UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June~~September 30, 2020


☐			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

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

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $2.50 par value	CHCO	NASDAQ Global Select Market

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

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer	x	Accelerated filer	o
Non accelerated filer	o	Smaller reporting company	☐
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had outstanding ~~16,030,180~~15,787,854 shares of common stock as of ~~July~~October 31, 2020.

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 (as hereinafter defined) 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, 2019 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) the uncertainties on the Company’s business, results of operations and financial condition, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on financial markets, the effectiveness of the Company’s work from home arrangements and staffing levels in operational facilities, the impact of market participants on which the Company relies and actions taken by governmental authorities and other third parties in response to the pandemic; (3) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for credit losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (4) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (5) changes in the interest rate environment; (6) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (7) changes in technology and increased competition, including competition from non-bank financial institutions; (8) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers' performance and creditworthiness; (9) difficulty growing loan and deposit balances; (10) our ability to effectively execute our business plan, including with respect to future acquisitions; (11) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (12) deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions; (13) regulatory enforcement actions and adverse legal actions; (14) difficulty attracting and retaining key employees; (15) the Company’s ability to pursue available remedies in the event of a loan default for loans under the Paycheck Protection Program, ("PPP"), and ~~(15)~~the risk of holding the PPP loans at unfavorable interest rates and on terms that are less favorable than those with customers to whom the Company would have otherwise lent; 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

Table of Contents

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Table of Contents

Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)


		(Unaudited)					(Unaudited)
		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Assets	Assets							Assets
Cash and due from banks	Cash and due from banks	$	87,658	$	88,658	Cash and due from banks	$	76,451
Interest-bearing deposits in depository institutions	Interest-bearing deposits in depository institutions	285,596		51,486		Interest-bearing deposits in depository institutions	176,267		51,486
Cash and Cash Equivalents	Cash and Cash Equivalents	373,254		140,144		Cash and Cash Equivalents	252,718		140,144

Investment securities available for sale, at fair value	Investment securities available for sale, at fair value	1,055,185		810,106		Investment securities available for sale, at fair value	1,157,399		810,106
Investment securities held-to-maturity, at amortized cost (approximate fair value at June 30, 2020 and December 31, 2019 - $0 and $50,598, respectively)		—		49,036
Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2020 and December 31, 2019 - $0 and $50,598, respectively)						Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2020 and December 31, 2019 - $0 and $50,598, respectively)	0		49,036
Other securities	Other securities	26,144		28,490		Other securities	26,548		28,490
Total Investment Securities	Total Investment Securities	1,081,329		887,632		Total Investment Securities	1,183,947		887,632

Gross loans	Gross loans	3,665,596		3,616,099		Gross loans	3,663,966		3,616,099
Allowance for credit losses	Allowance for credit losses	(25,199)		(11,589)		Allowance for credit losses	(24,867)		(11,589)
Net Loans	Net Loans	3,640,397		3,604,510		Net Loans	3,639,099		3,604,510

Bank owned life insurance	Bank owned life insurance	116,746		115,261		Bank owned life insurance	117,501		115,261
Premises and equipment, net	Premises and equipment, net	77,991		76,965		Premises and equipment, net	77,031		76,965
Accrued interest receivable	Accrued interest receivable	14,200		11,569		Accrued interest receivable	16,627		11,569
Net deferred tax asset	Net deferred tax asset	—		6,669		Net deferred tax asset	0		6,669
Goodwill and other intangible assets, net	Goodwill and other intangible assets, net	119,417		120,241		Goodwill and other intangible assets, net	119,004		120,241
Other assets	Other assets	105,438		55,765		Other assets	105,361		55,765
Total Assets	Total Assets	$	5,528,772	$	5,018,756	Total Assets	$	5,511,288	$	5,018,756

Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	1,079,469	$	805,087	Noninterest-bearing	$	1,061,310	$	805,087
Interest-bearing:	Interest-bearing:					Interest-bearing:
Demand deposits	Demand deposits	921,761		896,465		Demand deposits	940,791		896,465
Savings deposits	Savings deposits	1,067,254		1,009,771		Savings deposits	1,117,684		1,009,771
Time deposits	Time deposits	1,342,631		1,364,571		Time deposits	1,300,291		1,364,571
Total Deposits	Total Deposits	4,411,115		4,075,894		Total Deposits	4,420,076		4,075,894

Short-term borrowings:	Short-term borrowings:					Short-term borrowings:
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	282,676		211,255		Securities sold under agreements to repurchase	279,866		211,255
Long-term debt	Long-term debt	—		4,056		Long-term debt	0		4,056
Net deferred tax liability	Net deferred tax liability	2,598		—		Net deferred tax liability	1,601		0
Other liabilities	Other liabilities	138,633		69,568		Other liabilities	118,386		69,568
Total Liabilities	Total Liabilities	4,835,022		4,360,773		Total Liabilities	4,819,929		4,360,773
Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Preferred stock, par value $25 per share: 500,000 shares authorized; NaN issued	Preferred stock, par value $25 per share: 500,000 shares authorized; NaN issued	—		—		Preferred stock, par value $25 per share: 500,000 shares authorized; NaN issued	0		0
Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares issued at June 30, 2020 and December 31, 2019, less 2,970,815 and 2,744,109 shares in treasury, respectively		47,619		47,619
Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares issued at September 30, 2020 and December 31, 2019, less 3,199,421 and 2,744,109 shares in treasury, respectively						Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares issued at September 30, 2020 and December 31, 2019, less 3,199,421 and 2,744,109 shares in treasury, respectively	47,619		47,619
Capital surplus	Capital surplus	169,881		170,309		Capital surplus	170,526		170,309
Retained earnings	Retained earnings	565,804		539,253		Retained earnings	576,901		539,253
Cost of common stock in treasury	Cost of common stock in treasury	(120,583)		(105,038)		Cost of common stock in treasury	(134,177)		(105,038)
Accumulated other comprehensive income:	Accumulated other comprehensive income:					Accumulated other comprehensive income:
Unrealized gain on securities available-for-sale	Unrealized gain on securities available-for-sale	37,299		12,110		Unrealized gain on securities available-for-sale	36,760		12,110
Underfunded pension liability	Underfunded pension liability	(6,270)		(6,270)		Underfunded pension liability	(6,270)		(6,270)
Total Accumulated Other Comprehensive Income	Total Accumulated Other Comprehensive Income	31,029		5,840		Total Accumulated Other Comprehensive Income	30,490		5,840
Total Shareholders’ Equity	Total Shareholders’ Equity	693,750		657,983		Total Shareholders’ Equity	691,359		657,983
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	5,528,772	$	5,018,756	Total Liabilities and Shareholders’ Equity	$	5,511,288	$	5,018,756

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands, except earnings per share data)


Interest Income	Interest Income	Three months ended June 30,							Six months ended June 30,						Interest Income	Three months ended September 30,					Nine months ended September 30,
				2020		2019			2020		2019		Interest Income	2020		2019			2020		2019

Interest and fees on loans	Interest and fees on loans	$	37,718	$	43,174		$	79,053	$	85,453	Interest and fees on loans	$		$	42,944		$	114,813	$	128,397
Interest and dividends on investment securities:	Interest and dividends on investment securities:										Interest and dividends on investment securities:
Taxable	Taxable	5,718		5,732			11,589		11,421		Taxable	6,266		6,044			17,855		17,465
Tax-exempt	Tax-exempt	821		755			1,528		1,534		Tax-exempt	1,132		722			2,659		2,257
Interest on deposits in depository institutions	Interest on deposits in depository institutions	55		577			360		763		Interest on deposits in depository institutions	72		271			432		1,034
Total Interest Income	Total Interest Income	44,312		50,238			92,530		99,171		Total Interest Income	43,231		49,981			135,759		149,153

Interest Expense	Interest Expense										Interest Expense
Interest on deposits	Interest on deposits	5,963		8,417			13,201		16,184		Interest on deposits	5,123		8,585			18,324		24,768
Interest on short-term borrowings	Interest on short-term borrowings	279		863			743		1,915		Interest on short-term borrowings	131		814			873		2,729
Interest on long-term debt	Interest on long-term debt	—		47			100		95		Interest on long-term debt	0		45			100		140
Total Interest Expense	Total Interest Expense	6,242		9,327			14,044		18,194		Total Interest Expense	5,254		9,444			19,297		27,637
Net Interest Income	Net Interest Income	38,070		40,911			78,486		80,977		Net Interest Income	37,977		40,537			116,462		121,516
Provision for (recovery of) credit losses	Provision for (recovery of) credit losses	1,250		(600)			9,222		(1,449)		Provision for (recovery of) credit losses	1,026		274			10,248		(1,175)
Net Interest Income After Provision for (Recovery of) Credit Losses	Net Interest Income After Provision for (Recovery of) Credit Losses	36,820		41,511			69,264		82,426		Net Interest Income After Provision for (Recovery of) Credit Losses	36,951		40,263			106,214		122,691

Non-Interest Income	Non-Interest Income										Non-Interest Income
(Losses) gains on sale of investment securities, net	(Losses) gains on sale of investment securities, net	(6)		21			56		109		(Losses) gains on sale of investment securities, net	0		(40)			56		69
Unrealized gains (losses) recognized on equity securities still held	Unrealized gains (losses) recognized on equity securities still held	242		113			(2,159)		188		Unrealized gains (losses) recognized on equity securities still held	461		(214)			(1,698)		(27)
Service charges	Service charges	4,945		7,778			12,667		15,099		Service charges	6,295		8,183			18,962		23,281
Bankcard revenue	Bankcard revenue	5,888		5,522			11,003		10,491		Bankcard revenue	6,065		5,440			17,068		15,931
Trust and investment management fee income	Trust and investment management fee income	1,931		1,699			3,730		3,341		Trust and investment management fee income	1,844		1,802			5,574		5,144
Bank owned life insurance	Bank owned life insurance	848		1,132			2,523		2,148		Bank owned life insurance	1,088		762			3,611		2,910
Sale of VISA shares	Sale of VISA shares	—		—			17,837		—		Sale of VISA shares	0		0			17,837		0
Other income	Other income	783		1,560			2,318		2,374		Other income	1,232		765			3,550		3,139
Total Non-Interest Income	Total Non-Interest Income	14,631		17,825			47,975		33,750		Total Non-Interest Income	16,985		16,698			64,960		50,447

Non-Interest Expense	Non-Interest Expense										Non-Interest Expense
Salaries and employee benefits	Salaries and employee benefits	14,873		15,767			30,724		31,010		Salaries and employee benefits	15,361		15,210			46,085		46,220
Occupancy related expense	Occupancy related expense	2,402		2,598			4,890		5,330		Occupancy related expense	2,428		2,725			7,318		8,055
Equipment and software related expense	Equipment and software related expense	2,504		2,223			4,933		4,414		Equipment and software related expense	2,607		2,248			7,540		6,662
FDIC insurance expense	FDIC insurance expense	167		347			167		638		FDIC insurance expense	355		0			522		639
Advertising	Advertising	933		920			1,776		1,789		Advertising	462		861			2,238		2,650
Bankcard expenses	Bankcard expenses	1,498		1,534			2,933		2,716		Bankcard expenses	1,517		1,554			4,450		4,270
Postage, delivery, and statement mailings	Postage, delivery, and statement mailings	592		545			1,208		1,169		Postage, delivery, and statement mailings	513		659			1,721		1,828
Office supplies	Office supplies	353		399			747		785		Office supplies	396		382			1,143		1,167
Legal and professional fees	Legal and professional fees	589		605			1,190		1,126		Legal and professional fees	548		539			1,738		1,665
Telecommunications	Telecommunications	531		597			1,042		1,323		Telecommunications	547		569			1,589		1,892
Repossessed asset losses, net of expenses		76		253			274		469
Repossessed asset losses (gains), net of expenses											Repossessed asset losses (gains), net of expenses	39		(59)			313		410
Merger related costs	Merger related costs	—		547			—		797		Merger related costs	0		0			0		797
Other expenses	Other expenses	3,950		4,437			8,052		8,617		Other expenses	3,939		3,709			11,992		12,326
Total Non-Interest Expense	Total Non-Interest Expense	28,468		30,772			57,936		60,183		Total Non-Interest Expense	28,712		28,397			86,649		88,581
Income Before Income Taxes	Income Before Income Taxes	22,983		28,564			59,303		55,993		Income Before Income Taxes	25,224		28,564			84,525		84,557
Income tax expense	Income tax expense	4,732		5,813			12,054		11,623		Income tax expense	5,098		6,193			17,151		17,816
Net Income Available to Common Shareholders	Net Income Available to Common Shareholders	$	18,251	$	22,751		$	47,249	$	44,370	Net Income Available to Common Shareholders	$	20,126	$	22,371		$	67,374	$	66,741

Table of Contents


Average shares outstanding, basic	Average shares outstanding, basic	16,081		16,368		16,123		16,390		Average shares outstanding, basic	15,950		16,271		16,065		16,350
Effect of dilutive securities	Effect of dilutive securities	16		18		19		18		Effect of dilutive securities	20		18		19		18
Average shares outstanding, diluted	Average shares outstanding, diluted	16,097		16,386		16,142		16,408		Average shares outstanding, diluted	15,970		16,289		16,084		16,368

Basic earnings per common share	Basic earnings per common share	$	1.12	$	1.38	$	2.90	$	2.68	Basic earnings per common share	$	1.25	$	1.36	$	4.15	$	4.05
Diluted earnings per common share	Diluted earnings per common share	$	1.12	$	1.38	$	2.90	$	2.68	Diluted earnings per common share	$	1.25	$	1.36	$	4.15	$	4.04

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 30,						June 30,							September 30,
		2020		2019		2020		2019			2020		2019		2020		2019

Net income available to common shareholders	Net income available to common shareholders	$	18,251	$	22,751	$	47,249	$	44,370	Net income available to common shareholders	$	20,126	$	22,371	$	67,374	$	66,741

Available-for-Sale Securities	Available-for-Sale Securities									Available-for-Sale Securities
Unrealized gains on available-for-sale securities arising during the period		4,652		14,309		31,365		25,671
Reclassification adjustment for gains		6		(21)		(56)		(109)
Unrealized (losses) gains on available-for-sale securities arising during the period										Unrealized (losses) gains on available-for-sale securities arising during the period	(703)		8,199		30,662		33,870
Reclassification adjustment for gains (losses)										Reclassification adjustment for gains (losses)	0		40		(56)		(69)
Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	—		—		1,562		—		Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	0		0		1,562		0
Other comprehensive income before income taxes	Other comprehensive income before income taxes	4,658		14,288		32,871		25,562		Other comprehensive income before income taxes	(703)		8,239		32,168		33,801
Tax effect	Tax effect	(1,089)		(3,349)		(7,682)		(5,992)		Tax effect	164		(1,932)		(7,518)		(7,924)
Other comprehensive income, net of tax	Other comprehensive income, net of tax	3,569		10,939		25,189		19,570		Other comprehensive income, net of tax	(539)		6,307		24,650		25,877

Comprehensive Income, Net of Tax	Comprehensive Income, Net of Tax	$	21,820	$	33,690	$	72,438	$	63,940	Comprehensive Income, Net of Tax	$	19,587	$	28,678	$	92,024	$	92,618

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Three Months Ended ~~June~~September 30, 2020 and 2019

(in ~~thousands)~~thousands, except share amounts)

Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity
Balance at March 31, 2019 $ 47,619 $ 170,215 $ 498,847 $ (91,589) $ (5,851) $ 619,241
Net income — — 22,751 — — 22,751
Other comprehensive income (loss) — — — — 10,939 10,939
Cash dividends declared ($0.53 per share) — — (8,687) — — (8,687)
Stock-based compensation expense — 571 — — — 571
Restricted awards granted — (1,333) — 1,333 — —
Exercise of 2,502 stock options — (79) — 192 — 113
Purchase of 107,210 treasury shares — — — (8,020) — (8,020)
Balance at June 30, 2019 $ 47,619 $ 169,374 $ 512,911 $ (98,084) $ 5,088 $ 636,908


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at June 30, 2019	$	47,619	$	169,374	$	512,911	$	(98,084)	$	5,088	$	636,908
Net income	—		—		22,371		—		—		22,371
Other comprehensive income	—		—		—		—		6,307		6,307
Cash dividends declared ($0.57 per share)	—		—		(9,349)		—		—		(9,349)
Stock-based compensation expense	—		527		—		—		—		527
Exercise of 3,581 stock options	—		(107)		—		268		—		161
Purchase of 98,724 treasury shares	—		—		—		(7,322)		—		(7,322)
Balance at September 30, 2019	$	47,619	$	169,794	$	525,933	$	(105,138)	$	11,395	$	649,603


		Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity			Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at March 31, 2020		$	47,619	$	170,096	$	556,718	$	(116,665)	$	27,460	$	685,228
Balance at June 30, 2020														Balance at June 30, 2020	$	47,619	$	169,881	$	565,804	$	(120,583)	$	31,029	$	693,750
Net income	Net income	—		—		18,251		—		—		18,251		Net income	—		—		20,126		—		—		20,126
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—		—		—		3,569		3,569		Other comprehensive income (loss)	—		—		—		—		(539)		(539)
Cash dividends declared ($0.57 per share)	Cash dividends declared ($0.57 per share)	—		—		(9,165)		—		—		(9,165)		Cash dividends declared ($0.57 per share)	—		—		(9,029)		—		—		(9,029)
Stock-based compensation expense	Stock-based compensation expense	—		693		—		—		—		693		Stock-based compensation expense	—		753		—		—		—		753
Restricted awards granted	Restricted awards granted	—		(879)		—		879		—		—		Restricted awards granted	—		(93)		—		93		—		0
Exercise of 1,516 stock options		—		(29)		—		96		—		67
Purchase of 79,238 treasury shares		—		—		—		(4,893)		—		(4,893)
Balance at June 30, 2020		$	47,619	$	169,881	$	565,804	$	(120,583)	$	31,029	$	693,750
Exercise of 755 stock options														Exercise of 755 stock options	—		(15)		—		49		—		34
Purchase of 230,861 treasury shares														Purchase of 230,861 treasury shares	—		—		—		(13,736)		—		(13,736)
Balance at September 30, 2020														Balance at September 30, 2020	$	47,619	$	170,526	$	576,901	$	(134,177)	$	30,490	$	691,359

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

~~Six~~Nine Months Ended ~~June~~September 30, 2020 and 2019

(in ~~thousands)~~thousands, except share amounts)

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 — — 44,370 — — 44,370
Other comprehensive income (loss) — — — — 19,570 19,570
Cash dividends declared ($1.06 per share) — — (17,426) — — (17,426)
Stock-based compensation expense — 1,374 — — — 1,374
Restricted awards granted — (1,557) — 1,557 — —
Exercise of 8,140 stock options — 2 — 363 — 365
Purchase of 161,950 treasury shares — — — (12,109) — (12,109)
Balance at June 30, 2019 $ 47,619 $ 169,374 $ 512,911 $ (98,084) $ 5,088 $ 636,908


	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	—		—		66,741		—		—		66,741
Other comprehensive income	—		—		—		—		25,877		25,877
Cash dividends declared ($1.63 per share)	—		—		(26,775)		—		—		(26,775)
Stock-based compensation expense	—		1,901		—		—		—		1,901
Restricted awards granted	—		(1,557)		—		1,557		—		0
Exercise of 11,721 stock options	—		(105)		—		631		—		526
Purchase of 260,674 treasury shares	—		—		—		(19,431)		—		(19,431)
Balance at September 30, 2019	$	47,619	$	169,794	$	525,933	$	(105,138)	$	11,395	$	649,603


		Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity			Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at December 31, 2019	Balance at December 31, 2019	$	47,619	$	170,309	$	539,253	$	(105,038)	$	5,840	$	657,983	Balance at December 31, 2019	$	47,619	$	170,309	$	539,253	$	(105,038)	$	5,840	$	657,983
Adoption of ASU 2016-13	Adoption of ASU 2016-13	—		—		(2,335)		—		—		(2,335)		Adoption of ASU 2016-13	—		—		(2,335)		—		—		(2,335)
Net income	Net income	—		—		47,249		—		—		47,249		Net income	—		—		67,374		—		—		67,374
Other comprehensive income (loss)		—		—		—		—		25,189		25,189
Cash dividends declared ($1.14 per share)		—		—		(18,363)		—		—		(18,363)
Other comprehensive income														Other comprehensive income	—		—		—		—		24,650		24,650
Cash dividends declared ($1.71 per share)														Cash dividends declared ($1.71 per share)	—		—		(27,391)		—		—		(27,391)
Stock-based compensation expense	Stock-based compensation expense	—		1,702		—		—		—		1,702		Stock-based compensation expense	—		2,455		—		—		—		2,455
Restricted awards granted	Restricted awards granted	—		(2,033)		—		2,033		—		—		Restricted awards granted	—		(2,126)		—		2,126		—		0
Exercise of 4,166 stock options		—		(97)		—		286		—		189
Purchase of 261,137 treasury shares		—		—		—		(17,864)		—		(17,864)
Balance at June 30, 2020		$	47,619	$	169,881	$	565,804	$	(120,583)	$	31,029	$	693,750
Exercise of 4,921 stock options														Exercise of 4,921 stock options	—		(112)		—		335		—		223
Purchase of 491,998 treasury shares														Purchase of 491,998 treasury shares	—		—		—		(31,600)		—		(31,600)
Balance at September 30, 2020														Balance at September 30, 2020	$	47,619	$	170,526	$	576,901	$	(134,177)	$	30,490	$	691,359

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


		Six months ended June 30,									Nine months ended September 30,
				2020			2019			2020			2019
Net income	Net income	$	47,249		$	44,370	Net income	$			$	66,741
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion) and amortization, net	(Accretion) and amortization, net	873			557		(Accretion) and amortization, net	2,911			521
Provision for (recovery of) credit losses	Provision for (recovery of) credit losses	9,222			(1,449)		Provision for (recovery of) credit losses	10,248			(1,175)
Depreciation of premises and equipment	Depreciation of premises and equipment	2,772			2,467		Depreciation of premises and equipment	4,285			3,736
Deferred income tax expense	Deferred income tax expense	2,323			2,134		Deferred income tax expense	1,035			2,906
Net periodic employee benefit cost	Net periodic employee benefit cost	362			386		Net periodic employee benefit cost	542			579
Unrealized and realized investment securities losses (gains), net	Unrealized and realized investment securities losses (gains), net	2,103			(297)		Unrealized and realized investment securities losses (gains), net	1,642			(42)
Stock-compensation expense	Stock-compensation expense	1,702			1,374		Stock-compensation expense	2,455			1,901
Excess tax benefit from stock-compensation expense	Excess tax benefit from stock-compensation expense	(137)			(433)		Excess tax benefit from stock-compensation expense	(160)			(461)
Increase in value of bank-owned life insurance	Increase in value of bank-owned life insurance	(2,523)			(2,148)		Increase in value of bank-owned life insurance	(3,611)			(2,910)
Loans held for sale	Loans held for sale						Loans held for sale
Loans originated for sale	Loans originated for sale	(9,372)			(9,915)		Loans originated for sale	(19,345)			(14,229)
Proceeds from the sale of loans originated for sale	Proceeds from the sale of loans originated for sale	9,854			10,584		Proceeds from the sale of loans originated for sale	19,790			15,192
Gain on sale of loans	Gain on sale of loans	(177)			(284)		Gain on sale of loans	(277)			(421)
Payments for other operating activities	Payments for other operating activities	(450)			—		Payments for other operating activities	(450)			0
Change in accrued interest receivable	Change in accrued interest receivable	(2,631)			(295)		Change in accrued interest receivable	(5,058)			(505)
Change in other assets	Change in other assets	(9,515)			(1,231)		Change in other assets	(14,550)			(1,585)
Change in other liabilities	Change in other liabilities	16,334			2,600		Change in other liabilities	13,398			6,106
Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities	67,989			48,420		Net Cash Provided by Operating Activities	80,229			76,354

Net (increase) decrease in loans	Net (increase) decrease in loans	(46,146)			68,403		Net (increase) decrease in loans	(45,316)			5,332
Securities available-for-sale	Securities available-for-sale						Securities available-for-sale
Purchases	Purchases	(232,478)			(113,412)		Purchases	(393,932)			(170,396)
Proceeds from sales	Proceeds from sales	28,548			31,597		Proceeds from sales	28,548			70,241
Proceeds from maturities and calls	Proceeds from maturities and calls	51,246			31,982		Proceeds from maturities and calls	96,021			55,237
Securities held-to-maturity	Securities held-to-maturity						Securities held-to-maturity
Proceeds from maturities and calls	Proceeds from maturities and calls	—			7,427		Proceeds from maturities and calls	0			9,554
Other investments	Other investments						Other investments
Purchases	Purchases	(2,132)			(9,365)		Purchases	(2,173)			(10,366)
Proceeds from sales	Proceeds from sales	2,282			11,857		Proceeds from sales	2,386			12,555
Purchases of premises and equipment	Purchases of premises and equipment	(3,798)			(3,017)		Purchases of premises and equipment	(4,351)			(3,515)
Proceeds from bank-owned life insurance policies	Proceeds from bank-owned life insurance policies	1,513			2,211		Proceeds from bank-owned life insurance policies	1,940			2,211
Sale of Virginia Beach branch, net	Sale of Virginia Beach branch, net	—			(24,661)		Sale of Virginia Beach branch, net	0			(24,661)
Other investing activities	Other investing activities	(142)			(3,414)		Other investing activities	(233)			(4,522)
Net Cash Used in Investing Activities	Net Cash Used in Investing Activities	(201,107)			(392)		Net Cash Used in Investing Activities	(317,110)			(58,330)

Net increase in non-interest-bearing deposits	Net increase in non-interest-bearing deposits	274,382			19,696		Net increase in non-interest-bearing deposits	256,223			17,188
Net increase in interest-bearing deposits	Net increase in interest-bearing deposits	61,150			62,574		Net increase in interest-bearing deposits	88,425			63,099
Net increase (decrease) in short-term borrowings	Net increase (decrease) in short-term borrowings	71,421			(54,878)		Net increase (decrease) in short-term borrowings	68,611			(59,289)
Repayment of long-term debt	Repayment of long-term debt	(4,124)			—		Repayment of long-term debt	(4,124)			0
Purchases of treasury stock	Purchases of treasury stock	(17,864)			(12,109)		Purchases of treasury stock	(31,600)			(19,431)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	189			365		Proceeds from exercise of stock options	223			526
Dividends paid	Dividends paid	(18,492)			(17,510)		Dividends paid	(27,651)			(26,257)
Other financing activities	Other financing activities	(434)			(438)		Other financing activities	(652)			(657)
Net Cash Provided by (Used in) Financing Activities	Net Cash Provided by (Used in) Financing Activities	366,228			(2,300)		Net Cash Provided by (Used in) Financing Activities	349,455			(24,821)
Increase in Cash and Cash Equivalents		233,110			45,728
Increase (Decrease) in Cash and Cash Equivalents							Increase (Decrease) in Cash and Cash Equivalents	112,574			(6,797)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	140,144			122,991		Cash and cash equivalents at beginning of period	140,144			122,991
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$	373,254		$	168,719	Cash and Cash Equivalents at End of Period	$	252,718		$	116,194

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Supplemental Cash Flow Information:	Supplemental Cash Flow Information:					Supplemental Cash Flow Information:
Cash paid for interest	Cash paid for interest	$	14,878	$	18,333	Cash paid for interest	$	20,491	$	27,884
Cash paid for income taxes	Cash paid for income taxes	2,400		7,025		Cash paid for income taxes	21,975		12,500

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)

~~June~~September 30, 2020

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 94 banking offices in West Virginia (58), Kentucky (19), Virginia (13) 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 1 reportable business segment, which is community banking.

On January 30, 2019, the Company announced that City National had signed a definitive agreement to sell its Virginia Beach, Virginia branch. The terms of the agreement provided for the acquirer to assume the majority of deposits and to acquire the equipment and other select assets associated with the branch, while City National retained the loans. The transaction closed during the second quarter of 2019. As a result of this transaction, the Company recognized a gain of $0.7 million and outstanding deposit balances decreased by $25.7 million.

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding 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 ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2020. 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.~~S-X, and with Industry Guide 3, Statistical Disclosure by Bank Holding Companies. 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, 2019 has been derived from audited financial statements included in the Company’s 2019 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 2019 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:

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 credit 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 December 2018, the federal bank regulators issued a final rule that would provide an optional three-year phase-in period for the day-one regulatory capital effects of the adoption of ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial

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Instruments, as amended, on January 1, 2020. In April 2020, federal bank regulators issued an interim final rule which provided banking organizations that implement CECL before the end of 2020 the option to delay for two more years an estimate of CECL's effect on regulatory capital, followed by the three-year transition period as previously issued. Management has elected to utilize the five-year interim final rule.

The Company adopted 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet ("OBS") credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company adopted 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased-credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether the PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $2.7 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income over the remaining life of the asset.

The following table illustrates the impact of ASC 326 (in thousands):


	As Reported Under		Pre-ASC 326		Impact of ASC 326
	ASC 326		Adoption		Adoption

Gross Loans	$	3,618,825	$	3,616,099	$	2,726
Allowance for Credit Losses	(17,349)		(11,589)		(5,760)
Deferred Tax Assets, net	7,380		6,669		711

Shareholders' Equity	655,648		657,983		(2,335)

As a result of the adoption of ASU 2016-13, the Company revised some of its existing accounting policies as noted below:

Allowance for Credit Losses - Available-for-Sale Securities: For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Purchased Credit Deteriorated ("PCD") Loans: The Company has purchased loans during its acquisitions, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and the allowance for credit losses becomes the initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is accreted or amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

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Allowance for Credit Losses - Loans: The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:


Portfolio Segment			Measurement Method
Commercial and industrial			Migration
Commercial real estate:
1-4 family			Migration
Hotels			Migration
Multi-family			Migration
Non Residential Non-Owner Occupied			Migration
Non Residential Owner Occupied			Migration
Residential real estate			Vintage
Home equity			Vintage
Consumer			Vintage

Migration is an analysis that tracks a closed pool of loans for a configurable period of time and calculates a loss ratio on only those loans in the pool at the start date based on outstanding balance. Vintage is a predictive loss model that includes a reasonable approximation of probable and estimable future losses by tracking each loan's net losses over the life of the loan as compared to its original balance. For demand deposit overdrafts, the allowance for credit losses is measured using the historical loss rate. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable, the expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled-debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Troubled Debt Restructurings ("TDRs"): A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.

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 became effective for the Company on January 1, 2020. The adoption of ASU No. 2017-04 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

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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 amendment became effective for the Company on January 1, 2020. Effective January 1, 2020, the Company reclassified its held-to-maturity securities as available-for-sale utilizing the transition guidance under ASU 2019-04, and the unrealized gains/losses on these investments will be recorded through Other Comprehensive Income.

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 became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-13 did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-15 did not 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 with anticipation the LIBOR index will be phased out by the end of 2021. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This amendment provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and is effective as of March 12, 2020 through December 31, 2022. ~~The Company is in~~Management has reviewed the ~~process of reviewing all of its contracts that will be impacted by changing~~loan portfolio and taken the appropriate steps to prepare for the change from LIBOR to SOFR.

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 became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-17 did not have a material impact on the Company's financial statements.

Pending Adoption:

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.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. This ASU will become effective for the Company on January 1, 2021. The adoption of ASU No. 2019-12 is not expected to have a material impact on the Company's financial statements.

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Note C – Investments

The aggregate carrying and approximate fair ~~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.


		June 30, 2020														December 31, 2019																				September 30, 2020							December 31, 2019
				Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			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:	Securities available-for-sale:																	Securities available-for-sale:
U.S. Treasuries and U.S.	U.S. Treasuries and U.S.																	U.S. Treasuries and U.S.
government agencies	government agencies	$	—	$	—	$	—	$	—	$	500	$	2	$	—	$	502	government agencies	$		0		$	0		$	0		$	0		$	500		$	2		$	0		$	502
Obligations of states and	Obligations of states and																	Obligations of states and
political subdivisions	political subdivisions	211,439		7,383		595		218,227		112,393		4,800		6		117,187		political subdivisions	255,677		8,369			744			263,302			112,393			4,800			6			117,187
Mortgage-backed securities:	Mortgage-backed securities:																	Mortgage-backed securities:
U.S. government agencies	U.S. government agencies	746,148		40,638		279		786,507		631,637		12,292		1,825		642,104		U.S. government agencies	804,912		38,459			138			843,233			631,637			12,292			1,825			642,104
Private label	Private label	10,477		876		4		11,349		10,896		589		—		11,485		Private label	10,375		1,002			0			11,377			10,896			589			0			11,485
Trust preferred securities	Trust preferred securities	4,551		—		1,071		3,480		4,781		27		347		4,461		Trust preferred securities	4,554		0			662			3,892			4,781			27			347			4,461
Corporate securities	Corporate securities	31,568		1,857		44		33,381		31,669		500		43		32,126		Corporate securities	31,515		1,859			20			33,354			31,669			500			43			32,126
Total Debt Securities	Total Debt Securities	1,004,183		50,754		1,993		1,052,944		791,876		18,210		2,221		807,865		Total Debt Securities	1,107,033		49,689			1,564			1,155,158			791,876			18,210			2,221			807,865
Certificates of deposit held for investment	Certificates of deposit held for investment	2,241		—		—		2,241		2,241		—		—		2,241		Certificates of deposit held for investment	2,241		—			—			2,241			2,241			—			—			2,241
Total Securities Available-for-Sale	Total Securities Available-for-Sale	$	1,006,424	$	50,754	$	1,993	$	1,055,185	$	794,117	$	18,210	$	2,221	$	810,106	Total Securities Available-for-Sale	$	1,109,274	$	49,689		$	1,564		$	1,157,399		$	794,117		$	18,210		$	2,221		$	810,106


Securities held-to-maturity:	Securities held-to-maturity:																	Securities held-to-maturity:
Mortgage-backed securities:	Mortgage-backed securities:																	Mortgage-backed securities:
U.S. government agencies	U.S. government agencies	$	—	$	—	$	—	$	—	$	49,036	$	1,562	$	—	$	50,598	U.S. government agencies	$	0	$	0	$	0	$	0	$	49,036	$	1,562	$	0	$	50,598
Total Securities Held-to-Maturity	Total Securities Held-to-Maturity	$	—	$	—	$	—	$	—	$	49,036	$	1,562	$	—	$	50,598	Total Securities Held-to-Maturity	$	0	$	0	$	0	$	0	$	49,036	$	1,562	$	0	$	50,598

Effective January 1, 2020, the Company reclassified its held-to-maturity securities as available-for-sale utilizing the transition guidance under ASU 2019-04, and the unrealized gains/losses on these investments will be recorded through Other Comprehensive Income.

The Company's other investment securities include marketable and non-marketable equity securities. At ~~June~~September 30, 2020 and December 31, 2019, the Company held ~~$10.5~~$10.9 million and $12.6 million, respectively, in marketable equity securities. Marketable equity securities mainly 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%). Changes in the fair value of the marketable equity securities are recorded in "unrealized gains (losses) recognized on equity securities still held" in the consolidated statements of income. 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 ~~June~~September 30, 2020 and December 31, 2019, the Company held ~~$15.7~~$15.6 million and $15.9 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 ~~June~~September 30, 2020 and December 31, 2019 there were 0 securities of any non-governmental issuer whose aggregate carrying value or estimated fair value exceeded 10% of shareholders' equity.

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 ~~June~~September 30, 2020 and December 31, 2019. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

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		June 30, 2020																												September 30, 2020
				Less Than Twelve Months						Twelve Months or Greater						Total											Less Than Twelve Months				Twelve Months or Greater			Total
				Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss				Estimated Fair Value			Unrealized Loss			Estimated Fair Value			Unrealized Loss			Estimated Fair Value			Unrealized Loss
Securities available-for-sale:	Securities available-for-sale:													Securities available-for-sale:
Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	35,005	$	595	$	—	$	—	$	35,005	$	595	Obligations of states and political subdivisions	$			744		$	0		$	0					$	55,480		$	744
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
U.S. Government agencies	U.S. Government agencies	83,810		279		38		—		83,848		279		U.S. Government agencies	62,156				138			36			0			62,192			138
Private Label		275		4		—		—		275		4
Trust preferred securities	Trust preferred securities	—		—		3,480		1,071		3,480		1,071		Trust preferred securities	0			0			3,892			662			3,892			662
Corporate securities	Corporate securities	445		44		—		—		445		44		Corporate securities	469			20			0			0			469			20
Total available-for-sale	Total available-for-sale	$	119,535	$	922	$	3,518	$	1,071	$	123,053	$	1,993	Total available-for-sale	$		118,105		$	902		$	3,928		$	662		$	122,033		$	1,564


		December 31, 2019																												December 31, 2019
				Less Than Twelve Months						Twelve Months or Greater						Total											Less Than Twelve Months				Twelve Months or Greater			Total
				Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss				Estimated Fair Value			Unrealized Loss			Estimated Fair Value			Unrealized Loss			Estimated Fair Value			Unrealized Loss
Securities available-for-sale:	Securities available-for-sale:													Securities available-for-sale:
Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	230	$	—	$	1,439	$	6	$	1,669	$	6	Obligations of states and political subdivisions	$			0		$	1,439		$	6					$	1,669		$	6
Mortgage-backed securities:	Mortgage-backed securities:													Mortgage-backed securities:
U.S. Government agencies	U.S. Government agencies	123,289		1,247		34,746		578		158,035		1,825		U.S. Government agencies	123,289				1,247			34,746			578			158,035			1,825
Trust preferred securities	Trust preferred securities	4,200		347		—		—		4,200		347		Trust preferred securities	4,200			347			0			0			4,200			347
Corporate securities	Corporate securities	11,248		43		—		—		11,248		43		Corporate securities	11,248			43			0			0			11,248			43
Total available-for-sale	Total available-for-sale	$	138,967	$	1,637	$	36,185	$	584	$	175,152	$	2,221	Total available-for-sale	$		138,967		$	1,637		$	36,185		$	584		$	175,152		$	2,221

There were 0 held-to-maturity securities in an unrealized loss position as of December 31, 2019.

The Company incurred 0 credit-related investment impairment losses in either the ~~six~~nine months ended ~~June~~September 30, 2020 or ~~June~~September 30, 2019.

Declines in the fair value of 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.

As of ~~June~~September 30, 2020, 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 ~~June~~September 30, 2020, management believes the unrealized losses detailed in the table above are temporary and therefore no allowance for credit losses has been recognized on the Company’s securities.

The amortized cost and estimated fair value of debt securities at ~~June~~September 30, 2020, 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.

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		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Available-for-Sale Debt Securities	Available-for-Sale Debt Securities					Available-for-Sale Debt Securities
Due in one year or less	Due in one year or less	$	2,050	$	2,062	Due in one year or less	$	2,261	$	2,270
Due after one year through five years	Due after one year through five years	15,327		15,900		Due after one year through five years	16,269		16,817
Due after five years through ten years	Due after five years through ten years	294,981		312,351		Due after five years through ten years	288,225		305,691
Due after ten years	Due after ten years	691,825		722,631		Due after ten years	800,278		830,380
Total	Total	$	1,004,183	$	1,052,944	Total	$	1,107,033	$	1,155,158

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


		Three months ended June 30,						Six months ended June 30,							Three months ended September 30,				Nine months ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Gross realized gains on securities sold	Gross realized gains on securities sold	$	—	$	21	$	133	$	110	Gross realized gains on securities sold	$	0	$	116	$	133	$	226
Gross realized losses on securities sold	Gross realized losses on securities sold	(6)		—		(77)		(1)		Gross realized losses on securities sold	0		(156)		(77)		(157)
Net investment security (losses) gains	Net investment security (losses) gains	$	(6)	$	21	$	56	$	109	Net investment security (losses) gains	$	0	$	(40)	$	56	$	69

Gross unrealized gains recognized on equity securities still held	Gross unrealized gains recognized on equity securities still held	$	242	$	113	$	36	$	241	Gross unrealized gains recognized on equity securities still held	$	461	$	14	$	170	$	255
Gross unrealized losses recognized on equity securities still held	Gross unrealized losses recognized on equity securities still held	—		—		(2,195)		(53)		Gross unrealized losses recognized on equity securities still held	0		(228)		(1,868)		(282)
Net unrealized gains (losses) recognized on equity securities still held	Net unrealized gains (losses) recognized on equity securities still held	$	242	$	113	$	(2,159)	$	188	Net unrealized gains (losses) recognized on equity securities still held	$	461	$	(214)	$	(1,698)	$	(27)

During January 2020, the Company sold the entirety of its Visa Inc. Class B common shares (86,605) in a cash transaction which resulted in a pre-tax gain of $17.8 million. The carrying value of the Visa Class B shares on the Company's balance sheet was $0, as the Company had no historical cost basis in the shares.

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated ~~$581~~$618 million and $519 million at ~~June~~September 30, 2020 and December 31, 2019, respectively.

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Note D –Loans

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


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Commercial and industrial	Commercial and industrial	369,122		308,015		Commercial and industrial	383,980		308,015

1-4 Family	1-4 Family	123,814		N/R		1-4 Family	114,071		N/R
Hotels	Hotels	295,179		N/R		Hotels	295,989		N/R
Multi-family	Multi-family	204,580		N/R		Multi-family	214,394		N/R
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	628,628		N/R		Non Residential Non-Owner Occupied	628,814		N/R
Non Residential Owner Occupied	Non Residential Owner Occupied	215,472		N/R		Non Residential Owner Occupied	211,433		N/R
Commercial real estate	Commercial real estate	1,467,673		1,459,737		Commercial real estate	1,464,701		1,459,737

Residential real estate	Residential real estate	1,631,151		1,640,396		Residential real estate	1,621,265		1,640,396
Home equity	Home equity	142,672		148,928		Home equity	140,135		148,928
Consumer	Consumer	52,278		54,263		Consumer	50,541		54,263
DDA overdrafts	DDA overdrafts	2,700		4,760		DDA overdrafts	3,344		4,760
Gross loans	Gross loans	3,665,596		3,616,099		Gross loans	3,663,966		3,616,099
Allowance for credit losses	Allowance for credit losses	(25,199)		(11,589)		Allowance for credit losses	(24,867)		(11,589)
Net loans	Net loans	$	3,640,397	$	3,604,510	Net loans	$	3,639,099	$	3,604,510

Construction loans included in:	Construction loans included in:					Construction loans included in:
Residential real estate	Residential real estate	$	28,252	$	29,033	Residential real estate	$	28,947	$	29,033
Commercial real estate	Commercial real estate	42,092		64,049		Commercial real estate	42,449		64,049
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.									N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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 policies, which are 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 credit losses.

The Company originated loans to its customers under the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”) under the provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balances, if any, after the loan forgiveness, are fully guaranteed by the SBA. As of ~~June~~September 30, 2020, the Company has funded approximately $90 million of SBA-approved PPP loans to over 1,500 customers. Under the terms of the program, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans less than $350,000; 3% for loans greater than $350,000 but less than $2.0 million; and 1% for loans greater than $2.0 million). The Company expects to recognize approximately $3.0 million in PPP loan related processing fees, net of associated expenses, over the term of these loans.

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Note E – Allowance For Credit Losses

The following table summarizes the activity in the allowance for credit losses, by portfolio loan classification, for the ~~six~~three and nine months ended ~~June~~September 30, 2020 and 2019 (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.


		Commercial and		Commercial		Residential						DDA					Commercial and		Commercial		Residential						DDA
		Industrial		Real Estate				Home Equity		Consumer		Overdrafts		Total			Industrial		Real Estate				Home Equity		Consumer		Overdrafts		Total
Six months ended June 30, 2020
Nine months ended September 30, 2020																Nine months ended September 30, 2020
Beginning balance	Beginning balance	$	2,059	$	2,606	$	3,448	$	1,187	$	975	$	1,314	$	11,589	Beginning balance	$	2,059	$	2,606	$	3,448	$	1,187	$	975	$	1,314	$	11,589
Impact of adopting CECL	Impact of adopting CECL	1,715		3,254		2,139		(598)		(810)		60		5,760		Impact of adopting CECL	1,715		3,254		2,139		(598)		(810)		60		5,760
Charge-offs	Charge-offs	(77)		(422)		(859)		(206)		(91)		(1,162)		(2,817)		Charge-offs	(834)		(497)		(1,111)		(332)		(165)		(1,716)		(4,655)
Recoveries	Recoveries	14		331		103		56		141		800		1,445		Recoveries	17		375		127		89		183		1,134		1,925
Provision for credit losses	Provision for credit losses	2,555		4,321		2,492		208		(95)		(259)		9,222		Provision for credit losses	802		5,265		3,677		323		77		104		10,248
Ending balance	Ending balance	$	6,266	$	10,090	$	7,323	$	647	$	120	$	753	$	25,199	Ending balance	$	3,759	$	11,003	$	8,280	$	669	$	260	$	896	$	24,867

Six months ended June 30, 2019
Nine months ended September 30, 2019																Nine months ended September 30, 2019
Beginning balance	Beginning balance	$	4,060	$	4,495	$	4,116	$	1,268	$	319	$	1,708	$	15,966	Beginning balance	$	4,060	$	4,495	$	4,116	$	1,268	$	319	$	1,708	$	15,966
Charge-offs	Charge-offs	(51)		(178)		(631)		(117)		(296)		(1,213)		(2,486)		Charge-offs	(68)		(394)		(922)		(160)		(478)		(1,985)		(4,007)
Recoveries	Recoveries	140		607		125		—		143		749		1,764		Recoveries	183		614		282		0		211		1,112		2,402
(Recovery of) Provision for credit losses	(Recovery of) Provision for credit losses	(1,353)		(1,455)		349		60		343		607		(1,449)		(Recovery of) Provision for credit losses	(1,471)		(1,619)		162		85		591		1,077		(1,175)
Ending balance	Ending balance	$	2,796	$	3,469	$	3,959	$	1,211	$	509	$	1,851	$	13,795	Ending balance	$	2,704	$	3,096	$	3,638	$	1,193	$	643	$	1,912	$	13,186

Three months ended June 30, 2020
Three months ended September 30, 2020																Three months ended September 30, 2020
Beginning balance	Beginning balance	$	5,855	$	9,389	$	6,958	$	702	$	233	$	1,256	24,393		Beginning balance	$	6,266	$	10,090	$	7,323	$	647	$	120	$	753	25,199
Charge-offs	Charge-offs	—		(39)		(376)		(161)		(36)		(459)		(1,071)		Charge-offs	(757)		(75)		(252)		(126)		(74)		(554)		(1,838)
Recoveries	Recoveries	5		128		8		9		128		349		627		Recoveries	3		44		24		33		42		334		480
(Recovery of) provision		406		612		733		97		(205)		(393)		1,250
(Recovery of) Provision for credit losses																(Recovery of) Provision for credit losses	(1,753)		944		1,185		115		172		363		1,026
Ending balance	Ending balance	$	6,266	$	10,090	$	7,323	$	647	$	120	$	753	$	25,199	Ending balance	$	3,759	$	11,003	$	8,280	$	669	$	260	$	896	$	24,867

Three months ended June 30, 2019
Three months ended September 30, 2019																Three months ended September 30, 2019
Beginning balance	Beginning balance	$	2,970	$	4,640	$	3,820	$	1,248	$	468	$	1,500	$	14,646	Beginning balance	$	2,796	$	3,469	$	3,959	$	1,211	$	509	$	1,851	$	13,795
Charge-offs	Charge-offs	(51)		(133)		(303)		(71)		(111)		(588)		(1,257)		Charge-offs	(17)		(216)		(291)		(43)		(182)		(772)		(1,521)
Recoveries	Recoveries	5		575		50		—		46		330		1,006		Recoveries	43		7		157		0		68		363		638
(Recovery of) provision		(128)		(1,613)		392		34		106		609		(600)
(Recovery of) Provision for credit losses																(Recovery of) Provision for credit losses	(118)		(164)		(187)		25		248		470		274
Ending balance	Ending balance	$	2,796	$	3,469	$	3,959	$	1,211	$	509	$	1,851	$	13,795	Ending balance	$	2,704	$	3,096	$	3,638	$	1,193	$	643	$	1,912	$	13,186

Management systematically monitors the loan portfolio and the appropriateness of the allowance for credit losses on a quarterly basis to provide for expected 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. The provision for credit losses recorded during the ~~six~~nine months ended ~~June~~September 30, 2020 largely reflects the expected economic impact from the COVID-19 pandemic. The Company's estimate of future economic conditions utilized in its provision estimate is primarily dependent on expected unemployment ranges over a two-year period. Beyond two years, a straight line reversion to historical average loss rates is applied over the life of the loan pool in the migration methodology. The vintage methodology applies future average loss rates based on net losses in historical periods where the unemployment rate was within the forecasted range. As a result of COVID-19, expected unemployment ranges have significantly increased and resulted in an increase in the Company's provision for credit losses.

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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.

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Non-Performing 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 credit 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 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.

The following tables present the amortized cost basis of loans on non-accrual status and loans past due over 90 days still accruing as of ~~June~~September 30, 2020 (in thousands):


		Non-accrual With No		Non-accrual With		Loans Past Due			Non-accrual With No		Non-accrual With		Loans Past Due
		Allowance for				Over 90 Days			Allowance for				Over 90 Days
		Credit Losses				Still Accruing			Credit Losses				Still Accruing
Commercial & Industrial	Commercial & Industrial	$	207	$	880	$	—	Commercial & Industrial	$	216	$	512	$	221

1-4 Family	1-4 Family	—		2,212		—		1-4 Family	0		2,242		0
Hotels	Hotels	—		2,748		—		Hotels	0		2,842		0
Multi-family	Multi-family	—		—		—		Multi-family	0		0		0
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	—		346		3		Non Residential Non-Owner Occupied	0		105		0
Non Residential Owner Occupied	Non Residential Owner Occupied	2,521		888		—		Non Residential Owner Occupied	2,540		750		0
Commercial Real Estate	Commercial Real Estate	2,521		6,194		3		Commercial Real Estate	2,540		5,939		0

Residential Real Estate	Residential Real Estate	232		3,245		4		Residential Real Estate	0		3,983		124
Home Equity	Home Equity	—		265		61		Home Equity	0		74		0
Consumer	Consumer	—		—		—		Consumer	0		0		0
Total	Total	$	2,960	$	10,584	$	68	Total	$	2,756	$	10,508	$	345

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The following table presents the Company's loans on non-accrual status and loans past due over 90 days still accruing as of December 31, 2019 (in thousands):

Loans Past Due
Over 90 Days
Non-accrual Still Accruing
Commercial and industrial $ 1,182 $ 184
Commercial real estate 6,384 —
Residential real estate 3,393 83
Home equity 531 —
Consumer — —
Total $ 11,490 $ 267

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			Loans Past Due
			Over 90 Days
	Non-accrual		Still Accruing
Commercial and industrial	$	1,182	$	184
Commercial real estate	6,384		0
Residential real estate	3,393		83
Home equity	531		0
Consumer	0		0
Total	$	11,490	$	267

The Company recognized less than $0.1 million of interest income on nonaccrual loans during each of the three months ended ~~June~~September 30, 2020 and 2019 and less than $0.1 million ~~and $0.2 million~~ for each of the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

The following table presents the amortized cost basis of individually evaluated impaired collateral-dependent loans as of ~~June~~September 30, 2020 (in thousands). Changes in the fair value of the collateral for collateral-dependent loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.


	~~Secured by~~
	~~Real Estate~~		~~Equipment~~
~~Commercial and industrial~~	$	~~207~~	$	—

~~1-4 Family~~	—		—
~~Hotels~~	~~2,634~~		—
~~Multi-family~~	—		—
~~Non Residential Non-Owner Occupied~~	—		—
~~Non Residential Owner Occupied~~	~~2,520~~		—
~~Commercial real estate~~	~~5,154~~		—

~~Total~~	$	~~5,361~~	$	—


	Secured by
	Real Estate		Equipment
Commercial and industrial	$	216	$	—

1-4 Family	0		0
Hotels	2,729		—
Multi-family	—		—
Non Residential Non-Owner Occupied	—		—
Non Residential Owner Occupied	2,540		—
Commercial real estate	5,269		—
Total	$	5,485	$	—

The following table presents the Company’s impaired loans, by class (in thousands) as of December 31, 2019. The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off. There were no significant individually evaluated impaired residential, home equity, or consumer loans.

December 31, 2019
Unpaid
Recorded Principal Related
Investment Balance Allowance
With no related allowance recorded:
Commercial and industrial $ 501 $ 501 $ —
Commercial real estate 3,546 3,572 —
Total $ 4,047 $ 4,073 $ —
With an allowance recorded:
Commercial and industrial $ — $ — $ —
Commercial real estate 2,644 2,644 87
Total $ 2,644 $ 2,644 $ 87


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	501	$	501	$	—
Commercial real estate	3,546		3,572		—
Total	$	4,047	$	4,073	$	—

With an allowance recorded:
Commercial and industrial	$	0	$	0	$	0
Commercial real estate	2,644		2,644		87
Total	$	2,644	$	2,644	$	87

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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), for the three and ~~six~~nine months ended ~~June~~September 30, 2019:


		Three months ended June 30, 2019						Six months ended June 30, 2019							Three months ended September 30, 2019				Nine months ended September 30, 2019
		Average		Interest		Average		Interest			Average		Interest		Average		Interest
		Recorded		Income		Recorded		Income			Recorded		Income		Recorded		Income
		Investment		Recognized		Investment		Recognized			Investment		Recognized		Investment		Recognized
With no related allowance recorded:	With no related allowance recorded:									With no related allowance recorded:
Commercial and industrial	Commercial and industrial	$	589	—		$	603	$	—	Commercial and industrial	$	503	0		$	570	$	0
Commercial real estate	Commercial real estate	3,614		2		5,067		38		Commercial real estate	3,540		3		4,558		41
Total	Total	$	4,203	$	2	$	5,670	$	38	Total	$	4,043	$	3	$	5,128	$	41

With an allowance recorded:	With an allowance recorded:									With an allowance recorded:
Commercial and industrial	Commercial and industrial	$	—	$	—	$	—	$	—	Commercial and industrial	$	100	$	0	$	0	$	0
Commercial real estate	Commercial real estate	5,667		76		4,326		106		Commercial real estate	5,648		30		4,800		136
Total	Total	$	5,667	$	76	$	4,326	$	106	Total	$	5,748	$	30	$	4,800	$	136

The Company would have recognized less than ~~$0.1~~$0.2 million of interest income during each of the three months ended ~~June~~September 30, 2020 and 2019 and less than ~~$0.1~~$0.3 million during each of the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 if such loans had been current in accordance with their original terms.

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 days past due.

The following table presents the aging of the amortized cost basis in past-due loans as of ~~June~~September 30, 2020 by class of loan (in thousands):


		30-59		60-89		90+		Total		Current		Total			30-59		60-89		90+		Total		Current		Total
		Past Due								Loans					Past Due								Loans
Commercial and industrial	Commercial and industrial	$	130	$	30	$	—	$	160	$	368,962	$	369,122	Commercial and industrial	$	451	$	20	$	221	$	692	$	383,288	$	383,980

1-4 Family	1-4 Family	753		—		—		753		123,061		123,814		1-4 Family	354		0		0		354		113,717		114,071
Hotels	Hotels	—		—		—		—		295,179		295,179		Hotels	0		0		0		0		295,989		295,989
Multi-family	Multi-family	—		—		—		—		204,580		204,580		Multi-family	0		0		0		0		214,394		214,394
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	—		—		3		3		628,625		628,628		Non Residential Non-Owner Occupied	0		148		0		148		628,666		628,814
Non Residential Owner Occupied	Non Residential Owner Occupied	161		—		—		161		215,311		215,472		Non Residential Owner Occupied	100		0		0		100		211,333		211,433
Commercial real estate	Commercial real estate	914		—		3		917		1,466,756		1,467,673		Commercial real estate	454		148		0		602		1,464,099		1,464,701

Residential real estate	Residential real estate	3,923		1,334		4		5,261		1,625,890		1,631,151		Residential real estate	4,370		658		124		5,152		1,616,113		1,621,265
Home Equity	Home Equity	223		108		61		392		142,280		142,672		Home Equity	451		24		0		475		139,660		140,135
Consumer	Consumer	67		—		—		67		52,211		52,278		Consumer	106		15		0		121		50,420		50,541
Overdrafts	Overdrafts	272		1		—		273		2,427		2,700		Overdrafts	375		4		0		379		2,965		3,344
Total	Total	$	5,529	$	1,473	$	68	$	7,070	$	3,658,526	$	3,665,596	Total	$	6,207	$	869	$	345	$	7,421	$	3,656,545	$	3,663,966

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The following presents an aging analysis of the Company's past-due loans, by class, as of December 31, 2019 (in thousands):


		30-59		60-89		90+		Total		Current		Total			30-59		60-89		90+		Total		Current		Total
		Past Due								Loans					Past Due								Loans
Commercial and industrial	Commercial and industrial	$	243	$	31	$	184	$	458	$	307,557	$	308,015	Commercial and industrial	$	243	$	31	$	184	$	458	$	307,557	$	308,015
Commercial real estate	Commercial real estate	1,514		66		—		1,580		1,458,157		1,459,737		Commercial real estate	1,514		66		0		1,580		1,458,157		1,459,737
Residential real estate	Residential real estate	5,758		1,643		83		7,484		1,632,912		1,640,396		Residential real estate	5,758		1,643		83		7,484		1,632,912		1,640,396
Home equity	Home equity	840		116		—		956		147,972		148,928		Home equity	840		116		0		956		147,972		148,928
Consumer	Consumer	156		32		—		188		54,075		54,263		Consumer	156		32		0		188		54,075		54,263
Overdrafts	Overdrafts	644		86		—		730		4,030		4,760		Overdrafts	644		86		0		730		4,030		4,760
Total	Total	$	9,155	$	1,974	$	267	$	11,396	$	3,604,703	$	3,616,099	Total	$	9,155	$	1,974	$	267	$	11,396	$	3,604,703	$	3,616,099

Troubled Debt Restructurings ("TDRs")

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. These modifications range from partial deferrals (interest only) to full deferrals (principal and interest). When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

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

The following tables set forth the Company’s TDRs (in thousands). Substantially all of the Company's TDRs are accruing interest.


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Commercial and industrial	Commercial and industrial	$	—	$	—	Commercial and industrial	$	0	$	0

1-4 Family	1-4 Family	126		N/R		1-4 Family	123		N/R
Hotels	Hotels	2,634		N/R		Hotels	2,634		N/R
Multi-family	Multi-family	1,921		N/R		Multi-family	1,903		N/R
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	—		N/R		Non Residential Non-Owner Occupied	0		N/R
Non Residential Owner Occupied	Non Residential Owner Occupied	234		N/R		Non Residential Owner Occupied	234		N/R
Commercial real estate	Commercial real estate	4,915		4,973		Commercial real estate	4,894		4,973

Residential real estate	Residential real estate	20,631		21,029		Residential real estate	20,398		21,029
Home equity	Home equity	2,138		3,628		Home equity	2,100		3,628
Consumer	Consumer	185		—		Consumer	260		0
Total	Total	$	27,869	$	29,630	Total	$	27,652	$	29,630
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.									N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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The Company has allocated $1.6 million and $0.8 million of the allowance for credit losses for these loans as of ~~June~~September 30, 2020 and December 31, 2019, respectively. As of ~~June~~September 30, 2020, the Company has 0t committed to lend ~~any~~an additional ~~amounts~~$0.4 million in relation to these loans.

The following table presents loans by class, modified as TDRs, that occurred during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively (dollars in thousands):


		June 30, 2020								June 30, 2019									September 30, 2020				September 30, 2019
			Pre-		Post-			Pre-		Post-				Pre-		Post-			Pre-		Post-
			Modification					Modification						Modification					Modification
			Outstanding					Outstanding						Outstanding					Outstanding
		Number of	Recorded				Number of	Recorded					Number of	Recorded				Number of	Recorded
		Contracts	Investment				Contracts	Investment					Contracts	Investment				Contracts	Investment
Commercial and industrial	Commercial and industrial	—	$	—	$	—	—	$	—	$	—	Commercial and industrial	0	$	0	$	0	0	$	0	$	0

1-4 Family	1-4 Family	—	—		—		N/R					1-4 Family	0	0		0		N/R
Hotels	Hotels	—	—		—		N/R					Hotels	0	0		0		N/R
Multi-family	Multi-family	—	—		—		N/R					Multi-family	0	0		0		N/R
Non Owner Non-Owner Occupied	Non Owner Non-Owner Occupied	—	—		—		N/R					Non Owner Non-Owner Occupied	0	0		0		N/R
Non Owner Owner Occupied	Non Owner Owner Occupied	—	—		—		N/R					Non Owner Owner Occupied	0	0		0		N/R
Commercial real estate	Commercial real estate	—	—		—		—	—		—		Commercial real estate	0	0		0		0	0		0

Residential real estate	Residential real estate	24	1,720		1,716		27	2,066		2,066		Residential real estate	11	767		767		29	2,076		2,076
Home equity	Home equity	2	70		70		7	194		194		Home equity	0	0		0		8	213		213
Consumer	Consumer	—	—		—		—	—		—		Consumer	0	0		0		0	0		0
Total	Total	26	$	1,790	$	1,786	34	$	2,260	$	2,260	Total	11	$	767	$	767	37	$	2,289	$	2,289
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.																					N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The TDRs above increased the allowance for credit losses by less than $0.1 million in each of the ~~six~~nine months ended of ~~June~~September 30, 2020 and 2019 and resulted in charge-offs of less than ~~$0.1~~$0.2 million during those same time periods.

The Company had 1 TDR that subsequently defaulted in 2019. The loan balance was approximately $3.0 million and the subsequent default resulted in a charge-off of $0.7 million and the remaining balance was transferred to OREO during 2019. The Company has had 0 TDRs that subsequently defaulted in 2020.

COVID-19 Pandemic

In March of 2020, in response to the COVID-19 pandemic, regulatory guidance was issued that clarified the accounting for loan modifications. Modifications of loan terms do not automatically result in a TDR. Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time the modification program was implemented. However, these deferrals do not absolve the company from performing its normal risk rating and therefore a loan could be current and have a less than satisfactory risk rating.

~~Through June~~During the nine months ended September 30, 2020, the Company ~~has~~ granted deferrals of approximately ~~$125~~$135 million ~~for~~to its mortgage ~~borrowers and $430 million for commercial borrowers.~~customers. These deferral arrangements ranged from 30 days to 90 days. As of ~~June~~September 30, 2020, ~~$3.6~~approximately $15 million of ~~the mortgage~~these loans were still deferring, while approximately $120 million have resumed making their normal loan payment. As of September 30, 2020, approximately $4 million of these deferrals were previously and currently considered TDRs due to Chapter 7 bankruptcies.

During the nine months ended September 30, 2020, the Company granted deferrals of approximately $455 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of September 30, 2020, approximately $180 million of these loans were still deferring (including $160 million for hotel and lodging related loans), while approximately $275 million have resumed making their normal loan payment.

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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: 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

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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 and 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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Based on the most recent analysis performed, the risk category of loans by class of loans at ~~June~~September 30, 2020 is as follows (in thousands):


														Revolving																	Revolving
		Term Loans																						Loans					Term Loans						Loans
		Amortized Cost Basis by Origination Year and Risk Level																						Amortized					Amortized Cost Basis by Origination Year and Risk Level						Amortized
		2020		2019		2018		2017		2016		Prior		Cost Basis		Total			2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Commercial and industrial	Commercial and industrial																	Commercial and industrial
Pass	Pass	$	74,977	$	74,675	$	63,750	$	38,259	$	10,177	$	11,707	$	62,386	$	335,931	Pass	$	104,483	$	71,222	$	61,613	$	32,056	$	17,912	$	10,944	$	76,538	$	374,768
Special mention	Special mention	85		46		18		61		—		441		211		862		Special mention	83		43		14		60		0		437		414		1,051
Substandard	Substandard	64		830		1,196		816		8,729		2,195		18,499		32,329		Substandard	158		1,584		1,075		760		323		2,177		2,084		8,161
Total	Total	$	75,126	$	75,551	$	64,964	$	39,136	$	18,906	$	14,343	$	81,096	$	369,122	Total	$	104,724	$	72,849	$	62,702	$	32,876	$	18,235	$	13,558	$	79,036	$	383,980

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														Revolving
		Term Loans																						Loans
		Amortized Cost Basis by Origination Year and Risk Level																						Amortized
		2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Commercial real estate -	Commercial real estate -																	Commercial real estate -
Total	Total																	Total
Pass	Pass	$	172,741	$	343,898	$	200,306	$	165,468	$	164,439	$	346,209	$	27,105	$	1,420,166	Pass	$	229,396	$	314,931	$	183,421	$	149,838	$	161,976	$	304,069	$	27,339	$	1,370,970
Special mention	Special mention	—		5,156		1,222		691		359		6,211		—		13,639		Special mention	396		5,287		1,209		156		185		3,643		0		10,876
Substandard	Substandard	220		1,655		4,596		3,927		9,919		13,144		407		33,868		Substandard	1,171		22,495		4,559		13,388		9,695		31,226		321		82,855
Total	Total	$	172,961	$	350,709	$	206,124	$	170,086	$	174,717	$	365,564	$	27,512	$	1,467,673	Total	$	230,963	$	342,713	$	189,189	$	163,382	$	171,856	$	338,938	$	27,660	$	1,464,701


Commercial real estate -	Commercial real estate -																	Commercial real estate -
1-4 Family	1-4 Family																	1-4 Family
Pass	Pass	$	19,584	$	21,409	$	10,445	$	8,686	$	6,918	$	37,060	$	9,734	$	113,836	Pass	$	17,131	$	19,426	$	9,164	$	7,563	$	6,859	$	35,406	$	10,526	$	106,075
Special mention	Special mention	—		—		—		26		334		3,053		—		3,413		Special mention	171		0		0		24		162		957		0		1,314
Substandard	Substandard	—		229		—		952		109		5,268		7		6,565		Substandard	120		363		0		943		105		5,151		0		6,682
Total	Total	$	19,584	$	21,638	$	10,445	$	9,664	$	7,361	$	45,381	$	9,741	$	123,814	Total	$	17,422	$	19,789	$	9,164	$	8,530	$	7,126	$	41,514	$	10,526	$	114,071


Commercial real estate -	Commercial real estate -																	Commercial real estate -
Hotels	Hotels																	Hotels
Pass	Pass	$	14,655	$	110,833	$	35,038	$	49,483	$	21,518	$	56,378	$	—	$	287,905	Pass	$	23,983	$	95,401	$	26,376	$	39,848	$	21,521	$	44,727	$	0	$	251,856
Substandard	Substandard	—		—		—		—		4,526		2,748		—		7,274		Substandard	344		15,412		0		9,622		4,502		14,253		0		44,133
Total	Total	$	14,655	$	110,833	$	35,038	$	49,483	$	26,044	$	59,126	$	—	$	295,179	Total	$	24,327	$	110,813	$	26,376	$	49,470	$	26,023	$	58,980	$	0	$	295,989


Commercial real estate -	Commercial real estate -																	Commercial real estate -
Multi-family	Multi-family																	Multi-family
Pass	Pass	$	57,954	$	57,159	$	2,836	$	22,528	$	32,957	$	27,812	$	770	$	202,016	Pass	$	69,894	$	56,692	$	2,815	$	21,086	$	32,657	$	27,559	$	1,153	$	211,856
Special mention	Special mention	—		1,921		561		—		—		—		—		2,482		Special mention	0		1,903		556		0		0		0		0		2,459
Substandard	Substandard	—		—		—		—		—		82		—		82		Substandard	0		0		0		0		0		79		0		79
Total	Total	$	57,954	$	59,080	$	3,397	$	22,528	$	32,957	$	27,894	$	770	$	204,580	Total	$	69,894	$	58,595	$	3,371	$	21,086	$	32,657	$	27,638	$	1,153	$	214,394

Commercial real estate -
Non Residential Non-Owner Occupied
Pass $ 69,473 $ 120,792 $ 121,420 $ 57,873 $ 81,033 $ 160,184 $ 11,318 $ 622,093
Special mention — 316 602 574 — 595 — 2,087
Substandard 58 98 1,181 78 1,446 1,347 240 4,448
Total $ 69,531 $ 121,206 $ 123,203 $ 58,525 $ 82,479 $ 162,126 $ 11,558 $ 628,628

Commercial real estate -
Non Residential Owner Occupied
Pass $ 11,076 $ 33,705 $ 30,567 $ 26,899 $ 22,012 $ 64,777 $ 5,279 $ 194,315
Special mention — 2,919 58 91 24 2,563 — 5,655
Substandard 162 1,329 3,415 2,896 3,839 3,700 161 15,502
Total $ 11,238 $ 37,953 $ 34,040 $ 29,886 $ 25,875 $ 71,040 $ 5,440 $ 215,472






Commercial real estate -
Non Residential Non-Owner Occupied
Pass	$	100,384	$	115,117	$	118,026	$	55,387	$	80,109	$	142,361	$	10,399	$	621,783
Special mention	17		511		597		43		0		149		0		1,317
Substandard	590		1,386		1,166		65		1,204		1,143		160		5,714
Total	$	100,991	$	117,014	$	119,789	$	55,495	$	81,313	$	143,653	$	10,559	$	628,814

Table of Contents

Revolving
Term Loans Loans
Amortized Cost Basis by Origination Year and Risk Level Amortized
2020 2019 2018 2017 2016 Prior Cost Basis Total
Residential real estate
Performing $ 197,377 $ 281,064 $ 223,330 $ 165,437 $ 129,448 $ 507,921 $ 123,143 $ 1,627,720
Non-performing — 668 — 124 212 2,374 53 3,431
Total $ 197,377 $ 281,732 $ 223,330 $ 165,561 $ 129,660 $ 510,295 $ 123,196 $ 1,631,151






													Revolving
	Term Loans												Loans
	Amortized Cost Basis by Origination Year and Risk Level												Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Commercial real estate -
Non Residential Owner Occupied
Pass	$	18,004	$	28,295	$	27,040	$	25,954	$	20,830	$	54,016	$	5,261	$	179,400
Special mention	208		2,873		56		89		23		2,537		0		5,786
Substandard	117		5,334		3,393		2,758		3,884		10,600		161		26,247
Total	$	18,329	$	36,502	$	30,489	$	28,801	$	24,737	$	67,153	$	5,422	$	211,433


Home equity
Residential real estate																		Residential real estate
Performing	Performing	$	5,054	$	7,570	$	7,121	$	2,733	$	2,121	$	12,861	$	105,047	$	142,507	Performing	$	323,949	$	257,334	$	197,654	$	147,323	$	114,310	$	458,828	$	117,884	$	1,617,282
Non-performing	Non-performing	—		—		—		—		—		—		165		165		Non-performing	0		201		44		122		146		1,544		1,926		3,983
Total	Total	$	5,054	$	7,570	$	7,121	$	2,733	$	2,121	$	12,861	$	105,212	$	142,672	Total	$	323,949	$	257,535	$	197,698	$	147,445	$	114,456	$	460,372	$	119,810	$	1,621,265


Consumer
Home equity																		Home equity
Performing	Performing	$	9,689	$	18,922	$	12,199	$	4,492	$	2,485	$	2,284	$	2,207	$	52,278	Performing	$	7,765	$	6,757	$	6,363	$	2,373	$	1,828	$	11,233	$	103,742	$	140,061
Non-performing	Non-performing	—		—		—		—		—		—		—		—		Non-performing	0		0		0		0		0		0		74		74
Total	Total	$	9,689	$	18,922	$	12,199	$	4,492	$	2,485	$	2,284	$	2,207	$	52,278	Total	$	7,765	$	6,757	$	6,363	$	2,373	$	1,828	$	11,233	$	103,816	$	140,135






Consumer
Performing	$	13,561	$	16,784	$	10,371	$	3,805	$	2,055	$	2,106	$	1,859	$	50,541
Non-performing	0		0		0		0		0		0		0		0
Total	$	13,561	$	16,784	$	10,371	$	3,805	$	2,055	$	2,106	$	1,859	$	50,541

The following table presents the Company’s commercial loans by credit quality indicators, by portfolio loan classification (in thousands):, as of December 31, 2019:


		Commercial and Industrial		Commercial Real Estate		Total			Commercial and Industrial		Commercial Real Estate		Total
December 31, 2019
Pass	Pass	$	276,847	$	1,408,644	$	1,685,491	Pass	$	276,847	$	1,408,644	$	1,685,491
Special mention	Special mention	2,472		13,838		16,310		Special mention	2,472		13,838		16,310
Substandard	Substandard	28,696		37,255		65,951		Substandard	28,696		37,255		65,951
Total	Total	$	308,015	$	1,459,737	$	1,767,752	Total	$	308,015	$	1,459,737	$	1,767,752

The following table presents the Company's non-commercial loans by payment performance, by portfolio loan classification (in thousands):, as of December 31, 2019:


		Performing		Non-Performing		Total			Performing		Non-Performing		Total
December 31, 2019
Residential real estate	Residential real estate	$	1,636,920	$	3,476	$	1,640,396	Residential real estate	$	1,636,920	$	3,476	$	1,640,396
Home equity	Home equity	148,397		531		148,928		Home equity	148,397		531		148,928
Consumer	Consumer	54,263		—		54,263		Consumer	54,263		0		54,263
Total	Total	$	1,839,580	$	4,007	$	1,843,587	Total	$	1,839,580	$	4,007	$	1,843,587

Table of Contents

Note F –Derivative Instruments

As of ~~June~~September 30, 2020 and December 31, 2019, the Company primarily utilizes non-hedging derivative financial instruments with commercial banking customers to facilitate their interest rate management strategies. For these instruments, the Company acts as an intermediary for its customers and has offsetting contracts with financial institution counterparties. Changes in the fair value of these underlying derivative contracts generally offset each other and do not significantly impact the Company's results of operations.

~~Table of Contents~~

The following table summarizes the notional and fair value of these derivative instruments (in thousands):


		June 30, 2020						December 31, 2019							September 30, 2020				December 31, 2019
		Notional Amount		Fair Value		Notional Amount		Fair Value			Notional Amount		Fair Value		Notional Amount		Fair Value

Non-hedging interest rate derivatives:	Non-hedging interest rate derivatives:									Non-hedging interest rate derivatives:
Customer counterparties:	Customer counterparties:									Customer counterparties:
Loan interest rate swap - assets	Loan interest rate swap - assets	$	620,392	$	65,882	$	377,534	$	16,094	Loan interest rate swap - assets	$	651,096	$	62,404	$	377,534	$	16,094
Loan interest rate swap - liabilities	Loan interest rate swap - liabilities	2,041		279		189,803		3,214		Loan interest rate swap - liabilities	4,272		283		189,803		3,214

Non-hedging interest rate derivatives:	Non-hedging interest rate derivatives:									Non-hedging interest rate derivatives:
Financial institution counterparties:	Financial institution counterparties:									Financial institution counterparties:
Loan interest rate swap - assets	Loan interest rate swap - assets	2,041		279		189,803		3,214		Loan interest rate swap - assets	4,272		283		189,803		3,214
Loan interest rate swap - liabilities	Loan interest rate swap - liabilities	625,038		66,100		382,566		16,133		Loan interest rate swap - liabilities	655,743		62,602		382,566		16,133

The following table summarizes the change in fair value of these derivative instruments (in thousands):

Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Change in Fair Value Non-Hedging Interest Rate Derivatives:
Other income - derivative assets $ 3,807 $ 5,128 $ 41,718 $ 2,249
Other income - derivative liabilities (3,807) (5,128) (41,718) (2,249)
Other expense - derivative liabilities 10 97 183 154


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Change in Fair Value Non-Hedging Interest Rate Derivatives:
Other (expense) income - derivative assets	$	(4,615)	$	6,824	$	37,103	$	9,073
Other expense (income) - derivative liabilities	4,615		(6,824)		(37,103)		(9,073)
Other (income) expense - derivative liabilities	(20)		38		163		192

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association ("ISDA") master agreements which include "right of setoff" provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes.

Pursuant to the Company's agreements with certain of its derivative financial institution counterparties, the Company may receive collateral or post collateral, which may be in the form of cash or securities, based upon mark-to-mark ~~positions.The~~positions. The Company has posted collateral with a market value of ~~$68.5~~$70.9 million as of ~~June~~September 30, 2020.

Loans associated with a customer counterparty loan interest rate swap agreement may be subject to a make whole penalty upon termination of the agreement. The dollar amount of the make whole penalty varies based on the remaining term of the agreement and market rates at that time. The make whole penalty is secured by equity in the specific collateral securing the loan. The Company estimates the make whole penalty when determining if there is sufficient collateral to pay off both the potential make whole penalty and the outstanding loan balance at the origination of the loan. In the event of a customer default, the make whole penalty is capitalized into the existing loan balance; however, no guarantees can be made that the collateral will be sufficient to cover both the make whole provision and the outstanding loan balance at the time of foreclosure.

Subsequent to quarter-end, the Company entered into a series of fair value hedge agreements to reduce the interest rate risk associated with the change in fair value of certain securities. The total notional amount of these agreements was $150 million.

Table of Contents

Note G –Employee Benefit Plans

Stock Options

A summary of the Company’s stock option activity and related information is presented below:


		Six months ended June 30,											Nine months ended September 30,
		2020				2019						2020			2019
			Options		Weighted-Average Exercise Price	Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price	Options		Weighted-Average Exercise Price
Outstanding at January 1	Outstanding at January 1	46,251	$	52.74	57,972	$	51.15	Outstanding at January 1	46,251	$	52.74	57,972	$	51.15
Exercised	Exercised	(4,166)	45.44		(8,140)	44.85		Exercised	(4,921)	45.17		(11,721)	44.87
Outstanding at June 30		42,085	$	53.47	49,832	$	52.18
Outstanding at September 30								Outstanding at September 30	41,330	$	53.64	46,251	$	52.74

Exerciseable at June 30		22,214	$	50.22	11,644	$	44.62
Exerciseable at September 30								Exerciseable at September 30	21,459	$	50.45	8,063	$	44.48

Information regarding stock option exercises and stock-based compensation expense associated with stock options is provided in the following table (in thousands):


		Six months ended June 30,							Nine months ended September 30,
		2020		2019			2020		2019
Proceeds from stock option exercises	Proceeds from stock option exercises	$	189	$	365	Proceeds from stock option exercises	$	223	$	526
Intrinsic value of stock options exercised	Intrinsic value of stock options exercised	77		263		Intrinsic value of stock options exercised	93		368

Stock-based compensation expense associated with stock options	Stock-based compensation expense associated with stock options	$	34	$	64	Stock-based compensation expense associated with stock options	$	47	$	92

At period-end:	At period-end:	June 30, 2020				At period-end:	September 30, 2020
Unrecognized stock-based compensation expense associated with stock options	Unrecognized stock-based compensation expense associated with stock options	$	50			Unrecognized stock-based compensation expense associated with stock options	$	37
Weighted average period (in years) in which the above amount is expected to be	Weighted average period (in years) in which the above amount is expected to be					Weighted average period (in years) in which the above amount is expected to be
recognized	recognized	1.2				recognized	1.0

Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, all shares issued in connection with stock option exercises were issued from available treasury stock. For the stock options that have performance-based criteria, management has evaluated those criteria and has determined that, as of ~~June~~September 30, 2020, the criteria were probable of being met.

Restricted Shares, Restricted Stock Units, Performance Share Units

The Company records compensation expense with respect to restricted shares, restricted stock units and performance share units in an amount equal to the fair value of the common stock covered by each award on the date of grant. These awards become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is being charged to expense over the respective vesting periods.

Restricted shares are forfeited if the awardee officer or employee terminates his employment with the Company prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, and, except for restricted stock units and performance share units, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. For restricted shares and performance share units that have performance-based criteria, management has evaluated those criteria and has determined that, as of ~~June~~September 30, 2020, the criteria were probable of being met.

Table of Contents

A summary of the Company’s restricted shares activity and related information is presented below:


		Six months ended June 30,											Nine months ended September 30,
		2020				2019						2020			2019
			Restricted Awards		Average Market Price at Grant	Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant	Restricted Awards		Average Market Price at Grant
Outstanding at January 1	Outstanding at January 1	148,083	$	62.62	152,692	$	51.85	Outstanding at January 1	148,083	$	62.62	152,692	$	51.85
Granted	Granted	37,103	67.40		31,006	79.86		Granted	38,603	67.15		31,006	79.86
Vested	Vested	(26,450)	49.58		(41,657)	39.79		Vested	(29,775)	47.72		(45,007)	39.81
Outstanding at June 30		158,736	$	65.91	142,041	$	61.50
Outstanding at September 30								Outstanding at September 30	156,911	$	66.56	138,691	$	61.98

Information regarding stock-based compensation associated with restricted shares is provided in the following table (in thousands):


		Three months ended June 30, 2020						Six months ended June 30,							Three months ended September 30				Nine months ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Stock-based compensation expense associated with restricted shares	Stock-based compensation expense associated with restricted shares	$	681	$	501	$	1,310	$	935	Stock-based compensation expense associated with restricted shares	$	708	$	499	$	2,018	$	1,434

At period-end:	At period-end:					June 30, 2020				At period-end:					September 30, 2020
Unrecognized stock-based compensation expense associated with restricted shares	Unrecognized stock-based compensation expense associated with restricted shares					$	6,208			Unrecognized stock-based compensation expense associated with restricted shares					$	5,592
Weighted average period (in years) in which the above amount is expected to be recognized	Weighted average period (in years) in which the above amount is expected to be recognized					3.2				Weighted average period (in years) in which the above amount is expected to be recognized					3.1

Shares issued in conjunction with restricted stock awards are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, all shares issued in connection with restricted stock awards were issued from available treasury stock.

Benefit Plans

The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (the “401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). The Company also maintains a frozen defined benefit pension plan (the “Defined Benefit Plan”), which was inherited from the Company's acquisition of the plan sponsor (Horizon Bancorp, Inc.).

The following table presents the components of the Company's net periodic benefit cost, which is included in the line item "other expenses" in the consolidated statements of income, (in thousands):


		Three months ended June 30,						Six months ended June 30,								Three months ended September 30,						Nine months ended September 30,
				2020		2019		2020		2019			2020			2019			2020			2019
Components of net periodic cost:	Components of net periodic cost:									Components of net periodic cost:
Interest cost	Interest cost	$	112	$	174	$	224	$	348	Interest cost	$		112		$	242		$	336		$	522
Expected return on plan assets	Expected return on plan assets	(203)		(266)		(406)		(531)		Expected return on plan assets	(203)		(370)			(611)			(798)
Net amortization and deferral	Net amortization and deferral	272		285		544		569		Net amortization and deferral	272		396			817			855
Net Periodic Pension Cost	Net Periodic Pension Cost	$	181	$	193	$	362	$	386	Net Periodic Pension Cost	$	181	$	268		$	542		$	579

Table of Contents

Note H –Commitments and Contingencies

COVID-19

~~Table of Contents~~

and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, the effects could have a material adverse impact on the Company in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as well as financial statement related risk associated with critical accounting estimates such as the allowance for credit losses or valuation impairments on the Company's goodwill, intangible assets and deferred taxes.

Credit Related Financial Instruments

The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The Company has entered into agreements with certain customers to extend credit or provide a conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. Overdraft protection commitments, which are included with other commitments below, are uncollateralized and are paid at the Company’s discretion. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The funded portion of these financial instruments is reflected in the Company’s balance sheet, while the unfunded portion of these commitments is not reflected in the balance sheet.

The table below presents a summary of the contractual obligations of the Company resulting from significant commitments (in thousands):


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Commitments to extend credit:	Commitments to extend credit:					Commitments to extend credit:
Home equity lines	Home equity lines	$	219,045	$	214,715	Home equity lines	$	216,420	$	214,715
Commercial real estate	Commercial real estate	51,646		56,941		Commercial real estate	53,911		56,941
Other commitments	Other commitments	247,219		213,904		Other commitments	252,200		213,904
Standby letters of credit	Standby letters of credit	5,026		6,748		Standby letters of credit	5,477		6,748
Commercial letters of credit	Commercial letters of credit	1,045		1,249		Commercial letters of credit	771		1,249

Loan commitments and standby and commercial letters of credit have credit risks essentially the same as those involved in extending loans to customers and are subject to the Company’s standard credit policies. Collateral is obtained based on management’s credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments.

Litigation

In addition, the Company is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately resolved. There can be no assurance that current legal actions will have an immaterial impact on financial results, either positive or negative, or that no material legal actions may be presented in the future.

Table of Contents

Note I –Accumulated Other Comprehensive Income

The activity in accumulated other comprehensive income is presented in the tables below (in thousands). All amounts are shown net of tax, which is calculated using a combined federal and state income tax rate approximating 23%.


		Three months ended June 30,										Six months ended June 30,									Three months ended September 30,						Nine months ended September 30,

		Defined						Defined							Defined						Defined
		Benefit		Securities				Benefit		Securities					Benefit		Securities				Benefit		Securities
		Pension		Available-				Pension		Available-					Pension		Available-				Pension		Available-
		Plan		-for-Sale		Total		Plan		-for-Sale		Total			Plan		-for-Sale		Total		Plan		-for-Sale		Total
2020	2020													2020
Beginning Balance	Beginning Balance	$	(6,270)	$	33,730	$	27,460	$	(6,270)	$	12,110	$	5,840	Beginning Balance	$	(6,270)	$	37,299	$	31,029	$	(6,270)	$	12,110	$	5,840

Other comprehensive income before reclassifications		—		3,565		3,565		—		24,036		24,036
Other comprehensive (loss) income before reclassifications														Other comprehensive (loss) income before reclassifications	—		(539)		(539)		—		23,497		23,497
Amounts reclassified from other comprehensive income	Amounts reclassified from other comprehensive income	—		4		4		—		(44)		(44)		Amounts reclassified from other comprehensive income	—		0		0		—		(44)		(44)
Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	—		—		—		—		1,197		1,197		Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	—		0		0		—		1,197		1,197
		—		3,569		3,569		—		25,189		25,189			—		(539)		(539)		—		24,650		24,650

Ending Balance	Ending Balance	$	(6,270)	$	37,299	$	31,029	$	(6,270)	$	37,299	$	31,029	Ending Balance	$	(6,270)	$	36,760	$	30,490	$	(6,270)	$	36,760	$	30,490

2019	2019													2019
Beginning Balance	Beginning Balance	$	(5,871)	$	20	$	(5,851)	$	(5,871)	$	(8,611)	$	(14,482)	Beginning Balance	$	(5,871)	$	10,959	$	5,088	$	(5,871)	$	(8,611)	$	(14,482)

Other comprehensive income before reclassifications	Other comprehensive income before reclassifications	—		10,956		10,956		—		19,654		19,654		Other comprehensive income before reclassifications	—		6,277		6,277		—		25,931		25,931
Amounts reclassified from other comprehensive income	Amounts reclassified from other comprehensive income	—		(17)		(17)		—		(84)		(84)		Amounts reclassified from other comprehensive income	—		30		30		—		(54)		(54)
		—		10,939		10,939		—		19,570		19,570			—		6,307		6,307		—		25,877		25,877

Ending Balance	Ending Balance	$	(5,871)	$	10,959	$	5,088	$	(5,871)	$	10,959	$	5,088	Ending Balance	$	(5,871)	$	17,266	$	11,395	$	(5,871)	$	17,266	$	11,395


		Amounts reclassified from Other Comprehensive Income																Amounts reclassified from Other Comprehensive Income
		Three months ended						Six months ended					Affected line item			Three months ended				Nine months ended	Affected line item
		June 30,						June 30,					in the Consolidated Statements			September 30,					in the Consolidated Statements
		2020		2019		2020		2019		of Income		2020		2019		2020		2019		of Income

Securities available-for-sale:	Securities available-for-sale:										Securities available-for-sale:
Net securities (losses) gains reclassified into earnings	Net securities (losses) gains reclassified into earnings	$	(6)	$	21	$	56	$	109	(Losses) gains on sale of investment securities, net	Net securities (losses) gains reclassified into earnings	$	0	$	(40)	$	56	$	69	(Losses) gains on sale of investment securities, net
Related income tax expense (income)		2		(4)		(12)		(25)		Income tax expense (income)
Related income tax expense (benefit)											Related income tax expense (benefit)	0		10		(12)		(15)		Income tax expense
Net effect on accumulated other comprehensive income	Net effect on accumulated other comprehensive income	$	(4)	$	17	$	44	$	84		Net effect on accumulated other comprehensive income	$	0	$	(30)	$	44	$	54

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Note J – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share using the two class method (in thousands, except per share data):


		Three months ended June 30,						Six months ended June 30,							Three months ended September 30,				Nine months ended September 30,
				2020		2019		2020		2019			2020		2019		2020		2019
Net income available to common shareholders	Net income available to common shareholders	$	18,251	$	22,751	$	47,249	$	44,370	Net income available to common shareholders	$		$	22,371	$	67,374	$	66,741
Less: earnings allocated to participating securities	Less: earnings allocated to participating securities	(180)		(197)		(463)		(382)		Less: earnings allocated to participating securities	(198)		(192)		(658)		(567)
Net earnings allocated to common shareholders	Net earnings allocated to common shareholders	$	18,071	$	22,554	$	46,786	$	43,988	Net earnings allocated to common shareholders	$	19,928	$	22,179	$	66,716	$	66,174

Distributed earnings allocated to common stock	Distributed earnings allocated to common stock	$	9,073	$	8,615	$	18,147	$	17,231	Distributed earnings allocated to common stock	$	8,944	$	9,213	$	26,832	$	26,346
Undistributed earnings allocated to common stock	Undistributed earnings allocated to common stock	8,998		13,939		28,639		26,757		Undistributed earnings allocated to common stock	10,984		12,966		39,884		39,828
Net earnings allocated to common shareholders	Net earnings allocated to common shareholders	$	18,071	$	22,554	$	46,786	$	43,988	Net earnings allocated to common shareholders	$	19,928	$	22,179	$	66,716	$	66,174

Average shares outstanding	Average shares outstanding	16,081		16,368		16,123		16,390		Average shares outstanding	15,950		16,271		16,065		16,350
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Employee stock awards	Employee stock awards	16		18		19		18		Employee stock awards	20		18		19		18
Shares for diluted earnings per share	Shares for diluted earnings per share	16,097		16,386		16,142		16,408		Shares for diluted earnings per share	15,970		16,289		16,084		16,368

Basic earnings per share	Basic earnings per share	$	1.12	$	1.38	$	2.90	$	2.68	Basic earnings per share	$	1.25	$	1.36	$	4.15	$	4.05
Diluted earnings per share	Diluted earnings per share	$	1.12	$	1.38	$	2.90	$	2.68	Diluted earnings per share	$	1.25	$	1.36	$	4.15	$	4.04

Anti-dilutive options are not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore, the effect would have been anti-dilutive. Anti-dilutive options were not significant for any of the periods shown above.

Note K –Fair Value Measurements

Fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company bases fair value of assets and liabilities on quoted market prices, prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. If such information is not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty creditworthiness, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amount presented herein. A more detailed description of the valuation methodologies used for assets and liabilities

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measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Assets and Liabilities

The Company used the following methods and significant assumptions to estimate fair value for financial assets and liabilities measured on a recurring basis.

Securities Available for Sale. Securities available for sale are reported at fair value utilizing Level 1, Level 2, and Level 3 inputs. The fair value of securities available for sale is determined by utilizing a market approach by obtaining quoted prices on nationally recognized securities exchanges (other than forced or distressed transactions) that occur in sufficient volume or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. If such measurements are unavailable, the security is classified as Level 3. Significant judgment is required to make this determination.

The Company utilizes a third party pricing service provider to value its Level 1 and Level 2 investment securities. Annually, the Company obtains an independent auditor’s report from its third party pricing service provider regarding its controls over investment securities. On a quarterly basis, the Company reprices its debt securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes a market approach by obtaining dealer quotations to value its customer interest rate swaps. The Company’s derivatives are included within "other assets" and "other liabilities" in the accompanying consolidated balance sheets. Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Company pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Company considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Company's Asset and Liability Committee ("ALCO") are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, if necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Company to estimate its own credit risk in derivative liability positions. To date, 0 material losses have been incurred due to a counterparty's inability to pay any undercollateralized position. There was 0 significant change in the value of derivative assets and liabilities attributed to credit risk that would have resulted in a derivative credit risk valuation adjustment at ~~June~~September 30, 2020.

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The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. Financial assets measured at fair value on a nonrecurring basis include impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data for both real estate collateral and non-real estate collateral. The following table presents assets and liabilities measured at fair value (in thousands):


		Total		Level 1		Level 2		Level 3		Total Gains (Losses)			Total		Level 1		Level 2		Level 3		Total Gains (Losses)
June 30, 2020
September 30, 2020												September 30, 2020
Recurring fair value measurements	Recurring fair value measurements											Recurring fair value measurements
Financial Assets	Financial Assets											Financial Assets
Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	218,227	$	—	$	218,227	$	—			Obligations of states and political subdivisions	$	263,302	$	0	$	263,302	$	0
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
U.S. Government agencies	U.S. Government agencies	786,507		—		786,507		—				U.S. Government agencies	843,233		0		843,233		0
Private label	Private label	11,349		—		5,987		5,362				Private label	11,377		0		6,126		5,251
Trust preferred securities	Trust preferred securities	3,480		—		3,480		—				Trust preferred securities	3,892		0		3,892		0
Corporate securities	Corporate securities	33,381		—		29,331		4,050				Corporate securities	33,354		0		29,331		4,023
Marketable equity securities	Marketable equity securities	10,474		5,960		4,514		—				Marketable equity securities	10,936		5,955		4,981		0
Certificates of deposit held for investment	Certificates of deposit held for investment	2,241		—		2,241		—				Certificates of deposit held for investment	2,241		0		2,241		0
Derivative assets	Derivative assets	66,161		—		66,161		—				Derivative assets	62,687		0		62,687		0
Financial Liabilities	Financial Liabilities											Financial Liabilities
Derivative liabilities	Derivative liabilities	66,526		—		66,526		—				Derivative liabilities	63,020		0		63,020		0

Nonrecurring fair value measurements	Nonrecurring fair value measurements											Nonrecurring fair value measurements
Financial Assets	Financial Assets											Financial Assets
Loans individually evaluated	Loans individually evaluated	$	6,447	$	—	$	—	$	6,447	$	(1,150)	Loans individually evaluated	$	10,612	$	0	$	0	$	10,612	$	(1,172)
Non-Financial Assets	Non-Financial Assets											Non-Financial Assets
Other real estate owned	Other real estate owned	3,997		—		—		3,997		(267)		Other real estate owned	2,080		0		0		2,080		(267)

December 31, 2019	December 31, 2019											December 31, 2019
Recurring fair value measurements	Recurring fair value measurements											Recurring fair value measurements
Financial Assets	Financial Assets											Financial Assets
U.S. Government agencies	U.S. Government agencies	$	502	$	—	$	502	$	—			U.S. Government agencies	$	502	$	0	$	502	$	0
Obligations of states and political subdivisions	Obligations of states and political subdivisions	117,187		—		117,187		—				Obligations of states and political subdivisions	117,187		0		117,187		0
Mortgage-backed securities:	Mortgage-backed securities:											Mortgage-backed securities:
U.S. Government agencies	U.S. Government agencies	642,104		—		642,104		—				U.S. Government agencies	642,104		0		642,104		0
Private label	Private label	11,485		—		5,841		5,644				Private label	11,485		0		5,841		5,644
Trust preferred securities	Trust preferred securities	4,461		—		4,461		—				Trust preferred securities	4,461		0		4,461		0
Corporate securities	Corporate securities	32,126		—		28,064		4,062				Corporate securities	32,126		0		28,064		4,062
Marketable equity securities	Marketable equity securities	12,634		7,787		4,847		—				Marketable equity securities	12,634		7,787		4,847		0
Certificates of deposit held for investment	Certificates of deposit held for investment	2,241		—		2,241		—				Certificates of deposit held for investment	2,241		0		2,241		0
Derivative assets	Derivative assets	19,310		—		19,310		—				Derivative assets	19,310		0		19,310		0
Financial Liabilities	Financial Liabilities											Financial Liabilities
Derivative liabilities	Derivative liabilities	19,380		—		19,380		—				Derivative liabilities	19,380		0		19,380		0

Nonrecurring fair value measurements	Nonrecurring fair value measurements											Nonrecurring fair value measurements
Financial Assets	Financial Assets											Financial Assets
Impaired loans	Impaired loans	$	8,925	$	—	$	—	$	8,925	$	(87)	Impaired loans	$	8,925	$	0	$	0	$	8,925	$	(87)
Non-Financial Assets	Non-Financial Assets											Non-Financial Assets
Other real estate owned	Other real estate owned	4,670		—		—		4,670		(470)		Other real estate owned	4,670		0		0		4,670		(470)
Other assets	Other assets	100		—		—		100		(297)		Other assets	100		0		0		100		(297)

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The Company's financial assets and liabilities measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) include impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for credit losses based upon the fair value of the underlying collateral (in thousands). The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to discounts applied to the customers’ reported amount of collateral. The amount of collateral discount depends upon the marketability of the underlying collateral. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, collateral discounts ranged from ~~20%~~15% to 30%. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company had no Level 2 financial assets and liabilities that were measured on a nonrecurring basis.

Non-Financial Assets and Liabilities

The Company has no non-financial assets or liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include other real estate owned (“OREO”), which is measured at the lower of cost or fair value, and goodwill and other intangible assets, which are measured at fair value for impairment assessments.

Fair Value of Financial Instruments

ASC Topic 825 “Financial Instruments,” as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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The following table represents the estimates of fair value of financial instruments (in thousands). This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.


		Carrying Amount		Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Fair Value		Level 1		Level 2		Level 3
June 30, 2020
September 30, 2020												September 30, 2020
Assets:	Assets:
Cash and cash equivalents	Cash and cash equivalents											Cash and cash equivalents	$	252,718	$	252,718	$	252,718	$	0	$	0
Securities available-for-sale	Securities available-for-sale	1,055,185		1,055,185		—		1,045,773		9,412		Securities available-for-sale	1,157,399		1,157,399		0		1,148,125		9,274
Marketable equity securities	Marketable equity securities	10,474		10,474		5,960		4,514		—		Marketable equity securities	10,936		10,936		5,955		4,981		0
Net loans	Net loans	3,640,397		3,634,170		—		—		3,634,170		Net loans	3,639,099		3,626,632		0		0		3,626,632
Accrued interest receivable	Accrued interest receivable	14,200		14,200		14,200		—		—		Accrued interest receivable	16,627		16,627		16,627		0		0
Derivative assets	Derivative assets	66,161		66,161		—		66,161		—		Derivative assets	62,687		62,687		0		62,687		0

Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	4,411,115		4,444,930		3,068,484		1,376,446		—		Deposits	4,420,076		4,439,585		3,119,785		1,319,800		0
Short-term debt	Short-term debt	282,676		267,186		—		267,186		—		Short-term debt	279,866		279,866		0		279,866		0
Accrued interest payable	Accrued interest payable	2,257		2,257		2,257		—		—		Accrued interest payable	2,047		2,047		2,047		0		0
Derivative liabilities	Derivative liabilities	66,526		66,526		—		66,526		—		Derivative liabilities	63,020		63,020		0		63,020		0

December 31, 2019	December 31, 2019											December 31, 2019
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	140,144	$	140,144	$	140,144	$	—	$	—	Cash and cash equivalents	$	140,144	$	140,144	$	140,144	$	0	$	0
Securities available-for-sale	Securities available-for-sale	810,106		810,106		—		800,400		9,706		Securities available-for-sale	810,106		810,106		0		800,400		9,706
Securities held-to-maturity	Securities held-to-maturity	49,036		50,598		—		50,598		—		Securities held-to-maturity	49,036		50,598		0		50,598		0
Marketable equity securities	Marketable equity securities	12,634		12,634		7,787		4,847		—		Marketable equity securities	12,634		12,634		7,787		4,847		0
Net loans	Net loans	3,604,510		3,574,435		—		—		3,574,435		Net loans	3,604,510		3,574,435		0		0		3,574,435
Accrued interest receivable	Accrued interest receivable	11,569		11,569		11,569		—		—		Accrued interest receivable	11,569		11,569		11,569		0		0
Derivative assets	Derivative assets	19,310		19,310		—		19,310		—		Derivative assets	19,310		19,310		0		19,310		0

Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	4,075,894		4,094,493		2,711,323		1,383,170		—		Deposits	4,075,894		4,094,493		2,711,323		1,383,170		0
Short-term debt	Short-term debt	211,255		211,255		—		211,255		—		Short-term debt	211,255		211,255		0		211,255		0
Long-term debt	Long-term debt	4,056		4,124		—		4,124		—		Long-term debt	4,056		4,124		0		4,124		0
Accrued interest payable	Accrued interest payable	2,849		2,849		2,849		—		—		Accrued interest payable	2,849		2,849		2,849		0		0
Derivative liabilities	Derivative liabilities	19,380		19,380		—		19,380		—		Derivative liabilities	19,380		19,380		0		19,380		0

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

COVID-19 Pandemic/Update

The COVID-19 pandemic has placed significant health, economic and other major pressure throughout the communities the Company serves, the United States and the entire world. The Company has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders that continue through the date of this report:

•We have addressed the safety of our branches and while the branches generally remain open to customers, we have taken steps, and continue to evaluate, to push as much traffic and transactions as possible to our drive-thru facilities;

•Provided extensions and deferrals to loan customers ~~effected~~affected by COVID-19 provided such customers were not 30 days past due at March 19, ~~2020; As of June~~2020. During the nine months ended September 30, 2020, the Company ~~has~~ granted deferrals of approximately ~~$125~~$135 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As of September 30, 2020, approximately $15 million of these loans were still deferring, while approximately $120 million have resumed making their normal loan payment. During the nine months ended September 30, 2020, the Company granted deferrals of approximately $455 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of September 30, 2020, approximately $180 million of these loans were still deferring (including $160 million for ~~mortgage borrowers~~hotel and ~~$430~~lodging related loans), while approximately $275 million ~~for commercial borrowers; and~~have resumed making their normal loan payment;

•We have chosen to participate in the CARES Act Paycheck Protection Program ("PPP") that will provide government guaranteed and forgivable loans to our customers. As of ~~June~~September 30, 2020, the Company has funded approximately $90 million of SBA-approved PPP loans to over 1,500 customers.

The Company continues to closely monitor this pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies

The accounting policies of the Company conform with U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare the Company’s financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One to the audited financial statements included in the Company’s 2019 Annual Report to Shareholders. The information included in this Quarterly Report on Form 10-Q, including the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements and notes thereto included in the 2019 Annual Report of the Company. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses and income taxes to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

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Portfolio Segment			Measurement Method
Commercial and industrial			Migration
Commercial real estate:
1-4 family			Migration
Hotels			Migration
Multi-family			Migration
Non Residential Non-Owner Occupied			Migration
Non Residential Owner Occupied			Migration
Residential real estate			Vintage
Home equity			Vintage
Consumer			Vintage

The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis. The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors. However, management cannot currently estimate the range of possible change. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2017 and forward and by various state taxing authorities for the years ended December 31, 2016 and forward.

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Financial Summary

~~Six~~Nine months ended ~~June~~September 30, 2020 vs. 2019

The Company's financial performance is summarized in the following table:


		Six months ended June 30,										Nine months ended September 30,
		2020			2019				2020			2019

Net income available to common shareholders (in thousands)	Net income available to common shareholders (in thousands)	$	47,249		$	44,370		Net income available to common shareholders (in thousands)	$	67,374		$	66,741
Earnings per common share, basic	Earnings per common share, basic	$	2.90		$	2.68		Earnings per common share, basic	$	4.15		$	4.05
Earnings per common share, diluted	Earnings per common share, diluted	$	2.90		$	2.68		Earnings per common share, diluted	$	4.15		$	4.04
Dividend payout ratio	Dividend payout ratio	39.3		%	39.5		%	Dividend payout ratio	41.2		%	40.3		%
ROA*	ROA*	1.81		%	1.80		%	ROA*	1.68		%	1.81		%
ROE*	ROE*	13.7		%	14.3		%	ROE*	12.9		%	14.1		%
ROATCE*	ROATCE*	16.6		%	17.8		%	ROATCE*	15.6		%	17.5		%
Average equity to average assets ratio	Average equity to average assets ratio	13.2		%	12.6		%	Average equity to average assets ratio	13.0		%	12.8		%

*ROA (Return on Average Assets) is a measure of the effectiveness of asset utilization. ROE (Return on Average Equity) is a measure of the return on shareholders' investment. ROATCE (Return on Average Tangible Common Equity) is a measure of the return on shareholders' equity, less intangible assets.

The Company's net interest income for the ~~six~~nine months ended ~~June~~September 30, 2020 decreased ~~$2.5~~$5.1 million compared to the ~~six~~nine months ended ~~June~~September 30, 2019 (see Net Interest Income). The Company recorded a provision for credit losses of ~~$9.2~~$10.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to a recovery of credit losses of ~~$1.4~~$1.2 million for the ~~six~~nine months ended ~~June~~September 30, 2019 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest Income and Non-Interest Expense, non-interest income increased ~~$14.2~~$14.5 million and non-interest expense decreased ~~$2.2~~$1.9 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from the ~~six~~nine months ended ~~June~~September 30, 2019.

Financial Summary

Three months ended ~~June~~September 30, 2020 vs. 2019

The Company's financial performance is summarized in the following table:


		Three months ended June 30,										Three months ended September 30,
		2020			2019				2020			2019

Net income available to common shareholders (in thousands)	Net income available to common shareholders (in thousands)	$	18,251		$	22,751		Net income available to common shareholders (in thousands)	$	20,126		$	22,371
Earnings per common share, basic	Earnings per common share, basic	$	1.12		$	1.38		Earnings per common share, basic	$	1.25		$	1.36
Earnings per common share, diluted	Earnings per common share, diluted	$	1.12		$	1.38		Earnings per common share, diluted	$	1.25		$	1.36
Dividend payout ratio	Dividend payout ratio	50.8		%	38.5		%	Dividend payout ratio	45.7		%	41.9		%
ROA*	ROA*	1.35		%	1.84		%	ROA*	1.46		%	1.81		%
ROE*	ROE*	10.5		%	14.4		%	ROE*	11.5		%	13.8		%
ROATCE*	ROATCE*	12.6		%	17.9		%	ROATCE*	13.8		%	17.0		%
Average equity to average assets ratio	Average equity to average assets ratio	12.9		%	12.8		%	Average equity to average assets ratio	12.7		%	13.1		%

The Company's net interest income for the three months ended ~~June~~September 30, 2020 decreased ~~$2.8~~$2.6 million compared to the three months ended ~~June~~September 30, 2019 (see Net Interest Income). The Company recorded a provision for credit losses of ~~$1.3~~$1.0 million for the three months ended September 30, 2020 compared to a provision for credit losses of $0.3 million for the

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~~million for the~~ three months ended ~~June 30, 2020 compared to a recovery of credit losses of $0.6 million for the three months ended June~~September 30, 2019 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest Income and Non-Interest Expense, non-interest income ~~decreased $3.2~~increased $0.3 million and non-interest expense ~~decreased $2.3~~increased $0.3 million for the three months ended ~~June~~September 30, 2020 from the three months ended ~~June~~September 30, 2019.

Balance Sheet Analysis

Selected balance sheet fluctuations from the year ended December 31, 2019 are summarized in the following table (in millions):


		June 30,		December 31,							September 30,		December 31,
		2020		2019		$ Change		% Change			2020		2019		$ Change		% Change

Cash and cash equivalents	Cash and cash equivalents	$	373.3	$	140.1	$	233.2	166.5	%	Cash and cash equivalents	$	252.7	$	140.1	$	112.6	80.4	%
Investment securities	Investment securities	1,081.3		887.6		193.7		21.8	%	Investment securities	1,183.9		887.6		296.3		33.4	%
Gross loans	Gross loans	3,665.6		3,616.1		49.5		1.4	%	Gross loans	3,664.0		3,616.1		47.9		1.3	%
Net deferred tax (liability)/asset										Net deferred tax (liability)/asset	(1.6)		6.7		(8.3)		(123.9)	%
Other assets	Other assets	105.4		55.8		49.6		88.9	%	Other assets	105.4		55.8		49.6		88.9	%

Total deposits	Total deposits	4,411.1		4,075.9		335.2		8.2	%	Total deposits	4,420.1		4,075.9		344.2		8.4	%
Customer repurchase agreements	Customer repurchase agreements	282.7		211.3		71.4		33.8	%	Customer repurchase agreements	279.9		211.3		68.6		32.5	%
Other liabilities	Other liabilities	138.6		69.6		69.0		99.1	%	Other liabilities	118.4		69.6		48.8		70.1	%

Cash and cash equivalents increased ~~$233~~$113 million from December 31, 2019 to ~~$373~~$253 million at ~~June~~September 30, 2020, due to the increase in deposit balances and weak loan demand environment.

Investment securities increased ~~$194~~$296 million ~~(21.8%~~(33.4%) from December 31, 2019 to ~~$1.1~~$1.2 billion at ~~June~~September 30, 2020, due to the increase in deposit balances and weak loan demand environment.

Gross loans increased ~~$50~~$48 million ~~(1.4%~~(1.3%) from December 31, 2019 to ~~$3.67~~$3.66 billion at ~~June~~September 30, 2020. As a result of the Company's participation in the Paycheck Protection Program ("PPP") administered by the Small Business Administration ("SBA"), commercial and industrial loans increased approximately $90 million. Excluding these loans, total loans decreased ~~$39~~$41 million, (1.1%), from December 31, 2019 to $3.58 billion at ~~June~~September 30, 2020. ~~Commercial~~Residential real estate loans decreased $19 million (1.2%), commercial and industrial loans decreased ~~$27~~$13 million ~~(8.9%~~(4.1%) (excluding PPP loans)~~, residential real estate loans decreased $9 million (0.6%)~~, home equity loans decreased $6$9 million ~~(4.2%~~(5.9%) and ~~DDA overdrafts~~consumer loans decreased $2$4 million ~~(43.3%)~~(6.9)%. These decreases were partially offset by an increase in commercial real estate loans of $8$5 million ~~(0.5%~~(0.3%).

The Company’s net deferred tax position decreased $8.3 million, from a deferred tax asset of $6.7 million at December 31, 2019 to a deferred tax liability of $1.6 million at September 30, 2020, primarily as a result of an increase in the valuation of the Company's investment portfolio.

Other assets increased $50 million to $105 million and other liabilities increased ~~$69~~$49 million to ~~$139~~$118 million, respectively, at ~~June~~September 30, 2020, primarily as a result of market value changes in the Company's interest rate swap derivatives.

Total deposits increased ~~$335~~$344 million from December 31, 2019 to ~~$4.41~~$4.42 billion at ~~June~~September 30, 2020. This increase was largely attributable to the infusion of government transfer payments for unemployment insurance, stimulus checks received by the Company's customers from the CARES Act (approximately $90 million), proceeds from PPP loans, and ~~customers not~~decreased spending ~~as much~~by customers due to COVID-19.

Customer repurchase agreements increased ~~$71~~$69 million to ~~$283~~$280 million at ~~June~~September 30, 2020, due to proceeds from PPP loans and due to the liquidity needs of the Company's customers, specifically customers leaving monies in these deposit accounts due to the security of these deposits.

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Net Interest Income

~~Six~~Nine months ended ~~June~~September 30, 2020 vs. 2019

The Company’s tax equivalent net interest income decreased ~~$2.5~~$5.0 million, or ~~(3.1)~~(4.1)%, from ~~$81.4~~$122.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$78.9~~$117.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020. Excluding the impact of accretion from fair value adjustments, net interest income decreased ~~$3.7~~$5.5 million for the ~~six~~nine months ended ~~June~~September 30, 2020. Lower loan yields ~~(54~~(64 basis points) and lower investment yields ~~(40~~(36 basis points) decreased net interest income by ~~$9.6~~$17.6 million and ~~$1.9~~$2.8 million, respectively. These decreases were partially offset by a decrease in rates paid on interest-bearing liabilities ~~(26~~(35 basis points) and increases in investment balances ($~~128~~151 million) and average loan balances ($7790 million), which increased net interest income by ~~$4.3~~$8.7 million, ~~$2.0~~$3.7 million and ~~$1.9~~$3.2 million, respectively. The Company’s reported net interest margin decreased from ~~3.66%~~3.64% for the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~3.33%~~3.22% for the ~~six~~nine months ended ~~June~~September 30, 2020.

As a result of the COVID-19 crisis on March 15, 2020, the Federal Reserve cut the target range for the Fed Funds Rate to a range of 0-25 basis points, which had the impact of lowering interest rates on variable rates tied to Prime, LIBOR or Fed Funds, as well as the decreases in deposit rates. The Company's loan portfolio has historically included a significant portion of adjustable rate residential mortgage loans made in markets where the Company has a presence, and significant commercial loans collateralized with real estate.

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Table One

Average Balance Sheets and Net Interest Income

(in thousands)


Assets	Assets	Six months ended June 30,																														Assets		Nine months ended September 30,
				2020													2019																	2020				2019
				Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Assets		Average Balance			Interest			Yield/ Rate			Average Balance			Interest			Yield/ Rate

Loan portfolio⁽¹⁾:	Loan portfolio⁽¹⁾:
Residential real estate⁽²⁾	Residential real estate⁽²⁾	$	1,785,795			$	38,930	4.38		%	$	1,791,263		$	40,904	4.60		%	Residential real estate(2)			$		56,827		4.27		%	$	1,792,013		$	61,468		4.59		%
Commercial, financial, and agriculture⁽²⁾	Commercial, financial, and agriculture⁽²⁾	1,791,510		38,141			4.28		1,710,281			42,503			5.01		Commercial, financial, and agriculture(2)		1,810,165			55,051			4.06			1,704,141			63,796			5.01
Installment loans to individuals^(2),(3)	Installment loans to individuals^(2),(3)	57,217		1,715			6.03		56,383			1,728			6.18		Installment loans to individuals(2),(3)		56,535			2,519			5.95			57,263			2,656			6.20
Previously securitized loans⁽⁴⁾	Previously securitized loans⁽⁴⁾	***		267			***		***			317			***		Previously securitized loans(4)		***			415			***			***			477			***
Total loans	Total loans	3,634,522		79,053			4.37		3,557,927			85,452			4.84		Total loans		3,643,603			114,812			4.21			3,553,417			128,397			4.83
Securities:	Securities:																Securities:
Taxable	Taxable	853,882		11,589			2.73		731,976			11,420			3.15		Taxable		861,853			17,855			2.77			751,600			17,464			3.11
Tax-exempt⁽⁵⁾	Tax-exempt⁽⁵⁾	107,671		1,934			3.61		101,356			1,942			3.86		Tax-exempt(5)		140,075			3,366			3.21			99,555			2,856			3.84
Total securities	Total securities	961,553		13,523			2.83		833,332			13,362			3.23		Total securities		1,001,928			21,221			2.83			851,155			20,320			3.19
Deposits in depository institutions	Deposits in depository institutions	169,626		360			0.43		87,031			767			1.78		Deposits in depository institutions		214,912			432			0.27			82,214			1,038			1.69
Total interest-earning assets	Total interest-earning assets	4,765,701		92,936			3.92		4,478,290			99,581			4.48		Total interest-earning assets		4,860,443			136,465			3.75			4,486,786			149,755			4.46
Cash and due from banks	Cash and due from banks	75,132							64,583								Cash and due from banks		76,936									65,433
Bank premises and equipment	Bank premises and equipment	78,042							78,671								Bank premises and equipment		77,910									78,475
Goodwill and intangible assets	Goodwill and intangible assets	119,886							122,114								Goodwill and intangible assets		119,678									121,780
Other assets	Other assets	213,147							192,768								Other assets		218,695									191,231
Less: allowance for credit losses	Less: allowance for credit losses	(20,303)							(15,617)								Less: allowance for credit losses		(21,984)									(15,000)
Total assets	Total assets	$	5,231,605						$	4,920,809							Total assets		$		5,331,678								$	4,928,705

Liabilities	Liabilities																Liabilities
Interest-bearing demand deposits	Interest-bearing demand deposits	$	881,904	$	647		0.15	%	$	880,401		$	1,842		0.42	%	Interest-bearing demand deposits		$	898,440		$	833		0.12		%	$	880,763		$	2,796		0.42		%
Savings deposits	Savings deposits	1,021,608		1,063			0.21		963,804			2,302			0.48		Savings deposits		1,045,877			1,366			0.17			968,655			3,461			0.48
Time deposits⁽²⁾	Time deposits⁽²⁾	1,359,442		11,491			1.70		1,376,284			12,040			1.76		Time deposits(2)		1,347,013			16,125			1.60			1,370,934			18,511			1.81
Short-term borrowings	Short-term borrowings	232,900		743			0.64		218,527			1,915			1.77		Short-term borrowings		242,173			873			0.48			208,004			2,729			1.75
Long-term debt	Long-term debt	1,670		100			12.04		4,053			95			4.73		Long-term debt		1,109			100			12.04			4,053			140			4.62
Total interest-bearing liabilities	Total interest-bearing liabilities	3,497,524		14,044			0.81		3,443,069			18,194			1.07		Total interest-bearing liabilities		3,534,612			19,297			0.73			3,432,409			27,637			1.08
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	948,196							804,489								Noninterest-bearing demand deposits		1,004,144									811,411
Other liabilities	Other liabilities	95,516							52,070								Other liabilities		98,393									54,356
Stockholders’ equity	Stockholders’ equity	690,369							621,181								Stockholders’ equity		694,529									630,529
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	5,231,605						$	4,920,809							Total liabilities and stockholders’ equity		$	5,331,678								$	4,928,705
Net interest income	Net interest income			$	78,892							$	81,387				Net interest income					$	117,168								$	122,118
Net yield on earning assets	Net yield on earning assets						3.33	%							3.66	%	Net yield on earning assets								3.22		%							3.64		%

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(1)	(1)	For purposes of this table, non-accruing loans have been included in average balances and the following amounts (in thousands) of loan fees have been included in interest income:									(1)	For purposes of this table, non-accruing loans have been included in average balances and the following amounts (in thousands) of loan fees have been included in interest income:

		Loan fees	$	725	$	615	Loan fees	$	881	$	711

(2)	(2)	Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the Company's acquisitions:									(2)	Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the Company's acquisitions:

			2020		2019			2020		2019
		Residential real estate	$	345	$	115	Residential real estate	$	477	$	165
		Commercial, financial and agriculture	1,891		858		Commercial, financial and agriculture	2,141		1,968
		Installment loans to individuals	76		(12)		Installment loans to individuals	114		1
		Time deposits	311		452		Time deposits	466		527
			$	2,623	$	1,413		$	3,198	$	2,661

(3)	(3)	Includes the Company’s consumer and DDA overdrafts loan categories.									(3)	Includes the Company’s consumer and DDA overdrafts loan categories.
(4)	(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.									(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.
(5)	(5)	Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 21%.									(5)	Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 21%.

Table Two

Rate/Volume Analysis of Changes in Interest Income and Interest Expense

(in thousands)


		Six months ended June 30, 2020 vs. 2019														Nine months ended September 30, 2020 vs. 2019
Interest-earning assets:	Interest-earning assets:	Increase (Decrease) Due to Change In:													Interest-earning assets:	Increase (Decrease) Due to Change In:
				Volume			Rate			Net		Interest-earning assets:		Volume		Rate		Net

Loan portfolio	Loan portfolio
Residential real estate	Residential real estate	$	(125)			$	(1,849)		$	(1,974)	Residential real estate		$	(519)					$	(4,122)	$	(4,641)
Commercial, financial, and agriculture	Commercial, financial, and agriculture	2,024		(6,386)			(4,362)			Commercial, financial, and agriculture	3,973			(12,718)		(8,745)
Installment loans to individuals	Installment loans to individuals	26		(39)			(13)			Installment loans to individuals	(34)			(103)		(137)
Previously securitized loans	Previously securitized loans	—		(50)			(50)			Previously securitized loans	—			(62)		(62)
Total loans	Total loans	1,925		(8,324)			(6,399)			Total loans	3,420			(17,005)		(13,585)
Securities:	Securities:									Securities:
Taxable	Taxable	1,907		(1,738)			169			Taxable	2,564			(2,173)		391
Tax-exempt⁽¹⁾	Tax-exempt⁽¹⁾	121		(129)			(8)			Tax-exempt(1)	1,163			(653)		510
Total securities	Total securities	2,028		(1,867)			161			Total securities	3,727			(2,826)		901
Deposits in depository institutions	Deposits in depository institutions	730		(1,137)			(407)			Deposits in depository institutions	1,677			(2,283)		(606)
Total interest-earning assets	Total interest-earning assets	$	4,683	$	(11,328)		$	(6,645)		Total interest-earning assets	$	8,824		$	(22,114)	$	(13,290)
Interest-bearing liabilities:	Interest-bearing liabilities:									Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	3	$	(1,198)		$	(1,195)		Interest-bearing demand deposits	$	56		$	(2,019)	$	(1,963)
Savings deposits	Savings deposits	138		(1,377)			(1,239)			Savings deposits	276			(2,371)		(2,095)
Time deposits	Time deposits	(148)		(401)			(549)			Time deposits	(323)			(2,063)		(2,386)
Short-term borrowings	Short-term borrowings	126		(1,298)			(1,172)			Short-term borrowings	449			(2,305)		(1,856)
Long-term debt	Long-term debt	(56)		61			5			Long-term debt	(102)			62		(40)
Total interest-bearing liabilities	Total interest-bearing liabilities	$	63	$	(4,213)		$	(4,150)		Total interest-bearing liabilities	$	356		$	(8,696)	$	(8,340)
Net Interest Income	Net Interest Income	$	4,620	$	(7,115)		$	(2,495)		Net Interest Income	$	8,468		$	(13,418)	$	(4,950)

(1)Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 21%.

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Net Interest Income

Three months ended ~~June~~September 30, 2020 vs. 2019

The Company’s tax equivalent net interest income decreased ~~$2.8~~$2.5 million, or ~~6.9%~~6.0%, from ~~$41.1~~$40.7 million for the three months ended ~~June~~September 30, 2019 to $38.3 million for the three months ended ~~June~~September 30, 2020. Excluding the impact of accretion from fair value adjustments, net interest income decreased ~~$2.9~~$1.8 million for the three months ended ~~June~~September 30, 2020. Lower loan yields ~~(76~~(70 basis points) and lower investment yields ~~(49~~(28 basis points) decreased net interest income by ~~$7.1~~$6.5 million and ~~$1.3~~$1.0 million, respectively. These decreases were partially offset by a decrease in rates paid on interest-bearing liabilities ~~(38~~(50 basis points) and increases in average loan balances ($~~121 million) and investment balances ($168~~117 million), which increased net interest income by ~~$3.3 million, $1.5~~$4.3 million and $1.3 million, respectively. In addition, the Company received a $1.0 million prepayment penalty from an investment security that was called during the three months ended September 30, 2020. The Company’s reported net interest margin decreased from ~~3.66%~~3.59% for the three months ended ~~June~~September 30, 2019 to ~~3.13%~~3.02% for the three months ended ~~June~~September 30, 2020.

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Table Three

Average Balance Sheets and Net Interest Income

(in thousands)


Assets	Assets	Three months ended June 30,																														Assets		Three months ended September 30,
				2020													2019																	2020				2019
				Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Assets		Average Balance			Interest			Yield/ Rate			Average Balance			Interest			Yield/ Rate

Loan portfolio⁽¹⁾:	Loan portfolio⁽¹⁾:
Residential real estate⁽²⁾	Residential real estate⁽²⁾	$	1,785,631			$	19,048	4.29		%	$	1,783,718		$	20,454	4.60		%	Residential real estate(2)			$		17,899		4.03		%	$	1,794,068		$	20,564		4.55		%
Commercial, financial, and agriculture⁽²⁾	Commercial, financial, and agriculture⁽²⁾	1,818,344		17,665			3.91		1,698,186			21,658			5.12		Commercial, financial, and agriculture(2)		1,839,939			16,910			3.66			1,692,000			21,293			4.99
Installment loans to individuals^(2),(3)	Installment loans to individuals^(2),(3)	56,199		852			6.10		57,173			889			6.24		Installment loans to individuals(2),(3)		54,834			804			5.83			58,480			928			6.30
Previously securitized loans⁽⁴⁾	Previously securitized loans⁽⁴⁾	***		152			***		***			174			***		Previously securitized loans(4)		***			148			***			***			159			***
Total loans	Total loans	3,660,174		37,717			4.14		3,539,077			43,175			4.89		Total loans		3,661,569			35,761			3.89			3,544,548			42,944			4.81
Securities:	Securities:																Securities:
Taxable	Taxable	896,997		5,718			2.56		749,346			5,732			3.07		Taxable		877,623			6,266			2.84			790,207			6,044			3.03
Tax-exempt⁽⁵⁾	Tax-exempt⁽⁵⁾	120,751		1,039			3.46		100,348			956			3.82		Tax-exempt(5)		204,178			1,433			2.79			96,011			914			3.78
Total securities	Total securities	1,017,748		6,757			2.67		849,694			6,688			3.16		Total securities		1,081,801			7,699			2.83			886,218			6,958			3.11
Deposits in depository institutions	Deposits in depository institutions	236,320		55			0.09		113,176			577			2.04		Deposits in depository institutions		304,498			72			0.09			72,736			271			1.48
Total interest-earning assets	Total interest-earning assets	4,914,242		44,529			3.64		4,501,947			50,440			4.49		Total interest-earning assets		5,047,868			43,532			3.43			4,503,502			50,173			4.42
Cash and due from banks	Cash and due from banks	79,501							64,478								Cash and due from banks		80,505									67,106
Bank premises and equipment	Bank premises and equipment	78,717							79,116								Bank premises and equipment		77,647									78,091
Goodwill and intangible assets	Goodwill and intangible assets	119,681							121,628								Goodwill and intangible assets		119,267									121,124
Other assets	Other assets	230,423							189,618								Other assets		229,667									188,206
Less: allowance for credit losses	Less: allowance for credit losses	(24,700)							(15,057)								Less: allowance for credit losses		(25,311)									(13,786)
Total assets	Total assets	$	5,397,864						$	4,941,730							Total assets		$		5,529,643								$	4,944,243

Liabilities	Liabilities																Liabilities
Interest-bearing demand deposits	Interest-bearing demand deposits	$	893,832	$	178		0.08	%	$	874,039		$	909		0.42	%	Interest-bearing demand deposits		$	931,152		$	187		0.08		%	$	881,476		$	954		0.43		%
Savings deposits	Savings deposits	1,037,387		363			0.14		980,089			1,236			0.51		Savings deposits		1,093,886			303			0.11			978,198			1,159			0.47
Time deposits⁽²⁾	Time deposits⁽²⁾	1,353,619		5,422			1.61		1,384,017			6,272			1.82		Time deposits(2)		1,322,423			4,633			1.39			1,360,409			6,472			1.89
Short-term borrowings	Short-term borrowings	256,790		279			0.44		199,648			863			1.73		Short-term borrowings		260,518			131			0.20			187,301			814			1.72
Long-term debt	Long-term debt	—		—			—		4,053			47			4.65		Long-term debt		—			—			—			4,054			45			4.40
Total interest-bearing liabilities	Total interest-bearing liabilities	3,541,628		6,242			0.71		3,441,846			9,327			1.09		Total interest-bearing liabilities		3,607,979			5,254			0.58			3,411,438			9,444			1.10
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	1,044,009							820,689								Noninterest-bearing demand deposits		1,114,822									825,029
Other liabilities	Other liabilities	115,110							48,803								Other liabilities		104,084									58,857
Shareholders’ equity	Shareholders’ equity	697,117							630,392								Shareholders’ equity		702,758									648,919
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	5,397,864						$	4,941,730							Total liabilities and shareholders’ equity		$	5,529,643								$	4,944,243
Net interest income	Net interest income			$	38,287							$	41,113				Net interest income					$	38,278								$	40,729
Net yield on earning assets	Net yield on earning assets						3.13	%							3.66	%	Net yield on earning assets								3.02		%							3.59		%

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(1)	(1)	For purposes of this table, non-accruing loans have been included in average balances and the following amounts (in thousands) of loan fees have been included in interest income:									(1)	For purposes of this table, non-accruing loans have been included in average balances and the following amounts (in thousands) of loan fees have been included in interest income:

		Loan fees	$	609	$	481	Loan fees	$	156	$	96

(2)	(2)	Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the Company's acquisitions:									(2)	Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the Company's acquisitions:

			2020		2019			2020		2019
		Residential real estate	$	194	$	83	Residential real estate	$	132	$	50
		Commercial, financial and agriculture	651		668		Commercial, financial and agriculture	250		1,110
		Installment loans to individuals	37		(6)		Installment loans to individuals	38		13
		Time deposits	155		196		Time deposits	155		75
			$	1,037	$	941		$	575	$	1,248

(3)	(3)	Includes the Company’s consumer and DDA overdrafts loan categories.									(3)	Includes the Company’s consumer and DDA overdrafts loan categories.
(4)	(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.									(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.
(5)	(5)	Computed on a fully federal tax-equivalent basis assuming a tax rate of 21%.									(5)	Computed on a fully federal tax-equivalent basis assuming a tax rate of 21%.

Table Four

Rate/Volume Analysis of Changes in Interest Income and Interest Expense

(in thousands)


		Three months ended June 30, 2020 vs. 2019														Three months ended September 30, 2020 vs. 2019
Interest-earning assets:	Interest-earning assets:	Increase (Decrease) Due to Change In:													Interest-earning assets:	Increase (Decrease) Due to Change In:
				Volume			Rate			Net		Interest-earning assets:		Volume		Rate		Net

Loan portfolio	Loan portfolio
Residential real estate	Residential real estate	$	22			$	(1,428)		$	(1,406)	Residential real estate		$	(312)					$	(2,353)	$	(2,665)
Commercial, financial, and agriculture	Commercial, financial, and agriculture	1,528		(5,521)			(3,993)			Commercial, financial, and agriculture	1,857			(6,240)		(4,383)
Installment loans to individuals	Installment loans to individuals	(15)		(22)			(37)			Installment loans to individuals	(58)			(66)		(124)
Previously securitized loans	Previously securitized loans	—		(22)			(22)			Previously securitized loans	—			(11)		(11)
Total loans	Total loans	1,535		(6,993)			(5,458)			Total loans	1,487			(8,670)		(7,183)
Securities:	Securities:									Securities:
Taxable	Taxable	1,126		(1,140)			(14)			Taxable	667			(445)		222
Tax-exempt⁽¹⁾	Tax-exempt⁽¹⁾	194		(111)			83			Tax-exempt(1)	1,027			(508)		519
Total securities	Total securities	1,320		(1,251)			69			Total securities	1,694			(953)		741
Deposits in depository institutions	Deposits in depository institutions	626		(1,148)			(522)			Deposits in depository institutions	861			(1,060)		(199)
Total interest-earning assets	Total interest-earning assets	$	3,481	$	(9,392)		$	(5,911)		Total interest-earning assets	$	4,042		$	(10,683)	$	(6,641)
Interest-bearing liabilities:	Interest-bearing liabilities:									Interest-bearing liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	21	$	(752)		$	(731)		Interest-bearing demand deposits	$	54		$	(821)	$	(767)
Savings deposits	Savings deposits	72		(945)			(873)			Savings deposits	137			(993)		(856)
Time deposits	Time deposits	(137)		(713)			(850)			Time deposits	(180)			(1,659)		(1,839)
Short-term borrowings	Short-term borrowings	246		(830)			(584)			Short-term borrowings	317			(1,000)		(683)
Long-term debt	Long-term debt	(47)		—			(47)			Long-term debt	(45)			—		(45)
Total interest-bearing liabilities	Total interest-bearing liabilities	$	155	$	(3,240)		$	(3,085)		Total interest-bearing liabilities	$	283		$	(4,473)	$	(4,190)
Net Interest Income	Net Interest Income	$	3,326	$	(6,152)		$	(2,826)		Net Interest Income	$	3,759		$	(6,210)	$	(2,451)

(1) Computed on a fully federal taxable equivalent using a tax rate of 21%.

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Non-GAAP Financial Measures

Management of the Company uses measures in its analysis of the Company's performance other than those in accordance with generally accepted accounting ~~principals~~principles in the United States of America ("GAAP"). These measures are useful when evaluating the underlying performance of the Company's operations. The Company's management believes that these non-GAAP measures enhance comparability of results with prior periods and demonstrate the effects of significant gains and charges in the current period. The Company's management believes that investors may use these non-GAAP financial measures to evaluate the Company's financial performance without the impact of those items that may obscure trends in the Company's performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they comparable to non-GAAP financial measures that may be presented by other companies. The following table reconciles fully taxable equivalent net interest income with net interest income as derived from the Company's financial statements, as well as other non-GAAP measures (in thousands):


		Three months ended June 30,									Six months ended June 30,										Three months ended September 30,						Nine months ended September 30,
		2020			2019			2020			2019				2020			2019			2020			2019

Net interest income (GAAP)	Net interest income (GAAP)	$	38,070		$	40,911		$	78,486		$	80,977		Net interest income (GAAP)	$	37,977		$	40,537		$	116,462		$	121,516
Taxable equivalent adjustment	Taxable equivalent adjustment	217			202			406			410			Taxable equivalent adjustment	301			192			706			602
Net interest income, fully taxable equivalent	Net interest income, fully taxable equivalent	$	38,287		$	41,113		$	78,892		$	81,387		Net interest income, fully taxable equivalent	$	38,278		$	40,729		$	117,168		$	122,118
Less accretion income	Less accretion income	(1,037)			(941)			(2,623)			(1,413)			Less accretion income	(575)			(1,248)			(3,198)			(2,661)
Net interest income excluding accretion income	Net interest income excluding accretion income	$	37,250		$	40,172		$	76,269		$	79,974		Net interest income excluding accretion income	$	37,703		$	39,481		$	113,970		$	119,457

Equity to assets (GAAP)	Equity to assets (GAAP)	12.55		%	12.89		%							Equity to assets (GAAP)	12.54		%	13.10		%
Effect of goodwill and other intangibles, net	Effect of goodwill and other intangibles, net	(1.93)			(2.19)									Effect of goodwill and other intangibles, net	(1.93)			(2.17)
Tangible common equity to tangible assets	Tangible common equity to tangible assets	10.62		%	10.70		%							Tangible common equity to tangible assets	10.61		%	10.93		%

Return on tangible equity (GAAP)	Return on tangible equity (GAAP)	12.6		%	17.9		%	16.6		%	17.8		%	Return on tangible equity (GAAP)	13.8		%	17.0		%	15.6		%	17.5		%
Impact of merger related expenses	Impact of merger related expenses	—			0.3			—			0.2			Impact of merger related expenses	—			—			—			0.2
Impact of sale of VISA shares	Impact of sale of VISA shares	—			—			(4.8)			—			Impact of sale of VISA shares	—			—			(3.1)			—
Return on tangible equity, excluding merger related expenses and sale of VISA shares	Return on tangible equity, excluding merger related expenses and sale of VISA shares	12.6		%	18.2		%	11.8		%	18.0		%	Return on tangible equity, excluding merger related expenses and sale of VISA shares	13.8		%	17.0		%	12.5		%	17.7		%

Return on assets (GAAP)	Return on assets (GAAP)	1.35		%	1.84		%	1.81		%	1.80		%	Return on assets (GAAP)	1.46		%	1.81		%	1.68		%	1.81		%
Impact of merger related expenses	Impact of merger related expenses	—			0.04			—			0.03			Impact of merger related expenses	—			—			—			0.02
Impact of sale of VISA shares	Impact of sale of VISA shares	—			—			(0.52)			—			Impact of sale of VISA shares	—			—			(0.33)			—
Return on assets, excluding merger related expenses and sale of VISA shares	Return on assets, excluding merger related expenses and sale of VISA shares	1.35		%	1.88		%	1.29		%	1.83		%	Return on assets, excluding merger related expenses and sale of VISA shares	1.46		%	1.81		%	1.35		%	1.83		%

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Loans

Table Five

Loan Portfolio

The composition of the Company's loan portfolio as of the dates indicated follows (in thousands):


		June 30, 2020		December 31, 2019		June 30, 2019			September 30, 2020		December 31, 2019		September 30, 2019
Commercial and industrial	Commercial and industrial	369,122		308,015		288,803		Commercial and industrial	383,980		308,015		296,927

1-4 Family	1-4 Family	123,814		N/R				1-4 Family	114,071		N/R
Hotels	Hotels	295,179		N/R				Hotels	295,989		N/R
Multi-family	Multi-family	204,580		N/R				Multi-family	214,394		N/R
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	628,628		N/R				Non Residential Non-Owner Occupied	628,814		N/R
Non Residential Owner Occupied	Non Residential Owner Occupied	215,472		N/R				Non Residential Owner Occupied	211,433		N/R
Commercial real estate	Commercial real estate	1,467,673		1,459,737		1,378,116		Commercial real estate	1,464,701		1,459,737		1,431,983

Residential real estate	Residential real estate	1,631,151		1,640,396		1,644,494		Residential real estate	1,621,265		1,640,396		1,643,416
Home equity	Home equity	142,672		148,928		150,676		Home equity	140,135		148,928		150,808
Consumer	Consumer	52,278		54,263		53,356		Consumer	50,541		54,263		54,799
DDA overdrafts	DDA overdrafts	2,700		4,760		3,922		DDA overdrafts	3,344		4,760		4,638
Total loans	Total loans	$	2,197,923	$	2,156,362	$	2,141,251	Total loans	$	3,663,966	$	3,616,099	$	3,582,571
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.													N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Loan balances increased ~~$49.5~~$47.9 million from December 31, 2019 to ~~June~~September 30, 2020. As a result of the Company’s participation in the PPP loans administered by the SBA, commercial and industrial loans increased approximately $90 million. Excluding PPP loans, total loans decreased $40.6 million, (1.1%), from December 31, 2019 to $3.58 billion at September 30, 2020.

Residential real estate loans decreased ~~$9.2~~$19.1 million from December 31, 2019 to ~~June~~September 30, 2020. Residential real estate loans represent loans to consumers that are secured by a first lien on residential property. Residential real estate loans provide for the purchase or refinance of a residence and first-lien home equity loans allow consumers to borrow against the equity in their home. These loans primarily consist of single family 3 and 5 year adjustable rate mortgages with terms that amortize up to 30 years. The Company also offers fixed-rate residential real estate loans that are sold in the secondary market that are not included on the Company's balance sheet; the Company does not retain the servicing rights to these loans. Residential mortgage loans are generally underwritten to comply with Fannie Mae guidelines, while the home equity loans are underwritten with typically less documentation, but with lower loan-to-value ratios and shorter maturities. At ~~June~~September 30, 2020, ~~$28.3~~$28.9 million of the residential real estate loans were for properties under construction.

Home equity loans decreased ~~$6.3~~$8.8 million during the first ~~six~~nine months of 2020. The Company's home equity loans represent loans to consumers that are secured by a second (or junior) lien on a residential property. Home equity loans allow consumers to borrow against the equity in their home without paying off an existing first lien. These loans consist of home equity lines of credit ("HELOC") and amortized home equity loans that require monthly installment payments. Home equity loans are underwritten with less documentation, lower loan-to-value ratios and for shorter terms than residential mortgage loans. The amount of credit extended is directly related to the value of the real estate at the time the loan is made.

The commercial and industrial ("C&I") loan portfolio consists of loans to corporate borrowers that are primarily in small to mid-size industrial and commercial companies. Collateral securing these loans includes equipment, machinery, inventory, receivables and vehicles. C&I loans are considered to contain a higher level of risk than other loan types, although care is taken to minimize these risks. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. C&I loans increased ~~$61.1~~$76.0 million from December 31, 2019 to ~~June~~September 30, 2020, largely due to approximately $90 million of PPP loans funded.

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Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties, including hotel/motel and apartment lending. Commercial real estate loans are to many of the same customers and carry similar industry risks as C&I loans. Commercial real estate loans increased ~~$7.9~~$5.0 million from

~~Table of Contents~~

December 31, 2019 to ~~June~~September 30, 2020. At ~~June~~September 30, 2020, ~~$42.1~~$42.4 million of the commercial real estate loans were for commercial properties under construction.

In order to group loans with similar risk characteristics, the portfolio is further segmented by product types:

◦Commercial 1-4 Family loans consist of residential single-family, duplex, triplex, and fourplex rental properties and totaled ~~$123.8~~$114.1 million as of ~~June~~September 30, 2020. Risk characteristics are driven by rental housing demand as well as economic and employment conditions. These properties exhibit greater risk than multi-family properties due to fewer income sources.

◦The Hotel portfolio is comprised of all lodging establishments and totaled ~~$295.2~~$296.0 million as of ~~June~~September 30, 2020. Risk characteristics relate to the demand for travel.

◦Multi-family consists of 5 or more family residential apartment lending. The portfolio totaled ~~$204.6~~$214.4 million as of ~~June~~September 30, 2020. Risk characteristics are driven by rental housing demand as well as economic and employment conditions.

◦Non-residential commercial real estate includes properties such as retail, office, warehouse, storage, healthcare, entertainment, religious, and other nonresidential commercial properties. The non-residential product type is further segmented into owner- and non-owner occupied properties. Nonresidential non-owner occupied commercial real estate totaled ~~$628.6~~$628.8 million while nonresidential owner-occupied commercial real estate totaled ~~$215.5~~$211.4 million as of ~~June~~September 30, 2020. Risk characteristics relate to levels of consumer spending and overall economic conditions.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property or they may be unsecured. The Company monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Consumer loans decreased ~~$2.1~~$3.7 million during the first ~~six~~nine months of 2020.

Allowance for Credit Losses

The Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" effective January 1, 2020, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. ASU No. 2016-13 replaced the incurred loss impairment methodology 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 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. Results for reporting periods beginning after January 1, 2020 are presented under ASU No. 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As a result of adopting CECL, the Company increased its allowance for credit losses ("ACL") by $3.0 million and decreased retained earnings by $2.3 million on January 1, 2020. In addition, the adoption required the Company to "gross up" its previously purchased credit impaired loans through the allowance at January 1, 2020. As a result, the Company increased its ACL and loan balances as of January 1, 2020 by $2.7 million.

Management systematically monitors the loan portfolio and the appropriateness of the allowance for credit losses on a quarterly basis to provide for expected 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. The Company's estimate of future economic conditions utilized in its provision estimate is primarily dependent on expected unemployment ranges over a two-year period. Beyond two years, a straight line reversion to historical average loss rates is applied over the life of the loan pool in the migration methodology. The vintage methodology applies future average loss rates based on net losses in historical periods where the unemployment rate was within the forecasted range. As a result of COVID-19, expected unemployment ranges have significantly increased and resulted in an increase in the Company's provision for credit losses.

Individual credits in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance. Due to the nature of commercial lending, evaluation of the appropriateness of the allowance as it relates to these types of 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.

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Determination of the ACL is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between actual losses and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio.

~~Table of Contents~~

As a result of the Company’s quarterly analysis of the adequacy of the ACL, the Company recorded a provision for credit losses of ~~$9.2~~$10.2 million during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to a recovery of ~~$1.4~~$1.2 million for the comparable period in 2019. The provision for credit losses recorded during the six months ended June 30, 2020 largely reflects the expected economic impact from the COVID-19 pandemic. The Company’s estimate of future economic conditions used in its CECL estimates is primarily dependent on expected unemployment ranges. The expected unemployment ranges utilized at June 30, 2020, have not changed significantly from those utilized at March 31, 2020 which reflected the expected economic impact of the COVID-19 pandemic. Additionally, adjustments in qualitative and other factors have not been revised significantly from March 31, 2020, to June 30, 2020. The provision for credit losses recognized in the ~~second~~third quarter of 2020 primarily relates to ~~updated valuations for two specific~~changes in outstanding balances in the Company’s loan portfolio and their associated loss rates and downgrades of certain hotel/motel credits during the quarter based on current market conditions which increased the Company’s ACL by ~~$1.7~~$2.0 million and $1.2 million. Partially offsetting these increases in the ACL was a decrease in the ACL due to ~~lower amounts~~the upgrade of ~~DDA overdrafted balances which~~a specific credit that was downgraded in 2017, but has since seen improved financial performance. This upgrade released ~~$0.5~~$2.2 million of ACL reserves. ~~Due to the guarantee from the SBA for the PPP loans that were issued during the quarter ended June 30, 2020, no reserve for credit losses was deemed necessary for these loans.~~

The Company had net charge-offs of ~~$1.4~~$2.7 million for the first ~~six~~nine months of 2020 and ~~$0.7~~$1.6 million for the first ~~six~~nine months of 2019. Net charge-offs in the first ~~six~~nine months of 2020 consisted primarily of net charge-offs of residential real estate loans ($1.0 million), commercial and industrial loans ($0.8 million), and DDA overdrafts ($~~0.4 million), and home equity loans ($0.2~~0.6 million).

Based on the Company’s analysis of the adequacy of the allowance for credit losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for credit losses as of ~~June~~September 30, 2020 is adequate to provide for expected losses inherent in the Company’s loan portfolio. Future provisions for credit losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and recoveries of previously charged-off loans, among other factors.

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Table Six

Analysis of the Allowance for Credit Losses

An analysis of changes in the Company's allowance for credit losses follows (dollars in thousands):


		Six months ended June 30,									Year ended December 31,				Nine months ended September 30,						Year ended December 31,
					2020			2019							2020			2019
Balance at beginning of period	Balance at beginning of period	$	11,589		$	15,966		$	15,966		Balance at beginning of period	$	11,589		$	15,966		$	15,966
Charge-offs:	Charge-offs:										Charge-offs:
Commercial and industrial	Commercial and industrial	(77)			(51)			(261)			Commercial and industrial	(834)			(68)			(261)
Commercial real estate	Commercial real estate	(422)			(178)			(1,358)			Commercial real estate	(497)			(394)			(1,358)
Residential real estate	Residential real estate	(859)			(631)			(787)			Residential real estate	(1,111)			(922)			(787)
Home equity	Home equity	(206)			(117)			(294)			Home equity	(332)			(160)			(294)
Consumer	Consumer	(91)			(296)			(1,177)			Consumer	(165)			(478)			(1,177)
DDA overdrafts	DDA overdrafts	(1,162)			(1,213)			(2,777)			DDA overdrafts	(1,716)			(1,985)			(2,777)
Total charge-offs	Total charge-offs	(2,817)			(2,486)			(6,654)			Total charge-offs	(4,655)			(4,007)			(6,654)
Recoveries:	Recoveries:										Recoveries:
Commercial and industrial	Commercial and industrial	14			140			764			Commercial and industrial	17			183			764
Commercial real estate	Commercial real estate	331			607			624			Commercial real estate	375			614			624
Residential real estate	Residential real estate	103			125			369			Residential real estate	127			282			369
Home equity	Home equity	56			—			—			Home equity	89			—			—
Consumer	Consumer	141			143			265			Consumer	183			211			265
DDA overdrafts	DDA overdrafts	800			749			1,505			DDA overdrafts	1,134			1,112			1,505
Total recoveries	Total recoveries	1,445			1,764			3,527			Total recoveries	1,925			2,402			3,527
Net charge-offs	Net charge-offs	(1,372)			(722)			(3,127)			Net charge-offs	(2,730)			(1,605)			(3,127)
Impact of adopting CECL	Impact of adopting CECL	5,760			—			—			Impact of adopting CECL	5,760			—			—
Provision for (recovery of) credit losses	Provision for (recovery of) credit losses	9,222			(1,449)			(1,250)			Provision for (recovery of) credit losses	10,248			(1,175)			(1,250)
Balance at end of period	Balance at end of period	$	25,199		$	13,795		$	11,589		Balance at end of period	$	24,867		$	13,186		$	11,589
As a Percent of Average Total Loans:	As a Percent of Average Total Loans:										As a Percent of Average Total Loans:
Net charge-offs (annualized)	Net charge-offs (annualized)	0.08		%	0.04		%	0.09		%	Net charge-offs (annualized)	0.10		%	0.06		%	0.09		%
Provision for (recovery of) credit losses (annualized)	Provision for (recovery of) credit losses (annualized)	0.51		%	(0.08)		%	(0.04)		%	Provision for (recovery of) credit losses (annualized)	0.38		%	(0.04)		%	(0.04)		%
As a Percent of Non-Performing Loans:	As a Percent of Non-Performing Loans:										As a Percent of Non-Performing Loans:
Allowance for credit losses	Allowance for credit losses	185.12		%	115.32		%	98.57		%	Allowance for credit losses	182.70		%	84.26		%	98.57		%
As a Percent of Total Loans:	As a Percent of Total Loans:										As a Percent of Total Loans:
Allowance for credit losses	Allowance for credit losses	0.69		%	0.39		%	0.32		%	Allowance for credit losses	0.68		%	0.37		%	0.32		%

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Table Seven

Allocation of the Allowance for Credit Losses

The allocation of the allowance for credit losses is shown in the table below (in thousands). The allocation of a portion of the allowance in one portfolio loan classification does not preclude its availability to absorb losses in other portfolio segments.


		As of June 30,						As of December 31,			As of September 30,				As of December 31,
		2020		2019					2020		2019
Commercial and industrial	Commercial and industrial	$	6,266	$	2,796	$	2,059	Commercial and industrial	$	3,759	$	2,704	$	2,059
Commercial real estate	Commercial real estate	10,090		3,469		2,606		Commercial real estate	11,003		3,096		2,606
Residential real estate	Residential real estate	7,323		3,959		3,448		Residential real estate	8,280		3,638		3,448
Home equity	Home equity	647		1,211		1,187		Home equity	669		1,193		1,187
Consumer	Consumer	120		509		975		Consumer	260		643		975
DDA overdrafts	DDA overdrafts	753		1,851		1,314		DDA overdrafts	896		1,912		1,314
Allowance for Credit Losses	Allowance for Credit Losses	$	25,199	$	13,795	$	11,589	Allowance for Credit Losses	$	24,867	$	13,186	$	11,589

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The ACL increased from $11.6 million at December 31, 2019 to ~~$25.2~~$24.9 million at ~~June~~September 30, 2020. As previously discussed, the adoption of CECL comprised $5.8 million of this increase from December 31, 2019. Below is a summary of the changes in the components of the ACL from December 31, 2019 to ~~June~~September 30, 2020.

The allowance related to the commercial and industrial loan portfolio increased from $2.1 million at December 31, 2019 to ~~$6.3~~$3.8 million at ~~June~~September 30, 2020. The adoption of CECL increased the allowance by $1.7 million. ~~The remainder of the increase was largely attributable to a~~ change in unemployment forecast range due to the COVID-19 pandemic ("COVID-19"), changes in migration (primarily in the substandard portfolio) and an increase to the qualitative factors utilized related to COVID-19.

The allowance allocated to the commercial real estate portfolio increased from $2.6 million at December 31, 2019 to ~~$10.1~~$11.0 million at ~~June~~September 30, 2020. The adoption of CECL increased the allowance by $3.3 ~~million~~.million. The remainder of the increase was largely attributable to a change in the unemployment forecast range due to COVID-19, changes in the migration within the portfolio and an increase to the qualitative factors utilized related to COVID-19.

The allowance related to the residential real estate loan portfolio increased from $3.4 million at December 31, 2019 to ~~$7.3~~$8.3 million at ~~June~~September 30, 2020. The adoption of CECL increased the allowance by $2.1 million. The remainder of the increase was largely attributable to a change in the unemployment forecast range and an increase toin the qualitative factors utilized ~~related~~due to COVID-19 ~~and~~as well as an increase in the historical loss rates associated with the portfolio.

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Table Eight

Non-Performing Loans

The Company's nonperforming assets and past-due loans ~~as of June 30, 2020, June 30, 2019 and December 31, 2019~~ are shown below (dollars in thousands):


		June 30, 2020			June 30, 2019			December 31, 2019				September 30, 2020			September 30, 2019			December 31, 2019
Non-accrual loans with allowance for credit losses	Non-accrual loans with allowance for credit losses	$	10,584		N/R						Non-accrual loans with allowance for credit losses	$	10,508		N/R
Non-accrual loans with no allowance for credit losses	Non-accrual loans with no allowance for credit losses	2,960			N/R						Non-accrual loans with no allowance for credit losses	2,756			N/R
Total non-accrual loans	Total non-accrual loans	13,544			11,868			11,490			Total non-accrual loans	13,264			15,197			11,490
Accruing loans past due 90 days or more	Accruing loans past due 90 days or more	68			94			267			Accruing loans past due 90 days or more	345			452			267
Total non-performing loans	Total non-performing loans	13,612			11,962			11,757			Total non-performing loans	13,609			15,649			11,757
Other real estate owned ("OREO")	Other real estate owned ("OREO")	3,997			2,581			4,670			Other real estate owned ("OREO")	2,080			2,326			4,670
Total non-performing assets	Total non-performing assets	$	17,609		$	14,543		$	16,427		Total non-performing assets	$	15,689		$	17,975		$	16,427

Non-performing loans (as a percent of loans and OREO)	Non-performing loans (as a percent of loans and OREO)	0.48		%	0.41		%	0.45		%	Non-performing loans (as a percent of loans and OREO)	0.43		%	0.50		%	0.45		%

Past-due loans	Past-due loans	$	7,071		$	9,475		$	11,396		Past-due loans	$	7,420		$	10,207		$	11,396
Past-due loans (as a percentage of total loans)	Past-due loans (as a percentage of total loans)	0.19		%	0.27		%	0.32		%	Past-due loans (as a percentage of total loans)	0.20		%	0.28		%	0.32		%
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.																		N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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Table Nine

Troubled Debt Restructurings ("TDRs")

The following table sets forth the Company's troubled debt restructurings ("TDRs") (in thousands):


		As of June 30,						December 31,			As of September 30,				December 31,
		2020		2019					2020		2019

Commercial and industrial	Commercial and industrial	$	—	$	83	$	—	Commercial and industrial	$	—	$	83	$	—

1-4 Family	1-4 Family	126		N/R				1-4 Family	123		N/R
Hotels	Hotels	2,634		N/R				Hotels	2,634		N/R
Multi-family	Multi-family	1,921		N/R				Multi-family	1,903		N/R
Non Residential Non-Owner Occupied	Non Residential Non-Owner Occupied	—		N/R				Non Residential Non-Owner Occupied	—		N/R
Non Residential Owner Occupied	Non Residential Owner Occupied	234		N/R				Non Residential Owner Occupied	234		N/R
Commercial real estate	Commercial real estate	4,915		8,044		4,973		Commercial real estate	4,894		8,100		4,973

Residential real estate	Residential real estate	20,631		22,373		21,029		Residential real estate	20,398		21,320		21,029
Home equity	Home equity	2,138		3,062		3,628		Home equity	2,100		3,034		3,628
Consumer	Consumer	185		—		—		Consumer	260		—		—
Total TDRs	Total TDRs	$	27,869	$	33,562	$	29,630	Total TDRs	$	27,652	$	32,537	$	29,630
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.	N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.													N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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

The Company's troubled debt restructurings ("TDRs") related to its borrowers who had filed for Chapter 7 bankruptcy protection make up ~~82%~~79% of the Company's total TDRs as of ~~June~~September 30, 2020. The average age of these TDRs was ~~12.8~~13.0 years; the

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average current balance as a percentage of the original balance was ~~67.4%~~69.3%; and the average loan-to-value ratio was ~~63.6%~~64.6% as of ~~June~~September 30, 2020. Of the total ~~435~~419 Chapter 7 related TDRs, 3336 had an estimated loss exposure based on the current balance and appraised value at ~~June~~September 30, 2020.

COVID-19 Pandemic

In March of 2020, in response to the COVID-19 pandemic, regulatory guidance was issued that clarified the accounting for loan modifications. Modifications of loan terms do not automatically result in a TDR. Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time the modification program was implemented.

~~As of June~~During the nine months ended September 30, 2020, the Company ~~has~~ granted deferrals of approximately ~~$125~~$135 million ~~for~~to its mortgage ~~borrowers and $430 million for commercial borrowers.~~customers. These deferral arrangements ranged from 30 days to 90 days. As of ~~June~~September 30, 2020, ~~$3.6~~approximately $15 million of ~~the mortgage~~these loans were still deferring, while approximately $120 million have resumed making their normal loan payment. As of September 30, 2020, approximately $4 million of these deferrals were previously and currently considered TDRs due to Chapter 7 bankruptcies.

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Non-Interest Income and Non-Interest Expense

~~Six~~Nine months ended ~~June~~September 30, 2020 vs. 2019

(in millions)


		Six months ended June 30,											Nine months ended September 30,
		2020		2019		$ Change		% Change			2020		2019		$ Change		% Change
Net investment securities (losses) gains	Net investment securities (losses) gains	$	(2.1)	$	0.3	$	(2.4)	(800.0)	%	Net investment securities (losses) gains	$	(1.6)	$	—	$	(1.6)	-
Sale of VISA shares	Sale of VISA shares	17.8		—		17.8		100.0		Sale of VISA shares	17.8		—		17.8		100.0
Non-interest income, excluding net investment securities gains and sale of VISA shares	Non-interest income, excluding net investment securities gains and sale of VISA shares	32.2		33.5		(1.3)		(3.9)		Non-interest income, excluding net investment securities gains and sale of VISA shares	48.8		50.4		(1.6)		(3.2)
Merger related expenses	Merger related expenses	—		0.8		(0.8)		(100.0)		Merger related expenses	—		0.8		(0.8)		(100.0)
Non-interest expense, excluding merger related expenses	Non-interest expense, excluding merger related expenses	57.9		59.4		(1.5)		(2.5)		Non-interest expense, excluding merger related expenses	86.6		87.8		(1.2)		(1.4)

Non-Interest Income: Non-interest income was ~~$48.0~~$48.8 million for the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to ~~$33.8~~$50.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company reported ~~$2.1~~$1.6 million of unrealized fair value losses on the Company's equity securities compared to ~~$0.3 million of~~no unrealized fair value ~~gains~~losses on the Company's equity securities during the ~~six~~nine months ended September 30, 2019. Also, during the ~~six~~nine months ended ~~June~~September 30, 2020, the Company sold the entirety of its Visa Inc. Class B common shares (86,605) in a cash transaction which resulted in a pre-tax gain of $17.8 million. Excluding these items, non-interest income decreased from ~~$33.5~~$50.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$32.2~~$48.8 million for the ~~six~~nine months ended ~~June~~September 30, 2020. This decrease was largely attributable to a decrease of ~~$2.4~~$4.3 million, or ~~16.1%~~18.6%, in service charges as average deposit balances have increased during the COVID-19 pandemic. This decrease was partially offset by increases in the Company's bankcard revenue ($~~0.5 million), trust and investment management fee income ($0.4~~1.1 million) and bank owned life insurance ~~income~~revenues due to death benefit proceeds ($~~0.4~~0.7 million).

Non-Interest Expense: During the ~~six~~nine months ended ~~June~~September 30, 2019, the Company incurred an additional $0.8 million of acquisition and integration expenses associated with the acquisitions of Poage Bankshare, Inc. and Farmers Deposit Bankcorp, Inc. Excluding this expense, non interest expenses decreased ~~$1.5~~$1.2 million ~~(2.5%~~(1.4%), from ~~$59.4~~$87.8 million in the first ~~six~~nine months of 2019 to ~~$57.9~~$86.6 million in the first ~~six~~nine months of ~~2020. Decreases~~2020 mainly due to decreases in ~~other expenses ($0.6 million), FDIC insurance expense ($0.5 million) and~~ occupancy related expenses ($0.7 million) and advertising expenses ($0.4 million) ~~were partially offset by an increase in equipment and software related expenses ($0.5 million)~~.

Income Tax Expense: The Company’s effective income tax rate for the ~~six~~nine months ended ~~June~~September 30, 2020 was 20.3% compared to ~~20.8%~~21.1% for the ~~six~~nine months ended ~~June~~September 30, 2019.

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Non-Interest Income and Non-Interest Expense

Three months ended ~~June~~September 30, 2020 vs. 2019

(in millions)


		Three months ended June 30,											Three months ended September 30,
		2020		2019		$ Change		% Change			2020		2019		$ Change		% Change
Net investment securities gains	Net investment securities gains	$	0.2	$	0.1	$	0.1	100.0	%	Net investment securities gains	$	0.5	$	(0.3)	$	0.8	266.7	%
Non-interest income, excluding net investment securities gains	Non-interest income, excluding net investment securities gains	14.4		17.7		(3.3)		(18.6)	%	Non-interest income, excluding net investment securities gains	16.5		17.0		(0.5)		(2.9)	%
Merger related expenses		—		0.5		(0.5)		(100.0)	%
Non-interest expense, excluding merger related expenses		28.5		30.2		(1.7)		(5.6)	%
Non-interest expense										Non-interest expense	28.7		28.4		0.3		1.1	%

Non-Interest Income: Non-interest income was ~~$14.6~~$17.0 million for the ~~second~~third quarter of 2020, as compared to ~~$17.8~~$16.7 million for the ~~second~~third quarter of 2019. During the ~~second~~third quarter of 2020, the Company reported ~~$0.2~~$0.5 million of unrealized fair value gains on the Company's equity securities compared to ~~$0.1~~$0.3 million of unrealized fair value ~~gains~~losses on the Company's equity securities in the ~~second~~third quarter of 2019. Exclusive of these gains, non-interest income decreased from ~~$17.7~~$17.0 million for the ~~second~~third quarter of 2019 to ~~$14.4~~$16.5 million for the ~~second~~third quarter of 2020. This decrease was largely attributable to a decrease of ~~$2.8~~$1.9 million, or ~~36.4%~~23.1%, in service charges as average deposit balances have increased during the COVID-19 pandemic. ~~In addition, other income decreased $0.8 million primarily due to recognition of a $0.7 million gain from the sale the Company's Virginia Beach, VA, branch in June 2019. These decreases were~~This decrease was partially offset by increases in ~~the Company's~~our bankcard revenues ($~~0.4~~0.6 million), other income due to fees from loan interest rate swap originations ($0.5 million), and ~~trust and investment management fee income~~bank owned life insurance revenues due to death benefit proceeds ($~~0.2~~0.3 million).

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Non-Interest Expense: ~~During the quarter ended June 30, 2019, the Company incurred an additional $0.5~~Non-interest expenses increased $0.3 million of acquisition and integration expenses associated with the acquisitions of Poage Bankshare, Inc. and Farmers Deposit Bankcorp, Inc. Excluding this expense, non-interest expenses decreased $1.7 million (5.6%(1.1%), from ~~$30.2~~$28.4 million in the ~~second~~third quarter of 2019 to ~~$28.5~~$28.7 million in the ~~second~~third quarter of 2020. This ~~decrease~~increase was primarily due to a decrease in salaries and employee benefits of $0.9 million largely due to lower health insurance and incentive expenses. Additionally, other expenses decreased $0.5 million, occupancy related expenses decreased $0.2 million, FDIC expense decreased $0.2 million and repossessed asset losses decreased $0.2 million. These decreases were partially offset by an increase in equipment and software related expenses of ~~$0.3~~$0.4 million, FDIC insurance expense of $0.4 million, and other expenses of $0.2 million. These increases were partially offset by decreases in advertising expenses ($0.4 million) and occupancy related expenses ($0.3 million).

Income Tax Expense: The Company's effective income tax rate for the three months ended ~~June~~September 30, 2020 was ~~20.6%~~20.2% compared to ~~20.4%~~21.7% for the three months ended ~~June~~September 30, 2019.

Risk Management

Market risk is the risk of loss due to adverse changes in current and future cash flows, fair values, earnings or capital due to adverse movements in interest rates and other factors, including foreign exchange rates, underlying credit risk and commodity prices. Because the Company has no significant foreign exchange activities and holds no commodities, interest rate risk represents the primary risk factor affecting the Company’s balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in LIBOR interest rates, prime rates, and other benchmark interest rates that could affect the estimated fair value of the Company’s investment securities portfolio, interest paid on the Company’s short-term and long-term borrowings, interest earned on the Company’s loan portfolio and interest paid on its deposit accounts.

The Company’s Asset and Liability Committee (“ALCO”) has been delegated the responsibility of managing the Company’s interest-sensitive balance sheet accounts to maximize earnings while managing interest rate risk. ALCO, comprised of various members of executive and senior management, is also responsible for establishing policies to monitor and limit the Company’s exposure to interest rate risk and to manage the Company’s liquidity position. ALCO satisfies its responsibilities through quarterly meetings during which product pricing issues, liquidity measures, and interest sensitivity positions are monitored.

In order to measure and manage its interest rate risk, the Company uses an asset/liability management and simulation software model to periodically update the interest sensitivity position of the Company’s balance sheet. The model is also used

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to perform analyses that measure the impact on net interest income and capital as a result of various changes in the interest rate environment. Such analyses quantify the effects of various interest rate scenarios on projected net interest income.

The Company’s policy objective is to avoid negative fluctuations in net income or the economic value of equity of more than 15% within a 12-month period, assuming an immediate parallel increase of 300 points or decrease of 200 basis points. The Company measures the long-term risk associated with sustained increases and decreases in rates through analysis of the impact to changes in rates on the economic value of equity.

The following table summarizes the sensitivity of the Company’s net income to various interest rate scenarios. The results of the sensitivity analyses presented below differ from the results used internally by ALCO in that, in the analyses below, interest rates are assumed to have an immediate and sustained parallel shock. The Company recognizes that rates are volatile, but rarely move with immediate and parallel effects. Internally, the Company considers a variety of interest rate scenarios that are deemed possible while considering the level of risk it is willing to assume in “worst-case” scenarios such as shown by the following:

Immediate Basis Point Change in Interest Rates Implied Federal Funds Rate Associated with Change in Interest Rates Estimated Increase (Decrease) in Net Income Over 12 Months
June 30, 2020
+400 4.25 % +22.6 %
+300 3.25 +21.1
+200 2.25 +17.0
+100 1.25 +10.4
December 31, 2019
+300 4.75 % +3.8%
+200 3.75 +4.8
+100 2.75 +3.7
-50 1.25 -3.9
-100 0.75 -10

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Immediate Basis Point Change in Interest Rates	Implied Federal Funds Rate Associated with Change in Interest Rates		Estimated Increase (Decrease) in Net Income Over 12 Months
September 30, 2020
+400	4.25	%	+18.7	%
+300	3.25		+19.1
+200	2.25		+16.6
+100	1.25		+10.5

December 31, 2019
+300	4.75	%	+3.8%
+200	3.75		+4.8
+100	2.75		+3.7
-50	1.25		-3.9
-100	0.75		-10

These estimates are highly dependent upon assumptions made by management, including, but not limited to, assumptions regarding the manner in which interest-bearing demand deposit and savings deposit accounts reprice in different interest rate scenarios, changes in the composition of deposit balances, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the estimates above will be achieved in the event that interest rates increase or decrease during the remainder of 2020 and beyond. The estimates above do not necessarily imply that the Company will experience increases in net income if market interest rates rise. The table above indicates how the Company’s net income behaves relative to an increase or decrease in rates compared to what would otherwise occur if rates remain stable.

Based upon the estimates above, the Company believes that its net income is positively correlated with increasing rates as compared to the level of net income the Company would expect if interest rates remain flat.

Liquidity

The Company evaluates the adequacy of liquidity at both the City Holding level and at the City National level. At the City Holding level, the principal source of cash is dividends from City National. Dividends paid by City National to City Holding are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. At ~~June~~September 30, 2020, City National could pay dividends up to ~~$81.8~~$81.5 million plus net profits for the remainder of 2020, as defined by statute, up to the dividend declaration date without prior regulatory permission.

Additionally, City Holding anticipates continuing the payment of dividends on its common stock, which are expected to approximate ~~$36.7~~$36.1 million on an annualized basis over the next 12 months based on common shares outstanding at ~~June~~September 30, 2020. However, dividends to shareholders can, if necessary, be suspended. In addition to these anticipated cash needs, City Holding has operating expenses and other contractual obligations, which are estimated to require $1.4 million of additional cash

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over the next 12 months. As of ~~June~~September 30, 2020, City Holding reported a cash balance of ~~$5.1~~$3.9 million and management believes that City Holding’s available cash balance, together with cash dividends from City National, will be adequate to satisfy its funding and cash needs over the next 12 months.

City National manages its liquidity position in an effort to effectively and economically satisfy the funding needs of its customers and to accommodate the scheduled repayment of borrowings. Funds are available to City National from a number of sources, including depository relationships, sales and maturities within the investment securities portfolio, and borrowings from the FHLB and other financial institutions. As of ~~June~~September 30, 2020, City National’s assets are significantly funded by deposits and capital. Additionally, City National maintains borrowing facilities with the FHLB and other financial institutions that are accessed as necessary to fund operations and to provide contingency funding mechanisms. As of ~~June~~September 30, 2020, City National has the capacity to borrow $2.1 billion from the FHLB and other financial institutions under existing borrowing facilities. City National maintains a contingency funding plan, incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systemic financial industry crisis. Also, although it has no current intention to do so, City National could liquidate its unpledged securities, if necessary, to provide an additional funding source. City National

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also segregates certain mortgage loans, mortgage-backed securities, and other investment securities in a separate subsidiary so that it can separately monitor the asset quality of these primarily mortgage-related assets, which could be used to raise cash through securitization transactions or obtain additional equity or debt financing if necessary.

The Company manages its asset and liability mix to balance its desire to maximize net interest income against its desire to minimize risks associated with capitalization, interest rate volatility, and liquidity. With respect to liquidity, the Company has chosen a conservative posture and believes that its liquidity position is strong. The Company’s net loan to asset ratio is ~~65.8%~~66.0% as of ~~June~~September 30, 2020 and deposit balances fund ~~79.8%~~80.2% of total assets. The Company has obligations to extend credit, but these obligations are primarily associated with existing home equity loans that have predictable borrowing patterns across the portfolio. The Company has investment security balances with carrying values that totaled ~~$1.08~~$1.18 billion at ~~June~~September 30, 2020, and that exceeded the Company’s non-deposit sources of borrowing, which totaled ~~$282.7~~$279.9 million. Further, the Company’s deposit mix has a high proportion of transaction and savings accounts that fund ~~55.5%~~56.6% of the Company’s total assets.

As illustrated in the consolidated statements of cash flows, the Company generated ~~$68.0~~$80.2 million of cash from operating activities during the first ~~six~~nine months of 2020, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. The Company used ~~$201.1~~$317.1 million of cash in investing activities during the first ~~six~~nine months of 2020, primarily due to purchases of securities available-for-sale of ~~$232.5~~$393.9 million, a net increase in loans of ~~$46.1~~$45.3 million, purchases of premises and equipment of ~~$3.8~~$4.4 million, and purchases of other investments of ~~$2.1~~$2.2 million. These decreases were partially offset by proceeds from sales and maturities of securities available-for-sale of ~~$79.8~~$124.6 million, proceeds from sales of other investments of ~~$2.3~~$2.4 million, and proceeds from bank-owned life insurance policies of ~~$1.5~~$1.9 million. The Company generated ~~$366.2~~$349.5 million of cash in financing activities during the first ~~six~~nine months of 2020, principally as a result of an increase in non-interest-bearing deposits of ~~$274.4~~$256.2 million, short-term borrowings of ~~$71.4~~$88.4 million, and interest-bearing deposits of ~~$61.2~~$68.6 million. These increases were partially offset by purchases of treasury stock of $31.6 million, dividends paid ~~of $18.5 million~~ to the Company's common stockholders ~~purchases~~ of ~~treasury stock of $17.9~~$27.7 million, and repayment of long-term debt of $4.1 million.

Capital Resources

Shareholders' equity increased ~~$35.8~~$33.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 due to net income of ~~$47.2~~$67.4 million, other comprehensive income of ~~$25.2~~$24.7 million, and stock based related compensation expense of ~~$1.7~~$2.5 million. These increases were partially offset by ~~cash dividends declared of $18.4 million,~~ the repurchase of ~~261,137~~491,998 common shares at a weighted average price of ~~$68.41~~$64.23 per share ($~~17.9~~31.6 million) as part of a one million share repurchase plan authorized by the Board of Directors in February 2019, cash dividends declared of $27.4 million, and the adoption of ASU 2016-13 ($2.3 million).

As of January 1, 2019, the Basel III Capital Rules require City Holding and City National to maintain minimum CET 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to City Holding Company or City National Bank.

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The Company’s regulatory capital ratios for both City Holding and City National are illustrated in the following tables

(in thousands):


June 30, 2020		Actual						Minimum Required - Basel III						Required to be Considered Well Capitalized
				Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
September 30, 2020														September 30, 2020	Actual				Minimum Required - Basel III				Required to be Considered Well Capitalized
															Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio

CET I Capital	CET I Capital													CET I Capital
City Holding Company	City Holding Company	$	548,972	16.1	%	$	238,741	7.0	%	$	221,688	6.5	%	City Holding Company	$	548,269	15.9	%	$	240,984	7.0	%	$	233,771	6.5	%
City National Bank	City National Bank	492,875		14.6	%	237,098		7.0	%	220,162		6.5	%	City National Bank	494,474		14.5	%	239,336		7.0	%	222,241		6.5	%
Tier I Capital	Tier I Capital													Tier I Capital
City Holding Company	City Holding Company	548,972		16.1	%	289,900		8.5	%	272,847		8.0	%	City Holding Company	548,269		15.9	%	292,624		8.5	%	275,410		8.0	%
City National Bank	City National Bank	492,875		14.6	%	287,904		8.5	%	270,969		8.0	%	City National Bank	494,474		14.5	%	290,623		8.5	%	273,527		8.0	%
Total Capital	Total Capital													Total Capital
City Holding Company	City Holding Company	569,213		16.7	%	358,112		10.5	%	341,059		10.0	%	City Holding Company	568,153		16.5	%	361,476		10.5	%	344,263		10.0	%
City National Bank	City National Bank	513,115		15.2	%	355,647		10.5	%	338,711		10.0	%	City National Bank	514,359		15.0	%	359,005		10.5	%	341,909		10.0	%
Tier I Leverage Ratio	Tier I Leverage Ratio													Tier I Leverage Ratio
City Holding Company	City Holding Company	548,972		10.5	%	210,060		4.0	%	262,575		5.0	%	City Holding Company	548,269		10.2	%	215,174		4.0	%	268,967		5.0	%
City National Bank	City National Bank	492,875		9.3	%	212,162		4.0	%	265,202		5.0	%	City National Bank	494,474		9.3	%	212,268		4.0	%	265,335		5.0	%


December 31, 2019	Actual				Minimum Required - Basel III				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio

CET I Capital
City Holding Company	$	532,640	16.0	%	$	232,358	7.0	%	$	215,761	6.5	%
City National Bank	459,006		13.9	%	230,808		7.0	%	214,322		6.5	%
Tier I Capital
City Holding Company	536,640		16.2	%	282,150		8.5	%	265,552		8.0	%
City National Bank	459,006		13.9	%	280,267		8.5	%	263,781		8.0	%
Total Capital
City Holding Company	548,291		16.5	%	348,538		10.5	%	331,941		10.0	%
City National Bank	470,656		14.3	%	346,213		10.5	%	329,726		10.0	%
Tier I Leverage Ratio
City Holding Company	536,640		11.0	%	195,558		4.0	%	244,448		5.0	%
City National Bank	459,006		9.5	%	193,074		4.0	%	241,342		5.0	%

As of ~~June~~September 30, 2020, management believes that City Holding Company and its banking subsidiary, City National, were “well capitalized.” City Holding is subject to regulatory capital requirements administered by the Federal Reserve, while City National is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). Regulatory agencies can initiate certain mandatory actions if either City Holding or City National fails to meet the minimum capital requirements, as shown above. As of ~~June~~September 30, 2020, management believes that City Holding and City National have met all capital adequacy requirements.

In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less

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than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off–balance–sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk–based and leverage capital requirements under the Basel III Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two–quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater–than–9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III Rules and file the appropriate regulatory reports. The Company and its subsidiary bank do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is provided under the caption “Risk Management” under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4 - Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the quarter ended ~~June~~September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

Part II - OTHER INFORMATION

Item 1.Legal Proceedings

The Company is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately resolved. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.

Item 1A. Risk Factors

Other than the additional risk factor below, there have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic has adversely impacted our business and financial results. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, stay-at-home orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance.

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Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

The Company’s ability to pursue available remedies in the event of a loan default for loans under the Paycheck Protection Program, ("PPP"), and the risk of holding the PPP loans at unfavorable interest rates and on terms that are less favorable than those with customers to whom the Company would have otherwise lent.

The CARES Act was enacted on March 27, 2020. Among many other components, the CARES Act provides for payment forbearance on mortgages or loans to borrowers experiencing a hardship during the COVID-19 pandemic. The Company has offered deferral and forbearance plans and made PPP loans with a maturity of two years to small businesses consistent with the CARES Act that are fully guaranteed by the SBA. The PPP loans will be fully forgiven if the funds are used by the borrowers for payroll costs, mortgage interests, rent and utilities and loan payments will also be deferred until the SBA has determined whether the loan is eligible to be partially or fully forgivable. In addition, no collateral or personal guarantees are required for PPP loans. These PPP loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. The borrowers may not be able to repay the loans if the SBA determines that they are only partially or not forgivable at all. The borrowers, despite having a PPP loan, may not be able to maintain the level of employees and salary levels required for forgiveness due to the current economic conditions and thereby create the risk that the PPP loan will not be forgiven in full. Also, the borrower’s ability to repay the loan may not recover when the COVID-19 pandemic subsides, and the federal government may not timely pay the amounts that it would owe the Company pursuant to the terms of the loans, the guarantees and the PPP. Further, the Company may lend to borrowers under the PPP with creditworthiness or credit supports that are less than normal practice and may be subject to the risk of PPP fraud cases. Additionally, every PPP borrower is in a challenging financial position that may negatively impact its ability to repay if the loans are not subject to forgiveness. If the Company’s borrowers under the PPP loan fail to qualify for loan forgiveness or are unable to repay their loans, the Company is at heightened risk of holding these loans that are at unfavorable interest rates and underwriting standards as compared to the loans to customers to whom the Company would have otherwise lent. As a result, the Company’s business, financial condition and results of operations could be adversely affected.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On February 27, 2019, the Board of Directors of the Company authorized the Company to buy back up to 1,000,000 of its common shares (the "Program") in open market transactions, in block trades or otherwise at prices that are accretive to the earnings per share of continuing shareholders. The Program, which has no time limit on the duration, permits management to commence or suspend purchases at any time or from time-to-time based upon market and business conditions and without prior notice. The following table sets forth information regarding the Company's common stock repurchases transacted during the quarter ended ~~June~~September 30, 2020:

Total Number Maximum Number
of Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs
June 1 - June 30, 2020 79,238 $ 61.75 521,901 478,189

~~Table of Contents~~


				Total Number	Maximum Number
				of Shares Purchased	of Shares that May
				as Part of Publicly	Yet Be Purchased
	Total Number of	Average Price		Announced Plans	Under the Plans
Period	Shares Purchased	Paid per Share		or Programs	or Programs
July 1 - July 31, 2020	48,053	$	62.49	569,864	430,136
August 1 - August 31, 2020	17,877	64.50		587,741	412,259
September 1 - September 30, 2020	164,931	58.08		752,672	247,328

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

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Item 5.Other Information

None.

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Item 6.Exhibits

The exhibits required to be filed or furnished with this Form 10-Q are attached hereto or incorporated herein by reference as shown in the following "Exhibit Index."

Exhibit Index

The following exhibits are filed herewith or are incorporated herein by reference.


						2(a)			Agreement and Plan of Merger, dated November 14, 2011, by and among Virginia Savings Bancorp, Inc., Virginia Savings Bank, F.S.B., City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from, City Holding Company’s Form 8-K dated November 14, 2011, and filed with the Securities and Exchange Commission on November 14, 2011).
						2(b)			Agreement and Plan of Merger, dated August 2, 2012, by and among Community Financial Corporation, Community Bank, City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from, City Holding Company’s Form 8-K dated August 7, 2012, and filed with the Securities and Exchange Commission on August 7, 2012).
						2(c)			Agreement and Plan of Merger, dated July 11, 2018, by and among Poage Bankshares, Inc., Town Square Bank, City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from, City Holding Company’s Form 8-K dated July 11, 2018, and filed with the Securities and Exchange Commission on July 12, 2018).
						2(d)			Agreement and Plan of Merger, dated July 11, 2018, by and among Farmers Deposit Bancorp, Inc., Farmers Deposit Bank, City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from, City Holding Company’s Form 8-K dated July 11, 2018, and filed with the Securities and Exchange Commission on July 12, 2018).
						3(a)			Articles of Incorporation of City Holding Company (attached to, and incorporated by reference from, Amendment No. 1 to City Holding Company’s Registration Statement on Form S-4, Registration No. 2-86250, filed November 4, 1983 with the Securities and Exchange Commission).
						3(b)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 6, 1984 (attached to, and incorporated by reference from, City Holding Company's Form 8-K Report dated March 7, 1984, and filed with the Securities and Exchange Commission on March 22, 1984).
						3(c)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 4, 1986 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1986, filed March 31, 1987 with the Securities and Exchange Commission).
						3(d)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated September 29, 1987 (attached to and incorporated by reference from, City Holding Company's Registration Statement on Form S-4, Registration No. 33-23295, filed with the Securities and Exchange Commission on August 3, 1988).
						3(e)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 6, 1991 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission).
						3(f)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 7, 1991 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission).
						3(g)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated August 1, 1994 (attached to, and incorporated by reference from, City Holding Company's Form 10-Q Quarterly Report for the quarter ended September 30, 1994, filed November 14, 1994 with the Securities and Exchange Commission).
						3(h)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated December 9, 1998 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1998, filed March 31, 1999 with the Securities and Exchange Commission).
						3(i)			Articles of Amendment to the Articles of Incorporation of City Holding Company, dated June 13, 2001 (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form 8-A, filed June 22, 2001 with the Securities and Exchange Commission).

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3(j)

Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 10, 2006 (attached to, and incorporated by reference from, City Holding Company’s Form 10-Q, Quarterly Report for the quarter ended June 30, 2006, filed August 9, 2006 with the Securities and Exchange Commission).

3(k)

Articles of Amendment to the Articles of Incorporation of City Holding Company, dated April 19, 2017 (attached to, and incorporated by reference from, City Holding Company's Form 10-Q Quarterly Report for the quarter ended March 31, 2017, filed May 5, 2017 with the Securities and Exchange Commission).

3(l)

Amended and Restated Bylaws of City Holding Company, revised February 24, 2010 (attached to, and incorporated by reference from, City Holding Company’s Current Report on Form 8-K filed March 1, 2010 with the Securities and Exchange Commission).

4(a)

Rights Agreement dated as of June 13, 2001 (attached to, and incorporated by reference from, City Holding Company's Form 8–A, filed June 22, 2001, with the Securities and Exchange Commission).

4(b)

Amendment No. 1 to the Rights Agreement dated as of November 30, 2005 (attached to, and incorporated by reference from, City Holding Company’s Amendment No. 1 on Form 8-A, filed December 21, 2005, with the Securities and Exchange Commission).

31(a)

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck

31(b)

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for David L. Bumgarner

32(a)

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck

32(b)

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for David L. Bumgarner

101

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101.CAL

XBRL Taxonomy Extension Calculation Linkbase*

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104

Cover Page Interative Data file (formatted as inline XBRL and contained in Exhibit 101).

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			City Holding Company
			(Registrant)

			/s/ Charles R. Hageboeck
			Charles R. Hageboeck
			President and Chief Executive Officer
			(Principal Executive Officer)

			/s/ David L. Bumgarner
			David L. Bumgarner
			Executive Vice President, Chief Financial Officer and Principal Accounting Officer
			(Principal Financial Officer)

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Date: ~~August 6,~~November 5, 2020


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	76
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
Item 4.	Controls and Procedures	59

PART II	Other Information

Item 1.	Legal Proceedings	6059
Item 1A.	Risk Factors	6059
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	6160
Item 4.	Mine Safety Disclosures	6160
Item 5.	Other Information	61
Item 6.	Exhibits	62

Signatures		63