CHCO 10-Q Quarterly Report Sept. 30, 2021

CITY HOLDING CO

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chco-20210930

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 September 30, 2021


☐			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 15,118,194 shares of common stock as of November 1, 2021.

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, 2020 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) 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


PART I	Financial Information	Pages

Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	55

PART II	Other Information

Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57

Signatures		57

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)
	September 30, 2021		December 31, 2020
Assets
Cash and due from banks	$	103,841	$	77,412
Interest-bearing deposits in depository institutions	535,708		451,247
Cash and Cash Equivalents	639,549		528,659

Investment securities available for sale, at fair value	1,372,077		1,176,797
Other securities	25,497		29,364
Total Investment Securities	1,397,574		1,206,161

Gross loans	3,521,925		3,622,119
Allowance for credit losses	( 18,751 )		( 24,549 )
Net Loans	3,503,174		3,597,570

Bank owned life insurance	120,238		118,243
Premises and equipment, net	75,156		76,925
Accrued interest receivable	16,224		15,793
Net deferred tax assets	90		—
Goodwill and other intangible assets, net	117,489		118,592
Other assets	82,419		96,697
Total Assets	$	5,951,913	$	5,758,640

Liabilities
Deposits:
Noninterest-bearing	$	1,311,464	$	1,176,990
Interest-bearing:
Demand deposits	1,139,033		1,027,201
Savings deposits	1,332,910		1,188,003
Time deposits	1,104,069		1,260,022
Total Deposits	4,887,476		4,652,216

Short-term borrowings:
Securities sold under agreements to repurchase	296,642		295,956
Net deferred tax liability	—		3,202
Other liabilities	90,499		106,160
Total Liabilities	5,274,617		5,057,534

Commitments and contingencies - see Note H

Shareholders’ Equity
Preferred stock, par value $ 25 per share: 500,000 shares authorized; none issued	—		—
Common stock, par value $ 2.50 per share: 50,000,000 shares authorized; 19,047,548 shares issued at September 30, 2021 and December 31, 2020, less 3,855,971 and 3,280,040 shares in treasury, respectively	47,619		47,619
Capital surplus	170,300		171,304
Retained earnings	627,463		589,988
Cost of common stock in treasury	( 183,303 )		( 139,038 )
Accumulated other comprehensive income:
Unrealized gain on securities available-for-sale	20,878		36,894
Underfunded pension liability	( 5,661 )		( 5,661 )
Total Accumulated Other Comprehensive Income	15,217		31,233
Total Shareholders’ Equity	677,296		701,106
Total Liabilities and Shareholders’ Equity	$	5,951,913	$	5,758,640

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	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Interest and fees on loans	$	33,961	$	35,761	$	101,399	$	114,813
Interest and dividends on investment securities:
Taxable	6,144		6,266		17,318		17,855
Tax-exempt	1,257		1,132		3,801		2,659
Interest on deposits in depository institutions	196		72		476		432
Total Interest Income	41,558		43,231		122,994		135,759

Interest Expense
Interest on deposits	1,955		5,123		7,695		18,324
Interest on short-term borrowings	115		131		357		873
Interest on long-term debt	—		—		—		100
Total Interest Expense	2,070		5,254		8,052		19,297
Net Interest Income	39,488		37,977		114,942		116,462
(Recovery of) provision for credit losses	( 725 )		1,026		( 3,165 )		10,248
Net Interest Income After (Recovery of) Provision for Credit Losses	40,213		36,951		118,107		106,214

Non-Interest Income
Gains on sale of investment securities, net	—		—		312		56
Unrealized gains (losses) recognized on equity securities still held	93		461		452		( 1,698 )
Service charges	6,706		6,295		18,482		18,962
Bankcard revenue	6,791		6,065		20,225		17,068
Trust and investment management fee income	2,172		1,844		6,217		5,574
Bank owned life insurance	747		1,088		3,147		3,611
Sale of VISA shares	—		—		—		17,837
Other income	1,438		1,232		3,190		3,550
Total Non-Interest Income	17,947		16,985		52,025		64,960

Non-Interest Expense
Salaries and employee benefits	15,321		15,361		46,551		46,085
Occupancy related expense	2,507		2,428		7,654		7,318
Equipment and software related expense	2,554		2,607		7,753		7,540
FDIC insurance expense	396		355		1,183		522
Advertising	804		462		2,509		2,238
Bankcard expenses	1,549		1,517		4,879		4,450
Postage, delivery, and statement mailings	573		513		1,733		1,721
Office supplies	406		396		1,169		1,143
Legal and professional fees	610		548		1,874		1,738
Telecommunications	790		547		2,156		1,589
Repossessed asset (gains) losses, net of expenses	( 108 )		39		( 28 )		313
Other expenses	3,776		3,939		11,128		11,992
Total Non-Interest Expense	29,178		28,712		88,561		86,649
Income Before Income Taxes	28,982		25,224		81,571		84,525
Income tax expense	6,250		5,098		16,877		17,151
Net Income Available to Common Shareholders	$	22,732	$	20,126	$	64,694	$	67,374

Table of Contents


Average shares outstanding, basic	15,279		15,950		15,501		16,065
Effect of dilutive securities	23		20		25		19
Average shares outstanding, diluted	15,302		15,970		15,526		16,084

Basic earnings per common share	$	1.47	$	1.25	$	4.13	$	4.15
Diluted earnings per common share	$	1.47	$	1.25	$	4.13	$	4.15

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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

Net income available to common shareholders	$	22,732	$	20,126	$	64,694	$	67,374

Available-for-Sale Securities
Unrealized (losses) gains on available-for-sale securities arising during the period	( 9,666 )		( 703 )		( 20,752 )		30,662
Reclassification adjustment for gains	—		—		( 312 )		( 56 )
Reclassification of unrealized gains on held-to-maturity securities to available-for-sale	—		—		—		1,562
Other comprehensive (loss) income before income taxes	( 9,666 )		( 703 )		( 21,064 )		32,168
Tax effect	2,317		164		5,048		( 7,518 )
Other comprehensive (loss) income, net of tax	( 7,349 )		( 539 )		( 16,016 )		24,650

Comprehensive Income, Net of Tax	$	15,383	$	19,587	$	48,678	$	92,024

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 September 30, 2021 and 2020

(in thousands, except share amounts)


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at June 30, 2020	$	47,619	$	169,881	$	565,804	$	( 120,583 )	$	31,029	$	693,750
Net income	—		—		20,126		—		—		20,126
Other comprehensive loss	—		—		—		—		( 539 )		( 539 )
Cash dividends declared ($ 0.57 per share)	—		—		( 9,029 )		—		—		( 9,029 )
Stock-based compensation expense	—		753		—		—		—		753
Restricted awards granted	—		( 93 )		—		93		—		—
Exercise of 755 stock options	—		( 15 )		—		49		—		34
Purchase of 230,861 treasury shares	—		—		—		( 13,736 )		—		( 13,736 )
Balance at September 30, 2020	$	47,619	$	170,526	$	576,901	$	( 134,177 )	$	30,490	$	691,359


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at June 30, 2021	$	47,619	$	169,674	$	613,553	$	( 157,936 )	$	22,566	$	695,476
Net income	—		—		22,732		—		—		22,732
Other comprehensive loss	—		—		—		—		( 7,349 )		( 7,349 )
Cash dividends declared ($ 0.58 per share)	—		—		( 8,822 )		—		—		( 8,822 )
Stock-based compensation expense	—		652		—		—		—		652
Restricted awards granted	—		—		—		—		—		—
Exercise of 1,408 stock options	—		( 26 )		—		111		—		85
Purchase of 336,793 treasury shares	—		—		—		( 25,478 )		—		( 25,478 )
Balance at September 30, 2021	$	47,619	$	170,300	$	627,463	$	( 183,303 )	$	15,217	$	677,296

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Nine Months Ended September 30, 2021 and 2020

(in thousands, except share amounts)


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balance at December 31, 2019	$	47,619	$	170,309	$	539,253	$	( 105,038 )	$	5,840	$	657,983
Cumulative change in accounting principle	—		—		( 2,335 )		—		—		( 2,335 )
Balance at January 1, 2020	47,619		170,309		536,918		( 105,038 )		5,840		655,648
Net income	—		—		67,374		—		—		67,374
Other comprehensive income	—		—		—		—		24,650		24,650
Cash dividends declared ($ 1.71 per share)	—		—		( 27,391 )		—		—		( 27,391 )
Stock-based compensation expense	—		2,455		—		—		—		2,455
Restricted awards granted	—		( 2,126 )		—		2,126		—		—
Exercise of 4,921 stock options	—		( 112 )		—		335		—		223
Purchase of 491,998 treasury shares	—		—		—		( 31,600 )		—		( 31,600 )
Balance at September 30, 2020	$	47,619	$	170,526	$	576,901	$	( 134,177 )	$	30,490	$	691,359


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2020	$	47,619	$	171,304	$	589,988	$	( 139,038 )	$	31,233	$	701,106
Net income	—		—		64,694		—		—		64,694
Other comprehensive loss	—		—		—		—		( 16,016 )		( 16,016 )
Cash dividends declared ($ 1.74 per share)	—		—		( 27,219 )		—		—		( 27,219 )
Stock-based compensation expense	—		2,430		—		—		—		2,430
Restricted awards granted	—		( 1,860 )		—		1,860		—		—
Exercise of 13,098 stock options	—		( 1,574 )		—		2,196		—		622
Purchase of 628,809 treasury shares	—		—		—		( 48,321 )		—		( 48,321 )
Balance at September 30, 2021	$	47,619	$	170,300	$	627,463	$	( 183,303 )	$	15,217	$	677,296

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


	Nine months ended September 30,
	2021		2020
Net income	$	64,694	$	67,374
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and (accretion), net	6,225		2,911
(Recovery of) provision for credit losses	( 3,165 )		10,248
Depreciation of premises and equipment	4,373		4,285
Deferred income tax expense	1,805		1,035
Net periodic employee benefit cost	443		542
Pension contributions	( 1,000 )		( 450 )
Unrealized and realized investment securities (gains) losses, net	( 763 )		1,642
Gain from the sale of VISA shares	—		( 17,837 )
Stock-compensation expense	2,430		2,455
Excess tax benefit from stock-compensation expense	( 397 )		( 160 )
Increase in value of bank-owned life insurance	( 3,147 )		( 3,611 )
Loans held for sale
Loans originated for sale	( 28,601 )		( 19,345 )
Proceeds from the sale of loans originated for sale	28,591		19,790
Gain on sale of loans	( 271 )		( 277 )
Change in accrued interest receivable	( 431 )		( 5,058 )
Change in other assets	( 6,486 )		( 14,550 )
Change in other liabilities	9,393		13,398
Net Cash Provided by Operating Activities	73,693		62,392

Net decrease (increase) in loans	99,342		( 45,316 )
Securities available-for-sale
Purchases	( 438,625 )		( 393,932 )
Proceeds from sales	—		28,548
Proceeds from maturities and calls	213,579		96,021
Other investments
Purchases	( 116 )		( 2,173 )
Proceeds from sales	4,756		2,386
Proceeds from the sale of VISA shares	—		17,837
Purchases of premises and equipment	( 2,931 )		( 4,351 )
Proceeds from the disposals of premises and equipment	367		134
Proceeds from the disposition of assets held-for-sale	—		440
Proceeds from bank-owned life insurance policies	2,148		1,940
Payments for low income housing tax credits	( 1,692 )		( 807 )
Net Cash Used in Investing Activities	( 123,172 )		( 299,273 )

Net increase in non-interest-bearing deposits	134,474		256,223
Net increase in interest-bearing deposits	100,931		88,425
Net increase in short-term borrowings	686		68,611
Repayment of long-term debt	—		( 4,124 )
Purchases of treasury stock	( 48,321 )		( 31,600 )
Proceeds from exercise of stock options	622		223
Lease payments	( 632 )		( 652 )
Dividends paid	( 27,391 )		( 27,651 )
Net Cash Provided by Financing Activities	160,369		349,455
Increase in Cash and Cash Equivalents	110,890		112,574
Cash and cash equivalents at beginning of period	528,659		140,144
Cash and Cash Equivalents at End of Period	$	639,549	$	252,718

Table of Contents


Supplemental Cash Flow Information:
Cash paid for interest	$	9,111	$	20,491
Cash paid for income taxes	14,400		21,975

See notes to consolidated financial statements.

Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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 one reportable business segment, which is community banking.

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 nine months ended September 30, 2021 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2021. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information, with the instructions to Form 10-Q and Article 10 of Regulation 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, 2020 has been derived from audited financial statements included in the Company’s 2020 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 2020 Annual Report of the Company.

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

Note B - Recent Accounting Pronouncements

Recently Adopted:

In 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. Management has reviewed all contracts, identified those that will be affected, and is continuing to review probable replacements for LIBOR.

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 simpl ify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. This ASU became effective for the Company on January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company's financial statements.

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Note C – Investments

The aggregate carrying and approximate fair 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.


	September 30, 2021								December 31, 2020
	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:
Obligations of states and
political subdivisions	$	267,923	$	7,750	$	589	$	275,084	$	266,483	$	11,467	$	139	$	277,811
Mortgage-backed securities:
U.S. government agencies	1,038,806		20,906		5,289		1,054,423		815,682		34,807		105		850,384
Private label	8,864		701		—		9,565		9,976		916		—		10,892
Trust preferred securities	4,567		—		118		4,449		4,557		—		457		4,100
Corporate securities	27,337		1,221		2		28,556		31,465		2,146		1		33,610
Total Securities Available-for-Sale	$	1,347,497	$	30,578	$	5,998	$	1,372,077	$	1,128,163	$	49,336	$	702	$	1,176,797

The Company's other investment securities include marketable, non-marketable equity securities and certificates of deposits held for investment. At September 30, 2021 and December 31, 2020, the Company held $ 9.2 million and $ 11.8 million in marketable equity securities, respectively. Marketable equity securities mainly consist of investments made by the Company in equity positions of various community banks. Included within this po rtfolio are ownership positions in community bank holding companies including 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 Co mpany'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 September 30, 2021 and December 31, 2020, the Company held $ 15.3 million and $ 15.5 million, respectively, in non-marketable equity securities. These securities are carried at cost due to the restrictions placed on their transferability. At September 30, 2021 and December 31, 2020, the Company held $ 1.0 million and $ 2.0 million, respectively, in certificates of deposits held for investment.

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 September 30, 2021 and December 31, 2020 there were no securities of any non-governmental issuer whose aggregate carrying value or estimated fair value exceeded 10% of shareholders' equity.

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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 September 30, 2021 and December 31, 2020. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):


	September 30, 2021
	Less Than Twelve Months				Twelve Months or Greater				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	58,991	$	516	$	2,410	$	73	$	61,401	$	589
Mortgage-backed securities:
U.S. Government agencies	515,972		5,281		23,296		8		539,268		5,289
Trust preferred securities	—		—		4,449		118		4,449		118
Corporate securities	998		2		—		—		998		2
Total available-for-sale	$	575,961	$	5,799	$	30,155	$	199	$	606,116	$	5,998


	December 31, 2020
	Less Than Twelve Months				Twelve Months or Greater				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	10,578	$	139	$	—	$	—	$	10,578	$	139
Mortgage-backed securities:
U.S. Government agencies	62,412		105		35		—		62,447		105
Trust preferred securities	—		—		4,100		457		4,100		457
Corporate securities	488		1		—		—		488		1
Total available-for-sale	$	73,478	$	245	$	4,135	$	457	$	77,613	$	702

The Company incurred no credit-related investment impairment losses in either the nine months ended September 30, 2021 or September 30, 2020.

As of September 30, 2021, 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 a pproach their maturity date or repricing date. As of September 30, 2021, 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. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income. During the nine months ended September 30, 2021 and 2020, the Company had no credit-related net investment impairment losses.

The amortized cost and estimated fair value of debt securities at September 30, 2021, by contractual maturity, is shown in the following table (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.


	Amortized Cost		Estimated Fair Value
Available-for-Sale Debt Securities
Due in one year or less	$	3,829	$	3,888
Due after one year through five years	42,608		44,755
Due after five years through ten years	248,098		259,506
Due after ten years	1,052,962		1,063,928
Total	$	1,347,497	$	1,372,077

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Gross realized gains on securities sold	$	—	$	—	$	312	$	133
Gross realized losses on securities sold	—		—		—		( 77 )
Net investment security gains (losses)	$	—	$	—	$	312	$	56

Gross unrealized gains recognized on equity securities still held	$	100	$	461	$	481	$	170
Gross unrealized losses recognized on equity securities still held	( 7 )		—		( 29 )		( 1,868 )
Net unrealized gains (losses) recognized on equity securities still held	$	93	$	461	$	452	$	( 1,698 )

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 $ 691 million and $ 644 million at September 30, 2021 and December 31, 2020, respectively.

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Note D – Loans

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


	September 30, 2021		December 31, 2020
Commercial and industrial	$	353,046	$	372,989

1-4 Family	108,913		109,812
Hotels	297,341		294,464
Multi-family	215,307		215,671
Non Residential Non-Owner Occupied	664,365		641,351
Non Residential Owner Occupied	205,579		213,484
Commercial real estate	1,491,505		1,474,782

Residential real estate	1,506,572		1,587,694
Home equity	124,806		136,469
Consumer	43,296		47,688
Demand deposit account (DDA) overdrafts	2,700		2,497
Gross loans	3,521,925		3,622,119
Allowance for credit losses	( 18,751 )		( 24,549 )
Net loans	$	3,503,174	$	3,597,570

Construction loans included in:
Commercial real estate	$	19,360	$	40,449
Residential real estate	19,059		27,078

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.

Paycheck Protection Program

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. Through September 30, 2021, the Company has funded approximately $ 136 million of SBA-approved PPP loans to over 2,500 customers. The Company started submitting forgiveness applications on behalf of its customers during the fourth quarter of 2020 and as of September 30, 2021, has received forgiveness proceeds of approximately $ 110 million.

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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 three and nine months ended September 30, 2021 and 2020 (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
	Industrial		Real Estate		Real Estate		Home Equity		Consumer		Overdrafts		Total
Nine months ended September 30, 2021
Beginning balance	$	3,644	$	10,997	$	8,093	$	630	$	163	$	1,022	$	24,549
Charge-offs	( 245 )		( 2,111 )		( 197 )		( 119 )		( 229 )		( 1,516 )		( 4,417 )
Recoveries	140		197		120		84		215		1,028		1,784
(Recovery of) provision for credit losses	( 177 )		( 1,281 )		( 2,042 )		( 123 )		1		457		( 3,165 )
Ending balance	$	3,362	$	7,802	$	5,974	$	472	$	150	$	991	$	18,751

Nine months ended September 30, 2020
Beginning balance	$	2,059	$	2,606	$	3,448	$	1,187	$	975	$	1,314	11,589
Impact of adopting CECL	1,715		3,254		2,139		( 598 )		( 810 )		60		5,760
Charge-offs	( 834 )		( 497 )		( 1,111 )		( 332 )		( 165 )		( 1,716 )		( 4,655 )
Recoveries	17		375		127		89		183		1,134		1,925
Provision for (recovery of) credit losses	802		5,265		3,677		323		77		104		10,248
Ending balance	$	3,759	$	11,003	$	8,280	$	669	$	260	$	896	$	24,867

Three months ended September 30, 2021
Beginning balance	$	3,356	$	8,367	$	6,791	$	535	$	178	$	789	$	20,016
Charge-offs	—		( 392 )		( 18 )		( 47 )		( 3 )		( 633 )		( 1,093 )
Recoveries	69		18		29		58		72		307		553
(Recovery of) provision for credit losses	( 63 )		( 191 )		( 828 )		( 74 )		( 97 )		528		( 725 )
Ending balance	$	3,362	$	7,802	$	5,974	$	472	$	150	$	991	$	18,751

Three months ended September 30, 2020
Beginning Balance	$	6,266	$	10,090	$	7,323	$	647	$	120	$	753	25,199
Charge-offs	( 757 )		( 75 )		( 252 )		( 126 )		( 74 )		( 554 )		( 1,838 )
Recoveries	3		44		24		33		42		334		480
(Recovery of) provision for credit losses	( 1,753 )		944		1,185		115		172		363		1,026
	$	3,759	$	11,003	$	8,280	$	669	$	260	$	896	$	24,867

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 historica l 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. The provision for credit losses recorded during the nine months ended September 30, 2021 reflects the expected economic impact from the COVID-19 pandemic. As a result of COVID-19, expected unemployment ranges significantly increased during the quarter ended March 31, 2020 and resulted in an increase in the Company's provision for credit losses. During the quarter ended September 30, 2021, the Company partially recovered a portion of the provision for credit losses incurred in the quarter ended March 31, 2020, due to adjustments to qualitative and other factors.

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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.

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.

Non-Performing Loans

The following table presents the amortized cost basis of loans on non-accrual status and loans past due over 90 days still accruing as of September 30, 2021 (in thousands):


	Non-accrual With No		Non-accrual With		Loans Past Due
	Allowance for		Allowance for		Over 90 Days
	Credit Losses		Credit Losses		Still Accruing
Commercial & Industrial	$	172	$	359	$	127

1-4 Family	—		1,539		—
Hotels	—		113		—
Multi-family	—		—		—
Non Residential Non-Owner Occupied	—		686		—
Non Residential Owner Occupied	616		401		—
Commercial Real Estate	616		2,739		—

Residential Real Estate	76		3,558		—
Home Equity	—		67		—
Consumer	—		—		—
Total	$	864	$	6,723	$	127

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The following table presents the amortized cost basis of loans on non-accrual status and loans past due over 90 days still accruing as of December 31, 2020 (in thousands):


	Non-accrual With No		Non-accrual With		Loans Past Due
	Allowance for		Allowance for		Over 90 Days
	Credit Losses		Credit Losses		Still Accruing
Commercial & Industrial	$	172	$	596	$	—

1-4 Family	—		2,056		—
Hotels	—		2,951		—
Multi-family	—		—		—
Non Residential Non-Owner Occupied	—		508		—
Non Residential Owner Occupied	2,297		589		—
Commercial Real Estate	2,297		6,104		—

Residential Real Estate	21		2,947		—
Home Equity	—		95		—
Consumer	—		—		—
Total	$	2,490	$	9,742	$	—

The Company recognized less than $ 0.1 million of interest income on nonaccrual loans during each of the nine months ended September 30, 2021 and 2020.

The following table presents the amortized cost basis of individually evaluated impaired collateral-dependent loans as of September 30, 2021 and December 31, 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.


	September 30, 2021				December 31, 2020
	Secured by				Secured by
	Real Estate		Equipment		Real Estate		Equipment
Commercial and industrial	$	172	$	—	$	173	$	—

1-4 Family	—		—		—		—
Hotels	—		—		2,837		—
Multi-family	—		—		—		—
Non Residential Non-Owner Occupied	—		—		—		—
Non Residential Owner Occupied	616		—		2,296		—
Commercial real estate	616		—		5,133		—
Total	$	788	$	—	$	5,306	$	—

The Company would have recognized less than $ 0.3 million of interest income during each of the nine months ended September 30, 2021 and 2020, respectively, if such loans had been current in accordance with their original terms. There were no significant commitments to provide additional funds on non-accrual or impaired loans at September 30, 2021.

Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment. Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance. Commercial loans are generally charged off when the loan becomes 120 days past due. Open-end consumer loans are generally charged off when the loan becomes 180 days past due.

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The following tables present the aging of the amortized cost basis in past-due loans as of September 30, 2021 and December 31, 2020 by class of loan (in thousands):


	September 30, 2021
	30-59		60-89		90+		Total		Current		Non-		Total
	Past Due		Past Due		Past Due		Past Due		Loans		accrual		Loans
Commercial and industrial	$	122	$	206	$	127	$	455	$	352,060	$	531	$	353,046

1-4 Family	163		—		—		163		107,211		1,539		108,913
Hotels	—		—		—		—		297,228		113		297,341
Multi-family	—		—		—		—		215,307		—		215,307
Non Residential Non-Owner Occupied	278		—		—		278		663,401		686		664,365
Non Residential Owner Occupied	—		—		—		—		204,562		1,017		205,579
Commercial real estate	441		—		—		441		1,487,709		3,355		1,491,505

Residential real estate	4,655		603		—		5,258		1,497,680		3,634		1,506,572
Home Equity	646		41		—		687		124,052		67		124,806
Consumer	36		—		—		36		43,260		—		43,296
Overdrafts	389		1		—		390		2,310		—		2,700
Total	$	6,289	$	851	$	127	$	7,267	$	3,507,071	$	7,587	$	3,521,925


	December 31, 2020
	30-59		60-89		90+		Total		Current		Non-		Total
	Past Due		Past Due		Past Due		Past Due		Loans		accrual		Loans
Commercial and industrial	$	1,213	$	27	$	—	$	1,240	$	370,981	$	768	$	372,989

1-4 Family	484		—		—		484		107,272		2,056		109,812
Hotels	—		—		—		—		291,513		2,951		294,464
Multi-family	—		—		—		—		215,671		—		215,671
Non Residential Non-Owner Occupied	119		—		—		119		640,724		508		641,351
Non Residential Owner Occupied	22		—		—		22		210,576		2,886		213,484
Commercial real estate	625		—		—		625		1,465,756		8,401		1,474,782

Residential real estate	5,177		816		—		5,993		1,578,733		2,968		1,587,694
Home Equity	575		—		—		575		135,799		95		136,469
Consumer	63		50		—		113		47,575		—		47,688
Overdrafts	334		7		—		341		2,156		—		2,497
Total	$	7,987	$	900	$	—	$	8,887	$	3,601,000	$	12,232	$	3,622,119

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

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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.

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


	September 30, 2021		December 31, 2020
Commercial and industrial	$	430	$	—

1-4 Family	114		121
Hotels	—		2,634
Multi-family	1,823		1,883
Non Residential Non-Owner Occupied	—		—
Non Residential Owner Occupied	—		—
Commercial real estate	1,937		4,638

Residential real estate	16,910		19,226
Home equity	1,822		2,001
Consumer	221		277
Total	$	21,320	$	26,142

The Company has allocated $ 0.3 million and $ 1.6 million of the allowance for credit losses for these loans as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 , the Company has no t committed to lend any additional amounts in relation to these loans.

The following table presents loans by class, modified as TDRs, that occurred during the nine months ended

September 30, 2021 and 2020, respectively (dollars in thousands):


	September 30, 2021					September 30, 2020
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment
Commercial and industrial	1	$	430	$	430	—	$	—	$	—

1-4 Family	—	—		—		—	—		—
Hotels	—	—		—		—	—		—
Multi-family	—	—		—		—	—		—
Non Owner Non-Owner Occupied	—	—		—		—	—		—
Non Owner Owner Occupied	—	—		—		—	—		—
Commercial real estate	—	—		—		—	—		—

Residential real estate	2	147		147		11	767		767
Home equity	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	3	$	577	$	577	11	$	767	$	767

The TDRs above increased the allowance for credit losses by less than $ 0.1 million in each of the nine months ended September 30, 2021 and 2020 and resulted in no charge-offs durin g those same time periods.

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The Company had one TDR that had a partial charge-off of $ 2.1 million during 2021, and no significant TDRs that subsequently defaulted in 2020.

Most TDRs above are reported due to filing Chapter 7 bankruptcy. 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.

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 considered 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 of modification. In addition, modifications or deferrals pursuant to the CARES Act do not represent TDRs. 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 September 30, 2021, the Company granted deferrals of approximately $ 143 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As of September 30, 2021, approximately $ 3 million of these loans were still deferring, while approximately $ 140 million have resumed making their normal loan payment. As of September 30, 2021, approximately $ 4 million of these deferrals were previously and currently considered TDRs due to Chapter 7 bankruptcies.

Through September 30, 2021, the Company granted deferrals of approximately $ 479 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of September 30, 2021, approximately $ 15 million of these loans related to hotel and lodging customers were still deferring, while approximately $ 464 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 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 expected 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 September 30, 2021 is as follows (in thousands):


													Revolving
	Term Loans												Loans
	Amortized Cost Basis by Origination Year and Risk Level												Amortized
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	61,519	$	89,038	$	44,485	$	50,912	$	25,374	$	10,874	$	59,756	$	341,958
Special mention	5		498		18		—		34		—		3,301		3,856
Substandard	326		1,568		1,647		771		500		1,742		678		7,232
Total	$	61,850	$	91,104	$	46,150	$	51,683	$	25,908	$	12,616	$	63,735	$	353,046






Commercial real estate -
1-4 Family
Pass	$	20,387	$	17,710	$	11,559	$	6,565	$	4,532	$	30,805	$	12,389	$	103,947
Special mention	—		123		—		—		—		567		—		690
Substandard	—		279		164		—		731		3,102		—		4,276
Total	$	20,387	$	18,112	$	11,723	$	6,565	$	5,263	$	34,474	$	12,389	$	108,913






Commercial real estate -
Hotels
Pass	$	17,312	$	16,395	$	85,677	$	25,949	$	41,091	$	48,086	$	310	$	234,820
Special mention	108		—		8,879		—		—		8,574		—		17,561
Substandard	447		140		15,413		—		6,415		22,545		—		44,960
Total	$	17,867	$	16,535	$	109,969	$	25,949	$	47,506	$	79,205	$	310	$	297,341






Commercial real estate -
Multi-family
Pass	$	12,520	$	79,365	$	54,466	$	2,283	$	19,969	$	44,585	$	228	$	213,416
Special mention	—		—		1,823		—		—		—		—		1,823
Substandard	—		—		—		—		—		68		—		68
Total	$	12,520	$	79,365	$	56,289	$	2,283	$	19,969	$	44,653	$	228	$	215,307

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													Revolving
	Term Loans												Loans
	Amortized Cost Basis by Origination Year and Risk Level												Amortized
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Commercial real estate -
Non Residential Non-Owner Occupied
Pass	$	118,117	$	144,842	$	87,077	$	105,262	$	47,391	$	143,752	$	9,438	$	655,879
Special mention	121		186		189		260		278		140		—		1,174
Substandard	897		21		1,374		2,209		26		2,785		—		7,312
Total	$	119,135	$	145,049	$	88,640	$	107,731	$	47,695	$	146,677	$	9,438	$	664,365






Commercial real estate -
Non Residential Owner Occupied
Pass	$	40,868	$	27,610	$	22,779	$	23,067	$	15,657	$	42,595	$	2,385	$	174,961
Special mention	—		30		2,784		45		322		2,322		—		5,503
Substandard	201		115		6,169		656		6,911		10,244		819		25,115
Total	$	41,069	$	27,755	$	31,732	$	23,768	$	22,890	$	55,161	$	3,204	$	205,579


Commercial real estate -
Total
Pass	$	209,204	$	285,922	$	261,558	$	163,126	$	128,640	$	309,823	$	24,750	$	1,383,023
Special mention	229		339		13,675		305		600		11,603		—		26,751
Substandard	1,545		555		23,120		2,865		14,083		38,744		819		81,731
Total	$	210,978	$	286,816	$	298,353	$	166,296	$	143,323	$	360,170	$	25,569	$	1,491,505

Residential real estate
Performing	$	253,552	$	347,418	$	170,373	$	120,438	$	97,805	$	410,803	$	102,549	$	1,502,938
Non-performing	—		—		233		698		162		861		1,680		3,634
Total	$	253,552	$	347,418	$	170,606	$	121,136	$	97,967	$	411,664	$	104,229	$	1,506,572






Home equity
Performing	$	6,936	$	7,221	$	4,226	$	3,550	$	1,479	$	9,040	$	92,287	$	124,739
Non-performing	—		—		—		—		—		—		67		67
Total	$	6,936	$	7,221	$	4,226	$	3,550	$	1,479	$	9,040	$	92,354	$	124,806






Consumer
Performing	$	11,208	$	11,091	$	9,794	$	5,794	$	1,671	$	2,088	$	1,650	$	43,296
Non-performing	—		—		—		—		—		—		—		—
Total	$	11,208	$	11,091	$	9,794	$	5,794	$	1,671	$	2,088	$	1,650	$	43,296

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Based on the most recent analysis performed, the risk category of loans by class of loans at December 31, 2020 is as follows (in thousands):


													Revolving
	Term Loans												Loans
	Amortized Cost Basis by Origination Year and Risk Level												Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
Commercial and industrial
Pass	$	123,920	$	51,972	$	59,152	$	30,440	$	16,673	$	6,942	$	75,018	$	364,117
Special mention	72		27		13		47		—		433		508		1,100
Substandard	783		1,553		918		589		268		1,733		1,928		7,772
Total	$	124,775	$	53,552	$	60,083	$	31,076	$	16,941	$	9,108	$	77,454	$	372,989






Commercial real estate -
1-4 Family
Pass	$	19,970	$	17,540	$	8,217	$	7,444	$	6,158	$	33,075	$	10,274	$	102,678
Special mention	192		—		—		—		159		753		—		1,104
Substandard	119		343		—		863		102		4,603		—		6,030
Total	$	20,281	$	17,883	$	8,217	$	8,307	$	6,419	$	38,431	$	10,274	$	109,812






Commercial real estate -
Hotels
Pass	$	23,886	$	95,269	$	26,206	$	42,593	$	21,490	$	43,686	$	—	$	253,130
Substandard	343		15,412		—		6,750		4,465		14,364		—		41,334
Total	$	24,229	$	110,681	$	26,206	$	49,343	$	25,955	$	58,050	$	—	$	294,464






Commercial real estate -
Multi-family
Pass	$	81,127	$	56,371	$	2,688	$	20,730	$	23,873	$	27,009	$	1,363	$	213,161
Special mention	—		1,883		551		—		—		—		—		2,434
Substandard	—		—		—		—		—		76		—		76
Total	$	81,127	$	58,254	$	3,239	$	20,730	$	23,873	$	27,085	$	1,363	$	215,671

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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 -
Non Residential Non-Owner Occupied
Pass	$	155,937	$	101,011	$	115,524	$	51,329	$	76,219	$	125,349	$	8,825	$	634,194
Special mention	16		504		592		37		—		147		—		1,296
Substandard	580		1,385		1,159		52		1,187		1,338		160		5,861
Total	$	156,533	$	102,900	$	117,275	$	51,418	$	77,406	$	126,834	$	8,985	$	641,351






Commercial real estate -
Non Residential Owner Occupied
Pass	$	31,443	$	26,685	$	26,403	$	20,582	$	20,032	$	50,988	$	5,098	$	181,231
Special mention	234		2,901		53		90		—		2,470		—		5,748
Substandard	117		5,084		696		6,069		3,820		10,557		162		26,505
Total	$	31,794	$	34,670	$	27,152	$	26,741	$	23,852	$	64,015	$	5,260	$	213,484


Commercial real estate -
Total
Pass	$	312,363	$	296,876	$	179,038	$	142,678	$	147,772	$	280,107	$	25,560	$	1,384,394
Special mention	442		5,288		1,196		127		159		3,370		—		10,582
Substandard	1,159		22,224		1,855		13,734		9,574		30,938		322		79,806
Total	$	313,964	$	324,388	$	182,089	$	156,539	$	157,505	$	314,415	$	25,882	$	1,474,782

Residential real estate
Performing	$	407,135	$	233,709	$	176,523	$	134,425	$	102,828	$	416,473	$	113,633	$	1,584,726
Non-performing	—		—		—		164		41		1,184		1,579		2,968
Total	$	407,135	$	233,709	$	176,523	$	134,589	$	102,869	$	417,657	$	115,212	$	1,587,694






Home equity
Performing	$	9,038	$	6,241	$	5,375	$	2,126	$	1,309	$	11,573	$	100,712	$	136,374
Non-performing	—		—		—		—		—		—		95		95
Total	$	9,038	$	6,241	$	5,375	$	2,126	$	1,309	$	11,573	$	100,807	$	136,469






Consumer
Performing	$	15,342	$	14,977	$	9,229	$	3,154	$	1,688	$	1,422	$	1,876	$	47,688
Non-performing	—		—		—		—		—		—		—		—
Total	$	15,342	$	14,977	$	9,229	$	3,154	$	1,688	$	1,422	$	1,876	$	47,688

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Note F – Derivative Instruments

As of September 30, 2021 and December 31, 2020, 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.

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


	September 30, 2021				December 31, 2020
	Notional Amount		Fair Value		Notional Amount		Fair Value

Non-hedging interest rate derivatives:
Customer counterparties:
Loan interest rate swap - assets	$	540,737	$	26,126	$	647,613	$	52,364
Loan interest rate swap - liabilities	139,539		3,684		37,721		562

Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan interest rate swap - assets	149,170		3,954		37,721		562
Loan interest rate swap - liabilities	544,384		26,231		661,866		52,607

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Change in Fair Value Non-Hedging Interest Rate Derivatives:
Other (expense) income - derivative assets	$	( 3,999 )	$	( 4,615 )	$	( 22,138 )	$	37,103
Other income (expense) - derivative liabilities	3,999		4,615		22,138		( 37,103 )
Other income (expense) - derivative liabilities	59		( 20 )		411		163

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 Company has posted collateral with a value of $ 36.2 million and $ 68.4 million as of September 30, 2021 and December 31, 2020, respectively.

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.

During the year ended December 31, 2020, 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. The gains or losses on these hedges are recognized in current earnings as fair value changes. The fair value of these hedges was $ 3.0 million and $ 0.2 million at September 30, 2021 and December 31, 2020, respectively.

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Note G – Employee Benefit Plans

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 September 30, 2021, the criteria were probable of being met.

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


	Nine months ended September 30,
	2021			2020
	Restricted Awards	Average Market Price at Grant		Restricted Awards	Average Market Price at Grant
Outstanding at January 1	158,554	$	67.40	148,083	$	62.62
Granted	43,451	76.37		38,603	67.15
Vested	( 54,400 )	60.69		( 29,775 )	47.72
Outstanding at September 30	147,605	$	72.23	156,911	$	66.56

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


	Three months ended September 30				Nine months ended September 30,
	2021		2020		2021		2020
Stock-based compensation expense associated with restricted shares	$	717	$	708	$	2,192	$	2,018

At period-end:					September 30, 2021
Unrecognized stock-based compensation expense associated with restricted shares					$	5,704
Weighted average period (in years) in which the above amount is expected to be recognized					2.9

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 nine months ended September 30, 2021 and 2020, 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.).

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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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Components of net periodic cost:
Interest cost	$	83	$	112	$	248	$	336
Expected return on plan assets	( 237 )		( 203 )		( 646 )		( 611 )
Net amortization and deferral	280		272		841		817
Net Periodic Pension Cost	$	126	$	181	$	443	$	542

Note H – Commitments and Contingencies

COVID-19

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, shelter-in-place 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 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, 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):


	September 30, 2021		December 31, 2020
Commitments to extend credit:
Home equity lines	$	221,442	$	215,619
Commercial real estate	46,875		65,828
Other commitments	227,666		245,647
Standby letters of credit	6,026		6,460
Commercial letters of credit	153		610

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.

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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.

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 24 %.


	Three months ended September 30,						Nine months ended September 30,

	Defined						Defined
	Benefit		Securities				Benefit		Securities
	Pension		Available-				Pension		Available-
	Plan		-for-Sale		Total		Plan		-for-Sale		Total
2021
Beginning Balance	$	( 5,661 )	$	28,227	$	22,566	$	( 5,661 )	$	36,894	$	31,233

Other comprehensive loss before reclassifications	—		( 7,349 )		( 7,349 )		—		( 15,779 )		( 15,779 )
Amounts reclassified from other comprehensive income	—		—		—		—		( 237 )		( 237 )
	—		( 7,349 )		( 7,349 )		—		( 16,016 )		( 16,016 )

Ending Balance	$	( 5,661 )	$	20,878	$	15,217	$	( 5,661 )	$	20,878	$	15,217

2020
Beginning Balance	$	( 6,270 )	$	37,299	$	31,029	$	( 6,270 )	$	12,110	$	5,840

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

Ending Balance	$	( 6,270 )	$	36,760	$	30,490	$	( 6,270 )	$	36,760	$	30,490


	Amounts reclassified from Other Comprehensive Income
	Three months ended				Nine months ended				Affected line item
	September 30,				September 30,				in the Consolidated Statements
	2021		2020		2021		2020		of Income

Securities available-for-sale:
Net securities gains reclassified into earnings	$	—	$	—	$	312	$	56	Gains on sale of investment securities, net
Related income tax expense	—		—		( 75 )		( 12 )		Income tax expense
Net effect on accumulated other comprehensive income	$	—	$	—	$	237	$	44

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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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net income available to common shareholders	$	22,732	$	20,126	$	64,694	$	67,374
Less: earnings allocated to participating securities	( 220 )		( 198 )		( 618 )		( 658 )
Net earnings allocated to common shareholders	$	22,512	$	19,928	$	64,076	$	66,716

Distributed earnings allocated to common stock	$	8,726	$	8,944	$	26,177	$	26,832
Undistributed earnings allocated to common stock	13,786		10,984		37,899		39,884
Net earnings allocated to common shareholders	$	22,512	$	19,928	$	64,076	$	66,716

Average shares outstanding	15,279		15,950		15,501		16,065
Effect of dilutive securities:
Employee stock awards	23		20		25		19
Shares for diluted earnings per share	15,302		15,970		15,526		16,084

Basic earnings per share	$	1.47	$	1.25	$	4.13	$	4.15
Diluted earnings per share	$	1.47	$	1.25	$	4.13	$	4.15

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 amounts 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, no material losses have been incurred due to a counterparty's inability to pay any undercollateralized position. There was no 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 September 30, 2021.

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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 individually evaluated 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)
September 30, 2021
Recurring fair value measurements
Financial Assets
Obligations of states and political subdivisions	$	275,084	$	—	$	275,084	$	—
Mortgage-backed securities:
U.S. Government agencies	1,054,423		—		1,054,423		—
Private label	9,565		—		5,766		3,799
Trust preferred securities	4,449		—		4,449		—
Corporate securities	28,556		—		28,556		—
Marketable equity securities	9,159		4,089		5,070		—
Certificates of deposit held for investment	996		—		996		—
Derivative assets	33,076		—		33,076		—
Financial Liabilities
Derivative liabilities	29,985		—		29,985		—

Nonrecurring fair value measurements
Financial Assets
Loans individually evaluated	$	788	$	—	$	—	$	788	$	( 478 )
Non-Financial Assets
Other real estate owned	1,335		—		—		1,335		( 2 )

December 31, 2020
Recurring fair value measurements
Financial Assets
Obligations of states and political subdivisions	$	277,811	$	—	$	277,811	$	—
Mortgage-backed securities:
U.S. Government agencies	850,384		—		850,384		—
Private label	10,892		—		6,061		4,831
Trust preferred securities	4,100		—		4,100		—
Corporate securities	33,610		—		29,606		4,004
Marketable equity securities	11,839		6,800		5,039		—
Certificates of deposit held for investment	1,992		—		1,992		—
Derivative assets	53,166		—		53,166		—
Financial Liabilities
Derivative liabilities	53,288		—		53,288		—

Nonrecurring fair value measurements
Financial Assets
Loans individually evaluated	$	4,101	$	—	$	—	$	4,101	$	( 1,118 )
Non-Financial Assets
Other real estate owned	1,650		—		—		1,650		( 292 )

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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 nine months ended September 30, 2021 and 2020, collateral discounts ranged from 10 % to 30 %. During the nine months ended September 30, 2021 and 2020, 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). 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
September 30, 2021
Assets:
Cash and cash equivalents	$	639,549	$	639,549	$	639,549	$	—	$	—
Securities available-for-sale	1,372,077		1,372,077		—		1,368,278		3,799
Marketable equity securities	9,159		9,159		4,089		5,070		—
Net loans	3,503,174		3,422,601		—		—		3,422,601
Accrued interest receivable	16,224		16,224		16,224		—		—
Derivative assets	33,076		33,076		—		33,076		—

Liabilities:
Deposits	4,887,476		4,890,521		3,783,407		1,107,114		—
Short-term debt	296,642		296,642		—		296,642		—
Accrued interest payable	815		815		815		—		—
Derivative liabilities	29,985		29,985		—		29,985		—

December 31, 2020
Assets:
Cash and cash equivalents	$	528,659	$	528,659	$	528,659	$	—	$	—
Securities available-for-sale	1,176,797		1,176,797		—		1,167,962		8,835
Marketable equity securities	11,839		11,839		6,800		5,039		—
Net loans	3,597,570		3,578,013		—		—		3,578,013
Accrued interest receivable	15,793		15,793		15,793		—		—
Derivative assets	53,166		53,166		—		53,166		—

Liabilities:
Deposits	4,652,216		4,665,905		3,392,194		1,273,711		—
Short-term debt	295,956		295,956		—		295,956		—
Accrued interest payable	1,586		1,586		1,586		—		—
Derivative liabilities	53,288		53,288		—		53,288		—

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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, including but not limited to:

• We addressed the safety of our branches by following recommended state mandates. During this time, we found ways to service our customers based on their needs; in person, over the phone, via digital banking access and our drive thru faciliti es. We adapted our delivery channels to meet our customer's needs, including opening deposit accounts and closing loans in our drive thrus.

• We provided extensions and deferrals to loan customers affected by COVID-19 provided such customers were not 30 days past due at March 19, 2020. Through September 30, 2021, the Company granted deferrals of approximately $143 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As of September 30, 2021, approximately $3 million of these loans were still deferring, while approximately $140 million have resumed making their normal loan payment. Through September 30, 2021, the Company granted deferrals of approximately $479 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of September 30, 2021, approximately $15 million of these loans related to hotel and lodging customers were still deferring, while approximately $464 million ha ve resumed making their normal loan payment.

• We chose to participate in the CARES Act Paycheck Protection Program ("PPP") that provided government guaranteed and forgivable loans to our customers. As of September 30, 2021, the Company has funded approximately $136 million of SBA-approved PPP loans to over 2,500 customers. The Company started submitting forgiveness applications on behalf of its customers during the fourth quarter of 2020 and as of September 30, 2021, has received forgiveness proceeds of approximately $110 million.

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 2020 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 2020 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.

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. These evaluations are conducted at least quarterly and more frequently if deemed necessary. Additionally, all commercial loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process.

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In evaluating the appropriateness of its allowance for credit losses, the Company stratifies the loan portfolio into six major groupings. 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.

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 and various state taxing authorities for the years ended December 31, 2017 and forward.

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Financial Summary

Nine months ended September 30, 2021 vs. 2020

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


	Nine months ended September 30,
	2021			2020

Net income available to common shareholders ( in thousands )	$	64,694		$	67,374
Earnings per common share, basic	$	4.13		$	4.15
Earnings per common share, diluted	$	4.13		$	4.15
Dividend payout ratio	42.1		%	41.2		%
ROA*	1.47		%	1.68		%
ROE*	12.3		%	12.9		%
ROATCE*	14.8		%	15.6		%
Average equity to average assets ratio	11.9		%	13.0		%

*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 nine months ended September 30, 2021 decreased $1.5 million compared to the nine months ended September 30, 2020 (see Net Interest Income ). The Company recorded a recovery of credit losses of $3.2 million for the nine months ended September 30, 2021 compared to a provision for credit losses of $10.2 million for the nine months ended September 30, 2020 (see Allowance for Credit Losses ). As further discussed under the caption Non-Interest Income and Non-Interest Expense , non-interest income decreased $12.9 million and non-interest expense increased $1.9 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020.

Financial Summary

Three months ended September 30, 2021 vs. 2020

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


	Three months ended September 30,
	2021			2020

Net income available to common shareholders ( in thousands )	$	22,732		$	20,126
Earnings per common share, basic	$	1.47		$	1.25
Earnings per common share, diluted	$	1.47		$	1.25
Dividend payout ratio	39.4		%	45.7		%
ROA*	1.53		%	1.46		%
ROE*	13.1		%	11.5		%
ROATCE*	15.7		%	13.8		%
Average equity to average assets ratio	11.7		%	12.7		%

The Company's net interest income for the three months ended September 30, 2021 increased $1.5 million compared to the three months ended September 30, 2020 (see Net Interest Income ). The Company recorded a recovery of credit losses of $0.7 million for the three months ended September 30, 2021 compared to a provision for credit losses of $1.0 million for the three months ended September 30, 2020 (see Allowance for Credit Losses ). As further discussed under the caption Non-Interest

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Income and Non-Interest Expense , non-interest income increased $1.0 million and non-interest expense increased $0.5 million for the three months ended September 30, 2021 from the three months ended September 30, 2020.

Balance Sheet Analysis

Selected balance sheet fluctuations from the year ended December 31, 2020 are summarized in the following table (in millions):


	September 30,		December 31,
	2021		2020		$ Change		% Change

Cash and cash equivalents	$	639.5	$	528.7	$	110.8	21.0	%
Investment securities	1,397.6		1,206.2		191.4		15.9	%
Gross loans	3,521.9		3,622.1		(100.2)		(2.8)	%

Total deposits	4,887.5		4,652.2		235.3		5.1	%

Cash and cash equivalents increased $111 million (21.0%) from December 31, 2020 to $640 million at September 30, 2021, due to an increase in deposit balances primarily as a result of the third round of Economic Income Payments as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and a weak loan demand environment.

Investment securities increased $191 million (15.9%) from December 31, 2020 to $1.4 billion at September 30, 2021, due to the increase in deposit balances and a weak loan demand environment.

Gross loans decreased $100 million (2.8%) from December 31, 2020 to $3.52 billion at September 30, 2021. PPP loans decreased $29 million from December 31, 2020, as loans forgiven of $76 million were partially offset by the Company’s participation in the second round of the PPP lending ($47 million). Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans decreased $71.0 million, (2.0%), from December 31, 2020 to $3.50 billion at September 30, 2021. Residential real estate loans decreased $81.1 million (5.1%); home equity loans decreased $11.7 million (8.6%); consumer loans decreased $4.4 million (9.2%); commercial real estate loans increased $16.7 million (1.1%); and commercial and industrial loans increased $9.2 million (2.9%) (excluding PPP loans).

Total deposits increased $235 million (5.1%) from December 31, 2020 to $4.89 billion at September 30, 2021. This increase was largely attri butable to the third round of Economic Impact Payments as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (approximately $180 million).

Net Interest Income

Nine months ended September 30, 2021 vs. 2020

The Company’s tax equivalent net interest income decreased $1.2 million, or (1.0)%, from $117.2 million for the nine months ended September 30, 2020 to $116.0 million for the nine months ended September 30, 2021. Excluding the impact of accretion from fair value adjustments, net interest income increased $0.3 million for the nine months ended September 30, 2021. Lower loan yields (41 basis points) and lower investment yields (53 basis points) decreased net interest income by $10.8 million and $5.3 million, respectively. Additionally, lower average loan volumes ($89.6 million) decreased net interest income by $3.0 million. These decreases were partially offset by an increase in average investment securities ($284 million), which increased net interest income by $6.2 million, lower rates paid on interest-bearing liabilities (45 basis points), which lowered interest expense by approximately $9.1 million and an increase in loan fees related to PPP loan forgiveness, which increased net interest income by $2.4 million. The Company’s reported net interest margin decreased from 3.22% for the nine months ended September 30, 2020 to 2.87% for the nine months ended September 30, 2021.

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 decreasing deposit rates. The Company's loan portfolio has historically included a significant portion of adjustable rate residential mortgage loans and variable rate commercial real estate loans made in markets where the Company has a presence.

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Table One

Average Balance Sheets and Net Interest Income

(in thousands)


Assets	Nine months ended September 30,
	2021						2020
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Loan portfolio (1) :
Residential real estate (2)	$	1,669,324	$	48,801	3.91	%	$	1,776,903	$	56,827	4.27	%
Commercial, financial, and agriculture (2)	1,833,744		50,044		3.65		1,810,165		55,051		4.06
Installment loans to individuals (2),(3)	50,898		2,140		5.62		56,535		2,519		5.95
Previously securitized loans (4)	***		414		***		***		415		***
Total loans	3,553,966		101,399		3.81		3,643,603		114,812		4.21
Securities:
Taxable	1,043,269		17,318		2.22		861,853		17,855		2.77
Tax-exempt (5)	243,146		4,811		2.65		140,075		3,366		3.21
Total securities	1,286,415		22,129		2.30		1,001,928		21,221		2.83
Deposits in depository institutions	562,272		474		0.11		214,912		432		0.27
Total interest-earning assets	5,402,653		124,002		3.07		4,860,443		136,465		3.75
Cash and due from banks	91,073						76,936
Bank premises and equipment	76,481						77,910
Goodwill and intangible assets	118,084						119,678
Other assets	214,872						218,695
Less: allowance for credit losses	(22,989)						(21,984)
Total assets	$	5,880,174					$	5,331,678

Liabilities
Interest-bearing demand deposits	$	1,057,452	$	373	0.05	%	$	898,440	$	833	0.12	%
Savings deposits	1,275,211		516		0.05		1,045,877		1,366		0.17
Time deposits (2)	1,181,166		6,806		0.77		1,347,013		16,125		1.60
Short-term borrowings	292,845		357		0.16		242,173		873		0.48
Long-term debt	—		—		—		1,109		100		12.04
Total interest-bearing liabilities	3,806,674		8,052		0.28		3,534,612		19,297		0.73
Noninterest-bearing demand deposits	1,289,247						1,004,144
Other liabilities	82,953						98,393
Stockholders’ equity	701,300						694,529
Total liabilities and stockholders’ equity	$	5,880,174					$	5,331,678
Net interest income			$	115,950					$	117,168
Net yield on earning assets					2.87	%					3.22	%

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

	Loan fees	$	2,443	$	881

(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:

		2021		2020
	Residential real estate	$	472	$	477
	Commercial, financial and agriculture	956		2,141
	Installment loans to individuals	72		114
	Time deposits	145		466
		$	1,645	$	3,198

(3)	Includes the Company’s consumer and DDA overdrafts loan categories.
(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.
(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)


	Nine months ended September 30, 2021 vs. 2020
Interest-earning assets:	Increase (Decrease) Due to Change In:
	Volume		Rate		Net

Loan portfolio
Residential real estate	$	(3,437)	$	(4,589)	$	(8,026)
Commercial, financial, and agriculture	716		(5,723)		(5,007)
Installment loans to individuals	(251)		(128)		(379)
Previously securitized loans	—		(1)		(1)
Total loans	(2,972)		(10,441)		(13,413)
Securities:
Taxable	3,755		(4,292)		(537)
Tax-exempt (1)	2,475		(1,030)		1,445
Total securities	6,230		(5,322)		908
Deposits in depository institutions	698		(656)		42
Total interest-earning assets	$	3,956	$	(16,419)	$	(12,463)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	147	$	(607)	$	(460)
Savings deposits	299		(1,149)		(850)
Time deposits	(1,984)		(7,335)		(9,319)
Short-term borrowings	182		(698)		(516)
Long-term debt	(100)		—		(100)
Total interest-bearing liabilities	$	(1,456)	$	(9,789)	$	(11,245)
Net Interest Income	$	5,412	$	(6,630)	$	(1,218)

(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 September 30, 2021 vs. 2020

The Company’s tax equivalent net interest income increased from $38.3 million for the three months ended September 30, 2020 to $39.8 million for the three months ended September 30, 2021 . Excluding the impact of accretion from fair value adjustments, net interest income increased $1.6 million for the three months ended September 30, 2021. A decrease in rates paid on interest bearing deposits (41 basis points) and an increase in average investment balances ($300.3 million) increased net interest income by $2.9 million and $2.1 million, respectively. In addition, higher loan fees, primarily related to PPP loan forgiveness, increased net interest income by $1.0 million and lower average time deposit balances ($195.9 million) increased net interest income by $0.7 million. These increases were partially offset by lower average investment yields (61 basis points), lower loan yields (18 basis points) and lower average loan balances ($126.1 million), which lowered net interest income by $2.1 million, $1.4 million, and $1.4 million, respectively. The Company’s reported net interest margin decreased from 3.02% for the three months ended September 30, 2020 to 2.89% for the three months ended September 30, 2021.

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Table Three

Average Balance Sheets and Net Interest Income

(in thousands)


Assets	Three months ended September 30,
	2021						2020
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Loan portfolio (1) :
Residential real estate (2)	$	1,648,921	$	15,813	3.80	%	$	1,766,796	$	17,899	4.03	%
Commercial, financial, and agriculture (2)	1,836,604		17,344		3.75		1,839,939		16,910		3.66
Installment loans to individuals (2),(3)	49,972		714		5.67		54,834		804		5.83
Previously securitized loans (4)	***		91		***		***		148		***
Total loans	3,535,497		33,962		3.81		3,661,569		35,761		3.89
Securities:
Taxable	1,136,519		6,144		2.14		877,623		6,266		2.84
Tax-exempt (5)	245,551		1,590		2.57		204,178		1,433		2.79
Total securities	1,382,070		7,734		2.22		1,081,801		7,699		2.83
Deposits in depository institutions	544,843		196		0.14		304,498		72		0.09
Total interest-earning assets	5,462,410		41,892		3.04		5,047,868		43,532		3.43
Cash and due from banks	101,058						80,505
Bank premises and equipment	75,956						77,647
Goodwill and intangible assets	117,719						119,267
Other assets	220,420						229,667
Less: allowance for credit losses	(20,407)						(25,311)
Total assets	$	5,957,156					$	5,529,643

Liabilities
Interest-bearing demand deposits	$	1,093,243	$	127	0.05	%	$	931,152	$	187	0.08	%
Savings deposits	1,315,462		169		0.05		1,093,886		303		0.11
Time deposits (2)	1,126,553		1,659		0.58		1,322,423		4,633		1.39
Short-term borrowings	282,722		115		0.16		260,518		131		0.20
Total interest-bearing liabilities	3,817,980		2,070		0.22		3,607,979		5,254		0.58
Noninterest-bearing demand deposits	1,356,745						1,114,822
Other liabilities	86,263						104,084
Shareholders’ equity	696,168						702,758
Total liabilities and shareholders’ equity	$	5,957,156					$	5,529,643
Net interest income			$	39,822					$	38,278
Net yield on earning assets					2.89	%					3.02	%

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

	Loan fees, net	$	1,120	$	156

(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:

		2021		2020
	Residential real estate	$	154	$	132
	Commercial, financial and agriculture	265		250
	Installment loans to individuals	21		38
	Time deposits	48		155
		$	488	$	575

(3)	Includes the Company’s consumer and DDA overdrafts loan categories.
(4)	Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.
(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 September 30, 2021 vs. 2020
Interest-earning assets:	Increase (Decrease) Due to Change In:
	Volume		Rate		Net

Loan portfolio
Residential real estate	$	(1,197)	$	(889)	$	(2,086)
Commercial, financial, and agriculture	(31)		465		434
Installment loans to individuals	(71)		(19)		(90)
Previously securitized loans	—		(57)		(57)
Total loans	(1,299)		(500)		(1,799)
Securities:
Taxable	1,854		(1,976)		(122)
Tax-exempt (1)	291		(134)		157
Total securities	2,145		(2,110)		35
Deposits in depository institutions	57		67		124
Total interest-earning assets	$	903	$	(2,543)	$	(1,640)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	33	$	(93)	$	(60)
Savings deposits	62		(196)		(134)
Time deposits	(688)		(2,286)		(2,974)
Short-term borrowings	11		(27)		(16)
Total interest-bearing liabilities	$	(582)	$	(2,602)	$	(3,184)
Net Interest Income	$	1,485	$	59	$	1,544

(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 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 (dollars in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

Net interest income (GAAP)	$	39,488		$	37,977		$	114,942		$	116,462
Taxable equivalent adjustment	334			301			1,008			706
Net interest income, fully taxable equivalent	$	39,822		$	38,278		$	115,950		$	117,168
Less accretion income	(488)			(575)			(1,643)			(3,198)
Net interest income excluding accretion income	$	39,334		$	37,703		$	114,307		$	113,970

Equity to assets (GAAP)	11.37		%	12.54		%
Effect of goodwill and other intangibles, net	(1.78)			(1.93)
Tangible common equity to tangible assets	9.59		%	10.61		%

Return on tangible equity (GAAP)	15.7		%	13.8		%	14.8		%	15.6		%
Impact of sale of VISA shares	—			—			—			(3.1)
Return on tangible equity, excluding sale of VISA shares	15.7		%	13.8		%	14.8		%	12.5		%

Return on assets (GAAP)	1.53		%	1.46		%	1.47		%	1.68		%
Impact of sale of VISA shares	—			—			—			(0.33)
Return on assets, excluding sale of VISA shares	1.53		%	1.46		%	1.47		%	1.35		%

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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):


	September 30, 2021		December 31, 2020		September 30, 2020
Commercial and industrial	353,046		372,989		383,980

1-4 Family	108,913		109,812		114,071
Hotels	297,341		294,464		295,989
Multi-family	215,307		215,671		214,394
Non Residential Non-Owner Occupied	664,365		641,351		628,814
Non Residential Owner Occupied	205,579		213,484		211,433
Commercial real estate	1,491,505		1,474,782		1,464,701

Residential real estate	1,506,572		1,587,694		1,621,265
Home equity	124,806		136,469		140,135
Consumer	43,296		47,688		50,541
DDA overdrafts	2,700		2,497		3,344
Total loans	$	3,521,925	$	3,622,119	$	3,663,966

Loan balances decreased $100.2 million from December 31, 2020 to September 30, 2021.

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. Num erous 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. Included in C&I loans are PPP loans of $26.3 million at September 30, 2021, which decreased $29.2 million from December 31, 2020. Excluding PPP loans, C&I loans increased $9.2 million from December 31, 2020 to September 30, 2021.

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 $16.7 million from December 31, 2020 to September 30, 2021. At September 30, 2021, $19.4 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 decreased $0.9 million from December 31, 2020 to September 30, 2021. Commercial 1-4 Family loans consist of residential single-family, duplex, triplex, and fourplex rental properties and totaled $108.9 million as of September 30, 2021. 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.

◦ Hotel loans increased $2.9 million from December 31, 2020 to September 30, 2021. The Hotel portfolio is comprised of all lodging establishments and totaled $297.3 million as of September 30, 2021. Risk characteristics relate to the demand for travel.

◦ Multi-family loans decreased $0.4 million from December 31, 2020 to September 30, 2021. Multi-family consists of 5 or more family residential apartment lending. The portfolio totaled $215.3 million as of September 30, 2021. 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

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totaled $664.4 million at September 30, 2021 and increased $23.0 million from December 31, 2020 to September 30, 2021. Nonresidential owner-occupied commercial real estate totaled $205.6 million at September 30, 2021 and decreased $7.9 million from December 31, 2020 to September 30, 2021. Risk characteristics relate to levels of consumer spending and overall economic conditions.

Residential real estate loans decreased $81.1 million from December 31, 2020 to September 30, 2021. 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 September 30, 2021, $19.1 million of the residential real estate loans were for properties under construction.

Home equity loans decreased $11.7 million during the first nine months of 2021. 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.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property or they may b e 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 $4.4 million during the first nine months of 2021.

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 credit losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. 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 ra nges 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. The provision for credit losses recorded during the nine months ended September 30, 2021 reflects the expected economic impact from the COVID-19 pandemic. As a result of COVID-19, expected unemployment ranges significantly increased during the quarter ended March 31, 2020 and resulted in an increase in the Company's provision for credit losses. During the quarter and nine months ended September 30, 2021, the Company partially recovered a portion of the provision for credit losses incurred in the quarter ended March 31, 2020, due to adjustments to qualitative and other factors. As a result of the Company’s quarterly analysis of the adequacy of the ACL, the Company recorded a recovery of credit losses of $3.2 million during the nine months ended September 30, 2021, compared to a provision for credit losses of $10.2 million for the comparable period in 2020.

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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.

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 September 30, 2021 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.

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):


	Nine months ended September 30,						Year ended December 31,
	2021			2020			2020
Balance at beginning of period	$	24,549		$	11,589		$	11,589
Charge-offs:
Commercial and industrial	(245)			(834)			(843)
Commercial real estate	(2,111)			(497)			(1,113)
Residential real estate	(197)			(1,111)			(1,250)
Home equity	(119)			(332)			(420)
Consumer	(229)			(165)			(192)
DDA overdrafts	(1,516)			(1,716)			(2,345)
Total charge-offs	(4,417)			(4,655)			(6,163)
Recoveries:
Commercial and industrial	140			17			91
Commercial real estate	197			375			525
Residential real estate	120			127			184
Home equity	84			89			136
Consumer	215			183			238
DDA overdrafts	1,028			1,134			1,467
Total recoveries	1,784			1,925			2,641
Net charge-offs	(2,633)			(2,730)			(3,522)
Impact of adopting CECL	—			5,760			5,760
(Recovery of) provision for credit losses	(3,165)			10,248			10,722
Balance at end of period	$	18,751		$	24,867		$	24,549
As a Percent of Average Total Loans:
Net charge-offs (annualized)	0.10		%	0.10		%	0.10		%
(Recovery of) provision for credit losses (annualized)	(0.12)		%	0.38		%	0.29		%
As a Percent of Non-Performing Loans:
Allowance for credit losses	243.08		%	182.70		%	200.69		%
As a Percent of Total Loans:
Allowance for credit losses	0.53		%	0.68		%	0.68		%

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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 September 30,				As of December 31,
	2021		2020		2020
Commercial and industrial	$	3,362	$	3,759	$	3,644
Commercial real estate	7,802		11,003		10,997
Residential real estate	5,974		8,280		8,093
Home equity	472		669		630
Consumer	150		260		163
DDA overdrafts	991		896		1,022
Allowance for Credit Losses	$	18,751	$	24,867	$	24,549

The ACL decreased from $24.5 million at December 31, 2020 to $18.8 million at September 30, 2021. Below is a summary of the significant changes in the components of the ACL from December 31, 2020 to September 30, 2021.

The allowance allocated to the commercial real estate portfolio decreased from $11.0 million at December 31, 2020 to $7.8 million at September 30, 2021 due to a decline in loan balances and improvements in the outlook for employment ranges utilized by the Company.

The allowance related to the residential real estate loan portfolio decreased from $8.1 million at December 31, 2020 to $6.0 million at September 30, 2021 due to a decline in loan balances and improvements in the outlook for employment ranges utilized by the Company.

Table Eight

Non-Performing Loans

The Company's nonperforming assets and past-due loans are shown below (dollars in thousands):


	September 30, 2021			September 30, 2020			December 31, 2020
Non-accrual loans with allowance for credit losses	$	6,723		$	10,508		$	9,742
Non-accrual loans with no allowance for credit losses	864			$	2,756		$	2,490
Total non-accrual loans	7,587			13,264			12,232
Accruing loans past due 90 days or more	127			345			—
Total non-performing loans	7,714			13,609			12,232
Other real estate owned ("OREO")	1,335			2,080			1,650
Total non-performing assets	$	9,049		$	15,689		$	13,882

Non-performing assets (as a percent of loans and OREO)	0.26		%	0.43		%	0.38		%

Past-due loans	$	7,267		$	7,420		$	8,888
Past-due loans (as a percentage of total loans)	0.21		%	0.20		%	0.25		%

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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 September 30,				December 31,
	2021		2020		2020

Commercial and industrial	$	430	$	—	$	—

1-4 Family	114		123		121
Hotels	—		2,634		2,634
Multi-family	1,823		1,903		1,883
Non Residential Non-Owner Occupied	—		—		—
Non Residential Owner Occupied	—		234		—
Commercial real estate	1,937		4,894		4,638

Residential real estate	16,910		20,398		19,226
Home equity	1,822		2,100		2,001
Consumer	221		260		277
Total TDRs	$	21,320	$	27,652	$	26,142

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 85% of the Company's total TDRs as of September 30, 2021. The average age of these TDRs was 13.8 years; the average current balance as a percentage of the original balance was 66.9%; and the average loan-to-value ratio was 61.9% as of September 30, 2021. Of the total 371 Chapter 7 related TDRs, 21 had an estimated loss exposure based on the current balance and the latest appraised value at September 30, 2021.

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 of modification. In addition, modifications or deferrals pursuant to the CARES Act do not represent TDRs. 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 September 30, 2021, the Company granted deferrals of approximately $143 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As of September 30, 2021, approximately $3 million of these loans were still deferring, while approximately $140 million have resumed making their normal loan payment. As of September 30, 2021, approximately $4 million of these deferrals were previously and currently considered TDRs due to Chapter 7 bankruptcies.

Through September 30, 2021, the Company granted deferrals of approximately $479 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of September 30, 2021, approximately $15 million of these loans related to hotel and lodging customers were still deferring, while approximately $464 million have resumed making their normal loan payment.

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Non-Interest Income and Non-Interest Expense

Nine months ended September 30, 2021 vs. 2020

(in millions)


	Nine months ended September 30,
	2021		2020		$ Change		% Change
Net investment securities gains (losses)	$	0.8	$	(1.6)	$	2.4	150.0	%
Sale of VISA shares	—		17.8		(17.8)		(100.0)
Non-interest income, excluding net investment securities gains and sale of VISA shares	51.3		48.8		2.5		5.1
Non-interest expense	88.6		86.6		2.0		2.3

Non-Interest Income: Non-interest income was $52.0 million for the nine months ended September 30, 2021, as compared to $65.0 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company reported $0.8 million of unrealized fair value gains and gains on the sale of the Company's equity securities compared to $1.6 million unrealized fair value losses on the Company's equity securities during the nine months ended September 30, 2020. Also, during the nine months ended 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 increased from $48.8 million for the nine months ended September 30, 2020 to $51.3 million for the nine months ended September 30, 2021. This increase was largely attributable to an increase of $3.2 million, or 18.5%, in bankcard revenue.

Non-Interest Expense: Non-interest expenses increased $2.0 million (2.3%), from $86.6 million in the first nine months of 2020 to $88.6 million in the first nine months of 2021 mainly due to increases in FDIC insurance expense ($0.7 million), telecommunications expense ($0.6 million), salaries and employee benefits ($0.5 million), and bankcard expenses ($0.4 million). These increases were partially offset by a decrease in other expenses of $0.9 million.

Income Tax Expense: The Company’s effective income tax rate for the nine months ended September 30, 2021 was 20.7% compared to 20.3% for the nine months ended September 30, 2020.

Non-Interest Income and Non-Interest Expense

Three months ended September 30, 2021 vs. 2020

(in millions)


	Three months ended September 30,
	2021		2020		$ Change		% Change
Net investment securities gains	$	0.1	$	0.5	$	(0.4)	(80.0)	%
Non-interest income, excluding net investment securities gains	17.8		16.5		1.3		7.9	%
Non-interest expense	29.2		28.7		0.5		1.7	%

Non-Interest Income: Non-interest income was $17.9 million for the third quarter of 2021 as compared to $17.0 million for the third quarter of 2020. During the third quarter of 2021, the Company reported $0.1 million of unrealized fair value gains on the Company’s equity securities compared to $0.5 million of unrealized fair value gains on the Company’s equity securities in the third quarter of 2020. Exclusive of these gains, non-interest income increased from $16.5 million for the third quarter of 2020 to $17.8 million for the third quarter of 2021. This increase was largely attributable to higher bankcard revenues ($0.7 million, or 12.0%) and service charges ($0.4 million, or 6.5%). In addition, trust and investment management fee income increased $0.3 million and other income increased $0.2 million from the quarter ended September 30, 2020. These increases were partially offset by a decrease in bank owned life insurance revenues due to lower death benefit proceeds ($0.3 million).

Non-Interest Expense: Non-interest expenses increased $0.5 million (1.7%), from $28.7 million in the third quarter of 2020 to $29.2 million in the third quarter of 2021. This increase was primarily due to an increase in advertising expenses of $0.3 million and telecommunication expenses of $0.2 million.

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Income Tax Expense: The Company's effective income tax rate for the three months ended September 30, 2021 was 21.6% compared to 20.2% for the three months ended September 30, 2020.

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 market 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 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
September 30, 2021
+400	4.25	%	+14.7	%
+300	3.25		+15.1
+200	2.25		+13.2
+100	1.25		+8.5

December 31, 2020
+400	4.25	%	+22.1	%
+300	3.25		+21.5
+200	2.25		+17.9
+100	1.25		+12.0

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

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that the estimates above will be achieved in the event that interest rates increase or decrease during the remainder of 2021 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 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 September 30, 2021, City National could pay dividends up to $62.5 million plus net profits for the remainder of 2021, 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 $35.2 million on an annualized basis over the next 12 months based on common shares outstanding at September 30, 2021. 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 $1.2 million of additional cash over the next 12 months. As of September 30, 2021, City Holding reported a cash balance of $14.6 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 September 30, 2021, 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 September 30, 2021, City National has the capacity to borrow $2.0 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 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 58.9% as of September 30, 2021 and deposit balances fund 82.1% 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 $1.40 billion at September 30, 2021, and that exceeded the Company’s non-deposit sources of borrowing, which totaled $296.6 million. Further, the Company’s deposit mix has a high proportion of transaction and savings accounts that fund 63.6% of the Company’s total assets.

As illustrated in the consolidated statements of cash flows, the Company generated $73.7 million of cash from operating activities during the first nine months of 2021, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. The Company used $123.2 million of cash in investing activities during the first nine months of 2021, primarily due to purchases of securities available-for-sale of $438.6 million. This decrease was partially offset by proceeds from maturities and calls of securities available-for-sale of $213.6 million and a net decrease in loans of $99.3 million. The Company generated $160.4 million of cash in financing activities during the first nine months of 2021, principally as a result of increases in non-interest-bearing deposits of $134.5 million and interest-bearing deposits of $100.9 million. These increases were partially offset by purchases of treasury stock of $48.3 million and dividends paid to the Company's common stockholders of $27.4 million.

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Capital Resources

Shareholders' equity decreased $23.8 million for the nine months ended September 30, 2021 due to the repurchase of 628,809 common shares at a weighted average price of $76.85 per share ($48.3 million) as part of a one million share repurchase plan authorized by the Board of Directors in March 2021, cash dividends declared of $27.2 million, and other comprehensive loss of $16.0 million. These decreases were partially offset by net income of $64.7 million and stock based related compensation expense of $2.4 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):


September 30, 2021	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	$	550,426	16.1	%	$	239,191	7.0	%	$	222,106	6.5	%
City National Bank	501,757		14.8	%	237,953		7.0	%	220,957		6.5	%
Tier I Capital
City Holding Company	550,426		16.1	%	290,447		8.5	%	273,362		8.0	%
City National Bank	501,757		14.8	%	288,944		8.5	%	271,947		8.0	%
Total Capital
City Holding Company	565,712		16.6	%	358,787		10.5	%	341,702		10.0	%
City National Bank	517,043		15.2	%	356,930		10.5	%	339,934		10.0	%
Tier I Leverage Ratio
City Holding Company	550,426		9.5	%	232,754		4.0	%	290,942		5.0	%
City National Bank	501,757		8.7	%	230,022		4.0	%	287,527		5.0	%


December 31, 2020	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	$	557,641	16.2	%	$	241,221	7.0	%	$	223,991	6.5	%
City National Bank	482,754		14.1	%	239,569		7.0	%	222,457		6.5	%
Tier I Capital
City Holding Company	557,641		16.2	%	292,911		8.5	%	275,681		8.0	%
City National Bank	482,754		14.1	%	290,906		8.5	%	273,793		8.0	%
Total Capital
City Holding Company	577,292		16.8	%	361,831		10.5	%	344,601		10.0	%
City National Bank	502,405		14.7	%	359,354		10.5	%	342,242		10.0	%
Tier I Leverage Ratio
City Holding Company	557,641		10.2	%	218,163		4.0	%	272,704		5.0	%
City National Bank	482,754		9.0	%	215,277		4.0	%	269,097		5.0	%

As of September 30, 2021, 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 September 30, 2021, 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 than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%,

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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 September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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, 2020.

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

On March 31, 2021, the Board of Directors of the Company authorized the Company to buy back up to 1,000,000 shares of its common stock (approximately 6% of outstanding shares) in open market transactions at prices that are accretive to the earnings per share of continuing shareholders. No time limit was placed on the duration of the share repurchase program. As part of this authorization, the Company terminated its previous repurchase program that was approved in February 2019. The following table sets forth information regarding the Company's common stock repurchases transacted during the quarter ended September 30, 2021:


				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, 2021	143,293	$	74.27	360,199	639,801
August 1 - August 31, 2021	91,500	78.05		451,699	548,301
September 1 - September 30, 2021	102,000	75.44		553,699	446,301

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

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 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(b)	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)	Amended and Restated Articles of Incorporation of City Holding Company, as amended. (This document represents the Amended and Restated Articles of Incorporation of City Holding Company in compiled form incorporating all amendments. The compiled document has not been filed with the West Virginia Secretary of State.)
	3( b )	Amended and Restated Bylaws of City Holding Company , revised December 18, 2019 (attached to, and incorporated by reference from, City Holding Company’s Current Report on Form 8-K filed December 20, 2019 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	Interactive Data File - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
	101.SCH	XBRL Taxonomy Extension Schema*
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase*
	101.DEF	XBRL Taxonomy Extension Definition Linkbase*
	101.LAB	XBRL Taxonomy Extension Label Linkbase*
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase*
	104	Cover Page Interactive 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.

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			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)

Date: November 4, 2021

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Part I -Item 1 - Financial Statements Item 2 - Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3 - Quantitative and Qualitative Disclosures About Market Risk Item 4 - Controls and Procedures Part II - Other Information Part II -Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

2(a) 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 Companys Form 8-K dated July 11, 2018, and filed with the Securities and Exchange Commission on July 12, 2018). 2(b) 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 Companys Form 8-K dated July 11, 2018, and filed with the Securities and Exchange Commission on July 12, 2018). 3(a) Amended and Restated Articles of Incorporation of City Holding Company, as amended.(This document represents the Amended and Restated Articles of Incorporation of City Holding Company in compiled form incorporating all amendments. The compiled document has not been filed with the West Virginia Secretary of State.) 3(b) Amended and Restated Bylaws of City Holding Company, revised December 18, 2019 (attached to, and incorporated by reference from, City Holding Companys Current Report on Form 8-K filed December 20, 2019 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 8A, filed June 22, 2001, with the Securities and Exchange Commission). 4(b) Amendment No. 1 to the Rights Agreementdated as of November 30, 2005 (attached to, and incorporated by reference from, City Holding Companys 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.

CHCO 10-Q Quarter ended Sept. 30, 2021

Exhibits