UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For The Quarterly Period Ended ~~September 30, 2016~~March 31, 2017

[ ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From ____________To_____________.

Commission File Number 0-11733

CITY HOLDING COMPANY

(Exact name of registrant as specified in its charter)



West Virginia	55-0619957
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

25 Gatewater Road
Charleston, West Virginia	25313
(Address of principal executive offices)	(Zip Code)

(304) 769-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes	[X]	No	[ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).



Yes	[X]	No	[ ]

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer [X]		Accelerated filer [ ]

Non-accelerated filer [ ]		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 Exchange Act).



Yes	[ ]	No	[X]

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

Common stock, $2.50 Par Value – ~~15,007,221~~15,601,140 shares as of ~~November 2, 2016~~May 4, 2017.

FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company's actual results differing materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company could have adverse legal actions of a material nature; (4) the Company may face competitive loss of customers; (5) the Company may be unable to manage its expense levels; (6) the Company may have difficulty retaining key employees; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balances; (11) the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; (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 resulting in either actual losses or other than temporary impairments on such investments; (13) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject the Company and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; (14) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; and (15) other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those risk factors included in the disclosures under the heading “Item 1A Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2015.~~2016. 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.

Index

City Holding Company and Subsidiaries



PART I	Financial Information	Pages

Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	7
	Consolidated Statements of Comprehensive Income	9
	Consolidated Statements of Changes in Shareholders’ Equity	10
	Consolidated Statements of Cash Flows	11
	Notes to Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5855
Item 4.	Controls and Procedures	5855

PART II	Other Information

Item 1.	Legal Proceedings	5855
Item 1A.	Risk Factors	5855
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5855
Item 3.	Defaults Upon Senior Securities	5855
Item 4.	Mine Safety Disclosures	5857
Item 5.	Other Information	5957
Item 6.	Exhibits	6058

Signatures		6058


Part I -	FINANCIAL INFORMATION


Item 1 -	Financial Statements

Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)


	(Unaudited)						(Unaudited)
	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Assets
Cash and due from banks	$	57,233			$	58,829		$	164,887			$	62,263
Interest-bearing deposits in depository institutions	7,576			11,284			25,925			25,876
Cash and Cash Equivalents	64,809			70,113			190,812			88,139

Investment securities available for sale, at fair value	434,717			369,466			470,098			450,083
Investment securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2016 and December 31, 2015 - $82,993 and $90,810, respectively)	79,499			88,937
Investment securities held-to-maturity, at amortized cost (approximate fair value at March 31, 2017 and December 31, 2016 - $73,656 and $76,445, respectively)							72,308			75,169
Other securities	11,895			12,915			10,240			14,352
Total Investment Securities	526,111			471,318			552,646			539,604

Gross loans	2,957,912			2,862,534			3,074,173			3,046,226
Allowance for loan losses	(19,550		)	(19,251		)	(19,209		)	(19,730		)
Net Loans	2,938,362			2,843,283			3,054,964			3,026,496

Bank owned life insurance	100,293			97,919			101,481			100,732
Premises and equipment, net	75,589			77,271			73,805			75,165
Accrued interest receivable	7,986			7,432			8,644			8,408
Net deferred tax asset	23,179			29,974			24,606			28,043
Goodwill and other intangible assets, net	79,284			79,792			79,000			79,135
Other assets	50,748			36,957			38,029			38,681
Total Assets	$	3,866,361		$	3,714,059		$	4,123,987		$	3,984,403

Liabilities
Deposits:
Noninterest-bearing	$	669,865		$	621,073		$	714,791		$	672,286
Interest-bearing:
Demand deposits	713,642			679,735			743,246			695,891
Savings deposits	765,195			765,611			874,031			822,057
Time deposits	1,030,584			1,017,556			1,060,690			1,041,419
Total Deposits	3,179,286			3,083,975			3,392,758			3,231,653

Short term borrowings:
Federal funds purchased	6,000			13,000			—			64,100
Customer repurchase agreements	173,384			141,869			186,686			184,205
Long-term debt	16,495			16,495			16,495			16,495
Other liabilities	56,412			39,448			46,402			45,512
Total Liabilities	3,431,577			3,294,787			3,642,341			3,541,965


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; 18,499,282 shares issued at September 30, 2016 and December 31, 2015, less 3,492,061 and 3,319,067 shares in treasury, respectively	46,249			46,249
Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares and 18,606,944 shares issued at March 31, 2017 and December 31, 2017, less 3,462,038 and 3,478,511 shares in treasury, respectively							47,619			46,518
Capital surplus	105,996			106,269			140,305			112,873
Retained earnings	408,823			390,690			426,126			417,017
Cost of common stock in treasury	(127,538		)	(120,104		)	(126,265		)	(126,958		)
Accumulated other comprehensive income (loss):
Unrealized gain on securities available-for-sale	6,013			927			(1,479		)	(2,352		)
Underfunded pension liability	(4,759		)	(4,759		)	(4,660		)	(4,660		)
Total Accumulated Other Comprehensive Income (Loss)	1,254			(3,832		)	(6,139		)	(7,012		)
Total Shareholders’ Equity	434,784			419,272			481,646			442,438
Total Liabilities and Shareholders’ Equity	$	3,866,361		$	3,714,059		$	4,123,987		$	3,984,403

See notes to consolidated financial statements.

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,				Three months ended March 31,
	2016		2015		2016		2015		2017		2016

Interest and fees on loans	$	29,444	$	27,875	$	88,011	$	86,075	$	30,104	$	28,927
Interest and dividends on investment securities:
Taxable	3,183		2,621		9,115		7,974		3,444		3,005
Tax-exempt	419		272		1,141		803		663		357
Interest on deposits in depository institutions									3		—
Total Interest Income	33,046		30,768		98,267		94,852		34,214		32,289

Interest Expense
Interest on deposits	3,006		2,686		8,915		8,126		3,429		2,898
Interest on short-term borrowings	90		69		283		236		157		107
Interest on long-term debt	172		155		503		458		181		164
Total Interest Expense	3,268		2,910		9,701		8,820		3,767		3,169
Net Interest Income	29,778		27,858		88,566		86,032		30,447		29,120
Provision for loan losses	1,432		451		3,093		4,175		681		539
Net Interest Income After Provision for Loan Losses	28,346		27,407		85,473		81,857		29,766		28,581

Non-Interest Income
Net gains on sale of investment securities	2,668		—		3,513		2,130		4,276		—
Service charges	6,842		6,907		19,709		19,423		6,730		6,303
Bankcard revenue	4,216		3,895		12,373		11,971		4,140		3,967
Trust and investment management fee income	1,329		1,176		3,976		3,577		1,386		1,276
Bank owned life insurance	846		929		2,374		2,476		1,229		760
Gain on sale of insurance division	—		—		—		11,084
Other income	846		799		2,510		2,471		746		821
Total Non-Interest Income	16,747		13,706		44,455		53,132		18,507		13,127

Non-Interest Expense
Salaries and employee benefits	12,993		12,179		38,456		36,551		13,078		12,673
Occupancy and equipment	2,759		2,575		8,303		7,694		2,838		2,836
Depreciation	1,585		1,522		4,719		4,549		1,525		1,567
FDIC insurance expense	508		456		1,485		1,351		375		465
Advertising	667		777		2,161		2,182		733		716
Bankcard expenses	1,081		785		2,839		2,485		943		938
Postage, delivery, and statement mailings	517		523		1,588		1,591		555		565
Office supplies	325		384		1,044		1,077		361		353
Legal and professional fees	976		620		1,975		1,729		449		366
Telecommunications	459		418		1,318		1,356		484		428
Repossessed asset losses, net of expenses	305		492		646		1,047		336		288
Merger related expenses	—		175		—		283
Other expenses	3,109		4,471		9,173		9,891		2,923		2,945
Total Non-Interest Expense	25,284		25,377		73,707		71,786		24,600		24,140
Income Before Income Taxes	19,809		15,736		56,221		63,203		23,673		17,568
Income tax expense	6,577		5,129		18,745		22,621		7,647		5,866
Net Income Available to Common Shareholders	$	13,232	$	10,607	$	37,476	$	40,582	$	16,026	$	11,702

Total Comprehensive Income									$	16,899	$	14,445

Total Comprehensive Income $ 12,449
$ 11,939
$ 42,562
$ 41,181

Average common shares outstanding 14,899
15,178
14,902
15,111
Effect of dilutive securities:

Employee stock awards and warrants outstanding 11
20
11
58
Shares for diluted earnings per share 14,910
15,198
14,913
15,169

Basic earnings per common share $ 0.88
$ 0.69
$ 2.48
$ 2.66
Diluted earnings per common share $ 0.88
$ 0.69
$ 2.48
$ 2.65
Dividends declared per common share $ 0.43
$ 0.42
$ 1.29
$ 1.26




Average shares outstanding, basic	15,252		14,916
Effect of dilutive securities	25		11
Average shares outstanding, diluted	15,277		14,927

Basic earnings per common share	$	1.04	$	0.78
Diluted earnings per common share	$	1.04	$	0.78
Dividends declared per common share	$	0.44	$	0.43

See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,												March 31,
	2016			2015			2016			2015			2017			2016

Net income	$	13,232		$	10,607		$	37,476		$	40,582		$	16,026		$	11,702

Unrealized gains (losses) on available-for-sale securities arising during the period	1,427			2,111			11,575			3,079
Unrealized gains on available-for-sale securities arising during the period													5,660			4,348
Reclassification adjustment for gains	(2,668		)	—			(3,513		)	(2,130		)	(4,276		)	—
Other comprehensive income (loss) before income taxes	(1,241		)	2,111			8,062			949
Other comprehensive income before income taxes													1,384			4,348
Tax effect	458			(779		)	(2,976		)	(350		)	(511		)	(1,605		)
Other comprehensive income (loss), net of tax	(783		)	1,332			5,086			599
Other comprehensive income, net of tax													873			2,743

Comprehensive Income, Net of Tax	$	12,449		$	11,939		$	42,562		$	41,181		$	16,899		$	14,445

See notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

~~Nine~~Three Months Ended ~~September 30, 2016~~March 31, 2017 and ~~2015~~2016

(in thousands)

Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity
Balance at December 31, 2014 $ 46,249
$ 107,370
$ 362,211
$ (120,818 ) $ (4,159 ) $ 390,853
Net income —
—
40,582
—
—
40,582
Other comprehensive income —
—
—
—
599
599
Cash dividends declared ($1.26 per share) —
—
(19,242 ) —
—
(19,242 )
Stock-based compensation expense, net —
(38 ) —
1,468
—
1,430
Exercise of 71,750 stock options —
(459 ) —
3,108
—
2,649
Exercise of 61,796 warrants —
(765 ) —
2,661
—
1,896
Balance at September 30, 2015 $ 46,249
$ 106,108
$ 383,551
$ (113,581 ) $ (3,560 ) $ 418,767



	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2015	$	46,249	$	106,269		$	390,690		$	(120,104	)	$	(3,832	)	$	419,272
Net income	—		—			11,702			—			—			11,702
Other comprehensive income	—		—			—			—			2,743			2,743
Cash dividends declared ($0.43 per share)	—		—			(6,429		)	—			—			(6,429		)
Stock-based compensation expense	—		755			—			—			—			755
Restricted awards granted	—		(887		)				887						—
Purchase of 229,132 treasury shares	—		—			—			(9,925		)	—			(9,925		)
Balance at March 31, 2016	$	46,249	$	106,137		$	395,963		$	(129,142	)	$	(1,089	)	$	418,118

Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity
Balance at December 31, 2015 $ 46,249
$ 106,269
$ 390,690
$ (120,104 ) $ (3,832 ) $ 419,272
Net income —
—
37,476
—
—
37,476
Other comprehensive income —
—
—
—
5,086
5,086
Cash dividends declared ($1.29 per share) —
—
(19,343 ) —
—
(19,343 )
Stock-based compensation expense, net —
(59 ) —
1,665
—
1,606
Exercise of 21,000 stock options —
(214 ) —
919
—
705
Purchase of 231,132 treasury shares —
—
—
(10,018 ) —
(10,018 )
Balance at September 30, 2016 $ 46,249
$ 105,996
$ 408,823
$ (127,538 ) $ 1,254
$ 434,784



	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2016	$	46,518	$	112,873		$	417,017		$	(126,958	)	$	(7,012	)	$	442,438
Net income	—		—			16,026			—			—			16,026
Other comprehensive income	—		—			—			—			873			873
Cash dividends declared ($0.44 per share)	—		—			(6,917		)	—			—			(6,917		)
Stock-based compensation expense	—		780			—			—			—			780
Restricted awards granted			(638		)				638						—
Issuance of 440,604 shares of common stock	1,101		27,307			—			—			—			28,408
Exercise of 1,250 stock options	—		(17		)	—			55			—			38
Balance at March 31, 2017	$	47,619	$	140,305		$	426,126		$	(126,265	)	$	(6,139	)	$	481,646

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


	Nine months ended September 30,						Three months ended March 31,
	2016			2015			2017			2016
Net income	$	37,476		$	40,582		$	16,026		$	11,702
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion and amortization	436			(3,612		)	361			117
Provision for loan losses	3,093			4,175			681			539
Depreciation of premises and equipment	4,719			4,549			1,525			1,567
Deferred income tax expense	3,998			3,479			2,931			830
Net periodic employee benefit cost	386			625			114			129
Realized investment securities gains	(3,978		)	(2,130		)	(4,276		)	—
Investment securities impairment losses	465			—
Stock-compensation expense	1,606			1,430			780			755
Excess tax benefit from stock-compensation expense							(189		)	—
Proceeds from bank-owned life insurance	—			435			1,137			—
Increase in value of bank-owned life insurance	(2,374		)	(2,476		)	(749		)	(760		)
Loans originated for sale	(11,537		)	(13,994		)	(3,951		)	(2,809		)
Proceeds from the sale of loans originated for sale	11,637			14,533			6,118			3,107
Gain on sale of loans	(268		)	(279		)	(167		)	(58		)
Gain on sale of insurance division	—			(11,084		)
Change in accrued interest receivable	(554		)	(864		)	(236		)	(1,085		)
Asset write down	444			1,449
Change in other assets	(14,068		)	(288		)	(131		)	(10,630		)
Change in other liabilities	16,338			7,805			383			11,432
Net Cash Provided by Operating Activities	47,819			44,335			20,357			14,836

Proceeds from sales of securities available-for-sale	30,850			290			5,576			35
Proceeds from maturities and calls of securities available-for-sale	55,565			45,158			23,390			18,078
Proceeds from maturities and calls of securities held-to-maturity	9,194			10,640			2,823			2,332
Purchases of securities available-for-sale	(141,271		)	(91,190		)	(39,747		)	(4,289		)
Net increase in loans	(96,007		)	(43,411		)	(30,826		)	(14,668		)
Purchases of premises and equipment	(3,553		)	(1,729		)	(2,111		)	(610		)
Disposals of premises and equipment	408			133			1,781			341
Proceeds from sale of insurance division	—			15,250
Net Cash Used in Investing Activities	(144,814		)	(64,859		)
Net Cash (Used in) Provided by Investing Activities							(39,114		)	1,219

Net increase (decrease) in non-interest-bearing deposits	48,792			(3,288		)
Net increase (decrease) in interest-bearing deposits	46,963			(3,489		)
Net increase in short-term borrowings	24,515			12,105
Net increase in non-interest-bearing deposits							42,505			45,450
Net increase in interest-bearing deposits							118,616			57,994
Net (decrease) increase in short-term borrowings							(61,619		)	1,845
Proceeds from issuance of common stock							28,408			—
Purchases of treasury stock	(10,018		)	—			—			(9,925		)
Proceeds from exercise of stock options, net of tax benefit	705			2,649
Proceeds from exercise of warrants	—			1,896
Proceeds from exercise of stock options							38			—
Dividends paid	(19,266		)	(18,869		)	(6,518		)	(6,367		)
Net Cash Provided by (Used in) Financing Activities	91,691			(8,996		)
Decrease in Cash and Cash Equivalents	(5,304		)	(29,520		)
Net Cash Provided by Financing Activities							121,430			88,997
Increase in Cash and Cash Equivalents							102,673			105,052
Cash and cash equivalents at beginning of period	70,113			148,228			88,139			70,113
Cash and Cash Equivalents at End of Period	$	64,809		$	118,708		$	190,812		$	175,165

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements (Unaudited)

~~September 30, 2016~~March 31, 2017

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 85 banking offices in West Virginia (57), Virginia (14), Kentucky (11) and Ohio (3). City National provides credit, deposit, and trust and investment management services to its customers. In addition to its branch network, City National's delivery channels include ATMs, 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 9, 2015, the Company sold its insurance operations, CityInsurance, to The Hilb Group effective January 1, 2015. As a result of this sale, the Company recognized a one-time after tax gain of $5.8 million from this transaction in the first quarter of 2015.

On November 6, 2015, the Company consummated the acquisition of three branch locations from American Founders Bank, Inc. (“AFB”) located in Lexington, Kentucky. The Company acquired approximately $119 million in performing loans and and assumed deposit liabilities of approximately $145 million. The Company paid AFB a deposit premium of 5.5% on non-time deposits acquired, and a loan premium of 1.0% on loan balances acquired.

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of ~~the~~ City Holding Company and its wholly-owned subsidiaries (collectively, the "Company”). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, ~~2016~~2017. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management’s estimates.

The consolidated balance sheet as of December 31, ~~2015~~2016 has been derived from audited financial statements included in the Company’s ~~2015~~2016 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 ~~2015~~2016 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

In ~~August~~May 2014, the FASB issued ASU No. ~~2014-15,~~2014-09, "~~Presentation~~Revenue from Contracts with Customers (Topic 606)." This standard clarified the principles for recognizing revenue and developed a common revenue standard. The core principle of ~~Financial Statements - Going Concern."~~ ~~ASU 2014-15 requires management~~the standard is that an entity should recognize revenue to ~~evaluate whether there are conditions~~depict the transfer of promised goods or ~~events~~services to customers in an amount that ~~raise substantial doubt about~~reflects the ~~entity's ability~~consideration to ~~continue as~~which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: (i) identify the contracts with a ~~going concern~~customer, (ii) identify the performance obligations in ~~connection with preparing~~ the ~~entity's financial statements.~~contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU will become effective for the Company on ~~December 31, 2016.~~January 1, 2018. The ~~adoption~~Company's revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU ~~2014-15 is~~2014-09, and non-interest income. The Company continues to evaluate the impact of ASU 2014-09 on the components of non-interest income, but does not ~~expected to~~believe it will have a material impact on the Company's financial statements. The Company anticipates adopting this standard with a cumulative effect adjustment to opening retained earnings (the modified retrospective approach), if such adjustment is deemed to be material.

~~In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810) - Amendments to the Consolidation Analysis."~~ ASU 2015-02 eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on the Company's financial statements.

~~In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs."~~ ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt

~~discounts. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-03 did not have a material impact on the Company's financial statements.~~

~~In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement."~~ ASU 2015-05 provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-05 did not have a material impact on the Company's financial statements.

~~In May 2015, the FASB issued ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)."~~ ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-07 did not have a material impact on the Company's financial statements.

~~In September 2015, the FASB issued ASU No. 2015-16,~~ ~~"Business Combinations (Topic 85): Simplifying the Accounting for Measurement-Period Adjustments."~~ The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of the adjustments as a result of the change to the provisional amounts will be calculated as if the accounting had been completed at the acquisition date. The amount that would've been recorded in the previous reporting periods will be presented separately on the face of the income statement or disclosed in the notes to the financial statements. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-16 did not have a material impact on the Company's financial statements.

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~"Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes."~~ This standard requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. This ASU will become effective for the Company for interim and annual periods on January 1, 2017 and early adoption is permitted. The adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This standard makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognizing lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principals. This ASU

will become effective for the Company for interim and annual periods on January 1, 2019. Management is currently assessing the impact of the adoption of ASU No. 2016-02.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements

to Employee Share Based Accounting.”This standard makes several modifications to the accounting for share-based payment

transactions, including the income tax consequences when awards are exercised or vest, classification of awards as either equity

or liabilities, and classification on the statement of cash flows. This ASU ~~will become~~became effective for the Company for interim and

annual periods beginning on January 1, 2017. This ASU requires the Company to record all excess tax benefits and tax

deficiencies in the income statement and treat excess tax benefits as discrete items in the calculation of income tax expense in

the period in which they occur. Under this standard, the Company also elected to account for forfeitures of share-based

payments as they occur. The adoption of ASU No. 2016-09 isdid not ~~expected to~~ have a material impact on the Company’s financial

statements.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The ~~amendments in this~~ standard was issued to clarifyRevenue from Contracts with Customers (Topic 606) related to: (i) identifying performance ~~obligations~~obligations; and (ii) the licensing implementation ~~guidance under Topic 606. This~~ guidance. The effective date is the same as the effective date of ASU ~~will become effective for~~2014-09, "Revenue from Contracts with Customers (Topic 606)," as discussed above. ASU 2016-10 is not expected to have a significant impact on the ~~Company for interim and annual periods on January 1, 2018. Management is currently assessing the impact of the adoption of ASU No. 2016-10.~~Company's financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current

expected credit losses model (CECL) will apply to the allowance for loan losses, available-for-sale and held to maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. This ASU will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently evaluating the potential impact of ASU No. 2016-13 on the Company's financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This amendment addresses existing diversity in practice regarding how certain receipts and payments are presented in the statement of cash flows. Issues addressed in this amendment include debt prepayment and extinguishment costs, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies, and separately identifiable cash flows and application of the predominance principle and their classifications in the statement of cash flows. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Issues addressed in this amendment include the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company's financial statements.

In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." This amendment provides clarification for multiple aspects of Update 2014-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting”, including the scope of guarantee fees, impairment testing of contract costs and the accrual of advertising costs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-20 is not expected to have a material impact on the Company's financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." This amendment clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company's financial statements.

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

In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This amendment requires that an employer disaggregate the service cost component from the other components of net benefit cost and also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-07 is not expected to have a material impact on the Company's financial statements.

In March 2017, the FASB issued ASU No. 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The amendments in this update shorten the amortization period for certain callable debt securities held at a premium and require the premium to be amortized to the earliest call date. This ASU will become effective for the Company on January 1, 2019. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's financial statements.

Note C –Investments

The amortized cost and estimated fair values of the Company's securities are shown in the following table (in thousands):


	September 30, 2016								December 31, 2015								March 31, 2017								December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale:
U.S. Treasuries and U.S.
government agencies	$	4	$	—	$	—	$	4	$	5	$	—	$	—	$	5	$	3	$	—	$	—	$	3	$	3	$	—	$	—	$	3
Obligations of states and
political subdivisions	62,845		1,669		79		64,435		49,725		979		7		50,697		95,440		983		1,223		95,200		83,248		594		1,474		82,368
Mortgage-backed securities:
U.S. government agencies	327,608		5,896		302		333,202		287,933		2,285		2,021		288,197		343,681		1,548		6,075		339,154		335,867		1,507		6,560		330,814
Private label	1,000		2		—		1,002		1,222		9		—		1,231		877		2		—		879		941		1		—		942
Trust preferred securities	6,049		1,206		844		6,411		6,550		463		1,155		5,858		4,755		133		201		4,687		6,052		1,164		554		6,662
Corporate securities	23,927		613		126		24,414		18,793		221		321		18,693		23,923		361		196		24,088		23,925		127		478		23,574
Total Debt Securities	421,433		9,386		1,351		429,468		364,228		3,957		3,504		364,681		468,679		3,027		7,695		464,011		450,036		3,393		9,066		444,363
Marketable equity securities	2,136		1,577		—		3,713		2,131		1,142		—		3,273		2,136		2,462		—		4,598		2,136		2,095		—		4,231
Investment funds	1,525		11		—		1,536		1,525		—		13		1,512		1,525		—		36		1,489		1,525		—		36		1,489
Total Securities
Available-for-Sale	$	425,094	$	10,974	$	1,351	$	434,717	$	367,884	$	5,099	$	3,517	$	369,466	$	472,340	$	5,489	$	7,731	$	470,098	$	453,697	$	5,488	$	9,102	$	450,083


	September 30, 2016								December 31, 2015								March 31, 2017								December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities held-to-maturity:
Mortgage-backed securities
Mortgage-backed securities:
U.S. government agencies	$	75,499	$	3,494	$	—	$	78,993	$	84,937	$	1,949	$	76	$	86,810	$	68,308	$	1,392	$	44	$	69,656	$	71,169	$	1,346	$	70	$	72,445
Trust preferred securities	4,000		—		—		4,000		4,000		—		—		4,000		4,000		—		—		4,000		4,000		—		—		4,000
Total Securities
Held-to-Maturity	$	79,499	$	3,494	$	—	$	82,993	$	88,937	$	1,949	$	76	$	90,810	$	72,308	$	1,392	$	44	$	73,656	$	75,169	$	1,346	$	70	$	76,445

Other investment securities:
Non-marketable equity securities	$	11,895	$	—	$	—	$	11,895	$	12,915	$	—	$	—	$	12,915	$	10,240	$	—	$	—	$	10,240	$	14,352	$	—	$	—	$	14,352
Total Other Investment
Securities	$	11,895	$	—	$	—	$	11,895	$	12,915	$	—	$	—	$	12,915	$	10,240	$	—	$	—	$	10,240	$	14,352	$	—	$	—	$	14,352

Marketable equity securities consist of investments made by the Company in equity positions of various regional community banks. Included within this portfolio are ownership positions in the following community bank holding companies:

First National Corporation (FXNC) (4%) and Eagle Financial Services, Inc. (EFSI) (1.5%). Securities with limited marketability,

such as stock in the Federal Reserve Bank ("Federal Reserve") and the Federal Home Loan Bank ("FHLB"), are carried at cost and are reported as non-marketable equity securities in the table above.

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). 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, 2016												March 31, 2017
	Less Than Twelve Months				Twelve Months or Greater				Total				Less Than Twelve Months				Twelve Months or Greater				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	12,879	$	79	$	—	$	—	$	12,879	$	79	$	41,257	$	1,223	$	—	$	—	$	41,257	$	1,223
Mortgage-backed securities:
U.S. Government agencies	70,593		146		9,237		156		79,830		302		216,707		5,611		8,136		464		224,843		6,075
Trust preferred securities	—		—		4,678		844		4,678		844		—		—		4,319		201		4,319		201
Corporate securities	2,273		126		—		—		2,273		126		2,328		51		2,265		145		4,593		196
Investment funds													1,500		36		—		—		1,500		36
Total	$	85,745	$	351	$	13,915	$	1,000	$	99,660	$	1,351	$	261,792	$	6,921	$	14,720	$	810	$	276,512	$	7,731


	December 31, 2015												December 31, 2016
	Less Than Twelve Months				Twelve Months or Greater				Total				Less Than Twelve Months				Twelve Months or Greater				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	2,406	$	5	$	128	$	2	$	2,534	$	7	$	35,108	$	1,474	$	—	$	—	$	35,108	$	1,474
Mortgage-backed securities:
U.S. Government agencies	129,612		688		34,044		1,333		163,656		2,021		225,530		6,099		8,527		461		234,057		6,560
Trust preferred securities	—		—		4,769		1,155		4,769		1,155		—		—		4,971		554		4,971		554
Corporate securities	10,856		174		2,231		147		13,087		321		14,306		478		—		—		14,306		478
Investment funds	—		—		1,488		13		1,488		13		1,500		36		—		—		1,500		36
Total	$	142,874	$	867	$	42,660	$	2,650	$	185,534	$	3,517	$	276,444	$	8,087	$	13,498	$	1,015	$	289,942	$	9,102

During the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016,~~, the Company had $0.4 million in investment impairment losses. For the nine months ended September 30, 2015 and the year ended December 31, 2015,~~ the Company had no investment impairment losses. During the year ended December 31, 2016, the Company had $0.5 million in investment impairment losses. At ~~September 30, 2016,~~March 31, 2017, the cumulative amount of credit-related investment impairment losses that have been recognized by the Company on investments that remain in the Company's investment portfolio as of that date was ~~$10.5~~$3.7 million ~~($8.9~~($2.1 million related to the Company's debt securities and $1.6 million related to the Company's equity securities).

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition, capital strength, and near-term (within 12 months) prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (iii) the historical volatility in the market value of the investment and/or the liquidity or illiquidity of the investment; (iv) adverse conditions specifically related to the security, an industry, or a geographic area; and (v) the intent to sell the investment security and if it’s more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, management also employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings. Although the regional community bank stocks that are owned by the Company are publicly traded, the trading activity for these stocks is minimal, with trading volumes of less than 0.2% of each respective company being traded on a daily basis. As part of management’s review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.

Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of ~~September 30, 2016,~~March 31, 2017, management ~~generally~~ does not intend to sell an impaired security and it is not more than likely that it will be required to sell the security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of ~~September 30, 2016,~~March 31, 2017, management believes the unrealized losses detailed in the table above are temporary and no additional impairment loss has been recognized in the Company’s consolidated income statement. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

The amortized cost and estimated fair value of debt securities at ~~September 30, 2016~~March 31, 2017, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities Available-for-Sale
Due in one year or less	$	3,640	$	3,662	$	2,770	$	2,788
Due after one year through five years	25,215		17,395		15,041		15,225
Due after five years through ten years	59,193		68,514		81,726		80,029
Due after ten years	333,385		339,897		369,142		365,969
	$	421,433	$	429,468	$	468,679	$	464,011
Securities Held-to-Maturity
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	—		—		—		—
Due after five years through ten years	—		—		—		—
Due after ten years	79,499		82,993		72,308		73,656
	$	79,499	$	82,993	$	72,308	$	73,656

Gross gains and gross losses realized 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,					Three months ended March 31, 2017
	2016			2015		2016			2015		2017		2016

Gross realized gains	$	2,722		$	—	$	3,978		$	2,130	$	4,276	$	—
Gross realized losses	(54		)	—		(465		)	—		—		—
Net investment security gains	$	2,668		$	—	$	3,513		$	2,130	$	4,276	$	—

During the three months ended March 31, 2017 the Company realized $4.3 million of investment gains. These gains represented partial recoveries of impairment charges previously recognized on pooled trust preferred securities. As a result of these sales, the Company no longer holds any pooled trust preferred securities in its investment portfolio.

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated ~~$285~~$311 million and ~~$273~~$337 million at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively.

Note D –Loans

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


	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Residential real estate	$	1,445,242		$	1,383,133		$	1,444,795		$	1,451,462
Home equity	141,616			147,036			139,165			141,965
Commercial and industrial	176,387			165,340			205,011			185,667
Commercial real estate	1,158,088			1,127,581			1,250,106			1,229,516
Consumer	33,614			36,083			32,043			32,545
DDA overdrafts	2,965			3,361			3,053			5,071
Gross loans	2,957,912			2,862,534			3,074,173			3,046,226
Allowance for loan losses	(19,550		)	(19,251		)	(19,209		)	(19,730		)
Net loans	$	2,938,362		$	2,843,283		$	3,054,964		$	3,026,496

Construction loans of $~~12.3~~9.8 million and $~~13.1~~14.2 million are included within residential real estate loans at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016, respectively. Construction loans of $~~7.3~~18.5 million and $~~12.6~~12.8 million are included within commercial real estate loans at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016, respectively. The Company’s commercial and residential real estate construction loans are primarily secured by real estate within the Company’s principal markets. These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of residential and commercial real estate lending, including specific risks related to construction lending. Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.

The following table details the loans acquired in conjunction with the Virginia Savings Bancorp, Inc. ("Virginia Savings"), Community Financial Corporation ("Community") and American Founders Bank ("AFB") acquisitions (in thousands):

Virginia
Savings Community AFB Total
September 30, 2016
Outstanding loan balance $ 25,520
$ 154,832
$ 95,457
$ 275,809

Credit-impaired loans:
Carrying value 1,707
9,712
—
11,419
Contractual principal and interest 1,908
12,091
—
13,999

December 31, 2015
Outstanding loan balance $ 28,914
$ 181,545
$ 112,862
$ 323,321

Credit-impaired loans:
Carrying value 1,707
12,899
—
14,606
Contractual principal and interest 1,965
16,362
—
18,327

~~Changes in the accretable yield of the credit-impaired loans for the~~ ~~nine months ended September 30, 2016~~ ~~is as follows (in thousands):~~

Virginia Savings Community Total
Carrying Carrying Carrying
Accretable Amount Accretable Amount Accretable Amount
Yield of Loans Yield of Loans Yield of Loans
Balance at the beginning of the period $ 374
$ 1,707
$ 6,266
$ 12,899
$ 6,640
$ 14,606
Accretion (114 ) 114
(744 ) 744
(858 ) 858
Net reclassifications to accretable yield from
non-accretable yield 51
—
(38 ) —
13
—
Payments received, net —
(114 ) —
(3,197 ) —
(3,311 )
Disposals —
—
(1 ) (734 ) (1 ) (734 )
Balance at the end of period $ 311
$ 1,707
$ 5,483
$ 9,712
$ 5,794
$ 11,419

Increases in expected cash flow subsequent to the acquisition are recognized first as a reduction of any previous impairment, then prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for purchased credit-impaired loans.

Note E – Allowance For Loan Losses

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.

Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.

The following table summarizes the activity in the allowance for loan loss, by portfolio segment, for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015~~2016 (in thousands). The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. The following table also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 (in thousands).


	Commercial &			Commercial			Residential									DDA						Commercial &			Commercial			Residential									DDA
	Industrial			Real Estate						Home Equity			Consumer			Overdrafts			Total			Industrial			Real Estate						Home Equity			Consumer			Overdrafts			Total
Nine months ended September 30, 2016
Three months ended March 31, 2017
Allowance for loan loss
Beginning balance																						$	4,206		$	6,573		$	6,680		$	1,417		$	82		$	772		$	19,730
Charge-offs	(148		)	(1,213		)	(1,281		)	(300		)	(102		)	(1,017		)	(4,061		)	(53		)	(180		)	(626		)	(121		)	(6		)	(636		)	(1,622		)
Recoveries	13			447			113			—			109			585			1,267			2			11			25			—			11			371			420
Provision for acquired loans	—			164			—			—			—			—			164			—			(19		)	—			—			—			—			(19		)
Provision	918			(112		)	1,414			284			(29		)	454			2,929			128			(381		)	644			3			(23		)	329			700
Ending balance	$	4,054		$	6,271		$	7,024		$	1,447		$	75		$	679		$	19,550		$	4,283		$	6,004		$	6,723		$	1,299		$	64		$	836		$	19,209

Nine months ended September 30, 2015
Three months ended March 31, 2016
Allowance for loan loss
Beginning balance	$	1,582		$	8,845		$	7,208		$	1,495		$	85		$	859		$	20,074		$	3,271		$	6,985		$	6,778		$	1,463		$	97		$	657		$	19,251
Charge-offs	(2,620		)	(277		)	(758		)	(236		)	(171		)	(1,038		)	(5,100		)	(1		)	(302		)	(405		)	(106		)	(38		)	(318		)	(1,170		)
Recoveries	72			49			130			—			155			593			999			1			384			39			—			29			242			695

Provision for acquired loans —
521
—
—
—
—
521
Provision 3,747
(1,441 ) 681
249
27
391
3,654
Ending balance $ 2,781
$ 7,697
$ 7,261
$ 1,508
$ 96
$ 805
$ 20,148

As of September 30, 2016

Allowance for loan loss

Evaluated for impairment:

Individually $ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively 4,051
6,147
6,932
1,447
75
679
19,331
Acquired with deteriorated

credit quality 3
124
92
—
—
—
219
Total $ 4,054
$ 6,271
$ 7,024
$ 1,447
$ 75
$ 679
$ 19,550

Loans

Evaluated for impairment:

Individually $ 1,939
$ 3,428
$ —
$ —
$ —
$ —
$ 5,367
Collectively 174,131
1,146,316
1,442,599
141,616
33,499
2,965
2,941,126
Acquired with deteriorated
credit quality 317
8,344
2,643
—
115
—
11,419
Total $ 176,387
$ 1,158,088
$ 1,445,242
$ 141,616
$ 33,614
$ 2,965
$ 2,957,912

As of December 31, 2015

Allowance for loan loss

Evaluated for impairment:

Individually $ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively 3,267
6,173
6,765
1,463
97
657
18,422
Acquired with deteriorated
credit quality 4
812
13
—
—
—
829
Total $ 3,271
$ 6,985
$ 6,778
$ 1,463
$ 97
$ 657
$ 19,251

Loans

Evaluated for impairment:

Individually $ 2,349
$ 6,133
$ —
$ —
$ —
$ —
$ 8,482
Collectively 162,662
1,109,327
1,381,064
147,036
35,997
3,361
2,839,447
Acquired with deteriorated
credit quality 329
12,121
2,069
—
86
—
14,605
Total $ 165,340
$ 1,127,581
$ 1,383,133
$ 147,036
$ 36,083
$ 3,361
$ 2,862,534

During the second quarter of 2016, parts of West Virginia were impacted by tragic flooding. As a result of this flooding, the Company recognized $0.3 million of loan charge-offs in the third quarter of 2016 and its quarterly provision for loan losses reflects the impact of these losses.



Provision for acquired loans	—		40			—		—		—		—		40
Provision	632		(703		)	347		45		5		173		499
Ending balance	$	3,903	$	6,404		$	6,759	$	1,402	$	93	$	754	$	19,315

As of March 31, 2017
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	636		$	—	$	—	$	—	$	—	$	636
Collectively	4,277		5,267			6,632		1,299		62		836		18,373
Acquired with deteriorated
credit quality	6		101			91		—		2		—		200
Total	$	4,283	$	6,004		$	6,723	$	1,299	$	64	$	836	$	19,209

Loans
Evaluated for impairment:
Individually	$	1,282	$	5,941		$	—	$	—	$	—	$	—	$	7,223
Collectively	203,420		1,237,110			1,442,174		139,165		31,928		3,053		3,056,850
Acquired with deteriorated
credit quality	309		7,055			2,621		—		115		—		10,100
Total	$	205,011	$	1,250,106		$	1,444,795	$	139,165	$	32,043	$	3,053	$	3,074,173

As of December 31, 2016
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	665		$	—	$	—	$	—	$	—	$	665
Collectively	4,200		5,788			6,589		1,417		82		772		18,848
Acquired with deteriorated
credit quality	6		120			91		—		—		—		217
Total	$	4,206	$	6,573		$	6,680	$	1,417	$	82	$	772	$	19,730

Loans
Evaluated for impairment:
Individually	$	1,611	$	5,970		$	—	$	—	$	—	$	—	$	7,581
Collectively	183,741		1,216,050			1,448,830		141,965		32,545		5,071		3,028,202
Acquired with deteriorated
credit quality	315		7,496			2,632		—		—		—		10,443
Total	$	185,667	$	1,229,516		$	1,451,462	$	141,965	$	32,545	$	5,071	$	3,046,226

Credit Quality Indicators

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

The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/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.

The following table presents the Company’s commercial loans by credit quality indicators, by class (in thousands):


	Commercial and industrial		Commercial real estate		Total		Commercial and industrial		Commercial real estate		Total
September 30, 2016
March 31, 2017
Pass	$	167,493	$	1,105,229	$	1,272,722	$	195,748	$	1,199,652	$	1,395,400
Special mention	2,027		14,951		16,978		2,472		14,892		17,364
Substandard	6,867		37,908		44,775		6,791		35,562		42,353
Doubtful	—		—		—		—		—		—
Total	$	176,387	$	1,158,088	$	1,334,475	$	205,011	$	1,250,106	$	1,455,117

December 31, 2015
December 31, 2016
Pass	$	156,664	$	1,070,506	$	1,227,170	$	176,823	$	1,178,288	$	1,355,111
Special mention	4,099		20,942		25,041		2,427		16,031		18,458
Substandard	4,539		36,133		40,672		6,417		35,197		41,614
Doubtful	38		—		38		—		—		—
Total	$	165,340	$	1,127,581	$	1,292,921	$	185,667	$	1,229,516	$	1,415,183

The following table presents the Company's non-commercial loans by payment performance, by class (in thousands):


	Performing		Non-Performing		Total		Performing		Non-Performing		Total
September 30, 2016
March 31, 2017
Residential real estate	$	1,441,109	$	4,133	$	1,445,242	$	1,441,950	$	2,845	$	1,444,795
Home equity	141,462		154		141,616		139,051		114		139,165
Consumer	33,614		—		33,614		32,043		—		32,043
DDA overdrafts	2,691		274		2,965		3,053		—		3,053
Total	$	1,618,876	$	4,561	$	1,623,437	$	1,616,097	$	2,959	$	1,619,056

December 31, 2015
December 31, 2016
Residential real estate	$	1,379,797	$	3,336	$	1,383,133	$	1,447,087	$	4,375	$	1,451,462
Home equity	146,877		159		147,036		141,834		131		141,965
Consumer	36,049		34		36,083		32,545		—		32,545
DDA overdrafts	3,361		—		3,361		5,071		—		5,071
Total	$	1,566,084	$	3,529	$	1,569,613	$	1,626,537	$	4,506	$	1,631,043

Aging Analysis of Accruing and Non-Accruing Loans

Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types. However, any loan may be placed on non-accrual if the Company receives information that indicates a borrower is unable to meet the contractual terms of its respective loan agreement. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in the process of collection.

Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured. Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

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

A loan acquired and accounted for under ASC Topic 310-30 is reported as an accruing loan and a performing asset provided that the loan is performing in accordance with the initial expectations. The loan would be considered non-performing if the loan's performance deteriorates below the initial expectations.

The following table presents an aging analysis of the Company’s accruing and non-accruing loans, by class (in thousands):


	September 30, 2016														March 31, 2017
	Accruing														Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total		Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,435,610	$	4,612	$	886	$	215	$	—	$	3,919	$	1,445,242	$	1,438,109	$	3,455	$	386	$	35	$	—	$	2,810	$	1,444,795
Home equity	140,537		889		36		—		—		154		141,616		138,750		205		96		—		—		114		139,165
Commercial and industrial	173,547		291		108		—		—		2,441		176,387		203,046		562		50		—		—		1,353		205,011
Commercial real estate	1,148,737		668		—		80		526		8,077		1,158,088		1,241,951		239		525		—		250		7,141		1,250,106
Consumer	33,510		91		13		—		—		—		33,614		32,006		28		9		—		—		—		32,043
DDA overdrafts	2,411		276		4		274		—		—		2,965		2,723		319		11		—		—		—		3,053
Total	$	2,934,352	$	6,827	$	1,047	$	569	$	526	$	14,591	$	2,957,912	$	3,056,585	$	4,808	$	1,077	$	35	$	250	$	11,418	$	3,074,173

	December 31, 2015														December 31, 2016
	Accruing														Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total		Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,373,604	$	5,261	$	932	$	418	$	—	$	2,918	$	1,383,133	$	1,441,086	$	5,364	$	637	$	73	$	—	$	4,302	$	1,451,462
Home equity	146,493		318		65		24		—		136		147,036		141,192		423		219		31		—		100		141,965
Commercial and industrial	162,435		141		—		19		—		2,745		165,340		183,615		94		—		—		—		1,958		185,667
Commercial real estate	1,114,953		762		211		—		506		11,149		1,127,581		1,221,344		553		—		278		—		7,341		1,229,516
Consumer	35,886		154		9		34		—		—		36,083		32,506		38		1		—		—		—		32,545
DDA overdrafts	3,048		310		3		—		—		—		3,361		4,472		595		4		—		—		—		5,071
Total	$	2,836,419	$	6,946	$	1,220	$	495	$	506	$	16,948	$	2,862,534	$	3,024,215	$	7,067	$	861	$	382	$	—	$	13,701	$	3,046,226

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


	September 30, 2016						December 31, 2015						March 31, 2017						December 31, 2016
			Unpaid						Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and industrial	$	1,939	$	4,104	$	—	$	2,349	$	7,547	$	—	$	1,282	$	3,447	$	—	$	1,611	$	3,775	$	—
Commercial real estate	3,428		5,253		—		6,133		9,502		—		6,123		7,948		—		3,138		4,963		—
Total	$	5,367	$	9,357	$	—	$	8,482	$	17,049	$	—	$	7,405	$	11,395	$	—	$	4,749	$	8,738	$	—

With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		—		—		—		2,832		2,832		636		2,832		2,832		665
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	2,832	$	2,832	$	636	$	2,832	$	2,832	$	665

The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class (in thousands):


	Nine months ended September 30,								Three months ended March 31,
	2016				2015				2017				2016
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	2,234	—		$	1,807	$	—	$	1,365	—		$	2,349	$	—
Commercial real estate	4,286		9		5,321		3		3,118		5		5,358		4
Total	$	6,520	$	9	$	7,128	$	3	$	4,483	$	5	$	7,707	$	4

With an allowance recorded:
Commercial and industrial	$	—	$	—	$	1,350	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		—		2,832		19		—		—
Total	$	—	$	—	$	1,350	$	—	$	2,832	$	19	$	—	$	—

~~Approximately $0.3~~Less than $0.1 million and ~~$0.6~~$0.2 million of interest income would have been recognized during the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ respectively, if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at ~~September 30, 2016.~~March 31, 2017.

Loan Modifications

The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-2, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the borrower is currently in payment default on any of its debt or whether it is probable that the borrower would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the borrower has declared or is in the process of declaring bankruptcy, the borrower’s ability to continue as a going concern, and the borrower’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

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

The following tables set forth the Company’s TDRs (in thousands):


	September 30, 2016						December 31, 2015						March 31, 2017						December 31, 2016
			Non-						Non-						Non-						Non-
	Accruing				Total		Accruing				Total		Accruing				Total		Accruing				Total
Commercial and industrial	$	46	$	—	$	46	$	58	$	—	$	58	$	38	$	—	$	38	$	42	$	—	$	42
Commercial real estate	2,718		—		2,718		1,746		—		1,746		8,513		—		8,513		5,525		—		5,525
Residential real estate	19,944		452		20,396		17,796		191		17,987		20,276		150		20,426		20,424		391		20,815
Home equity	3,159		85		3,244		2,659		34		2,693		3,072		30		3,102		3,105		30		3,135
Consumer	—		—		—		—		—		—		—		—		—		—		—		—
	$	25,867	$	537	$	26,404	$	22,259	$	225	$	22,484	$	31,899	$	180	$	32,079	$	29,096	$	421	$	29,517


	New TDRs										New TDRs
	Nine months ended September 30,										Three months ended March 31,
	2016					2015					2017					2016
		Pre		Post			Pre		Post			Pre		Post			Pre		Post
		Modification					Modification					Modification					Modification
		Outstanding					Outstanding					Outstanding					Outstanding
	Number of	Recorded				Number of	Recorded				Number of	Recorded				Number of	Recorded
	Contracts	Investment				Contracts	Investment				Contracts	Investment				Contracts	Investment
Commercial and industrial	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—
Commercial real estate	1	2,207		2,207		—	—		—		1	3,015		3,015		—	—		—
Residential real estate	30	2,924		2,924		35	2,431		2,431		9	1,130		1,130		8	741		741
Home equity	7	190		190		14	368		368		2	58		58		1	29		29
Consumer	—	—		—		—	—		—		—	—		—		—	—		—
	38	$	5,321	$	5,321	49	$	2,799	$	2,799	12	$	4,203	$	4,203	9	$	770	$	770

Note F – Long-Term Debt

The components of long-term debt are summarized below (in thousands):

September 30, 2016 December 31, 2015
Junior subordinated debentures owed to City Holding Capital Trust III, due 2038, interest at a rate of 4.35% and 4.01%, respectively $ 16,495
$ 16,495

The Company formed a statutory business trust, City Holding Capital Trust III (“Capital Trust III”), under the laws of Delaware. Capital Trust III was created for the exclusive purpose of (i) issuing trust-preferred capital securities (“Capital Securities”), which represent preferred undivided beneficial interests in the assets of the trust, (ii) using the proceeds from the sale of the Capital Securities to acquire junior subordinated debentures (“Debentures”) issued by the Company, and (iii) engaging in only those activities necessary or incidental thereto. The trust is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, the accounts of the trust are not included in the Company’s consolidated financial statements.

Distributions on the Debentures are cumulative and will be payable quarterly at an interest rate of 3.50% over the three month LIBOR rate, reset quarterly. Interest payments are due in March, June, September and December. The Debentures are redeemable prior to maturity at the option of the Company (i) in whole at any time or in part from time-to-time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain predefined events.

Payments of distributions on the Capital Securities and payments on redemption of the Capital Securities are guaranteed by the Company. The Company also entered into an agreement as to expenses and liabilities with the trust pursuant to which it agreed, on a subordinated basis, to pay any cost, expenses or liabilities of the trust other than those arising under the Capital Securities. The obligations of the Company under the Debentures, the related indentures, the trust agreement establishing the trust, the guarantees and the agreements as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the trust’s obligations under the Capital Securities. The Capital Securities issued by the statutory business trust qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.

Note G – Derivative Instruments

The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities on future cash flows. As of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016, the Company has derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps and floors used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For the majority of these instruments the Company acts as an intermediary for its customers. Changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations. The Company also has an interest rate swap that serves as a fair value hedge for ~~the purpose of hedging~~ changes in ~~LIBOR~~long term fixed interest rates related to commercial real estate loans. Hedge ineffectiveness is assessed quarterly and any ineffectiveness is recorded as non-interest expense. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ hedge ineffectiveness was less than $0.1 million for each respective period.

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

September 30, 2016 December 31, 2015
Notional Amount Fair Value Notional Amount Fair Value

Non-hedging interest rate derivatives:
Other Assets $ 407,714
$ 27,459
$ 372,995
$ 10,811
Other Liabilities 415,071
27,725
380,995
10,872

Derivatives designated as hedges of fair value:
Other Liabilities 4,734
191
5,475
61



	March 31, 2017				December 31, 2016
	Notional Amount		Fair Value		Notional Amount		Fair Value

Non-hedging interest rate derivatives:
Customer counterparties:
Loan interest rate swap - assets	$	261,945	$	6,562	$	234,806	$	7,352
Loan interest rate swap - liabilities	245,311		8,984		207,201		8,111

Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan interest rate swap - assets	252,074		8,996		207,201		8,111
Loan interest rate swap - liabilities	261,562		6,525		241,995		7,360

Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan interest rate swap - assets	4,626		6		—		—
Loan interest rate swap - liabilities	—		—		4,626		12

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,						Three months ended March 31,
	2016			2015			2016			2015			2017			2016
Change in fair value non-hedging interest rate derivatives:
Other income - derivative asset	$	2,244		$	6,922		$	(15,846	)	$	4,494		$	(485	)	$	11,346
Other income - derivative liability	(2,317		)	(7,028		)	16,181			(4,613		)	485			(11,630		)
Other expense - derivative asset													45			—

Change in fair value hedging interest rate derivatives:
Hedged item - derivative asset	(45		)	101			119			89			14			121
Other income - derivative liability	6			5			10			6
Other income (expense) - derivative liability with financial institution counterparties													—			(2		)
Other income (expense) - derivative asset with financial institution counterparties													(4		)	—

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. Information about financial instruments that are eligible for offset in the consolidated balance sheet as of ~~September 30, 2016~~March 31, 2017 is presented in the following tables (in thousands):

Gross Amounts

Not Offset in the

Balance Sheet

Total

of Gross

Amounts

Not Offset in

the Statement

of Financial

Position

Netting

Including

Netting

Including

Gross

Net Amounts

Adjustment

Applicable

Gross

Net Amounts

Adjustment

Applicable

Amounts

of Assets

per

Netting

Amounts

of Assets

per

Netting

Gross

Offset in the

Presented in

Applicable

Agreement

Gross

Offset in the

Presented in

Applicable

Agreement

Amounts of

Statement of

the Statement

Master

Fair Value

and Fair

Amounts of

Statement of

the Statement

Master

Fair Value

and Fair

Recognized

Financial

of Financial

Netting

of Financial

Value of

Recognized

Financial

of Financial

Netting

of Financial

Value of

Description

Assets

Position

Arrangements

Collateral

Net Amount

Assets

Position

Arrangements

Collateral

Net Amount

(a)

(b)

(c)=(a)-(b)

(d)

(c)-(d) *

(a)

(b)

(c)=(a)-(b)

(d)

(c)-(d) *

Non-hedging derivative assets:

Interest rate swap agreements - customer counterparties

6,562

—

6,562

—

6,562

—

Interest rate swap agreements - financial institution counterparties

8,996

—

8,996

—

8,996

Hedging derivative assets:

Interest rate swap agreements

27,459

—

27,459

—

27,459

—

Gross Amounts

Not Offset in the

Balance Sheet

Total

of Gross

Amounts

Not Offset in

the Statement

of Financial

Position

Netting

Including

Netting

Including

Gross

Net Amounts

Adjustment

Applicable

Gross

Net Amounts

Adjustment

Applicable

Amounts

of Liabilities

per

Netting

Amounts

of Liabilities

per

Netting

Gross

Offset in the

Presented in

Applicable

Agreement

Gross

Offset in the

Presented in

Applicable

Agreement

Amounts of

Statement of

the Statement

Master

Fair Value

and Fair

Amounts of

Statement of

the Statement

Master

Fair Value

and Fair

Recognized

Financial

of Financial

Netting

of Financial

Value of

Recognized

Financial

of Financial

Netting

of Financial

Value of

Description

Liabilities

Position

Arrangements

Collateral

Net Amount

Liabilities

Position

Arrangements

Collateral

Net Amount

(a)

(b)

(c)=(a)-(b)

(d)

(c)-(d) *

(a)

(b)

(c)=(a)-(b)

(d)

(c)-(d) *

Non-hedging derivative liabilities:

Interest rate swap agreements

27,725

—

27,725

—

33,067

—

Hedging derivative liabilities:

Interest rate swap agreements

191

—

191

—

227

—

Interest rate swap agreements - customer counterparties

8,984

—

8,984

—

8,984

—

Interest rate swap agreements - financial institution counterparties

6,525

—

6,525

—

29,304

—

For instances where the fair value of financial collateral meets or exceeds the amounts presented in the Statement of Financial Position, no value is displayed to represent full collateralization.

Note H – Employee Benefit Plans

Pursuant to the terms of the City Holding Company 2003 Incentive Plan and the City Holding Company 2013 Incentive Plan (the "2003 Plan” and "2013 Plan", respectively), the Compensation Committee of the Board of Directors, or its delegate, may, from time to time, grant stock options, stock appreciation rights (“SARs”), or restricted stock awards to employees, directors and individuals who provide service to the Company (collectively, "Plan Participants"). The 2003 Plan expired in April of 2013 and the 2013 Plan was approved by the Company's shareholders in April 2013. A maximum of 750,000 shares of the Company’s common stock may be issued upon the exercise of stock options, SARs and stock awards under the 2013 Plan. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price at date of grant) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the option grants equals the market price of the Company’s common stock on the date of grant. All incentive stock options and SARs will be exercisable up to 10 years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement. As of ~~September 30, 2016,~~March 31, 2017, 579,145 shares were still available to be issued under the ~~2003 Plan and~~ 2013 ~~Plan, 462,863 stock options had been awarded and 271,797 restricted stock awards had been awarded, respectively.~~Plan.

Each award from the 2003 Plan and 2013 Plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Compensation Committee, or its delegate, determines. The option price for each grant is equal to the fair market value of a share of the Company’s common stock on the date of the grant. Options granted expire at such time as the Compensation Committee, or its delegate, determines at the date of the grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of the Company, as defined in the 2003 Plan and 2013 Plan, all outstanding options and awards shall immediately vest.

Certain stock options and restricted stock awards granted pursuant to the 2013 Plan have performance-based vesting requirements. These shares will vest in three separate annual installments of approximately 33.33% per installment on the third, fourth and fifth anniversaries of the grant date, subject further to performance-based vesting requirements. The performance-based vesting requirements are as follows:

* First Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the three years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

* Second Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the four years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

* Third Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the five years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

Stock Options

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


	Nine months ended September 30,								Three months ended March 31,
	2016				2015				2017				2016
	Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price		Options	Weighted-Average Exercise Price
Outstanding at January 1	95,015		$	38.38	167,554		$	36.74	86,613		$	41.08	95,015	$	38.38
Granted	24,348		43.73		12,961		46.41		17,631		66.32		24,348	43.73
Exercised	(21,000	)	33.57		(71,750	)	37.01		(1,250	)	30.38		—	—
Forfeited	—		—		(4,000	)	31.66		—		—		—	—
Outstanding at September 30	98,363		$	40.76	104,765		$	37.95
Outstanding at March 31									102,994		$	45.53	119,363	$	39.49

Exerciseable at September 30	14,750		$	36.53	29,500		$	34.30
Exerciseable at March 31									23,276		$	36.70	35,750	$	34.79

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


	Nine months ended September 30,				Three months ended March 31,
	2016		2015		2017		2016
Proceeds from stock option exercises	$	705	$	2,649	$	38	$	—
Intrinsic value of stock options exercised	317		724		44		—

Stock-based compensation expense associated with stock options	$	180	$	160	$	65	$	60

At period-end:	September 30, 2016				March 31, 2017
Unrecognized stock-based compensation expense associated with stock options	$	440			$	563
Weighted average period (in years) in which the above amount is expected to be
recognized	2.6				3.0

Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ all shares issued in connection with stock option exercises were issued from available treasury stock. For the stock options that have performance-based criteria, management has evaluated those criteria and has determined that, as of March 31, 2017, the criteria were probable of being met.

Additional information regarding stock options outstanding and exercisable at ~~September 30, 2016~~,March 31, 2017, is provided in the following table:


Ranges of Exercise Prices	No. of Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)		No. of Options Currently Exercisable	Weighted-Average Exercise Price of Options Currently Exercisable		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)		No. of Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)		No. of Options Currently Exercisable	Weighted-Average Exercise Price of Options Currently Exercisable		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
$25.00 - $29.99	1,250	$	28.15	2.5	$	28	1,250	$	28.15	2.5	$	28	1,250	$	28.15	2.0	$	45	1,250	$	28.15	2.0	$	45
30.00 - 34.99	2,250	30.38		2.2	45		2,250	30.38		2.2	45		500	30.38		1.7	17		500	30.38		1.7	17
35.00 - 39.99	36,601	36.35		5.8	510		4,250	35.09		4.5	65		32,351	36.51		5.4	905		16,876	35.39		5.0	491
40.00 - 44.99	45,301	43.51		7.6	307		7,000	40.88		1.5	66		38,301	43.99		8.2	785		4,650	44.43		7.0	93
45.00 - 50.00	12,961	46.61		8.4	48		—	—		—	—
45.00 - 49.99													12,961	46.61		7.9	232		—	—		—	—
50.00 - 70.00													17,631	66.32		9.9	$	—	—	—		—	$	—
	98,363				$	938	14,750				$	204	102,994				$	1,984	23,276				$	646

The fair value of the options is estimated at the date of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used to estimate the fair value of options granted:


	Nine months ended September 30,				Three months ended March 31,
	2016		2015		2017		2016
Risk-free interest rate	1.43	%	1.95	%	2.12	%	1.43	%
Expected dividend yield	3.86	%	3.50	%	2.60	%	3.86	%
Volatility factor	30.76	%	45.40	%	25.80	%	30.76	%
Expected life of option	7.0 years		7.0 years		7.0 years		7.0 years

Restricted Shares

The Company records compensation expense with respect to restricted shares in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded 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 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 that have performance-based criteria, management has evaluated those criteria and has determined that, as of March 31, 2017, 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,								Three months ended March 31,
	2016				2015				2017				2016
	Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant
Outstanding at January 1	172,921		$	37.38	163,431		$	35.50	180,622		$	39.31	172,921		$	37.83
Granted	28,801		46.16		25,440		46.35		10,609		66.33		11,251		43.73
Forfeited	(500	)	46.54		(500	)	37.50		(750	)	42.05		—		—
Vested	(22,200	)	33.81		(16,550	)	33.51		(18,438	)	37.50		(14,950	)	35.52
Outstanding at September 30	179,022		$	39.21	171,821		$	37.29
Outstanding at March 31									172,043		$	41.16	169,222		$	37.97

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


	Nine months ended September 30,				Three months ended March 31,
	2016		2015		2017		2016
Stock-based compensation expense associated with restricted shares	$	1,010	$	933	$	355	$	316

At period-end:	September 30, 2016				March 31, 2017
Unrecognized stock-based compensation expense associated with restricted shares	$	3,215			$	3,271
Weighted average period (in years) in which the above amount is expected to be
recognized	3.2				3.1

Shares issued in connection 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~~three months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ 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 two frozen defined benefit pension plans (the “Defined Benefit Plans”), which were inherited from the Company's acquisition of the plan sponsors (Horizon Bancorp, Inc. and Community Financial Corporation).

The following table presents details of the Company's activities pursuant to these plans (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2016			2015			2016			2015			2017			2016
Components of net periodic cost:
Interest cost	$	205		$	203		$	615		$	668		$	193		$	205
Expected return on plan assets	(288		)	(234		)	(865		)	(757		)	(294		)	(288		)
Net amortization and deferral	212			244			636			714			215			212
Net Periodic Pension Cost	$	129		$	213		$	386		$	625		$	114		$	129

401(k) Plan expense	$	197		$	166		$	615		$	578		$	251		$	217

Defined benefit plan contributions	$	—		$	143		$	—		$	313		$	—		$	—

Note I – Commitments and Contingencies

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, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Commitments to extend credit:
Home equity lines	$	186,423	$	183,017	$	188,498	$	185,553
Commercial real estate	155,629		84,672		79,584		98,883
Other commitments	202,277		177,491		205,652		203,103
Standby letters of credit	4,815		5,086		5,012		5,014
Commercial letters of credit	1,862		2,312		1,443		1,859

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.

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 J – Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss 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 37%.


	Accumulated Other Comprehensive Income (Loss)									Accumulated Other Comprehensive Income (Loss)
				Unrealized									Unrealized
				Gains (Losses) on									Gains (Losses) on
	Defined Benefit			Securities						Defined Benefit			Securities
	Pension Plans			Available-for-Sale			Total			Pension Plans			Available-for-Sale			Total

Balance at December 31, 2014	$	(5,349	)	$	1,190		$	(4,159	)

Other comprehensive income before reclassifications	—			1,943			1,943
Amounts reclassified from other comprehensive loss	—			(1,344		)	(1,344		)
	—			599			599

Balance at September 30, 2015	$	(5,349	)	$	1,789		$	(3,560	)

Balance at December 31, 2015	$	(4,759	)	$	927		$	(3,832	)	$	(4,759	)	$	927		$	(3,832	)

Other comprehensive income before reclassifications	—			7,301			7,301			—			2,743			2,743
Amounts reclassified from other comprehensive loss	—			(2,215		)	(2,215		)	—			—			—
	—			5,086			5,086			—			2,743			2,743

Balance at September 30, 2016	$	(4,759	)	$	6,013		$	1,254
Balance at March 31, 2016										$	(4,759	)	$	3,670		$	(1,089	)

Balance at December 31, 2016										$	(4,660	)	$	(2,352	)	$	(7,012	)

Other comprehensive income before reclassifications										—			3,571			3,571
Amounts reclassified from other comprehensive loss										—			(2,698		)	(2,698		)
										—			873			873

Balance at March 31, 2017										$	(4,660	)	$	(1,479	)	$	(6,139	)


	Amount reclassified from Other Comprehensive Loss												Amount reclassified from Other Comprehensive Loss
	Three months ended					Nine months ended						Affected line item	Three months ended					Affected line item
	September 30,					September 30,						in the Statements	March 31,					in the Statements
	2016			2015		2016			2015			of Income	2017			2016		of Income

Securities available-for-sale:
Net securities gains reclassified into earnings	$	(2,668	)	$	—	$	(3,513	)	$	(2,130	)	Security gains (losses)	$	(4,276	)	$	—	Security gains (losses)
Related income tax expense	985			—		1,298			786			Income tax expense	1,578			—		Income tax expense
Net effect on accumulated other comprehensive loss	$	(1,683	)	$	—	$	(2,215	)	$	(1,344	)		$	(2,698	)	$	—

Note K – 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,
2016 2015 2016 2015
Distributed earnings allocated to common stock $ 6,376
$ 6,362
$ 19,128
$ 19,086
Undistributed earnings allocated to common stock 6,699
4,125
17,901
21,040
Net earnings allocated to common shareholders $ 13,075
$ 10,487
$ 37,029
$ 40,126

Average shares outstanding 14,899
15,178
14,902
15,111
Effect of dilutive securities:

Warrants outstanding —
—
—
37
Employee stock awards 11
20
11
21
Shares for diluted earnings per share 14,910
15,198
14,913
15,169

Basic earnings per share $ 0.88
$ 0.69
$ 2.48
$ 2.66
Diluted earnings per share $ 0.88
$ 0.69
$ 2.48
$ 2.65

During the three and nine months ended September 30, 2015 there were no anti-dilutive options outstanding. Options to purchase approximately 3,000 shares and 5,000 shares of common stock were outstanding during the three and nine months ended September 30, 2016, respectively, but were not included in the computation of diluted earnings per share because the effect of the options' exercises would have been anti-dilutive.



	Three months ended March 31,
	2017		2016
Distributed earnings allocated to common stock	$	6,782	$	6,365
Undistributed earnings allocated to common stock	9,067		5,206
Net earnings allocated to common shareholders	$	15,849	$	11,571

Average shares outstanding	15,252		14,916
Effect of dilutive securities:
Employee stock awards	25		11
Shares for diluted earnings per share	15,277		14,927

Basic earnings per share	$	1.04	$	0.78
Diluted earnings per share	$	1.04	$	0.78

Note L – 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) orfor 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 credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amount presented herein. A more detailed description of the valuation methodologies used

for assets and liabilities 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. Although no control deficiencies were noted, the report did contain caveats and disclaimers regarding the pricing information, such as the Company should review fair values for reasonableness. On a quarterly basis, the Company selects a sample of its debt securities and reprices those securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values. In addition, the Company selects a sample of securities and reviews the underlying support from the primary pricing service provider.

The Company has determined that its pooled trust preferred securities should be priced using Level 3 inputs in accordance with ASC Topic 820 and guidance issued by the SEC. The Company has determined that there are few observable transactions and market quotations available for pooled trust preferred securities and they are not reliable for purposes of determining fair value at ~~September 30, 2016~~March 31, 2017. Due to these circumstances, the Company has elected to utilize an income valuation approach produced by a third party pricing source. This third party model utilizes deferral and default probabilities for the underlying issuers, estimated prepayment rates and assumes no future recoveries of any defaults or deferrals. The Company then compares the values provided by the third party model with other external sources. At such time as there are observable transactions or quoted prices that are associated with an orderly and active market for pooled trust preferred securities, the Company will incorporate such market values in its estimate of fair values for these securities.

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 its 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, 2016.~~March 31, 2017.

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. Financial assets measured at fair value on a nonrecurring basis include impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data for real estate collateral or Level 3 inputs for non-real estate collateral. The following table presents assets and liabilities measured at fair value (in thousands):


	Total		Level 1		Level 2		Level 3		Total Gains (Losses)			Total		Level 1		Level 2		Level 3		Total Gains (Losses)
September 30, 2016
March 31, 2017
Recurring fair value measurements
Financial Assets
U.S. Government agencies	$	4	$	—	$	4	$	—				$	3	$	—	$	3	$	—
Obligations of states and political subdivisions	64,435		—		64,435		—					95,200		—		95,200		—
Mortgage-backed securities:
U.S. Government agencies	333,202		—		333,202		—					339,154		—		339,154		—
Private label	1,002		—		1,002		—					879		—		879		—
Trust preferred securities	6,411		—		3,787		2,624					4,687		—		4,429		258
Corporate securities	24,414		—		24,414		—					24,088		—		24,088		—
Marketable equity securities	3,713		3,713		—		—					4,598		4,598		—		—
Investment funds	1,536		1,536		—		—					1,489		1,489		—		—
Derivative assets	27,459		—		27,459		—					15,564		—		15,564		—
Financial Liabilities
Derivative liabilities	27,916		—		27,916		—					15,509		—		15,509		—

Nonrecurring fair value measurements
Financial Assets
Impaired loans	$	5,367	$	—	$	—	$	5,367	$	—		$	9,601	$	—	$	—	$	9,601	$	29
Non-Financial Assets
Other real estate owned	5,491		—		—		5,491		(399		)	4,405		—		—		4,405		(191		)
Other assets												1,850		—		—		1,850		(175		)

December 31, 2015
December 31, 2016
Recurring fair value measurements
Financial Assets
U.S. Government agencies	$	5	$	—	$	5	$	—				$	3	$	—	$	3	$	—
Obligations of states and political subdivisions	50,697		—		50,697		—					82,368		—		82,368		—
Mortgage-backed securities:
U.S. Government agencies	288,197		—		288,197		—					330,814		—		330,814		—
Private label	1,231		—		1,231		—					942		—		942		—
Trust preferred securities	5,858		—		3,762		2,096					6,662		—		4,127		2,535
Corporate securities	18,693		—		18,693		—					23,574		—		23,574		—
Marketable equity securities	3,273		3,273		—		—					4,231		4,231		—		—
Investment funds	1,512		1,512		—		—					1,489		1,489		—		—
Derivative assets	10,811		—		10,811		—					15,463		—		15,463		—
Financial Liabilities
Derivative liabilities	10,933		—		10,933		—					15,483		—		15,483		—

Nonrecurring fair value measurements
Financial Assets
Impaired loans	$	8,482	$	—	$	—	$	8,482	$	—		$	6,916	$	—	$	—	$	6,916	$	(665	)
Non-Financial Assets
Other real estate owned	6,518		—		—		6,518		(937		)	4,588		—		—		4,588		(665		)
Other assets												625		—		—		625		(444		)

The table below presents a reconcilement of the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consist solely of trust preferred securities (in thousands):


	Nine months ended September 30,					Three months ended March 31,
	2016			2015		2017			2016
Beginning balance	$	2,096		$	1,871	$	2,535		$	2,096
Impairment losses on investment securities	(465		)	—		—			—
Gains on sale of investment securities	3,978			—
Included in other comprehensive income	(2,985		)	220		(977		)	18
Dispositions	—			—		(1,300		)	—
Transfers into Level 3	—			—		—			—
Ending balance	$	2,624		$	2,091	$	258		$	2,114

The Company utilizes a third party model to compute the present value of expected cash flows which considers the structure and term of each of the five respective pooled trust preferred securities and the financial condition of the underlying issuers. Specifically, the third party model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. For issuing banks that have defaulted, management generally assumes no recovery. For issuing banks that have deferred interest payments, management excludes the collateral balance associated with these banks and assumes no recoveries of such collateral balance in the future. The exclusion of such issuing banks in a current deferral position is based on such bank experiencing a certain level of financial difficulty that raises doubt about its ability to satisfy its contractual debt obligation, and accordingly, the Company excludes the associated collateral balance from its estimate of expected cash flows. Other assumptions used in the estimate of expected cash flows include expected future default rates and prepayments. Specifically, the model assumes annual prepayments of 1.0% with 100% at maturity and assumes 150 basis points of additional annual defaults from banks that are currently not in default or deferral. In addition, the model assumes no recoveries except for one trust preferred security which assumes that one of the banks currently deferring or in default will cure such positions.

The table below presents a reconcilement of the Company's financial assets and liabilities measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3), which solely relates to impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan 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~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015~~2016, collateral discounts ranged from 20% to 30%. During the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015~~2016, the Company had no Level 2 financial assets and liabilities that were measured on a nonrecurring basis.


	Nine months ended September 30,						Three months ended March 31,
	2016			2015			2017			2016

Beginning balance	$	8,482		$	6,517		$	6,916		$	8,482

Loans classified as impaired during the period	—			799			3,015			—
Specific valuation allowance allocations	—			—			—			—
	—			799			3,015			—

(Additional) reduction in specific valuation allowance allocations	—			(22		)	(29		)	—

Paydowns, payoffs, other activity	(3,115		)	(172		)	(301		)	(1,247		)

Ending balance	$	5,367		$	7,122		$	9,601		$	7,235

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. The

table below presents OREO that was remeasured and reported at fair value based on significant unobservable inputs (Level 3) (in thousands):


	Nine months ended September 30,						Three months ended March 31,
	2016			2015			2017			2016

Beginning balance	$	6,518		$	8,179		$	4,588		$	6,518

OREO remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	2,528			2,356			1,226			673
Charge-offs recognized in the allowance for loan losses	—			—			(442		)	—
Fair value	2,528			2,356			784			673

OREO remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	1,228			3,601			1,464			1,228
Fair value	829			2,819			1,273			1,063
Write-downs included in other non-interest expense	(399		)	(782		)	(191		)	(165		)

Disposed	(3,156		)	(3,727		)	(776		)	(972		)

Ending balance	$	5,491		$	6,026		$	4,405		$	6,054

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 rate 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. The following methods and assumptions were used in estimating fair value for financial instruments:

Cash and cash equivalents: Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate fair value.

Securities: The fair value of securities, both available-for-sale and held-to-maturity, are generally based on quoted market prices 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.

Net loans: The fair value of the loan portfolio is estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers for the same remaining maturities. Loans were first segregated by type such as commercial, real estate and consumer, and were then further segmented into fixed, adjustable and variable rate categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Deposits: The fair values of demand deposits (i.e., interest and noninterest-bearing deposits, regular savings and other money market demand accounts) are, by definition, equal to their carrying values. The fair values of time deposits were estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Short-term debt: Securities sold under agreements to repurchase represent borrowings with original maturities of less than 90 days. The carrying amount of borrowings under purchase agreements approximate their fair value.

Long-term debt: The fair value of long-term borrowings is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements and market conditions of similar debt instruments.

Commitments and letters of credit: The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The amounts of fees currently charged on commitments and letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values have not been reflected in the table below.

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


	Carrying Amount	Fair Value	Level 1	Level 2	Level 3	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2016
March 31, 2017
Assets:
Cash and cash equivalents						$	190,812	$	190,812	$	190,812	$	—	$	—
Securities available-for-sale	434,717	434,717	5,249	426,844	2,624	470,098		470,098		6,087		463,753		258
Securities held-to-maturity	79,499	82,993	—	82,993	—	72,308		73,656		—		73,656		—
Other securities	11,895	11,895	—	11,895	—	10,240		10,240		—		10,240		—
Net loans	2,938,362	2,949,827	—	—	2,949,827	3,054,964		3,040,822		—		—		3,040,822
Accrued interest receivable	7,986	7,986	7,986	—	—	8,644		8,644		8,644		—		—
Derivative assets	27,459	27,459	—	27,459	—	15,564		15,564		—		15,564		—

Liabilities:
Deposits	3,179,286	3,186,387	2,148,702	1,037,685	—	3,392,758		2,606,844		1,545,468		1,061,376		—
Short-term debt	179,384	179,384	—	179,384	—	186,686		186,686		—		186,686		—
Long-term debt	16,495	16,457	—	16,457	—	16,495		16,453		—		16,453		—
Derivative liabilities	27,916	27,916	—	27,916	—	15,509		15,509		—		15,509		—

December 31, 2015
December 31, 2016
Assets:
Cash and cash equivalents	70,113	70,113	70,113	—	—	88,139		88,139		88,139		—		—
Securities available-for-sale	369,466	369,466	4,785	362,585	2,096	450,083		450,083		5,720		441,828		2,535
Securities held-to-maturity	88,937	90,810	—	90,810	—	75,169		76,445		—		76,445		—
Other securities	12,915	12,915	—	12,915	—	14,352		14,352		—		14,352		—
Net loans	2,843,283	2,843,973	—	—	2,843,973	3,026,496		3,014,425		—		—		3,014,425
Accrued interest receivable	7,432	7,432	7,432	—	—	8,408		8,408		8,408		—		—
Derivative assets	10,811	10,811	—	10,811	—	15,463		15,463		—		15,463		—

Liabilities:
Deposits	3,083,975	3,085,908	2,066,419	1,019,489	—	3,231,653		3,232,970		2,190,234		1,042,736		—
Short-term debt	154,869	154,872	—	154,872	—	248,305		248,305		—		248,305		—
Long-term debt	16,495	16,457	—	16,457	—	16,495		16,455		—		16,455		—
Derivative liabilities	10,933	10,933	—	10,933	—	15,483		15,483		—		15,483		—


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

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 ~~2015~~2016 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 ~~2015~~2016 Annual Report of the Company. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and income taxes ~~and purchased credit-impaired loans~~ 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.

The section Allowance and Provision for Loan Losses provides management’s analysis of the Company’s allowance for loan losses and related provision. The allowance for loan losses is maintained at a level that represents management’s best estimate of probable losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions, and other relevant factors. This determination is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis. The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors. However, management cannot currently estimate the range of possible change. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2013 through ~~2015. The Company is open to audit under~~2015 and various state taxing ~~authorities' statutes of limitations for the years ended December 31, 2012 through 2015.~~

The Company values purchased credit-impaired loans at fair value in accordance with ASC Topic 310-30. In determining the estimated fair value, management considers several factors, such as estimated future credit losses, estimated prepayments, remaining lives of the acquired loans, estimated value of the underlying collateral and the net present value of the cash flows expected to be received. For these loans, the expected cash flows that exceed the fair value of the loan represent the accretable yield, which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The non-accretable difference represents the difference between the contractually required principal and interest payments and the cash flows expected to be collected based upon management's estimation. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Company's allowance for loan losses. Subsequent increases in the expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges with a corresponding adjustment to the accretable yield, which will result in the recognition of additional interest income over the remaining lives of the loans.authorities.

Financial Summary

~~Nine~~Three months ended ~~September 30,~~March 31, 2017 vs. 2016 ~~vs. 2015~~

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


	Nine months ended September 30,						Three months ended March 31,
	2016			2015			2017			2016

Net income available to common shareholders (in thousands)	$	37,476		$	40,582		$	16,026		$	11,702
Earnings per common share, basic	$	2.48		$	2.66		$	1.04		$	0.78
Earnings per common share, diluted	$	2.48		$	2.65		$	1.04		$	0.78
ROA*	1.31		%	1.53		%	1.60		%	1.25		%
ROE*	11.7		%	13.1		%	13.7		%	11.2		%
ROATCE*	14.4		%	15.9		%	16.5		%	13.8		%

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

The Company's net interest income for the ~~nine months ended September 30, 2016 increased $2.5 million compared to the nine months ended September 30, 2015, primarily as a result of the AFB branch acquisition in the fourth quarter of 2015 (see~~ ~~Net Interest Income), higher average residential and commercial loan balances and higher average investment security balances. The Company recorded a provision for loan losses of~~ ~~$3.1 million~~ ~~for the~~ ~~nine months ended September 30, 2016~~ ~~compared to $4.2 million for the nine months ended September 30, 2015 (see~~ ~~Allowance and Provision for Loan Losses). As further discussed under the caption~~ ~~Non-Interest Income and Non-Interest Expense, non-interest income decreased~~ ~~$8.7 million, primarily due to the sale of CityInsurance in the first quarter of 2015. Non-interest expense for the~~ ~~nine months ended September 30, 2016~~ ~~increased~~ ~~$1.9 million~~ ~~from the~~ ~~nine months ended September 30, 2015, primarily as a result of the AFB branch acquisition in the fourth quarter of 2015.~~

~~Three months ended September 30, 2016 vs. 2015~~

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

Three months ended September 30,
2016 2015

Net income available to common shareholders (in thousands)
$ 13,232
$ 10,607
Earnings per common share, basic $ 0.88
$ 0.69
Earnings per common share, diluted $ 0.88
$ 0.69
ROA 1.38 % 1.21 %
ROE 12.2 % 10.1 %
ROATCE 14.9 % 12.2 %

~~The Company’s net interest income for the~~ three months ended ~~September 30, 2016~~March 31, 2017 increased ~~$1.9~~$1.3 million compared to the three months ended September 30, 2015, primarily as a result of the AFB branch acquisition in the fourth quarter of 2015, growth in the average balances of the commercial real estate and residential real estate loans, and an increase in average investment balancesMarch 31, 2016 (see Net Interest Income). The Company recorded a provision for loan losses of ~~$1.4~~$0.7 million for the three months ended ~~September 30, 2016~~March 31, 2017 compared to $0.5 million for the three months ended ~~September 30, 2015~~March 31, 2016 (see Allowance and Provision for Loan Losses). As further discussed under the caption Non-Interest Income and Non-Interest Expense, non-interest income increased ~~$3.0~~$5.4 million ~~as a result of realized investment gains in the third quarter of 2016~~ and non-interest expense ~~decreased $0.1~~increased $0.5 million ~~from~~ for the three months ended ~~September 30, 2015.~~March 31, 2017 from the

three months ended March 31, 2016.

Balance Sheet Analysis

Selected balance sheet fluctuations from the year ended December 31, ~~2015~~2016 are summarized in the following table (in millions):


	September 30,		December 31,						March 31,		December 31,
	2016		2015		$ Change		% Change		2017		2016		$ Change			% Change

Cash and cash equivalents									$	190.8	$	88.1	$	102.7		116.6	%
Investment securities	$	526.1	$	471.3	$	54.8	11.6	%	552.6		539.6		13.0			2.4	%
Gross loans	2,957.9		2,862.5		95.4		3.3	%	3,074.2		3,046.2		28.0			0.9	%
Other assets	50.7		37.0		13.7		37.0	%

Total deposits	3,179.3		3,084.0		95.3		3.1	%	3,392.8		3,231.7		161.1			5.0	%
Other liabilities	56.4		39.4		17.0		43.1	%
Customer repurchase agreements	173.4		141.9		31.5		22.2	%
Federal Funds purchased									—		64.1		(64.1		)	(100.0	)%

Capital surplus									140.3		112.9		27.4			24.3	%

Cash and cash equivalents increased $102.7 million from December 31, 2016 to $190.8 million at March 31, 2017 primarily due to increased deposit balances.

Investment securities increased ~~$54.8~~$13.0 million from December 31, ~~2015~~2016 to ~~September 30, 2016~~552.6 million at March 31, 2017 primarily due to additional investment purchases made during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017.

Gross loans increased ~~$95.4~~$28.0 million ~~(3.3%~~(0.9%) from December 31, ~~2015~~2016 to ~~$2.96~~$3.07 billion at ~~September 30, 2016. Residential~~March 31, 2017. Commercial real estate loans increased ~~$62.1~~$20.6 million ~~(4.5%), commercial real estate loans increased $30.5 million (2.7%~~(1.7%) and commercial and industrial loans increased ~~$11.0~~$19.3 million ~~(6.7%~~(10.4%). These increases were partially offset by decreases in residential real estate loans of $6.7 million, home equity loans of ~~$5.4~~$2.8 million and consumer loans of ~~$2.5~~$0.5 million.

Other assets and other liabilities increased $13.7 million, primarily due to an increase in market values and additional customer interest rate swap contracts entered into during the nine months ended September 30, 2016, which are primarily used in the Company's back-to-back program and are reported on a gross basis on the consolidated balance sheet.

Total deposits increased ~~$95.3~~$161.1 million from December 31, ~~2015~~2016 to ~~$3.18~~$3.39 billion at ~~September 30, 2016 partially~~March 31, 2017 due to ~~a large~~growth in savings deposits of $52.0 million, interest-bearing demand deposits of $47.4 million, non-interest bearing ~~deposit on the last day~~demand deposits of ~~the first quarter of 2016 with a balance of $45.7~~$42.5 million ~~as of September 30, 2016, growth in demand deposit accounts of $33.9 million~~ and ~~growth in~~ time deposits of ~~$13.0~~$19.3 million. Total average depository balances increased $184.6 million or 6.2% for the quarter ended September 30, 2016 compared to the quarter ended December 31, 2015 consisting of increases in non-interest bearing deposits ($91.6 million), interest bearing deposits ($37.0 million), savings deposits ($29.6 million) and time deposits ($26.4 million). The growth is partially attributable to deposits acquired from AFB.

~~Customer repurchase agreements increased $31.5~~Federal Funds purchased decreased $64.1 million to from December 31, ~~2015~~2016, as the Company's deposit growth was sufficient to ~~September 30, 2016. This is~~fund the Company's loan and securities growth.

Capital surplus increased $27.4 million primarily due to ~~an increase in~~ the ~~Company's commercial sweep accounts.~~fact that the Company sold approximately 441,000 shares of common stock at a weighted average price of $64.48 per share, net of broker fees.

Net Interest Income

~~Nine~~Three months ended ~~September 30,~~March 31, 2017 vs. 2016 ~~vs. 2015~~

The Company’s tax equivalent net interest income increased ~~$2.7~~$1.5 million, or ~~3.1%~~5.1%, from ~~$86.5~~$29.3 million for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 to ~~$89.2~~$30.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2017. The increase was primarily due to an increase in commercial loans of $0.7 million and residential real estate loans of $0.6 million due to increased balances as compared to the three months ended March 31, 2016. In addition, higher average investment balances increased investment income by $0.9 million. These increases were partially offset by increased interest expense on interest bearing accounts ($0.5

million) and lower accretion from fair value adjustments on recent acquisitions ($0.4 million). The Company’s reported net interest margin decreased from ~~3.81%~~3.53% for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 to ~~3.52%~~3.45% for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017. Excluding the favorable impact of accretion, the net interest margin for the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ would have been ~~3.43%~~3.42% and ~~3.58%~~3.44%, respectively.

The following schedule presents the estimated future accretion on net interest income as a result of the Company's acquisitions (in thousands). The amounts in the table below require management to make significant assumptions based on estimated future default, prepayment and discount rates. Actual performance could be significantly different from that assumed, which could result in actual results being materially different than those estimated below.

Estimated Accretion Forecast

Remainder 2016 $ 525
2017 1,314
2018 990

Table One

Average Balance Sheets and Net Interest Income

(in thousands)


Assets	Nine months ended September 30,														Three months ended March 31,
	2016							2015							2017							2016
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate

Loan portfolio⁽¹⁾:
Residential real estate⁽²⁾	$	1,549,465		$	45,267	3.90	%	$	1,459,247		$	43,159	3.95	%	$	1,591,254		$	15,479	3.95	%	$	1,531,966		$	14,918	3.92	%
Commercial, financial, and agriculture⁽²⁾	1,304,467			39,294		4.02		1,157,677			38,914		4.49		1,429,075			13,598		3.86		1,294,345			12,919		4.01
Installment loans to individuals^(2),(3)	38,166			2,220		7.77		41,338			2,692		8.71		35,650			581		6.61		38,632			721		7.51
Previously securitized loans⁽⁴⁾	***			1,230		***		***			1,310		***		***			447		***		***			369		***
Total loans	2,892,098			88,011		4.06		2,658,262			86,075		4.33		3,055,979			30,105		4.00		2,864,943			28,927		4.06
Securities:
Taxable	432,303			9,115		2.82		340,585			7,974		3.13		458,295			3,444		3.05		421,289			3,005		2.87
Tax-exempt⁽⁵⁾	46,646			1,754		5.02		29,222			1,235		5.65		84,784			1,019		4.87		41,898			549		5.27
Total securities	478,949			10,869		3.03		369,807			9,209		3.33		543,079			4,463		3.33		463,187			3,554		3.09
Deposits in depository institutions	9,779			—		—		9,790			—		—		16,826			3		0.07		10,529			—		—
Total interest-earning assets	3,380,826			98,880		3.91		3,037,859			95,284		4.19		3,615,884			34,571		3.88		3,338,659			32,481		3.91
Cash and due from banks	104,287							202,423							81,629							81,569
Bank premises and equipment	76,161							76,273							74,768							76,945
Other assets	260,297							242,294							253,378							256,329
Less: allowance for loan losses	(19,930		)					(20,960		)					(20,150		)					(20,591		)
Total assets	$	3,801,641						$	3,537,889						$	4,005,509						$	3,732,911

Liabilities
Interest-bearing demand deposits	$	683,926		$	458	0.09	%	$	643,086		$	379	0.08	%	$	708,434		$	157	0.09	%	$	677,849		$	145	0.09	%
Savings deposits	765,222			699		0.12		698,433			520		0.10		831,639			324		0.16		767,262			228		0.12
Time deposits⁽²⁾	1,026,845			7,757		1.01		1,005,548			7,227		0.96		1,052,218			2,948		1.14		1,019,416			2,525		1.00
Short-term borrowings	156,884			283		0.24		138,192			236		0.23		195,626			157		0.33		162,046			107		0.27
Long-term debt	16,495			504		4.08		16,495			458		3.71		16,495			181		4.45		16,495			164		4.00
Total interest-bearing liabilities	2,649,372			9,701		0.49		2,501,754			8,820		0.47		2,804,412			3,767		0.54		2,643,068			3,169		0.48
Noninterest-bearing demand deposits	679,730							584,046							690,243							630,524
Other liabilities	45,452							40,207							43,655							40,198
Stockholders’ equity	427,087							411,882							467,199							419,121
Total liabilities and stockholders’ equity	$	3,801,641						$	3,537,889						$	4,005,509						$	3,732,911
Net interest income				$	89,179						$	86,464						$	30,804						$	29,312
Net yield on earning assets						3.52	%						3.81	%						3.45	%						3.53	%


(1)	For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.					For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.
(2)	Included in the above table are the following amounts for the accretion of the fair value adjustments related to the acquisitions of Virginia Savings, Community and AFB:					Included in the above table are the following amounts for the accretion of the fair value adjustments related to the acquisitions of Virginia Savings Bancorp, Inc., Community Financial Corporation and American Founders Bank, Inc.:

		Nine months ended September 30,					Three months ended March 31,
		2016		2015			2017		2016
	Residential real estate	$	538	$	697	Residential real estate	$	138	$	181
	Commercial, financial and agriculture	1,360		3,683		Commercial, financial and agriculture	174		394
	Installment loans to individuals	98		226		Installment loans to individuals	9		54
	Time deposits	444		507		Time deposits	17		148
		$	2,440	$	5,113		$	338	$	777

(3)	Includes the Company’s consumer and DDA overdrafts loan categories.					Includes the Company’s consumer and DDA overdrafts loan categories.
(4)	Effective January 1, 2012, there is no carrying value of the Company’s previously securitized loans.					Effective January 1, 2012, there is no carrying value of the Company’s previously securitized loans.
(5)	Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.					Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.

Table Two

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

(in thousands)

Nine months ended September 30, 2016 vs. 2015
Interest-earning assets:
Increase (Decrease)
Due to Change In:
Volume Rate Net

Loan portfolio
Residential real estate $ 2,671
$ (563 ) $ 2,108
Commercial, financial, and agriculture 4,939
(4,559 ) 380
Installment loans to individual (207 ) (265 ) (472 )
Previously securitized loans —
(80 ) (80 )
Total loans 7,403
(5,467 ) 1,936
Securities:

Taxable 2,149
(1,008 ) 1,141
Tax-exempt⁽¹⁾
737
(218 ) 519
Total securities 2,886
(1,226 ) 1,660
Total interest-earning assets $ 10,289
$ (6,693 ) $ 3,596
Interest-bearing liabilities:

Interest-bearing demand deposits $ 24
$ 55
$ 79
Savings deposits 50
129
179
Time deposits 153
377
530
Short-term borrowings 32
15
47
Long-term debt —
46
46
Total interest-bearing liabilities $ 259
$ 622
$ 881
Net Interest Income $ 10,030
$ (7,315 ) $ 2,715


~~(1)~~	~~Fully federal taxable equivalent using a tax rate of approximately 35%.~~

~~Three months ended September 30, 2016 vs. 2015~~

The Company’s tax equivalent net interest income increased $2.0 million or 7.1%, from $28.0 million for the three months ended September 30, 2015 to $30.0 million for the three months ended September 30, 2016. The Company’s reported net interest margin decreased from 3.62% for the three months ended September 30, 2015 to 3.48% for the three months ended September 30, 2016. Excluding the favorable impact of accretion, the net interest margin for the three months ended September 30, 2016 and 2015 would have been 3.40% and 3.48%, respectively.

~~Table Three~~

~~Average Balance Sheets and Net Interest Income~~

~~(in thousands)~~

Assets Three months ended September 30,
2016 2015
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate

Loan portfolio⁽¹⁾:
Residential real estate⁽²⁾
$ 1,570,787
$ 15,309
3.88 % $ 1,482,445
$ 14,469
3.87 %
Commercial, financial, and agriculture⁽²⁾
1,311,819
13,066
3.96
1,156,264
12,174
4.18
   Installment loans to individuals^(2),(3)
37,150
690
7.39
40,720
875
8.53
   Previously securitized loans⁽⁴⁾
***
378
*** ***
357
***
Total loans 2,919,756
29,443
4.01
2,679,429
27,875
4.13
Securities:

Taxable 449,977
3,183
2.81
352,567
2,621
2.95
   Tax-exempt⁽⁵⁾
54,317
644
4.72
29,675
419
5.60
Total securities 504,294
3,827
3.02
382,242
3,040
3.16
Deposits in depository institutions 9,623
—
—
9,924
—
—
Total interest-earning assets 3,433,673
33,270
3.85
3,071,595
30,915
3.99
Cash and due from banks 87,219
156,575

Bank premises and equipment 75,743
74,543

Other assets 263,258
237,803

Less: allowance for loan losses (19,517 ) (21,425 )
Total assets $ 3,840,376

$ 3,519,091

Liabilities

   Interest-bearing demand deposits $ 687,487
$ 138
0.08 % $ 644,375
$ 122
0.08 %
Savings deposits 761,734
234
0.12
691,600
165
0.09
Time deposits⁽²⁾
1,030,731
2,634
1.02
989,149
2,399
0.96
Short-term borrowings 154,585
90
0.23
135,274
69
0.20
Long-term debt 16,495
172
4.15
16,495
155
3.73
Total interest-bearing liabilities 2,651,032
3,268
0.49
2,476,893
2,910
0.47
Noninterest-bearing demand deposits 700,932
594,821

Other liabilities 52,641
28,583

Stockholders’ equity 435,771
418,794

Total liabilities and stockholders’ equity $ 3,840,376

$ 3,519,091

Net interest income
$ 30,002

$ 28,005

Net yield on earning assets

3.48 % 3.62 %

(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.
(2) Included in the above table are the following amounts for the accretion of the fair value adjustments related to the acquisitions of Virginia Savings, Community and AFB:
Three months ended September 30,
2016
2015
Residential real estate $ 166
$ 257

Commercial, financial and agriculture 311
576

Installment loans to individuals 16
54

Time deposits 148
169

$ 641
$ 1,056

(3) Includes the Company’s consumer and DDA overdrafts loan categories.
(4) Effective January 1, 2012, there is no carrying value of the Company’s previously securitized loans.
(5) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.

~~Table Four~~

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

~~(in thousands)~~


	Three months ended September 30, 2016 vs. 2015									Three months ended March 31, 2017 vs. 2016
Interest-earning assets:	Increase (Decrease) Due to Change In:									Increase (Decrease) Due to Change In:
	Volume			Rate			Net			Volume			Rate			Net

Loan portfolio
Residential real estate	$	860		$	(20	)	$	840		$	573		$	(12	)	$	561
Commercial, financial, and agriculture	1,633			(741		)	892			1,334			(655		)	679
Installment loans to individual	(77		)	(108		)	(185		)
Installment loans to individuals										(55		)	(85		)	(140		)
Previously securitized loans	—			21			21			—			78			78
Total loans	2,416			(848		)	1,568			1,852			(674		)	1,178
Securities:
Taxable	722			(160		)	562			262			177			439
Tax-exempt⁽¹⁾	347			(122		)	225			557			(87		)	470
Total securities	1,069			(282		)	787			819			90			909
Deposits in depository institutions										—			3			3
Total interest-earning assets	$	3,485		$	(1,130	)	$	2,355		$	2,671		$	(581	)	$	2,090
Interest-bearing liabilities:
Interest-bearing demand deposits	$	8		$	8		$	16		$	6		$	6		$	12
Savings deposits	17			52			69			19			77			96
Time deposits	101			134			235			81			342			423
Short-term borrowings	10			11			21			22			28			50
Long-term debt	—			17			17			—			17			17
Total interest-bearing liabilities	$	136		$	222		$	358		$	128		$	470		$	598
Net Interest Income	$	3,349		$	(1,352	)	$	1,997		$	2,543		$	(1,051	)	$	1,492


(1)	Fully federal taxable equivalent using a tax rate of approximately 35%.

Table ~~Five~~Three

Non-GAAP Financial Measures

Management of the Company uses measures in its analysis of the Company's performance other than those in accordance with generally accepted accounting principals 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 ~~these~~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 and fully taxable equivalent net interest income excluding accretion with net interest income as derived from the Company's financial statements (in thousands):

Three months ended September 30, Nine months ended September 30,
2016 2015 2016 2015

Net interest income ("GAAP") $ 29,778
$ 27,858
$ 88,566
$ 86,032
Taxable equivalent adjustment 224
147
613
432
Net interest income, fully taxable equivalent $ 30,002
$ 28,005
$ 89,179
$ 86,464

Average interest earning assets $ 3,433,673
$ 3,071,595
$ 3,380,826
$ 3,037,859
Net interest margin 3.48 % 3.62 % 3.52 % 3.81 %

Net interest income ("GAAP") $ 29,778
$ 27,858
$ 88,566
$ 86,032
Taxable equivalent adjustment 224
147
613
432
Accretion related to fair value adjustments (641 ) (1,056 ) (2,441 ) (5,113 )
Net interest income, fully taxable equivalent, excluding accretion $ 29,361
$ 26,949
$ 86,738
$ 81,351

Average interest earning assets $ 3,433,673
$ 3,071,595
$ 3,380,826
$ 3,037,859
Net interest margin (excluding accretion) 3.40 % 3.48 % 3.43 % 3.58 %



	Three months ended March 31,
	2017			2016

Net interest income, fully taxable equivalent	$	30,804		$	29,312
Taxable equivalent adjustment	(357		)	(192		)
Net interest income ("GAAP")	$	30,447		$	29,120

Average interest earning assets	$	3,615,884		$	3,338,659
Net interest margin	3.45		%	3.53		%

Net interest income, fully taxable equivalent, excluding accretion	$	30,466		$	28,535
Taxable equivalent adjustment	(357		)	(192		)
Accretion related to fair value adjustments	338			777
Net interest income ("GAAP")	$	30,447		$	29,120

Average interest earning assets	$	3,615,884		$	3,338,659
Net interest margin (excluding accretion)	3.42		%	3.44		%

Loans

Table ~~Six~~Four

Loan Portfolio

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


	September 30, 2016		December 31, 2015		September 30, 2015		March 31, 2017		December 31, 2016		March 31, 2016
Residential real estate	$	1,445,242	$	1,383,133	$	1,358,083	$	1,444,795	$	1,451,462	$	1,395,670
Home equity	141,616		147,036		144,748		139,165		141,965		142,694
Commercial and industrial	176,387		165,340		123,948		205,011		185,667		165,549
Commercial real estate	1,158,088		1,127,581		1,028,857		1,250,106		1,229,516		1,135,625
Consumer	33,614		36,083		36,751		32,043		32,545		34,754
DDA overdrafts	2,965		3,361		3,258		3,053		5,071		2,825
Total loans	$	2,957,912	$	2,862,534	$	2,695,645	$	3,074,173	$	3,046,226	$	2,877,117

Loan balances increased $~~95.4~~27.9 million from December 31, ~~2015~~2016 to ~~September 30, 2016~~March 31, 2017.

Residential real estate loans ~~increased $62.1~~decreased $6.7 million ~~or 4.5%,~~ from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017. 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, 2016, $12.3~~March 31, 2017, $9.8 million of the residential real estate loans were for properties under construction.

Home equity loans decreased ~~$5.4~~$2.8 million during the first ~~nine~~three months of ~~2016.~~2017. 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. The amount of credit extended is directly related to the value of the real estate at the time the loan is made.

The commercial and industrial ("C&I") loan portfolio consists of loans to corporate borrowers primarily in small to mid-size industrial and commercial companies. Collateral securing these loans includes equipment, machinery, inventory, receivables and vehicles. C&I loans are considered to contain a higher level of risk than other loan types, although care is taken to minimize these risks. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. C&I loans increased ~~$11.0~~$19.3 million from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017.

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 ~~$30.5~~$20.6 million from December 31, ~~2015~~2016 to September 30, 2016, despite the unanticipated repayment of a $16.1 million loan late in the second quarter. This repayment was significant in that it was one of the Company's largest individual loans.March 31, 2017. At ~~September 30, 2016, $7.3~~March 31, 2017, $18.5 million of the commercial real estate loans were for commercial properties under construction.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property. The Company monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Consumer loans decreased ~~$2.5~~$0.5 million during the first ~~nine~~three months of ~~2016.~~2017.

Allowance and Provision for Loan Losses

~~Table Seven~~

~~Analysis of the Allowance for Loan Losses~~

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

Nine months ended September 30,
Year ended
December 31,
2016 2015 2015
Balance at beginning of period $ 19,251
$ 20,074
$ 20,074
Charge-offs:

Commercial and industrial (148 ) (2,620 ) (5,768 )
Commercial real estate (1,213 ) (277 ) (580 )
Residential real estate (1,281 ) (758 ) (1,144 )
Home equity (300 ) (236 ) (312 )
Consumer (102 ) (171 ) (210 )
DDA overdrafts (1,017 ) (1,038 ) (1,414 )
Total charge-offs (4,061 ) (5,100 ) (9,428 )
Recoveries:

Commercial and industrial 13
72
74
Commercial real estate 447
49
366
Residential real estate 113
130
199
Home equity —
—
—
Consumer 109
155
187
DDA overdrafts 585
593
791
Total recoveries 1,267
999
1,617
Net charge-offs (2,794 ) (4,101 ) (7,811 )
Provision for purchased credit impaired loans 164
521
6,435
Provision for loan losses 2,929
3,654
553
Balance at end of period $ 19,550
$ 20,148
$ 19,251
As a Percent of Average Total Loans:

Net charge-offs (annualized) 0.13 % 0.21 % 0.26 %
Provision for loan losses (annualized) 0.14 % 0.21 % 0.26 %
As a Percent of Non-Performing Loans:
Allowance for loan losses 129.00 % 92.20 % 110.40 %
As a Percent of Total Loans:
Allowance for loan losses 0.66 % 0.75 % 0.67 %

Management systematically monitors the loan portfolio and the appropriateness of the allowance for loan losses (“ALLL”) on a quarterly basis to provide for probable losses incurred in the portfolio. Management assesses the risk in each loan type based on historical delinquency and loss trends, the general economic environment of its local markets, individual loan performance, and other relevant factors. Individual credits in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance. Due to the nature of commercial lending, evaluation of the appropriateness of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for general economic conditions and other inherent risk factors. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior loss history of each portfolio, adjusted for general economic conditions and other inherent risk factors. Risk factors considered by the Company in completing this analysis include: (i) unemployment and economic trends in the Company’s markets; (ii) concentrations of credit, if any, among any industries; (iii) trends in loan growth, loan mix, delinquencies, losses or credit impairment; and (iv) adherence to lending policies and others. Each risk factor is designated as low, moderate/increasing, or high based on the Company’s assessment of the risk to loss associated with each factor. Each risk factor is then weighted to consider probability of occurrence.

In evaluating the adequacy of the ALLL, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, seasoning of the portfolio, and general economic conditions.

The allowance not specifically allocated to individual credits is generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Loans not individually evaluated for impairment are grouped by pools with similar risk characteristics and the related historical loss rates are adjusted to reflect current inherent risk factors, such as unemployment, overall economic conditions, concentrations of credit, loan growth, classified and impaired loan trends, staffing, adherence to lending policies, and loss trends.

Determination of the ALLL 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.

As a result of the Company’s quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of ~~$3.1~~$0.7 million in the first ~~nine~~three months of ~~2016~~2017 as compared to ~~$4.2~~$0.5 million in the first ~~nine~~three months of ~~2015.~~2016. The provision for loan losses recorded in the first ~~nine~~three months of ~~2016~~2017 reflects the growth in the loan portfolio, ~~losses attributable to the West Virginia flooding experienced in June 2016 and~~ changes in the quality of the ~~portfolio.~~portfolio, and general improvement in the Company's historical loss rates used to compute the allowance not specifically allocated to individual credits. Changes in the amount of the provision and related allowance are based on the Company’s detailed systematic methodology and are directionally consistent with changes in the composition and quality of the Company’s loan portfolio. The Company believes its methodology for determining the adequacy of its ALLL adequately provides for probable losses inherent in the loan portfolio and produces a provision and allowance for loan losses that is directionally consistent with changes in asset quality and loss experience.

The Company had net charge-offs of ~~$2.8~~$1.2 million for the first ~~nine~~three months of ~~2016~~2017 and ~~$4.1~~$0.5 million for the first ~~nine~~three months of ~~2015.~~2016. Net charge-offs in the first ~~nine~~three months of ~~2016~~2017 consisted primarily of net charge-offs on residential real estate loans ($~~1.2~~0.6 million) and ~~commercial real estate loans~~DDA overdrafts ($~~0.8~~0.3 million).

During the second quarter of 2016, parts of West Virginia were impacted by tragic flooding. As a result of this flooding, the Company recognized $0.3 million of loan charge-offs in the third quarter of 2016 and our quarterly provision for loan losses has been adjusted to recognize these losses. The Company does not expect to incur any further significant losses as a result of this flooding.

Based on the Company’s analysis of the adequacy of the allowance for loan losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for loan losses as of ~~September 30, 2016~~March 31, 2017 is adequate to provide for probable losses inherent in the Company’s loan portfolio. Future provisions for loan 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 ~~Eight~~Five

Analysis of the Allowance for Loan Losses

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



	Three months ended March 31,						Year ended December 31,
	2017			2016			2016
Balance at beginning of period	$	19,730		$	19,251		$	19,251
Charge-offs:
Commercial and industrial	(53		)	(1		)	(148		)
Commercial real estate	(180		)	(302		)	(1,676		)
Residential real estate	(626		)	(405		)	(1,734		)
Home equity	(121		)	(106		)	(390		)
Consumer	(6		)	(38		)	(126		)
DDA overdrafts	(636		)	(318		)	(1,412		)
Total charge-offs	(1,622		)	(1,170		)	(5,486		)
Recoveries:
Commercial and industrial	2			1			14
Commercial real estate	11			384			487
Residential real estate	25			39			187
Home equity	—			—			—
Consumer	11			29			118
DDA overdrafts	371			242			764
Total recoveries	420			695			1,570
Net charge-offs	(1,202		)	(475		)	(3,916		)
Provision for purchased credit impaired loans	(19		)	40			4,232
Provision for loan losses	700			499			163
Balance at end of period	$	19,209		$	19,315		$	19,730
As a Percent of Average Total Loans:
Net charge-offs (annualized)	0.16		%	0.07		%	0.13		%
Provision for loan losses (annualized)	0.09		%	0.08		%	0.15		%
As a Percent of Non-Performing Loans:
Allowance for loan losses	167.70		%	120.40		%	140.10		%
As a Percent of Total Loans:
Allowance for loan losses	0.62		%	0.67		%	0.65		%

Table Six

Allocation of the Allowance for Loan Losses

The allocation of the allowance for loan losses is shown in the table below (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.


	As of September 30,				As of December 31,		As of March 31,				As of December 31,
	2016		2015				2017		2016
Commercial and industrial	$	4,054	$	2,781	$	3,271	$	4,283	$	3,903	$	4,206
Commercial real estate	6,271		7,697		6,985		6,004		6,404		6,573
Residential real estate	7,024		7,261		6,778		6,723		6,759		6,680
Home equity	1,447		1,508		1,463		1,299		1,402		1,417
Consumer	75		96		97		64		93		82
DDA overdrafts	679		805		657		836		754		772
Allowance for Loan Losses	$	19,550	$	20,148	$	19,251	$	19,209	$	19,315	$	19,730

The ALLL ~~increased~~decreased slightly from ~~$19.3~~$19.7 million at December 31, ~~2015~~2016 to ~~$19.6~~$19.2 million at ~~September 30, 2016.~~March 31, 2017. Below is a summary of the changes in the components of the ALLL from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017.

The allowance related to the commercial and industrial loan portfolio increased ~~$0.8~~$0.1 million from ~~$3.3~~$4.2 million at December 31, ~~2015~~2016 to ~~$4.1~~$4.3 million at ~~September 30, 2016.~~March 31, 2017. This increase is due to ~~an increase in loans classified as substandard as of September 30, 2016 and~~ growth in the loan ~~portfolio.~~as of March 31, 2017 .

The allowance allocated to the commercial real estate portfolio decreased ~~$0.7~~$0.6 million from ~~$7.0~~$6.6 million at December 31, ~~2015~~2016 to ~~$6.3~~$6.0 million at ~~September 30, 2016,~~March 31, 2017, primarily due to an improvement in the historical loss rate of the portfolio which was partially offset by growth in the loan portfolio.

The allowance allocated to the residential real estate portfolio ~~increased from $6.8~~remained flat at $6.7 million at December 31, ~~2015 to $7.0 million at September 30, 2016. The increase is due to growth in the loan portfolio which was partially offset by decreases in the historical loss rate of the portfolio.~~2016 and March 31, 2017.

The allowance allocated to the home equity loan portfolio decreased slightly from ~~$1.5~~$1.4 million at December 31, ~~2015~~2016 to ~~$1.4~~$1.3 million at ~~September 30, 2016.~~March 31, 2017.

The allowance allocated to the consumer loan portfolio remained flat at $0.1 million at December 31, ~~2015~~2016 and ~~September 30, 2016.~~March 31, 2017.

The allowance allocated to overdraft deposit accounts remained flat at ~~$0.7~~$0.8 million at December 31, ~~2015~~2016 and ~~September 30, 2016.~~

~~Non-Performing Assets~~March 31, 2017.

Table ~~Nine~~Seven

~~Non-Performing~~Non-Accrual and Past-Due Loans

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

As of September 30, December 31,
2016 2015 2015
Residential real estate $ 3,919
$ 3,012
$ 2,918
Home equity 154
159
136
Commercial and industrial 2,441
6,430
2,745
Commercial real estate 8,077
11,806
11,149
Consumer —
—
—
Total non-accrual loans 14,591
21,407
16,948
Accruing loans past due 90 days or more 569
449
495
Total non-performing loans $ 15,160
$ 21,856
$ 17,443

As a Percent of Loans and Other Real Estate Owned:
Non-performing loans 0.51 % 0.81 % 0.61 %

Non-accrual loans decreased $2.4 million from $16.9 million at December 31, 2015 to $14.6 million at September 30, 2016. The average recorded investment in impaired loans during the nine months ended September 30, 2016 and 2015 was $6.5 million and $8.5 million, respectively. There were no commitments to provide additional funds on non-accrual, impaired, or other potential problem loans at September 30, 2016.



	As of March 31,						December 31,
	2017			2016			2016
Non-accrual loans	$	11,418		$	15,814		$	13,701
Accruing loans past due 90 days or more	35			225			382
Total non-performing loans	11,453			16,039			14,083
Other real estate owned ("OREO")	4,405			6,054			4,588
Total non-performing assets	$	15,858		$	22,093		$	18,671

As a Percent of Loans and Other Real Estate Owned:
Non-performing loans	0.52		%	0.77		%	0.61		%

Past-due loans	$	6,170		$	8,717		$	8,594

As a Percentage of Total Loans
Past-due loans	0.20		%	0.30		%	0.28		%

The Company’s ratio of non-performing assets to total loans and other real estate owned improved from 0.61% at December 31, ~~2015~~2016 to ~~0.51%~~0.52% at September 30, 2016. This improvement was primarily related to a single commercial customer engaged in the mining and energy sectors (per the North American Industry Classification System) which filed for bankruptcy and for which the Company recorded a charge-off.March 31, 2017. Excluded from this ratio are purchased credit-impaired loans in which the Company estimated cash flows and estimated a credit mark. These loans are considered performing loans provided that the loan is performing in accordance with the estimated expectations. Such loans would be considered non-performing loans if the loan's performance deteriorates below the initial expectations. Total past due loans decreased from $8.6 million, or 0.28% of total loans outstanding, at December 31, 2016 to $6.2 million, or 0.20% of total loans outstanding, at March 31, 2017.

The Company recognized less than $0.1 million of interest income received in cash on non-accrual and impaired loans for both the nine months ended September 30, 2016 and September 30, 2015. Approximately $0.3 million and $0.6 million of interest income would have been recognized during the nine months ended September 30, 2016 and September 30, 2015, if such loans had been current in accordance with their original terms. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest, unless the loan is well collateralized and in the process of collection. When interest accruals are discontinued, interest credited to income in the current year that is unpaid and deemed uncollectible is charged to operations. Prior-year interest accruals that are unpaid and deemed uncollectible are charged to the allowance for loan losses, provided that such amounts were specifically reserved.

Table ~~Ten~~Eight

Impaired Loans

Information pertaining to the Company's impaired loans is included in the following table (in thousands):



	As of March 31,				As of December 31,
	2017		2016		2016
Impaired loans with a valuation allowance	$	2,832	$	—	$	2,832
Impaired loans with no valuation allowance	7,405		7,235		4,749
Total impaired loans	$	10,237	$	7,235	$	7,581

Allowance for loan losses allocated to impaired loans	$	636	$	—	$	665

The average recorded investment in impaired loans during the three months ended March 31, 2017 and 2016 was $7.3 million and $7.7 million, respectively. There were no commitments to provide additional funds on non-accrual, impaired, or other potential problem loans at March 31, 2017.

The Company recognized less than $0.1 million of interest income received in cash on non-accrual and impaired loans for both the three months ended March 31, 2017 and March 31, 2016. Less than $0.1 million and $0.2 million of interest income would have been recognized during the three months ended March 31, 2017 and March 31, 2016, if such loans had been current in accordance with their original terms.

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,		As of March 31,				December 31,
	2016		2015				2017		2016
Accruing:
Residential real estate	$	19,944	$	18,154	$	17,796	$	20,276	$	18,306	$	20,424
Home equity	3,159		2,730		2,659		3,072		2,878		3,105
Commercial and industrial	46		62		58		38		54		42
Commercial real estate	2,718		1,921		1,746		8,513		523		5,525
Total accruing TDRs	25,867		22,867		22,259		31,899		21,761		29,096

Non-Accruing:
Residential real estate	452		—		191		150		36		391
Home equity	85		16		34		30		—		30
Total non-accruing TDRs	537		16		225		180		36		421

Total TDRs	$	26,404	$	22,883	$	22,484	$	32,079	$	21,797	$	29,517

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 ~~84%~~67% of the Company's total TDRs as of ~~September 30, 2016.~~March 31, 2017. The average age of these TDRs was ~~11.6~~11.8 years; the average current balance as a percentage of the original balance was ~~67.6%~~66.9%; and the average loan-to-value ratio was ~~65.7%~~64.8% as of ~~September 30, 2016.~~March 31, 2017. Of the total ~~493~~473 Chapter 7 related TDRs, 4332 had an estimated loss exposure based on the current balance and

appraised value at ~~September 30, 2016.~~March 31, 2017. The increase in commercial real estate TDRs from March 31, 2016 to March 31, 2017 resulted from an addition of 3 loans with a total balance of $8.0 million.

~~Table Eleven~~

~~Impaired Loans~~

~~Information pertaining to the Company's impaired loans is included in the following table (in thousands):~~

As of September 30, As of December 31,
2016 2015 2015
Impaired loans with a valuation allowance $ —
$ 1,352
$ —
Impaired loans with no valuation allowance 5,367
6,043
8,482
Total impaired loans $ 5,367
$ 7,395
$ 8,482

Allowance for loan losses allocated to impaired loans $ —
$ 274
$ —

Non-Interest Income and Non-Interest Expense

~~Nine~~Three months ended ~~September 30,~~March 31, 2017 vs. 2016 ~~vs. 2015~~

(in millions)

Nine months ended September 30,
2016 2015 $ Change % Change
Gains on sale of investment securities $ 3.5
$ 2.1
$ 1.4
66.7 %
Gain on sale of insurance division —
11.1
(11.1 ) (100.0 )%
Non-interest income (excluding above gains) 40.9
39.9
1.0
2.5 %

M&A expenses —
0.3
(0.3 ) (100.0 )%
Non-interest expense (excluding M&A expenses) 73.7
71.5
2.2
3.1 %



	Three months ended March 31,
	2017		2016		$ Change		% Change
Gains on sale of investment securities	$	4.3	$	—	$	4.3	-
Non-interest income (excluding above gains)	14.2		13.1		1.1		8.4	%

Non-interest expense	24.6		24.1		0.5		2.1	%

Non-Interest Income: The Company realized ~~$3.5~~$4.3 million of investment gains during the ~~nine~~three months ended ~~September 30, 2016 and $2.1 million during the nine months ended September 30, 2015.~~March 31, 2017. These gains represented partial recoveries of impairment charges previously recognized on pools of trust preferred securities. ~~On January 1, 2015,~~As a result of the sale of these securities, the Company ~~sold~~no longer holds any pooled trust preferred securities in its ~~insurance operations, CityInsurance, which resulted in a pre-tax gain of $11.1 million.~~investment portfolio. Exclusive of these gains, non-interest income increased from ~~$39.9~~$13.1 million for the first ~~nine~~three months of ~~2015~~2016 to ~~$40.9~~$14.2 million for the first ~~nine~~three months of ~~2016.~~2017. This increase was mainly due to an increase of $0.5 million in bank owned life insurance revenues due to death benefit proceeds, an increase of $0.4 million, or 6.8%, in service charges, ~~increasing $0.3~~and an increase of $0.2 million, ~~to $19.7 million,~~or 4.4%, in bankcard ~~revenues increasing $0.4 million to $12.4 million, and trust and investment management fee income increasing $0.4 million to $4.0 million.~~revenues.

Non-Interest Expense: Non-interest expenses ~~excluding merger and acquisition expenses,~~ increased ~~$2.2~~$0.5 million, from ~~$71.5~~$24.1 million in the first ~~nine~~three months of ~~2015~~2016 to ~~$73.7~~$24.6 million in the first ~~nine~~three months of ~~2016.~~2017. This increase was largely due to ~~the acquisition of three branches from AFB (for~~ an increase ~~of $1.5 million), partially offset by a decrease~~ in other expenses of $0.7 million. The decrease in other expenses is primarily related to the $1.4 million recognition of expense associated with the write down of the investment in Mountaineer Capital LP in the third quarter of 2015, which was partially offset by an asset write downsalaries and employee benefits of $0.4 million ~~in the third quarter of 2016, and the change in the fair value adjustment for a $5 million notional interest rate swap~~due primarily to ~~protect against changes in long-term fixed interest rates related to commercial loans of $0.2 million.~~salary increases.

Income Tax Expense: The Company’s effective income tax rate for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 was ~~33.3%~~32.3% compared to ~~34.4%~~33.4% for the ~~year ended December 31, 2015, and 35.8% for the nine~~three months ended September 30, 2015. As noted previously, the Company sold CityInsurance in the first quarter of 2015. As a result of differences between the book basis and tax basis of the assets that were sold, the Company’s income tax expense increased by $1.1 million. Exclusive of the sale of CityInsurance in the first quarter of 2015, the Company’s tax rate from operations was 33.2% for the nine months ended September 30, 2015.

~~Three months ended September 30, 2016 vs. 2015~~

~~(in millions)~~

Three months ended September 30,
2016 2015 $ Change % Change
Gains on sale of investment securities $ 2.7
$ —
$ 2.7
— %
Non-interest income (excluding investment gains) 14.1
13.7
0.4
2.9 %
Merger related expense —
0.2
(0.2 ) — %
Non-interest expense (excluding merger related expense) 25.3
25.2
0.1
0.4 %

~~Non-Interest Income:~~ ~~During the third quarter of 2016, the Company realized investment gains of~~ ~~$2.7 million~~ ~~. These gains represented partial recoveries of impairment charges previously recognized on pools of trust preferred securities. Exclusive of these gains, non-interest income increased from~~ ~~$13.7 million~~ ~~for the third quarter of 2015 to~~ ~~$14.1 million~~ ~~for the third quarter of~~March 31, 2016. ~~This increase was mainly due to an increase in bankcard revenues of~~ ~~$0.3 million, or~~ ~~8.2%, from the third quarter of 2015 to~~ ~~$4.2 million~~ ~~and an increase in trust and investment management fees of $0.2 million or 13.0% to $1.3 million.~~

~~Non-Interest Expense:~~ ~~Non-interest expenses (excluding merger related expenses) increased $0.1 million, from 25.2 million in the third quarter of 2015 to~~ ~~$25.3 million~~ ~~in the third quarter of 2016. During the third quarter of 2015, the Company~~

realized a $1.4 million expense associated with the write down of an investment in Mountaineer Capital LP . Exclusive of these expenses during the third quarter of 2015, non-interest expenses increased $1.5 million, from $23.8 million in the third quarter of 2015 to $25.3 million in the third quarter of 2016. This increase was due to an increase in salaries and employee benefits of $0.6 million, the acquisition of the AFB branches ($0.5 million) in November 2015, an increase in legal and professional fees of $0.4 million and an increase in bankcard expenses of $0.3 million. The increase in salaries and employee benefits is due to salary adjustments and increased health insurance costs, while the increase in legal and professional fees is related to the settlement of a legal dispute associated with the sales of loans to a third party in the late 1990s. These increases were partially offset by a decrease in realized losses on sales of repossessed assets of $0.2 million from the third quarter of 2015.

~~Income Tax Expense:~~ The Company's effective income tax rate for the third quarter of 2016 was 33.2% compared to 32.6% for the third quarter of 2015. The effective income tax rate is based upon the Company's expected tax rate for the year ended December 31, 2016.

Risk Management

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

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

In order to measure and manage its interest rate risk, the Company uses an asset/liability management and simulation software model to periodically update the interest sensitivity position of the Company’s balance sheet. The model is also used 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 or decrease of 400 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 to be 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	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		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, 2016
March 31, 2017						March 31, 2017
+400		4.50	%	+10.8	%		5.00	%	+7.9	%
+300		3.50		+12.2			4.00		+9.8
+200		2.50		+11.2			3.00		+9.3
+100		1.50		+6.0			2.00		+6.2
-50		0.00		-5.8			0.50		-6.5
-100							(0.50	)	-11.7

December 31, 2015
December 31, 2016						December 31, 2016
+400		4.50	%	+6.0	%		4.75	%	+8.0	%
+300		3.50		+7.5			3.75		+9.9
+200		2.50		+6.8			2.75		+9.7
+100		1.50		+3.3			1.75		+6.2
-50							0.25		-6.1
-100							(0.25	)	-9.5

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 saving deposit accounts reprice in different interest rate scenarios, changes in the composition of deposit balances, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the estimates above will be achieved in the event that interest rates increase during ~~2016~~2017 and beyond. The estimates above do not necessarily imply that the Company will experience increases in net income if market interest rates rise. The table above indicates how the Company’s net income behaves relative to an increase or decrease in rates compared to what would otherwise occur if rates remain stable.

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

Liquidity

The Company evaluates the adequacy of liquidity at both the City Holding Company ("City Holding") level and at the banking subsidiary level. At the City Holding level, the principal source of cash is dividends from its banking subsidiary, City National Bank ("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, 2016~~March 31, 2017, City National could pay dividends up to $~~50.8~~66.7 million plus net profits for the remainder of ~~2016~~2017, as defined by statute, up to the dividend declaration date without prior regulatory permission.

On December 19, 2016, the Company announced that it had filed a prospectus supplement to its existing shelf registration statement on Form S-3 for the sale of its common stock having an aggregate value of up to $55 million through an "at-the-market" equity offering program. The Company intends to use the net proceeds from the offering to support loan growth, bolster regulatory capital, and provide cash for possible future acquisitions. Pending this use, the proceeds will be invested by the Company in various investment securities. During the quarter ended March 31, 2017, the Company sold approximately 441,000 common shares at a weighted average price of $64.48, net of broker fees. Through May 4, 2017, the Company has sold approximately 548,000 common shares at a weighted average price of $64.82, net of broker fees.

City Holding used cash obtained from the dividends received from its banking subsidiary primarily to: (i) pay common dividends to shareholders, (ii) remit interest payments on the Company’s junior subordinated debentures and (iii) fund repurchases of the Company's common shares.

Over the next 12 months, City Holding has an obligation to remit interest payments approximating $0.7 million on the debentures held by City Holding Capital Trust III. Interest payments on the debentures can be deferred for up to five years under certain circumstances and dividends to shareholders can, if necessary, be suspended. City Holding anticipates continuing the payment of dividends on its common stock, which are expected to approximate $~~25.8~~27.4 million on an annualized basis over the next 12 months based on common shareholders outstanding at ~~September 30, 2016~~March 31, 2017. In addition to these anticipated cash needs, City Holding has operating expenses and other contractual obligations, which are estimated to require $~~1.4~~1.7 million of additional cash over the next 12 months. As of ~~September 30, 2016~~March 31, 2017, City Holding reported a cash balance of $~~19.3~~49.5 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.

Excluding the interest and dividend payments discussed above, City Holding has no significant commitments or obligations in years after ~~2016~~2017 other than the repayment of its $16.5 million obligation under the debentures held by City Holding Capital Trust III. However, this obligation does not mature until June 2038, or earlier at the option of City Holding. It is expected that City Holding will be able to obtain the necessary cash, either through dividends obtained from City National or the issuance of other debt, to fully repay the debentures at their maturity.

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 Federal Home Loan Bank ("FHLB") and other financial institutions. As of ~~September 30, 2016~~March 31, 2017, 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, 2016~~March 31, 2017, City National has the capacity to borrow an additional $~~1.6~~1.7 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 ~~76.0%~~74.1% as of ~~September 30, 2016~~March 31, 2017 and deposit balances fund ~~82.2%~~82.3% 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 $~~526.1~~552.6 million at ~~September 30, 2016~~March 31, 2017, and that greatly exceeded the Company’s non-deposit sources of borrowing, which totaled $~~195.9~~203.2 million. Further, the Company’s deposit mix has a very high proportion of transaction and savings accounts that fund ~~55.6%~~56.5% of the Company’s total assets.

As illustrated in the Consolidated Statements of Cash Flows, the Company generated $~~47.8~~20.4 million of cash from operating activities during the first ~~nine~~three months of ~~2016~~2017, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. The Company used $~~144.8~~39.1 million of cash in investing activities during the first ~~nine~~three months of ~~2016~~2017, primarily due to an increase in loans and net purchases of investment securities. The Company generated $~~91.7~~121.4 million of cash in financing activities during the first ~~nine~~three months of ~~2016,~~2017, principally as a result of ~~an increase~~increases in ~~noninterest-bearing deposts of $48.8 million,~~ interest-bearing deposits of ~~$47.0~~$118.6 million and noninterest-bearing deposits of $42.5 million, and proceeds from the issuance of common stock of $28.4 million. These increases were partially offset by a decrease in other short-term borrowings of ~~$24.5~~$61.6 million ~~which was partially offset by cash~~and dividends paid of ~~$19.3~~$6.5 million to the Company’s common ~~stockholders and repurchases of the Company's common shares of $10.0 million.~~stockholders.

Capital Resources

During the first ~~nine~~three months of ~~2016~~2017, ~~Shareholders’ Equity~~shareholders’ equity increased $~~15.5~~39.2 million, or ~~3.7%~~8.9%, from $~~419.3~~442.4 million at December 31, ~~2015~~2016 to $~~434.8~~481.6 million at ~~September 30, 2016~~March 31, 2017. This increase was primarily due to net income of ~~$37.5~~$16.0 million and ~~unrealized investment security gains~~the issuance of ~~$5.1~~common stock of $28.4 million, that were partially offset by dividends declared of ~~$19.3 million and the repurchase of the Company's stock pursuant to its stock repurchase program of $10.0~~$6.9 million.

In July 2013, the Federal Reserve published the final rules that established a new comprehensive capital framework for banking organizations, commonly referred to as Basel III. These final rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions. The final rule became effective January 1, 2015 for smaller, non-complex banking organizations with full implementation by January 1, 2019.

Regulatory guidelines require the Company to maintain a minimum common equity tier I ("CET1") capital ratio of ~~5.125%~~5.75% and a total capital to risk-adjusted assets ratio of ~~8.625%~~9.25%, with at least one-half of capital consisting of tangible common stockholders’ equity and a minimum Tier I leverage ratio of ~~6.625%~~7.25%. Similarly, City National is also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, City National is required to maintain minimum CET1, total capital, Tier I capital, and leverage ratios of ~~5.125%~~5.75%, ~~8.625%~~9.25%, ~~6.625%~~7.25%, and 4.0%, respectively. To be classified as “well capitalized,” City National must maintain CET1, total capital, Tier I capital, and leverage ratios of 6.5%, 10.0%, 8.0%, and 5.0%, respectively.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require City Holding and City National to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3.0% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority's risk-adjusted measure for market risk).

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). 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.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 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 Company’s regulatory capital ratios for both City Holding and City National are illustrated in the following tables

(dollars in thousands):


September 30, 2016	Actual				Minimum Required - Basel III Phase-In Schedule				Minimum Required - Basel III Fully Phased-In (*)				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
March 31, 2017																	Actual				Minimum Required - Basel III Phase-In Schedule				Minimum Required - Basel III Fully Phased-In (*)				Required to be Considered Well Capitalized
																	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio

CET I Capital
City Holding Company	$	355,667	13.0	%	$	140,295	5.125	%	$	191,622	7.0	%	$	177,935	6.5	%	$	409,533	14.6	%	$	161,422	5.750	%	$	196,514	7.0	%	$	182,478	6.5	%
City National Bank	303,356		11.1		139,519		5.125		190,563		7.0		176,951		6.5		326,913		11.7		160,054		5.750		194,849		7.0		180,931		6.5
Tier I Capital
City Holding Company	371,667		13.6		181,356		6.625		232,684		8.5		218,996		8.0		425,533		15.2		203,533		7.250		238,625		8.5		224,588		8.0
City National Bank	319,316		11.7		180,354		6.625		231,398		8.5		217,786		8.0		326,913		11.7		201,808		7.250		236,602		8.5		222,684		8.0
Total Capital
City Holding Company	391,992		14.3		236,105		8.625		287,433		10.5		273,745		10.0		445,938		15.9		259,680		9.250		294,771		10.5		280,735		10.0
City National Bank	338,930		12.5		234,801		8.625		285,845		10.5		272,233		10.0		346,226		12.4		257,479		9.250		292,273		10.5		278,355		10.0
Tier I Leverage Ratio
City Holding Company	371,667		9.9		150,037		4.0		150,037		4.0		187,547		5.0		425,533		10.8		157,203		4.0		157,203		4.0		196,504		5.0
City National Bank	319,316		8.6		149,395		4.0		149,395		4.0		186,744		5.0		326,913		8.4		155,629		4.0		155,629		4.0		194,537		5.0
																									��
(*) Represents the minimum required capital levels as of January 1, 2019 when Basel III Capital Rules have been fully phased in.


December 31, 2015	Actual				Minimum Required - Basel III Phase-In Schedule				Minimum Required - Basel III Fully Phased-In (*)				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
December 31, 2016																	Actual				Minimum Required - Basel III Phase-In Schedule				Minimum Required - Basel III Fully Phased-In (*)				Required to be Considered Well Capitalized
																	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio

CET I Capital
City Holding Company	$	345,620	13.7	%	$	113,919	4.5	%	$	177,207	7.0	%	$	164,549	6.5	%	$	371,677	13.3	%	$	142,845	5.125	%	$	195,105	7.0	%	$	181,169	6.5	%
City National Bank	264,812		10.5		113,209		4.5		176,103		7.0		163,524		6.5		310,912		11.2		141,860		5.125		193,761		7.0		179,921		6.5
Tier I Capital
City Holding Company	361,620		14.3		151,891		6.0		215,180		8.5		202,522		8.0		387,677		13.9		184,653		6.625		236,913		8.5		222,977		8.0
City National Bank	288,752		11.5		150,945		6.0		213,839		8.5		201,260		8.0		318,872		11.5		183,381		6.625		235,281		8.5		221,441		8.0
Total Capital
City Holding Company	382,180		15.1		202,522		8.0		265,810		10.5		253,152		10.0		408,406		14.7		240,397		8.625		292,658		10.5		278,722		10.0
City National Bank	308,804		12.3		201,260		8.0		264,154		10.5		251,575		10.0		338,675		12.2		238,741		8.625		290,641		10.5		276,801		10.0
Tier I Leverage Ratio
City Holding Company	361,620		10.2		142,521		4.0		142,521		4.0		178,151		5.0		387,677		10.1		153,864		4.000		153,864		4.0		192,330		5.0
City National Bank	288,752		8.1		141,874		4.0		141,874		4.0		177,343		5.0		318,872		8.3		153,088		4.000		153,088		4.0		191,359		5.0

(*) Represents the minimum required capital levels as of January 1, 2019 when Basel III Capital Rules have been fully phased in.

As of ~~September 30, 2016,~~March 31, 2017, 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, 2016~~March 31, 2017, management believes that City Holding and City National meet all capital adequacy requirements.


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, 2016~~March 31, 2017 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, ~~2015.~~2016.


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

~~None.~~At-The-Market Common Stock Offering



				Total Number	Maximum Number
				of Shares Issued	of Shares that May
		Average Price		as Part of Publicly	Yet Be Issued
	Total Number of	Received per		Announced Plans	Under the Plans
Period	Shares Issued	Share*		or Programs	or Programs**

January 1 - January 31, 2017	153,744	$	64.93	153,744	548,000
February 1 - February 29, 2017	286,860	$	64.23	286,680	262,000
March 1 - March 31, 2017	—	$	—	—	262,000
* The common share issue price is presented net of commissions and excludes one time offering costs of approximately $265,000.
** Estimate based on average price per share received to date, before broker fees.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.


Item 6.	Exhibits

The exhibits required to be filed or furnished with this Form 10-Q are attached hereto or incorporated herein by reference. For a list of such exhibits, see "Exhibit Index."

SIGNATURES

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



	City Holding Company
	(Registrant)

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

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

Date: ~~November 3, 2016~~May 5, 2017

Exhibit Index

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



		2(a)	Agreement and Plan of Merger, dated November 14, 2011, by and among Virginia Savings Bancorp, Inc., Virginia Savings Bank, F.S.B., City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from, City Holding Company’s Form 8-K dated November 14, 2011, and filed with the Securities and Exchange Commission on November 14, 2011).
		2(b)	Agreement and Plan of Merger, dated August 2, 2012, by and among Community Financial Corporation, Community Bank, City Holding Company and City National Bank of West Virginia (attached to, and incorporated by reference from City Holding Company’s Form 8-K dated August 7, 2012, and filed with the Securities and Exchange Commission on August 7, 2012).
		3(a)	Articles of Incorporation of City Holding Company (attached to, and incorporated by reference from, Amendment No. 1 to City Holding Company’s Registration Statement on Form S-4, Registration No. 2-86250, filed November 4, 1983 with the Securities and Exchange Commission).
		3(b)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 6, 1984 (attached to, and incorporated by reference from, City Holding Company's Form 8-K Report dated March 7, 1984, and filed with the Securities and Exchange Commission on March 22, 1984).
		3(c)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 4, 1986 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1986, filed March 31, 1987 with the Securities and Exchange Commission).
		3(d)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated September 29, 1987 (attached to and incorporated by reference from, City Holding Company's Registration Statement on Form S-4, Registration No. 33-23295, filed with the Securities and Exchange Commission on August 3, 1988).



		3(e)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 6, 1991 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission).
		3(f)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 7, 1991 (attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission).
		3(g)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated August 1, 1994 (attached to, and incorporated by reference from, City Holding Company's Form 10-Q Quarterly Report for the quarter ended September 30, 1994, filed November 14, 1994 with the Securities and Exchange Commission).
		3(h)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated December 9, 1998 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1998, filed March 31, 1999 with the Securities and Exchange Commission).
		3(i)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated June 13, 2001 (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form 8-A, filed June 22, 2001 with the Securities and Exchange Commission).
		3(j)	Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 10, 2006 (attached to, and incorporated by reference from, City Holding Company’s Form 10-Q, Quarterly Report for the quarter ended June 30, 2006, filed August 9, 2006 with the Securities and Exchange Commission).
		3(k)	~~Amended and Restated Bylaws~~Articles of Amendment to the Articles of Incorporation of City Holding Company, ~~revised February 28, 2007 (attached to, and incorporated by reference from, City Holding Company’s Current Report on Form 8-K filed March 1, 2007 with the Securities and Exchange Commission).~~dated April 19, 2017.
		3(l)	Amended and Restated Bylaws of City Holding Company, revised February 24, 2010 (attached to, and incorporated by reference from, City Holding Company’s Current Report on Form 8-K filed March 1, 2010 with the Securities and Exchange Commission).
		4(a)	Rights Agreement dated as of June 13, 2001 (attached to, and incorporated by reference from City Holding Company's Form 8–A, filed June 22, 2001, with the Securities and Exchange Commission).
		4(b)	Amendment No. 1 to the Rights Agreement dated as of November 30, 2005 (attached to, and incorporated by reference from City Holding Company’s Amendment No. 1 on Form 8-A, filed December 21, 2005, with the Securities and Exchange Commission).
		31(a)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck
		31(b)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for David L. Bumgarner
		32(a)	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck
		32(b)	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for David L. Bumgarner
		101.INS	XBRL Instance 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*
*	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.

6159



	Virginia
	Savings		Community		AFB		Total
September 30, 2016
Outstanding loan balance	$	25,520	$	154,832	$	95,457	$	275,809

Credit-impaired loans:
Carrying value	1,707		9,712		—		11,419
Contractual principal and interest	1,908		12,091		—		13,999

December 31, 2015
Outstanding loan balance	$	28,914	$	181,545	$	112,862	$	323,321

Credit-impaired loans:
Carrying value	1,707		12,899		—		14,606
Contractual principal and interest	1,965		16,362		—		18,327



	Virginia Savings						Community						Total
				Carrying						Carrying						Carrying
	Accretable			Amount			Accretable			Amount			Accretable			Amount
	Yield			of Loans			Yield			of Loans			Yield			of Loans
Balance at the beginning of the period	$	374		$	1,707		$	6,266		$	12,899		$	6,640		$	14,606
Accretion	(114		)	114			(744		)	744			(858		)	858
Net reclassifications to accretable yield from
non-accretable yield	51			—			(38		)	—			13			—
Payments received, net	—			(114		)	—			(3,197		)	—			(3,311		)
Disposals	—			—			(1		)	(734		)	(1		)	(734		)
Balance at the end of period	$	311		$	1,707		$	5,483		$	9,712		$	5,794		$	11,419



Provision for acquired loans	—		521			—		—		—		—		521
Provision	3,747		(1,441		)	681		249		27		391		3,654
Ending balance	$	2,781	$	7,697		$	7,261	$	1,508	$	96	$	805	$	20,148

As of September 30, 2016
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	—		$	—	$	—	$	—	$	—	$	—
Collectively	4,051		6,147			6,932		1,447		75		679		19,331
Acquired with deteriorated
credit quality	3		124			92		—		—		—		219
Total	$	4,054	$	6,271		$	7,024	$	1,447	$	75	$	679	$	19,550

Loans
Evaluated for impairment:
Individually	$	1,939	$	3,428		$	—	$	—	$	—	$	—	$	5,367
Collectively	174,131		1,146,316			1,442,599		141,616		33,499		2,965		2,941,126
Acquired with deteriorated
credit quality	317		8,344			2,643		—		115		—		11,419
Total	$	176,387	$	1,158,088		$	1,445,242	$	141,616	$	33,614	$	2,965	$	2,957,912

As of December 31, 2015
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	—		$	—	$	—	$	—	$	—	$	—
Collectively	3,267		6,173			6,765		1,463		97		657		18,422
Acquired with deteriorated
credit quality	4		812			13		—		—		—		829
Total	$	3,271	$	6,985		$	6,778	$	1,463	$	97	$	657	$	19,251

Loans
Evaluated for impairment:
Individually	$	2,349	$	6,133		$	—	$	—	$	—	$	—	$	8,482
Collectively	162,662		1,109,327			1,381,064		147,036		35,997		3,361		2,839,447
Acquired with deteriorated
credit quality	329		12,121			2,069		—		86		—		14,605
Total	$	165,340	$	1,127,581		$	1,383,133	$	147,036	$	36,083	$	3,361	$	2,862,534



Estimated Accretion Forecast

Remainder 2016	$	525
2017	1,314
2018	990

March 31, 2017

December 31, 2016

Junior subordinated debentures owed to City Holding Capital Trust III, due 2038, interest at a rate of 4.63% and 4.35%, respectively