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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, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________

Commission file number 0-11733
chco-20200930_g1.jpg

CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia
55-0619957
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
25 Gatewater Road,
Charleston,
West Virginia
25313
(Address of Principal Executive Offices)
(Zip Code)
(304) 769-1100
Registrant's telephone number, including area code


(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $2.50 par valueCHCONASDAQ 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.
o

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 15,787,854 shares of common stock as of October 31, 2020.


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements express only management's beliefs regarding future results or events and are subject to inherent uncertainty, risks, and changes in circumstances, many of which are outside of management's control. Uncertainty, risks, changes in circumstances and other factors could cause the Company's (as hereinafter defined) actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to, those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under “ITEM 1A Risk Factors” and the following: (1) general economic conditions, especially in the communities and markets in which we conduct our business; (2) the uncertainties on the Company’s business, results of operations and financial condition, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on financial markets, the effectiveness of the Company’s work from home arrangements and staffing levels in operational facilities, the impact of market participants on which the Company relies and actions taken by governmental authorities and other third parties in response to the pandemic; (3) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for credit losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (4) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (5) changes in the interest rate environment; (6) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (7) changes in technology and increased competition, including competition from non-bank financial institutions; (8) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers' performance and creditworthiness; (9) difficulty growing loan and deposit balances; (10) our ability to effectively execute our business plan, including with respect to future acquisitions; (11) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (12) deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions; (13) regulatory enforcement actions and adverse legal actions; (14) difficulty attracting and retaining key employees; (15) the Company’s ability to pursue available remedies in the event of a loan default for loans under the Paycheck Protection Program, ("PPP"), and the risk of holding the PPP loans at unfavorable interest rates and on terms that are less favorable than those with customers to whom the Company would have otherwise lent; and (16) other economic, competitive, technological, operational, governmental, regulatory, and market factors affecting our operations.  Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.






Table of Contents
Index
City Holding Company and Subsidiaries

Pages
   
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
  
  
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
  
 



Table of Contents
Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

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Consolidated Balance Sheets
City Holding Company and Subsidiaries
(in thousands)
(Unaudited)
September 30, 2020December 31, 2019
Assets
Cash and due from banks$76,451 $88,658 
Interest-bearing deposits in depository institutions176,267 51,486 
Cash and Cash Equivalents252,718 140,144 
Investment securities available for sale, at fair value1,157,399 810,106 
Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2020 and December 31, 2019 - $0 and $50,598, respectively)
 49,036 
Other securities26,548 28,490 
Total Investment Securities1,183,947 887,632 
Gross loans3,663,966 3,616,099 
Allowance for credit losses(24,867)(11,589)
Net Loans3,639,099 3,604,510 
Bank owned life insurance117,501 115,261 
Premises and equipment, net77,031 76,965 
Accrued interest receivable16,627 11,569 
Net deferred tax asset 6,669 
Goodwill and other intangible assets, net119,004 120,241 
Other assets105,361 55,765 
Total Assets$5,511,288 $5,018,756 
Liabilities  
Deposits:  
Noninterest-bearing$1,061,310 $805,087 
Interest-bearing:  
   Demand deposits940,791 896,465 
   Savings deposits1,117,684 1,009,771 
   Time deposits1,300,291 1,364,571 
Total Deposits4,420,076 4,075,894 
Short-term borrowings:
   Securities sold under agreements to repurchase279,866 211,255 
Long-term debt 4,056 
Net deferred tax liability1,601  
Other liabilities118,386 69,568 
Total Liabilities4,819,929 4,360,773 
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, 2020 and December 31, 2019, less 3,199,421 and 2,744,109 shares in treasury, respectively
47,619 47,619 
Capital surplus170,526 170,309 
Retained earnings576,901 539,253 
Cost of common stock in treasury(134,177)(105,038)
Accumulated other comprehensive income:  
    Unrealized gain on securities available-for-sale36,760 12,110 
    Underfunded pension liability(6,270)(6,270)
Total Accumulated Other Comprehensive Income30,490 5,840 
Total Shareholders’ Equity691,359 657,983 
Total Liabilities and Shareholders’ Equity$5,511,288 $5,018,756 
See notes to consolidated financial statements.
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Consolidated Statements of Income (Unaudited)
City Holding Company and Subsidiaries
(in thousands, except earnings per share data)
Interest IncomeThree months ended September 30,Nine months ended September 30,
2020201920202019
  
Interest and fees on loans$35,761 $42,944 $114,813 $128,397 
Interest and dividends on investment securities:  
Taxable6,266 6,044 17,855 17,465 
Tax-exempt1,132 722 2,659 2,257 
Interest on deposits in depository institutions72 271 432 1,034 
Total Interest Income43,231 49,981 135,759 149,153 
Interest Expense  
Interest on deposits5,123 8,585 18,324 24,768 
Interest on short-term borrowings131 814 873 2,729 
Interest on long-term debt 45 100 140 
Total Interest Expense5,254 9,444 19,297 27,637 
Net Interest Income37,977 40,537 116,462 121,516 
Provision for (recovery of) credit losses1,026 274 10,248 (1,175)
Net Interest Income After Provision for (Recovery of) Credit Losses36,951 40,263 106,214 122,691 
Non-Interest Income  
(Losses) gains on sale of investment securities, net (40)56 69 
Unrealized gains (losses) recognized on equity securities still held461 (214)(1,698)(27)
Service charges6,295 8,183 18,962 23,281 
Bankcard revenue6,065 5,440 17,068 15,931 
Trust and investment management fee income1,844 1,802 5,574 5,144 
Bank owned  life insurance1,088 762 3,611 2,910 
Sale of VISA shares  17,837  
Other income1,232 765 3,550 3,139 
Total Non-Interest Income16,985 16,698 64,960 50,447 
Non-Interest Expense  
Salaries and employee benefits15,361 15,210 46,085 46,220 
Occupancy related expense2,428 2,725 7,318 8,055 
Equipment and software related expense2,607 2,248 7,540 6,662 
FDIC insurance expense355  522 639 
Advertising462 861 2,238 2,650 
Bankcard expenses1,517 1,554 4,450 4,270 
Postage, delivery, and statement mailings513 659 1,721 1,828 
Office supplies396 382 1,143 1,167 
Legal and professional fees548 539 1,738 1,665 
Telecommunications547 569 1,589 1,892 
Repossessed asset losses (gains), net of expenses39 (59)313 410 
Merger related costs   797 
Other expenses3,939 3,709 11,992 12,326 
Total Non-Interest Expense28,712 28,397 86,649 88,581 
Income Before Income Taxes25,224 28,564 84,525 84,557 
Income tax expense5,098 6,193 17,151 17,816 
Net Income Available to Common Shareholders$20,126 $22,371 $67,374 $66,741 
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Average shares outstanding, basic15,950 16,271 16,065 16,350 
Effect of dilutive securities20 18 19 18 
Average shares outstanding, diluted15,970 16,289 16,084 16,368 
Basic earnings per common share$1.25 $1.36 $4.15 $4.05 
Diluted earnings per common share$1.25 $1.36 $4.15 $4.04 

See notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income (Unaudited)
City Holding Company and Subsidiaries
(in thousands)

Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Net income available to common shareholders$20,126 $22,371 $67,374 $66,741 
Available-for-Sale Securities
Unrealized (losses) gains on available-for-sale securities arising during the period(703)8,199 30,662 33,870 
Reclassification adjustment for gains (losses) 40 (56)(69)
Reclassification of unrealized gains on held-to-maturity securities to available-for-sale  1,562  
   Other comprehensive income before income taxes(703)8,239 32,168 33,801 
Tax effect164 (1,932)(7,518)(7,924)
   Other comprehensive income, net of tax(539)6,307 24,650 25,877 
    Comprehensive Income, Net of Tax$19,587 $28,678 $92,024 $92,618 

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
City Holding Company and Subsidiaries
Three Months Ended September 30, 2020 and 2019
(in thousands, except share amounts)



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

 Common StockCapital SurplusRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)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 income (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 

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
City Holding Company and Subsidiaries
Nine Months Ended September 30, 2020 and 2019
(in thousands, except share amounts)



 Common StockCapital SurplusRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total Shareholders’ Equity
Balance at December 31, 2018$47,619 $169,555 $485,967 $(87,895)$(14,482)$600,764 
Net income— — 66,741 — — 66,741 
Other comprehensive income — — — — 25,877 25,877 
Cash dividends declared ($1.63 per share)
— — (26,775)— — (26,775)
Stock-based compensation expense— 1,901 — — — 1,901 
Restricted awards granted— (1,557)— 1,557 —  
Exercise of 11,721 stock options
— (105)— 631 — 526 
Purchase of 260,674 treasury shares
— — — (19,431)— (19,431)
Balance at September 30, 2019$47,619 $169,794 $525,933 $(105,138)$11,395 $649,603 

 Common StockCapital SurplusRetained EarningsTreasury StockAccumulated Other Comprehensive IncomeTotal Shareholders’ Equity
Balance at December 31, 2019$47,619 $170,309 $539,253 $(105,038)$5,840 $657,983 
Adoption of ASU 2016-13  (2,335)  (2,335)
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 

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows (Unaudited)
City Holding Company and Subsidiaries
(in thousands)
 Nine months ended September 30,
20202019
Net income$67,374 $66,741 
Adjustments to reconcile net income to net cash provided by operating activities:  
(Accretion) and amortization, net2,911 521 
Provision for (recovery of) credit losses10,248 (1,175)
Depreciation of premises and equipment4,285 3,736 
Deferred income tax expense1,035 2,906 
Net periodic employee benefit cost542 579 
Unrealized and realized investment securities losses (gains), net1,642 (42)
Stock-compensation expense2,455 1,901 
Excess tax benefit from stock-compensation expense(160)(461)
Increase in value of bank-owned life insurance(3,611)(2,910)
Loans held for sale
   Loans originated for sale(19,345)(14,229)
   Proceeds from the sale of loans originated for sale19,790 15,192 
   Gain on sale of loans(277)(421)
Payments for other operating activities(450) 
Change in accrued interest receivable(5,058)(505)
Change in other assets(14,550)(1,585)
Change in other liabilities13,398 6,106 
Net Cash Provided by Operating Activities80,229 76,354 
Net (increase) decrease in loans(45,316)5,332 
Securities available-for-sale
     Purchases(393,932)(170,396)
     Proceeds from sales28,548 70,241 
     Proceeds from maturities and calls96,021 55,237 
Securities held-to-maturity
     Proceeds from maturities and calls 9,554 
Other investments
     Purchases(2,173)(10,366)
     Proceeds from sales2,386 12,555 
Purchases of premises and equipment(4,351)(3,515)
Proceeds from bank-owned life insurance policies1,940 2,211 
Sale of Virginia Beach branch, net (24,661)
Other investing activities(233)(4,522)
Net Cash Used in Investing Activities(317,110)(58,330)
Net increase in non-interest-bearing deposits256,223 17,188 
Net increase in interest-bearing deposits88,425 63,099 
Net increase (decrease) in short-term borrowings68,611 (59,289)
Repayment of long-term debt(4,124) 
Purchases of treasury stock(31,600)(19,431)
Proceeds from exercise of stock options223 526 
Dividends paid(27,651)(26,257)
Other financing activities(652)(657)
Net Cash Provided by (Used in) Financing Activities349,455 (24,821)
Increase (Decrease) in Cash and Cash Equivalents112,574 (6,797)
Cash and cash equivalents at beginning of period140,144 122,991 
Cash and Cash Equivalents at End of Period$252,718 $116,194 

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Supplemental Cash Flow Information:
Cash paid for interest$20,491 $27,884 
Cash paid for income taxes21,975 12,500 

See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

Note A –Background and Basis of Presentation

City Holding Company ("City Holding"), a West Virginia corporation headquartered in Charleston, West Virginia, is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 94 banking offices in West Virginia (58), Kentucky (19), Virginia (13) and southeastern Ohio (4). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities including Charleston (WV), Huntington (WV), Martinsburg (WV), Ashland (KY), Lexington (KY), Winchester (VA) and Staunton (VA). In addition to its branch network, City National's delivery channels include automated-teller-machines ("ATMs"), interactive-teller machines ("ITMs"), mobile banking, debit cards, interactive voice response systems, and Internet technology. The Company’s business activities are currently limited to one reportable business segment, which is community banking.

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

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding and its wholly-owned subsidiaries (collectively, the "Company"). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2020. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information, 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, 2019 has been derived from audited financial statements included in the Company’s 2019 Annual Report to Shareholders.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2019 Annual Report of the Company.

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

Note B -     Recent Accounting Pronouncements    

Recently Adopted:

CECL

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model ("CECL") will apply to the allowance for credit losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses." This amendment clarifies the scope of the guidance in ASU No. 2016-13. In December 2018, the federal bank regulators issued a final rule that would provide an optional three-year phase-in period for the day-one regulatory capital effects of the adoption of ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
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Instruments, as amended, on January 1, 2020. In April 2020, federal bank regulators issued an interim final rule which provided banking organizations that implement CECL before the end of 2020 the option to delay for two more years an estimate of CECL's effect on regulatory capital, followed by the three-year transition period as previously issued. Management has elected to utilize the five-year interim final rule.

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

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

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

As Reported UnderPre-ASC 326Impact of ASC 326
ASC 326AdoptionAdoption
Gross Loans$3,618,825 $3,616,099 $2,726 
Allowance for Credit Losses(17,349)(11,589)(5,760)
Deferred Tax Assets, net7,380 6,669 711 
Shareholders' Equity655,648 657,983 (2,335)

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

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

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

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

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

Portfolio SegmentMeasurement Method
Commercial and industrialMigration
Commercial real estate:
   1-4 familyMigration
   HotelsMigration
   Multi-familyMigration
   Non Residential Non-Owner OccupiedMigration
   Non Residential Owner OccupiedMigration
Residential real estateVintage
Home equityVintage
ConsumerVintage

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

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

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

Others

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This amendment simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2017-04 did not have a material impact on the Company's financial statements.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."