		$	433,944		$	(124,943	)	$	(4,085	)	$	492,507
Net income	—		—			13,932			—			—			13,932
Other comprehensive income	—		—			—			—			308			308
Cash dividends declared ($0.44 per share)	—		—			(6,875		)	—			—			(6,875		)
Stock-based compensation expense	—		443			—			—			—			443
Restricted awards granted	—		(34		)	—			34			—			—
Balance at September 30, 2017	$	47,619	$	140,381		$	441,001		$	(124,909	)	$	(3,777	)	$	500,315

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Nine Months Ended September 30, 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, 2017	$	47,619	$	140,960		$	444,481		$	(124,909	)	$	(5,644	)	$	502,507
Net income	—		—			59,283			—			—			59,283
Other comprehensive income	—		—			—			—			(14,976		)	(14,976		)
Adoption of new accounting pronouncement (see Note B)						2,657						(2,657		)	—
Cash dividends declared ($1.45 per share)	—		—			(22,404		)	—			—			(22,404		)
Stock-based compensation expense	—		1,697			—			—			—			1,697
Restricted awards granted	—		(1,494		)	—			1,494			—			—
Exercise of 29,133 stock options	—		(713		)	—			1,862			—			1,149
Purchase of 221,327 treasury shares	—		—			—			(15,230		)	—			(15,230		)
Balance at September 30, 2018	$	47,619	$	140,450		$	484,017		$	(136,783	)	$	(23,277	)	$	512,026



	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2016	$	46,518	$	112,873		$	417,017		$	(126,958	)	$	(7,012	)	$	442,438
Net income	—		—			44,646			—			—			44,646
Other comprehensive income	—		—			—			—			3,235			3,235
Cash dividends declared ($1.32 per share)	—		—			(20,662		)	—			—			(20,662		)
Stock-based compensation expense	—		1,653			—			—			—			1,653
Restricted awards granted	—		(1,351		)	—			1,351			—			—
Issuance of 440,604 shares of common stock	1,101		27,307			—			—			—			28,408
Exercise of 16,639 stock options	—		(101		)	—			698			—			597
Balance at September 30, 2017	$	47,619	$	140,381		$	441,001		$	(124,909	)	$	(3,777	)	$	500,315

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)



	Nine months ended September 30,
	2018			2017
Net income	$	59,283		$	44,646
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion and amortization	1,154			836
(Recovery of) provision for loan losses	(1,910		)	2,584
Depreciation of premises and equipment	3,819			4,486
Deferred income tax expense	921			3,810
Net periodic employee benefit cost	438			337
Unrealized gains recognized on securities still held	(1,155		)	—
Realized investment securities gains	—			(4,276		)
Stock-compensation expense	1,697			1,653
Excess tax benefit from stock-compensation expense	(155		)	(550		)
Proceeds from life insurance	425			1,717
Increase in value of bank-owned life insurance	(1,932		)	(1,974		)
Loans originated for sale	(9,286		)	(13,858		)
Proceeds from the sale of loans originated for sale	9,601			16,315
Gain on sale of loans	(249		)	(437		)
Change in accrued interest receivable	(2,226		)	(828		)
Change in other assets	(15,709		)	1,562
Change in other liabilities	11,543			(1,505		)
Net Cash Provided by Operating Activities	56,259			54,518

Proceeds from sales of securities available-for-sale	—			5,576
Proceeds from maturities and calls of securities available-for-sale	53,917			61,367
Proceeds from maturities and calls of securities held-to-maturity	6,552			8,072
Purchases of securities available-for-sale	(101,227		)	(136,418		)
Net increase in loans	(19,057		)	(63,139		)
Purchases of premises and equipment	(4,236		)	(4,262		)
Disposals of premises and equipment	772			2,500
Net Cash Used in Investing Activities	(63,279		)	(126,304		)

Net increase in non-interest-bearing deposits	5,403			(2,410		)
Net increase in interest-bearing deposits	122,594			27,307
Net increase (decrease) in short-term borrowings	137,905			33,159
Proceeds from issuance of common stock	—			28,408
Purchases of treasury stock	(15,230		)	—
Proceeds from exercise of stock options	1,149			597
Dividends paid	(21,399		)	(20,249		)
Net Cash Provided by Financing Activities	230,422			66,812
Increase (Decrease) in Cash and Cash Equivalents	223,402			(4,974		)
Cash and cash equivalents at beginning of period	82,508			88,139
Cash and Cash Equivalents at End of Period	$	305,910		$	83,165

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)

September 30, 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 87 banking offices in West Virginia (58), 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), Morgantown (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.

On July 11, 2018, the Company announced that it had concurrently executed two separate definitive agreements to acquire Poage Bankshares, Inc. (“Poage”), of Ashland, Kentucky and its principal banking subsidiary, Town Square Bank, and Farmers Deposit Bancorp, Inc. (“Farmers Deposit”), of Cynthiana, Kentucky and its principal banking subsidiary, Farmers Deposit Bank. The proposed mergers are expected to close in the fourth quarter of 2018 and the core data system conversions are also targeted to occur in the fourth quarter of 2018. City has received all regulatory approvals needed to acquire both Poage and Farmers Deposit and each merger has been approved by the shareholders of Poage and Farmers, respectively. Consummation of the respective mergers is subject to the completion of other customary closing conditions. Merger expenses are estimated at $18 million (pre-tax) for the Poage transaction and at $6 million (pre-tax) for the Farmers Deposit transaction, while core deposit intangibles are estimated at $4 million for Poage and at $1.5 million for Farmers Deposit. The Poage and Farmers Deposit transactions are not conditional upon each other.

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding Company and its wholly-owned subsidiaries (collectively, the "Company"). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 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) identify 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

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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 (see Note M - Contracts with Customers).

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. During the nine months ended September 30, 2018, a $1.2 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.

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.

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

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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.

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 July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases." This amendment provides improvements to specific sections of previously issued lease guidance, including a package of three practical expedients regarding the reassessment of prior period leases. This ASU will become effective for the Company on January 1, 2019. The adoption of ASU No. 2018-10 is not expected to have a material impact on the Company's financial statements.

In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." This amendment offers a practical expedient that allows the Company to recognize the prior period balance sheet impacts in the period of adoption and will not require adjustments to the prior period financial statements when adopting ASU No. 2016-02 described above. This ASU will become effective for the Company on January 1, 2019. The adoption of ASU No. 2018-11 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 Framework-Changes to the Disclosure Requirements for Fair Value Measurement." This amendment removes, modifies, and clarifies the 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, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes 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.

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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):



	September 30, 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	92,972		265		1,673		91,564		94,552		2,051		407		96,196
Mortgage-backed securities:
U.S. government agencies	469,810		222		22,286		447,746		425,559		1,093		7,305		419,347
Private label	523		6		—		529		649		3		—		652
Trust preferred securities	4,772		26		—		4,798		4,764		26		54		4,736
Corporate securities⁽¹⁾	17,086		7		172		16,921		21,916		475		123		22,268
Total Debt Securities	585,164		526		24,131		561,559		547,442		3,648		7,889		543,201
Marketable equity securities	—		—		—		—		2,136		3,563		—		5,699
Investment funds	1,526		—		82		1,444		1,525		—		36		1,489
Total Securities
Available-for-Sale	$	586,690	$	526	$	24,213	$	563,003	$	551,103	$	7,211	$	7,925	$	550,389



Securities held-to-maturity:
Mortgage-backed securities:
U.S. government agencies	$	53,812	$	—	$	971	$	52,841	$	60,449	$	1,222	$	25	$	61,646
Trust preferred securities	4,000		—		—		4,000		4,000		—		—		4,000
Total Securities
Held-to-Maturity	$	57,812	$	—	$	971	$	56,841	$	64,449	$	1,222	$	25	$	65,646



Other investment securities:
Non-marketable equity securities	$	17,316	$	—	$	—	$	17,316	$	14,147	$	—	$	—	$	14,147
Marketable equity securities⁽¹⁾	11,559		—		—		11,559		—		—		—		—
Total Other Investment
Securities	$	28,875	$	—	$	—	$	28,875	$	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.

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Certain investment securities owned by the Company are in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities). The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):



	September 30, 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	$	45,560	$	653	$	19,197	$	1,020	$	64,757	$	1,673
Mortgage-backed securities:
U.S. Government agencies	239,964		8,325		191,172		13,961		431,136		22,286
Corporate securities	14,922		172		—		—		14,922		172
Investment funds	1,500		82		—		—		1,500		82
Total available-for-sale	$	301,946	$	9,232	$	210,369	$	14,981	$	512,315	$	24,213

Securities held-to-maturity:
Mortgage-backed securities
U.S. Government agencies	$	52,841	$	971	$	—	$	—	$	52,841	$	971
Total held-to-maturity	$	52,841	$	971	$	—	$	—	$	52,841	$	971



	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 nine months ended September 30, 2018 and 2017, the Company had no investment impairment losses. At September 30, 2018, 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 $1.6 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

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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 0.5% of each respective company being traded on a daily basis. As part of management’s review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.

Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of September 30, 2018, 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 September 30, 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 September 30, 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
Available-for-Sale Debt Securities
Due in one year or less	$	2,685	$	2,684
Due after one year through five years	10,504		10,493
Due after five years through ten years	81,069		76,996
Due after ten years	490,906		471,386
Total	$	585,164	$	561,559

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	—		—
Due after ten years	57,812		56,841
Total	$	57,812	$	56,841

The table below presents the unrealized gains (losses) that were recognized in "Other Income" in the consolidated statements of income during the three and nine months ended September 30, 2018 as a result of the change in the fair value of the Company's equity and perpetual preferred securities due to the adoption of ASU 2016-01 (in thousands). Additionally, on January 1, 2018, the Company reclassified $2.7 million, net of deferred taxes, 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 nine months ended September 30, 2017, the Company realized $4.3 million of investment gains. These gains represented partial recoveries of impairment charges previously recognized on pooled trust preferred securities. As a result of these sales, the Company no longer holds any pooled trust preferred securities in its investment portfolio.



	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017

Equity and perpetual preferred securities:
Unrealized gains recognized on securities still held	$	383	$	—	$	1,155	$	—

Gross realized gains on securities sold	$	—	$	—	—		4,276
Gross realized losses on securities sold	—		—		—		—
Net investment security gains	$	—	$	—	$	—	$	4,276

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The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $490 million and $429 million at September 30, 2018 and December 31, 2017, respectively.

Note D –Loans

The following summarizes the Company’s major classifications for loans (in thousands):



	September 30, 2018			December 31, 2017
Residential real estate	$	1,485,823		$	1,468,278
Home equity	143,540			139,499
Commercial and industrial	213,815			208,484
Commercial real estate	1,268,052			1,277,576
Consumer	31,869			29,162
DDA overdrafts	3,598			4,411
Gross loans	3,146,697			3,127,410
Allowance for loan losses	(16,311		)	(18,836		)
Net loans	$	3,130,386		$	3,108,574

Construction loans of $17.6 million and $25.3 million are included within residential real estate loans at September 30, 2018 and December 31, 2017, respectively. Construction loans of $24.1 million and $28.9 million are included within commercial real estate loans at September 30, 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 losses, by portfolio loan classification, for the nine months ended September 30, 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 September 30, 2018 and December 31, 2017 (in thousands).

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	Commercial and			Commercial			Residential									DDA
	Industrial			Real Estate			Real Estate			Home Equity			Consumer			Overdrafts			Total
Nine months ended September 30, 2018
Allowance for loan losses
Beginning balance	$	4,571		$	6,183		$	5,212		$	1,138		$	62		$	1,670		$	18,836
Charge-offs	(724		)	(349		)	(464		)	(219		)	(560		)	(1,976		)	(4,292		)
Recoveries	1,625			538			275			—			130			1,109			3,677
(Recovery of) provision	(1,583		)	(1,775		)	(557		)	385			709			911			(1,910		)
Ending balance	$	3,889		$	4,597		$	4,466		$	1,304		$	341		$	1,714		$	16,311

Nine months ended September 30, 2017
Allowance for loan losses
Beginning balance	$	4,206		$	6,573		$	6,680		$	1,417		$	82		$	772		$	19,730
Charge-offs	(150		)	(564		)	(1,295		)	(256		)	(47		)	(1,989		)	(4,301		)
Recoveries	57			92			286			45			46			1,015			1,541
(Recovery of) provision	946			205			218			68			(25		)	1,172			2,584
Ending balance	$	5,059		$	6,306		$	5,889		$	1,274		$	56		$	970		$	19,554

As of September 30, 2018
Allowance for loan losses
Evaluated for impairment:
Individually	$	—		$	355		$	—		$	—		$	—		$	—		$	355
Collectively	3,885			4,189			4,466			1,304			334			1,714			15,892
Acquired with deteriorated credit quality	4			53			—			—			7			—			64
Total	$	3,889		$	4,597		$	4,466		$	1,304		$	341		$	1,714		$	16,311

Loans
Evaluated for impairment:
Individually	$	656		$	9,894		$	—		$	—		$	—		$	—		$	10,550
Collectively	212,959			1,252,989			1,483,829			143,540			31,754			3,598			3,128,669
Acquired with deteriorated credit quality	200			5,169			1,994			—			115			—			7,478
Total	$	213,815		$	1,268,052		$	1,485,823		$	143,540		$	31,869		$	3,598		$	3,146,697

As of December 31, 2017
Allowance for loan losses
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

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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: Pass, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields; ratios and leverage; cash flow spread and coverage; prior history; capability of management; market position/industry; potential impact of changing economic, legal, regulatory or environmental conditions; purpose; structure; collateral support; and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.

The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk 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.

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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
September 30, 2018
Pass	$	182,275	$	1,228,716	$	1,410,991
Special mention	26,345		7,421		33,766
Substandard	5,195		31,915		37,110
Doubtful	—		—		—
Total	$	213,815	$	1,268,052	$	1,481,867

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
September 30, 2018
Residential real estate	$	1,482,771	$	3,052	$	1,485,823
Home equity	143,531		9		143,540
Consumer	31,869		—		31,869
DDA overdrafts	3,598		—		3,598
Total	$	1,661,769	$	3,061	$	1,664,830

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

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-accrual loans, by portfolio loan classification (in thousands):



	September 30, 2018
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Non-accrual		Total
Residential real estate	$	1,478,137	$	3,841	$	793	$	23	$	3,029	$	1,485,823
Home equity	143,072		407		52		9		—		143,540
Commercial and industrial	212,810		187		—		—		818		213,815
Commercial real estate	1,259,519		934		—		—		7,599		1,268,052
Consumer	31,829		38		1		—		1		31,869
DDA overdrafts	3,016		570		9		3		—		3,598
Total	$	3,128,383	$	5,977	$	855	$	35	$	11,447	$	3,146,697

	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	$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$80.05	17	$1,330

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-30	Other Events, Exhibits
8-K	2019-01-24	Earnings, Exhibits
8-K	2019-01-24	Earnings, Exhibits
8-K	2018-12-19	Officers, Other Events
8-K	2018-12-10	M&A, Exhibits
8-K	2018-10-22	Earnings, Exhibits
8-K	2018-09-26	Other Events, Exhibits
8-K	2018-08-22	Other Events
8-K	2018-08-01	Other Events, Exhibits
8-K	2018-07-19	Earnings, Exhibits
8-K	2018-07-11	Enter Agreement, Exhibits
8-K	2018-06-28	Regulation FD
8-K	2018-05-04	Shareholder Vote
8-K	2018-04-19	Earnings, Exhibits
8-K	2018-03-30	Regulation FD
8-K	2018-02-02	Officers, Exhibits
8-K	2018-02-01	Other Events
8-K	2018-01-24	Earnings, Exhibits

SIVB	Silicon Valley Bank
EWBC	East West Bancorp
CBU	Community Bank System
FBK	FB Financial
FISI	Financial Institutions
BSRR	Sierra Bancorp
CIVB	Civista Bancshares
CBAN	Colony Bankcorp
SSFN	Stewardship Financial
OPHC	Optimumbank Holdings

EX-31.A	exhibit31a09-30x20181.htm
EX-31.B	exhibit31b09-30x20181.htm
EX-32.A	exhibit32a09-30x20181.htm
EX-32.B	exhibit32b09-30x20181.htm



PART I	Financial Information	Pages

Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 4.	Controls and Procedures	57

PART II	Other Information

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58

Signatures		59