CITY HOLDING COMPANY The information noted below is provided pursuant to Guide 3 -- Statistical Disclosure by Bank Holding Companies.
Page
Description of Information Reference
Item I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential
a. Average Balance Sheets 32
b. Analysis of Net Interest Earnings 33
c. Rate Volume Analysis of Changes in Interest Income and Expense 33
II. Investment Portfolio
a. Maturity Schedule of Investments 41
III. Loan Portfolio
a. Types of Loans 42
b. Maturities and Sensitivity to Changes in Interest Rates 42
c. Other Interest Bearing Assets None
d. Risk Elements 72
V. Deposits
Breakdown of Deposits byCategories, Average Balance and Average Rate
a. Paid 32
b. Maturity Schedule of Uninsured Time Certificates of Deposit 48
VI. Return on Equity and Assets 31
VII. Short-term Borrowings 37
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City Holding Company (the "Company"), aWest Virginia corporation headquartered inCharleston, West Virginia , is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly owned subsidiary,City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 94 bank branches inWest Virginia (58),Kentucky (19),Virginia (13) andOhio (4). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities includingCharleston (WV),Huntington (WV),Martinsburg (WV),Ashland (KY),Lexington (KY),Winchester (VA) andStaunton (VA). In the Company's key markets, the Company's primary subsidiary, City National, generally ranks in the top three relative to deposit market share and the top two relative to branch share (Charleston /Huntington MSA,Beckley /Lewisburg counties, Staunton MSA andWinchester, VA /WV EasternPanhandle counties). In addition to its branch network, City National's delivery channels include automated-teller-machines ("ATMs"), interactive-teller-machines ("ITMs"), mobile banking, debit cards, interactive voice response systems, and Internet technology. The Company's business activities are currently limited to one reportable business segment, which is community banking.
COVID-19 Pandemic/Update
The ongoing COVID-19 pandemic has placed significant health, economic and other major pressure throughout the communities the Company serves,the United States and the entire world. The Company previously implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders including pushing as much traffic as possible to our drive-thru facilities, providing extensions and deferrals to loan customers affected by COVID-19 and participating in the CARES Act Paycheck Protection Program ("PPP"). The Company continues to closely monitor this pandemic and will continue to make changes to respond to the pandemic as this situation continues to evolve.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting policies of the Company conform toU.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 of the Notes to Consolidated Financial Statements included herein. 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: (i) the determination of the allowance for credit losses and (ii) income taxes to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.
Allowance for Credit Losses
The Allowance for Credit Losses section of this Annual Report on Form 10-K provides management's analysis of the Company's allowance for credit losses and related provision. The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These evaluations are conducted at least quarterly and more frequently if deemed necessary. Additionally, all commercial loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company's internal loan review process.
In evaluating the appropriateness of its allowance for credit losses, the Company stratifies the loan portfolio into six major groupings. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
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Portfolio Segment Measurement Method
Commercial and industrial Migration
Commercial real estate:
1-4 family Migration
Hotels Migration
Multi-family Migration
Non Residential Non-Owner Occupied Migration
Non Residential Owner Occupied Migration
Residential real estate Vintage
Home equity Vintage
Consumer Vintage
Migration is an analysis that tracks a closed pool of loans for a configurable
period of time and calculates a loss ratio on only those loans in the pool at
the start date based on outstanding balance. Vintage is a predictive loss model
that includes a reasonable approximation of probable and estimable future losses
by tracking each loan's net losses over the life of the loan as compared to its
original balance. For demand deposit overdrafts, the allowance for credit losses
is measured using the historical loss rate. Loans that do not share risk
characteristics are evaluated on an individual basis. Loans evaluated
individually are not included in the collective evaluation. When management
determines that foreclosure is probable, the expected credit losses are based on
the fair value of the collateral at the reporting date, adjusted for selling
costs as appropriate.
Expected credit losses are estimated over the contractual term of the loan,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals, and modifications unless either of the
following applies: management has a reasonable expectation at the reporting date
that a troubled-debt restructuring will be executed with an individual borrower
or the extension or renewal options are included in the original or modified
contract at the reporting date and are not unconditionally cancellable by the
Company.
The Company uses a number of economic variables in its scenarios to estimate the
allowance for credit losses, with the most significant drivers being an
unemployment rate forecast and qualitative adjustments. In the December 31, 2021
estimate, the Company assumed an unemployment forecast range of 3.5% to 5.2%,
which has decreased from a range of 4.6% to 9% utilized in the December 31, 2020
estimate. Historical loss rates from periods where the average unemployment rate
matches the forecast range are considered when calculating the forecast period
loss rate. The impact of the changes in the unemployment forecast range between
December 31, 2020 and December 31, 2021 resulted in a decrease in the ACL of
approximately $0.6 million .
Based on sensitivity analysis of all portfolios, a 0.0050% change (slight
improvement or decline on bank's scale) in all 11 qualitative risk factors
(where assigned) would have a $1.8 million impact on the reserve allocation.
Changing each factor by 0.01% (moderate improvement or decline) would have a
$3.7 million impact. Management recognizes that these are extreme scenarios and
it is very unlikely that all risk factors would change by 0.005% or 0.01%
simultaneously. Between December 31, 2020 and December 31, 2021 , management
assigned a "moderate improvement," or 1 basis point decrease, to the overall
economic conditions and unemployment qualitative factors and eliminated the
0.055% COVID-19 qualitative adjustment. Management also assigned a "moderate
improvement," or 1 basis point decrease to 0.01%, to the delinquency trend
factor for all pools. In total, the qualitative changes reduced the ACL by
approximately $2.9 million .
Income Taxes
The Income Taxes section of this Annual Report on Form 10-K provides management's analysis of the Company's income taxes. The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis. The Company's unrecognized tax benefits could change over the next twelve months as a result of various factors. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state taxing authorities for the years endedDecember 31, 2018 and forward. 30 -------------------------------------------------------------------------------- The effective tax rate is calculated by taking the statutory rate and adjusting for permanent and discrete items. The discrete items can vary between periods but historically have remained consistent.
FINANCIAL SUMMARY
The Company's financial performance over the previous three years is summarized in the following table:
2021 2020 2019
Net income available to common shareholders (in thousands)$ 88,080 $ 89,595 $ 89,352 Earnings per common share, basic$ 5.67 $ 5.55 $ 5.43 Earnings per common share, diluted$ 5.66 $ 5.55 $ 5.42 Cash dividends declared$ 2.34 $ 2.29 $ 2.20 Book value per share$ 45.22 $ 44.47 $ 40.36 Dividend payout ratio 41.3 % 41.2 % 40.5 % ROA* 1.49 % 1.66 % 1.80 % ROE* 12.7 % 12.9 % 14.0 % ROATCE* 15.3 % 15.6 % 17.3 %
*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.
BALANCE SHEET ANALYSIS
Selected balance sheet fluctuations and ratios are summarized in the following
table (in millions):
December 31,
2021 2020 $ Change % Change
Investment securities 1,433.7 1,206.2 227.5 19 %
Gross loans 3,543.8 3,622.1 (78.3) (2) %
Total deposits 4,925.3 4,652.2 273.1 6 %
Tangible equity to tangible assets 9.58 % 10.33 %
Investment securities increased
Gross loans decreased$78.3 million (2.2%) fromDecember 31, 2020 to$3.54 billion atDecember 31, 2021 . PPP loans decreased$48.8 million from$55.4 million atDecember 31, 2020 to$6.6 million atDecember 31, 2021 . Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans decreased$29.4 million , (0.8%), fromDecember 31, 2020 to$3.54 billion atDecember 31, 2021 . Residential real estate loans decreased$38.7 million (2.4%); home equity loans decreased$14.1 million (10.4%); and consumer loans decreased$6.8 million (14.2%). These decreases were partially offset by increases in commercial and industrial loans ($22.1 million , or 7.5%) (excluding PPP loans). Total deposits increased$273.1 million fromDecember 31, 2020 to$4.93 billion atDecember 31, 2021 . Noninterest bearing demand deposits increased$196.1 million , savings deposits increased$159.4 million , and interest bearing demand deposits increased$108.6 million . These increases were partially offset by a decrease in time deposits of$191.1 million . 31 -------------------------------------------------------------------------------- TABLE ONE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME (In thousands) 2021 2020 2019 Yield/ Yield/ Yield/ Average Balance Interest Rate Average Balance Interest Rate Average Balance Interest Rate Assets Loan portfolio(1): Residential real estate(2),(3)$ 1,658,710 $ 64,492 3.89 %$ 1,768,789 $ 74,452 4.21 %$ 1,791,636 $ 81,603 4.55 % Commercial, financial, and agriculture(3) 1,838,560 68,784 3.74 1,816,658 72,128 3.97 1,717,381 84,167 4.90 Installment loans to individuals(3),(4) 48,708 2,831 5.81 56,163 3,319 5.91 58,126 3,559 6.12 Previously securitized loans(5) - 568 - - 599 - - 684 - Total loans 3,545,978 136,675 3.85 3,641,610 150,498 4.13 3,567,143 170,013 4.77 Securities: Taxable 1,075,550 23,071 2.15 890,771 23,355 2.62 761,358 23,389 3.07 Tax-exempt(6) 242,125 6,362 2.63 164,740 4,954 3.01 98,217 3,756 3.82 Total securities 1,317,675 29,433 2.23 1,055,511 28,309 2.68 859,575 27,145 3.16 Deposits in depository institutions 568,928 693 0.12 230,043 492 0.21 84,826 1,332 1.57 Total interest-earning assets 5,432,581 166,801 3.07 4,927,164 179,299 3.64 4,511,544 198,490 4.40 Cash and due from banks 92,847 76,173
65,664
Bank premises and equipment 76,069 77,670
78,103
Goodwill and intangible assets 117,899 119,471 121,460 Other assets 216,493 221,864 191,422 Less: allowance for credit losses (21,922) (22,770) (14,466) Total assets$ 5,913,967 $ 5,399,572 $ 4,953,727 Liabilities
Interest-bearing demand deposits
0.05 % $ 912,306 1,005 0.11 % $ 878,716 3,490 0.40 %
Savings deposits 1,291,225 689 0.05 1,071,727 1,591 0.15 977,327 4,405 0.45
Time deposits(3) 1,157,502 8,213 0.71 1,329,841 19,927 1.50 1,368,752 24,771 1.81
Short-term borrowings 298,413 489 0.16 253,456 993 0.39 211,452 3,491 1.65
Long-term debt - - - 830 100 12.05 4,054 182 4.49
Total interest-bearing liabilities 3,818,768 9,895 0.26 3,568,160 23,616 0.66 3,440,301 36,339 1.06
Noninterest-bearing demand deposits 1,315,801 1,035,801 818,161
Other liabilities 84,377 100,166 57,350
Total shareholders' equity 695,021 695,445 637,915
Total liabilities and
shareholders' equity $ 5,913,967 $ 5,399,572 $ 4,953,727
Net interest income $ 156,906 $ 155,683 $ 162,151
Net yield on earning assets 2.89 % 3.16 % 3.59 %
1.For purposes of this table, non-accruing loans have been included in average
balances and the following net loan fees (in thousands) have been included in
interest income:
2021 2020 2019
Loan fees, net $ 3,550 $ 1,842 $ 863 2.Includes the Company's residential real estate and home equity loan categories.
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--------------------------------------------------------------------------------3.Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the Company's acquisitions:
2021 2020 2019
Residential real estate $ 620 $ 630 $ 323
Commercial, financial, and agriculture 1,198 2,445 2,366
Installment loans to individuals 87 143 47
Time deposits 193 622 843
Total $ 2,098 $ 3,840 $ 3,579
4.Includes the Company's consumer and DDA overdrafts loan categories.
5.Effective January 1, 2012 , the carrying value of the Company's previously
securitized loans was reduced to $0 .
6.Computed on a fully federal tax-equivalent basis assuming a tax rate of
approximately 21%.
NET INTEREST INCOME
2021 2020 2019
Total interest income $ 165,467 $ 178,259 $ 197,700
Total interest expense 9,894 23,615 36,339
Net interest income 155,573 154,644 161,361
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TABLE TWO
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In thousands)
2021 vs. 2020 2020 vs. 2019
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
Volume Rate Net Volume Rate Net
Interest-earning assets:
Loan portfolio
Residential real estate $ (4,633) $ (5,327) $
(9,960)
Commercial, financial, and agriculture 870 (4,214) (3,344) 4,865 (16,904) (12,039)
Installment loans to individuals (441) (47)
(488) (120) (120) (240)
Previously securitized loans - (31) (31) - (85) (85) Total loans (4,204) (9,619) (13,823) 3,704 (23,219) (19,515) Securities: Taxable 4,845 (5,129) (284) 3,976 (4,010) (34) Tax-exempt(1) 2,327 (919) 1,408 2,544 (1,346) 1,198 Total securities 7,172 (6,048) 1,124 6,520 (5,356) 1,164 Deposits in depository institutions 725 (524) 201 2,280 (3,120) (840) Total interest-earning assets$ 3,693 $ (16,191) $
(12,498)
Interest-bearing liabilities: Interest-bearing demand deposits$ 176 $ (677) $ (501) $ 133 $ (2,618) $ (2,485) Savings deposits 326 (1,228) (902) 425 (3,239) (2,814) Time deposits (2,582) (9,132) (11,714) (704) (4,140) (4,844) Short-term borrowings 176 (680)
(504) 693 (3,191) (2,498)
Long-term debt (100) -
(100) (145) 63 (82)
Total interest-bearing liabilities (2,004) (11,717) (13,721) 402 (13,125) (12,723) Net Interest Income$ 5,697 $ (4,474) $ 1,223 $ 12,102 $ (18,570) $ (6,468)
1.Fully federal taxable equivalent using a tax rate of approximately 21%.
2021 vs. 2020
The Company's net interest income increased from$154.6 million for the year endedDecember 31, 2020 to$155.6 million for the year endedDecember 31, 2021 . The Company's tax equivalent net interest income increased$1.2 million , or 0.8%, from$155.7 million for the year endedDecember 31, 2020 to$156.9 million for the year endedDecember 31, 2021 . The Company recognized$4.0 million of loan fees associated with PPP loans during 2021 as compared to$1.6 million during 2020. However, lower loan yields (which fell 29 basis points) decreased net interest income by$10.0 million . Additionally, lower average loan balances ($95.6 million ) lowered net interest income by$4.2 million and a decrease in accretion from fair value adjustments decreased interest income by$1.7 million . Higher investment balances (which increased$262.2 million ) increased net interest income by$7.2 million , while investment yields (which decreased by 45 basis points) decreased net interest income by$6.0 million . Lower rates paid on interest bearing liabilities (40 basis points) and lower average time deposit balances (down$172.3 million ) increased net interest income by$11.7 million and$2.6 million , respectively. The Company's reported net interest margin declined from 3.16% for the year endedDecember 31, 2020 to 2.89% for the year endedDecember 31, 2021 . Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 2.85% for the year endedDecember 31, 2021 and 3.08% for the year endedDecember 31, 2020 .
2020 vs. 2019
The Company's net interest income decreased from$161.4 million for the year endedDecember 31, 2019 to$154.6 million for the year endedDecember 31, 2020 . The Company's tax equivalent net interest income decreased$6.5 million , or 4.0%, from$162.2 million for the year endedDecember 31, 2019 to$155.7 million for the year endedDecember 31, 2020 . 34 -------------------------------------------------------------------------------- Lower loan yields (68 basis points) and investment yields (48 basis points) decreased net interest income by$24.5 million and$5.4 million , respectively. These decreases were partially offset by lower rates paid on interest bearing liabilities (40 basis points), higher investment balances ($195.9 million ), and higher commercial loan balances ($99.3 million , driven largely by PPP loans) which increased net interest income by$13.1 million ,$6.5 million , and$4.7 million , respectively. In addition, the Company recognized$1.6 million of loan fees associated with PPP loans during 2020. The Company's reported net interest margin declined from 3.59% for the year endedDecember 31, 2019 to 3.16% for the year endedDecember 31, 2020 . Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.08% for the year endedDecember 31, 2020 and 3.51% for the year endedDecember 31, 2019 . Non-GAAP Financial Measures Management of the Company uses measures in its analysis of the Company's performance other than those in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). These measures are useful when evaluating the underlying performance of the Company's operations. The Company's management believes that these non-GAAP measures enhance comparability of results with prior periods and demonstrate the effects of significant gains and charges in the current period. The Company's management believes that investors may use these non-GAAP financial measures to evaluate the Company's financial performance without the impact of those items that may obscure trends in the Company's performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they comparable to non-GAAP financial measures that may be presented by other companies. TABLE THREE NON-GAAP FINANCIAL MEASURES (In thousands) 2021 2020 2019 Net interest income ("GAAP")$ 155,573 $ 154,644 $ 161,361 Taxable equivalent adjustment 1,333 1,039 790 Net interest income, fully taxable equivalent$ 156,906 $
155,683
Average total interest earning assets$ 5,432,581 $
4,927,164
Net interest margin 2.89 % 3.16 % 3.59 % Accretion related to fair value adjustments (0.04) (0.08) (0.08) Net interest margin (excluding accretion) 2.85 %
3.08 % 3.51 %
Equity to assets ("GAAP") 11.34 % 12.18 % 13.11 %
Effect of goodwill and other intangibles, net (1.76) (1.85) (2.13)
Tangible common equity to tangible assets 9.58 % 10.33 % 10.98 %
Return on tangible equity ("GAAP") 15.3 % 15.6 % 17.3 %
Impact of sale of VISA shares - (2.4) -
Impact of merger related expenses - - 0.1
Return on tangible equity, excluding the above items 15.3 % 13.2 % 17.4 %
Return on assets ("GAAP") 1.49 % 1.66 % 1.80 %
Impact of sale of VISA shares - (0.24) -
Impact of merger related expenses - - 0.02
Return on assets, excluding the above items 1.49 % 1.42 % 1.82 %
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NON-INTEREST INCOME AND NON-INTEREST EXPENSE
2021 vs. 2020
Selected income statement fluctuations and ratios are summarized in the following table (dollars in millions):
For the year ended December
31,
2021 2020 $ Change % Change
Unrealized gains (losses) recognized on equity
securities still held $ 0.5 $ (0.9) $ 1.4 156 %
Sale of VISA shares - 17.8 (17.8) (100) %
Non-interest income, excluding net investment
securities (losses) gains and sale of VISA shares 68.8 65.6 3.2 5 %
Non-interest expense 117.2 115.3 1.9 2 %
Efficiency ratio 51.3 51.3
Full-time equivalent employees 905 926
Non-interest income was $69.6 million for 2021 as compared to $82.7 million
for 2020. During 2020, the Company sold the entirety of its Visa Inc. Class B
common shares (86,605 shares) in a cash transaction that resulted in a pre-tax
gain of $17.8 million , or $0.84 diluted per share on an after-tax basis.
Additionally, the Company reported $0.3 million of realized security gains on
the sale of investment securities and $0.5 million of unrealized fair value
gains on the Company's equity securities during 2021 compared to $0.9 million of
unrealized fair value losses on the Company's equity securities during 2020.
Exclusive of these items, non-interest income increased from $65.6 million for
the year ended December 31, 2020 to $68.8 million for the year ended December
31, 2021 . This increase was largely attributable to an increase of $3.9 million ,
or 17.0%, in bankcard revenues and a $0.7 million , or 8.8%, increase in trust
and investment management fee income. These increases were partially offset by a
decrease of $0.7 million , or 15.0%, in other income and a decrease of $0.5
million in bank owned life insurance due to lower death benefit proceeds
received during 2021 compared to 2020.
Non-interest expenses increased from $115.3 million for 2020 to $117.2 million
for 2021. This increase was primarily due to an increase in telecommunication
expenses ($0.7 million ), FDIC insurance expense ($0.7 million ), bankcard
expenses ($0.6 million ), occupancy related expenses ($0.3 million ), advertising
expenses ($0.3 million ), and equipment and software related expense ($0.3
million ). These increases were partially offset by a decrease in other expenses
($0.6 million ) and repossessed asset gains ($0.3 million ).
2020 vs. 2019
Selected income statement fluctuations are summarized in the following table
(dollars in millions):
For the year ended
December 31,
2020 2019 $ Change % Change
Unrealized gains (losses) recognized on equity
securities still held $ (0.9) $ 0.9 $ (1.8) (200) %
Sale of VISA shares 17.8 - 17.8 100 %
Non-interest income, excluding net investment
securities (losses) gains and sale of VISA shares 65.6 67.5 (1.9) (3) %
Merger related expenses - 0.8 (0.8) (100) %
Non-interest expense, excluding merger related
expenses 115.3 116.8 (1.5) (1) %
Non-interest income was $82.7 million for 2020 as compared to $68.5 million
for 2019. During 2020, the Company sold the entirety of its Visa Inc. Class B
common shares (86,605 shares) in a cash transaction which resulted in a pre-tax
gain of $17.8 million , or $0.84 diluted per share on an after-tax basis.
Additionally, the Company reported $0.9 million of unrealized fair value losses
on the Company's equity securities compared to $0.9 million of unrealized fair
value gains on the Company's equity securities during 2019. Exclusive of these
items, non-interest income decreased from $67.5 million for the year ended
December 31, 2019 to $65.6 million for the year ended December 31, 2020 . This
decrease was largely attributable to a decrease of $5.8 million , or 18.3%, in
service charges as average deposit balances have increased during the COVID-19
36
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pandemic. This decrease was partially offset by an increase of $2.0 million , or
9.3%, in bankcard revenues, an increase of $0.7 million , or 17.3%, in other
income (largely due to fees from loan interest rate swap originations), an
increase of $0.7 million in bank owned life insurance due to higher death
benefit proceeds received during 2020 compared to 2019, and an increase of $0.6
million in trust and investment management fee income.
During 2019, the Company recognized $0.8 million of acquisition and integration
expenses associated with the completed acquisitions of Poage Bankshares, Inc.
("Poage") and Farmers Deposit Bancorp, Inc. ("Farmers"). Excluding these
expenses, non-interest expenses decreased from $116.8 million for 2019 to $115.3
million for 2020. This decrease was primarily due to a decrease in occupancy
related expense of $0.8 million , other expenses of $0.8 million (largely on the
strength of a gain from the sale of a branch bank location acquired in
connection with the acquisition of Farmers), advertising of $0.6 million ,
repossessed asset losses of $0.4 million , and telecommunication expense of $0.3
million . These decreases were partially offset by an increase in equipment and
software related expenses ($1.2 million ), bankcard expenses ($0.3 million ), and
FDIC insurance expense ($0.2 million ).
INCOME TAXES
Selected information regarding the Company's income taxes is presented in the table below (dollars in millions):
For the year ended December 31,
2021 2020 2019
Income tax expense $ 23.1 $ 21.7 $ 24.1
Effective tax rate 20.8 % 19.5 % 21.3 %
A reconciliation of the effective tax rate to the statutory rate is included in Note Eleven of the Notes to Consolidated Financial Statements.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company was in a net deferred tax asset position ($0.1 million ) atDecember 31, 2021 and a net deferred tax liability position ($3.2 million ) atDecember 31, 2020 . The increase from net deferred tax liability to net deferred tax asset was largely due to a decrease in the Company's investment valuation, primarily in the mortgage-backed security portfolio. The components of the Company's net deferred tax assets/liabilities are disclosed in Note Eleven of the Notes to Consolidated Financial Statements. Realization of the most significant net deferred tax assets is primarily dependent on future events taking place that will reverse the current deferred tax assets. The deferred tax asset and/or liability associated with unrealized securities losses and/or gains is the tax impact of the unrealized gains and/or losses on the Company's available-for-sale security portfolio. The impact of the Company's unrealized losses is noted in the Company's Consolidated Statements of Changes in Shareholders' Equity as an adjustment to Accumulated Other Comprehensive Income (Loss). This deferred tax asset/liability would be realized if the unrealized securities gains/losses on the Company's securities were realized from either the sales or maturities of the related securities. The deferred tax asset associated with the allowance for credit losses is expected to be realized as additional loan charge-offs, which have already been provided for within the Company's financial statements, and is recognized for tax purposes. The Company believes that it is more likely than not that each of the deferred tax assets will be realized and that no significant valuation allowances were necessary as ofDecember 31, 2021 or 2020.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company evaluates the adequacy of liquidity at both the Parent Company level and at the banking subsidiary level. At the Parent Company level, the principal source of cash is dividends from its banking subsidiary, City National. Dividends paid by City National to the Parent Company 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. AtDecember 31, 2021 , City National could pay dividends up to$76.9 million without prior regulatory permission. 37 -------------------------------------------------------------------------------- During 2021, the Parent Company used cash obtained from the dividends received primarily to: (1) pay common dividends to shareholders and (2) fund repurchases of the Company's common shares. Additional information concerning sources and uses of cash by the Parent Company is discussed in Note Eighteen of the Notes to Consolidated Financial Statements. During the first quarter of 2020, the Company repaid its Subordinated Debentures, assumed as part of its acquisition of Poage, at a price of 100% of the principal amount. These securities were issued inDecember 2006 and were callable in whole or in part any time afterDecember 22, 2012 .The Parent Company anticipates continuing the payment of dividends, which are expected to approximate$36.1 million on an annualized basis for 2022 based on common shareholders of record atDecember 31, 2021 at a dividend rate of$2.40 per share for 2022. However, dividends to shareholders can, if necessary, be suspended. In addition to these anticipated cash needs, the Parent Company has operating expenses and other contractual obligations, which are estimated to require$1.2 million of additional cash over the next 12 months. As ofDecember 31, 2021 , the Parent Company reported a cash balance of$26.9 million and management believes that the Parent Company's available cash balance, together with cash dividends from City National, will be adequate to satisfy its funding and cash needs over the next twelve months. Excluding the dividend payments discussed above, the Parent Company has no significant commitments or obligations in years after 2022. 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 theFederal Home Loan Bank ("FHLB") and other financial institutions. As ofDecember 31, 2021 , City National's assets are significantly funded by deposits and capital. City National maintains borrowing facilities with the FHLB and other financial institutions that can be accessed as necessary to fund operations and to provide contingency funding mechanisms. As ofDecember 31, 2021 , City National had the capacity to borrow an additional$2.1 billion from the FHLB and other financial institutions under existing borrowing facilities. City National maintains a contingency funding plan, incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systemic financial industry crisis. Also, although it has no current intention to do so, City National could liquidate its unpledged securities, if necessary, to provide an additional funding source. City National 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. As illustrated in the Consolidated Statements of Cash Flows, the Company generated$102.3 million of cash from operating activities during 2021, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. The Company has obligations to extend credit, but these obligations are primarily associated with existing home equity loans that have predictable borrowing patterns across the portfolio. The Company has investment security balances with carrying values that totaled$1.43 billion atDecember 31, 2021 , and that greatly exceeded the Company's non-deposit sources of borrowing, which totaled$312 million . The Company's net loan to asset ratio is 58.7% as ofDecember 31, 2021 and deposit balances fund 82.0% of total assets as compared to 79.5% for its peers (Bank Holding Company Peer Group , as of the most recent data available as ofSeptember 30, 2021 , which includes commercial banks with assets ranging from$3 billion to$10 billion ). Further, the Company's deposit mix has a very high proportion of transaction and savings accounts that fund 64.2% of the Company's total assets and the Company uses time deposits over$250,000 to fund 2.2% of total assets compared to its peers, which fund (4.3)% of total assets with such deposits. Capital Resources During 2021, Shareholders' Equity decreased$20 million , or 2.9%, from$701 million atDecember 31, 2020 to$681 million atDecember 31, 2021 . This decrease was primarily due to common share repurchases of$59 million , cash dividends declared of$36 million , and other comprehensive loss of$17 million (due to a decrease in the Company's investment valuation), partially offset by net income of$88 million . 38 -------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , the Company repurchased approximately 760,000 common shares at a weighted average price of$77.21 per share as part of a one million share repurchase plan authorized by the Board of Directors inMarch 2021 . AtDecember 31, 2021 , the Company could repurchase approximately 315,000 shares under the current plan. The Basel III Capital Rules requireCity Holding and City National to maintain minimum CET 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does not have any current applicability toCity Holding Company orCity National Bank .
The Company's regulatory capital ratios for both
Required to be Considered Well
Actual Minimum Required - Basel III Capitalized
December 31, 2021 Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio CET 1 Capital City Holding Company$ 555,532 16.1 %$ 241,772 7.0 %$ 224,503 6.5 % City National Bank 492,721 14.4 % 240,392 7.0 % 223,221 6.5 % Tier 1 Capital City Holding Company 555,532 16.1 % 293,581 8.5 % 276,311 8.0 % City National Bank 492,721 14.4 % 291,905 8.5 % 274,734 8.0 % Total Capital City Holding Company 570,336 16.5 % 362,659 10.5 % 345,389 10.0 % City National Bank 507,526 14.8 % 360,588 10.5 % 343,418 10.0 % Tier 1 Leverage Ratio City Holding Company 555,532 9.4 % 235,403 4.0 % 294,254 5.0 % City National Bank 492,721 8.5 % 233,342 4.0 % 291,678 5.0 % 39
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Required to be Considered Well
Actual Minimum Required - Basel III Capitalized
December 31, 2020: Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
CET 1 Capital
City Holding Company $ 557,641 16.2 % $ 241,221 7.0 % $ 223,991 6.5 %
City National Bank 482,754 14.1 % 239,569 7.0 % 222,457 6.5 %
Tier 1 Capital
City Holding Company 557,641 16.2 % 292,911 8.5 % 275,681 8.0 %
City National Bank 482,754 14.1 % 290,906 8.5 % 273,793 8.0 %
Total Capital
City Holding Company 577,292 16.8 % 361,831 10.5 % 344,601 10.0 %
City National Bank 502,405 14.7 % 359,354 10.5 % 342,242 10.0 %
Tier 1 Leverage Ratio
City Holding Company 557,641 10.2 % 218,163 4.0 % 272,704 5.0 %
City National Bank 482,754 9.0 % 215,277 4.0 % 269,097 5.0 %
As of December 31, 2021 , management believes that City Holding Company , and its
banking subsidiary, City National, were "well capitalized." City Holding is
subject to regulatory capital requirements administered by the Federal Reserve ,
while City National is subject to regulatory capital requirements administered
by the OCC and the 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 December 31, 2021 , management
believes that City Holding and City National meet all capital adequacy
requirements.
In November 2019 , the federal banking regulators published final rules
implementing a simplified measure of capital adequacy for certain banking
organizations that have less than $10 billion in total consolidated assets.
Under the final rules, which went into effect on January 1, 2020 , depository
institutions and depository institution holding companies that have less than
$10 billion in total consolidated assets and meet other qualifying criteria,
including a leverage ratio of greater than 9%, off-balance-sheet exposures of
25% or less of total consolidated assets and trading assets plus trading
liabilities of 5% or less of total consolidated assets, are deemed "qualifying
community banking organizations" and are eligible to opt into the "community
bank leverage ratio framework." A qualifying community banking organization that
elects to use the community bank leverage ratio framework and that maintains a
leverage ratio of greater than 9% is considered to have satisfied the generally
applicable risk-based and leverage capital requirements under the Basel III
Rules and, if applicable, is considered to have met the "well capitalized" ratio
requirements for purposes of its primary federal regulator's prompt corrective
action rules, discussed below. The final rules include a two-quarter grace
period during which a qualifying community banking organization that temporarily
fails to meet any of the qualifying criteria, including the greater-than-9%
leverage capital ratio requirement, is generally still deemed "well capitalized"
so long as the banking organization maintains a leverage capital ratio greater
than 8%. A banking organization that fails to maintain a leverage capital ratio
greater than 8% is not permitted to use the grace period and must comply with
the generally applicable requirements under the Basel III Rules and file the
appropriate regulatory reports. The Company and its subsidiary bank do not have
any immediate plans to elect to use the community bank leverage ratio framework
but may make such an election in the future.
Contractual Obligations
The Company has various financial obligations that may require future cash
payments according to the terms of the obligations. Demand, both noninterest-
and interest-bearing, and savings deposits are, generally, payable immediately
upon demand at the request of the customer. Therefore, the contractual maturity
of these obligations is presented in the following table as "less than one
year." Time deposits, typically certificates of deposit, are customer deposits
that are evidenced by an agreement between the Company and the customer that
specify stated maturity dates; early withdrawals by the customer are subject to
penalties assessed by the Company. Short-term borrowings and long-term debt
represent borrowings of the Company and have stated maturity dates. Operating
leases between the Company and the lessor have stated expiration dates and
renewal terms.
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TABLE FOUR
CONTRACTUAL OBLIGATIONS
The composition of the Company's contractual obligations as of
Contractual Maturity in
Less than One Greater than
Year One Year Total
Noninterest-bearing demand deposits $ 1,373,125 $ - $ 1,373,125
Interest-bearing demand deposits(1) 1,135,852 - 1,135,852
Savings deposits(1) 1,347,455 - 1,347,455
Time deposits(1) 872,474 197,545 1,070,019
Short-term borrowings(1) 312,962 - 312,962
Low income housing tax credits ("LIHTCs") funding commitments 5,719
13,299 19,018
Supplemental employee retirement plans 861 6,439 7,300
Deferred compensation plans - 2,777 2,777
Real estate leases 980 5,722 6,702
Total Contractual Obligations $ 5,049,428 (1)Includes interest on both fixed- and variable-rate obligations. The interest associated with variable-rate obligations is based upon interest rates in effect atDecember 31, 2021 . The contractual amounts to be paid on variable-rate obligations are affected by market interest rates that could materially affect the contractual amounts to be paid. The Company's liability for uncertain tax positions atDecember 31, 2021 was$1.8 million pursuant to ASC Topic 740. This liability represents an estimate of tax positions that the Company has taken in its tax returns that may ultimately not be sustained upon examination by tax authorities. As the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable reliability, this estimated liability has been excluded from the contractual obligations table. As disclosed in Note Fourteen of the Notes to Consolidated Financial Statements, the Company has entered into agreements with its customers to extend credit or to provide conditional commitments to provide payment on drafts presented in accordance with the terms of the underlying credit documents (including standby and commercial letters of credit). The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. As a result of the Company's off-balance sheet arrangements for 2021 and 2020, no material revenue, expenses, or cash flows were recognized. In addition, the Company had no other indebtedness or retained interests nor entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.
INVESTMENTS
The investment portfolio is structured to provide flexibility in managing liquidity needs and interest rate risk, while providing acceptable rates of return.
The majority of the Company's investment securities continue to be
mortgage-backed securities. These securities are collateralized by both
residential and commercial properties. The mortgage-backed securities in which
the Company has invested are predominantly issued by government-sponsored
agencies such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC") and
The Company's municipal bond portfolio of$272 million as ofDecember 31, 2021 has an average tax equivalent yield of 2.50% with an average maturity of 13.1 years. The average dollar amount invested in each security is$1.2 million . The portfolio has 92% rated "A" or better and the remaining portfolio is unrated, as the issuances represented small issuances of revenue bonds. Additional credit support has been purchased by the issuer for 28% of the portfolio, while 72% has no additional credit support. Management re-underwrites 100% of the portfolio on an annual basis, using the same guidelines that are used to underwrite its commercial loans. Revenue bonds were 55% of the portfolio, while the remaining 45% were general obligation bonds. Geographically, the portfolio supports the Company's footprint, with 17% of the portfolio being 41 --------------------------------------------------------------------------------
from municipalities throughout
The weighted average yield of the Company's investment portfolio is presented in the following table (dollars in thousands):
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
Securities available-for-sale:
Obligations of states and political
subdivisions $ 2,910 3.97 % $
21,701 2.91 %
U.S. government agencies 179 2.56
10,348 2.38 231,770 2.30 852,014 1.73
Private label - - - - - - 9,108 3.90 Trust preferred securities - - - - - - 4,203 1.57 Corporate securities - - 11,698 4.92 16,137 2.82 492 3.60
Weighted-average yields on tax-exempt obligations of states and political
subdivisions have been computed on a taxable-equivalent basis using the federal
statutory tax rate of 21%. Average yields on investments available-for-sale are
computed based on amortized cost. Mortgage-backed securities have been allocated
to their respective maturity groupings based on their contractual maturity.
42
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TABLE FIVE
LOAN PORTFOLIO
Loans decreased $78.3 million (2.2%) from December 31, 2020 to $3.54 billion
at December 31, 2021 . PPP loans decreased $48.8 million from $55.4 million at
December 31, 2020 to $6.6 million at December 31, 2021 . Excluding outstanding
PPP loans (included in the commercial and industrial loan category), total loans
decreased $29.4 million , (0.8%), from December 31, 2020 to $3.54 billion at
December 31, 2021 . The composition of the Company's loan portfolio as of the
dates indicated follows (in thousands):
2021 2020
Commercial and industrial $ 346,184 $ 372,989
1-4 Family 107,873 109,812
Hotels 311,315 294,464
Multi-family 215,677 215,671
Non Residential Non-Owner Occupied 639,818 641,351
Non Residential Owner Occupied 204,233 213,484
Commercial real estate 1,478,916 1,474,782
Residential real estate 1,548,965 1,587,694
Home equity 122,345 136,469
Consumer 40,901 47,688
DDA overdrafts 6,503 2,497
Total loans $ 3,543,814 $ 3,622,119
The commercial and industrial ("C&I") loan portfolio consists of loans to
corporate and other legal entity borrowers, primarily small to mid-size
industrial and commercial companies. C&I loans typically involve a higher level
of risk than other loan types, including industry specific risks such as the
pertinent economy, new technology, labor rates and cyclicality, as well as
customer specific factors, such as cash flow, financial structure, operating
controls and asset quality. Collateral securing these loans includes equipment,
machinery, inventory, receivables and vehicles. C&I loans decreased $27 million
to $346 million at December 31, 2021 , largely due to a decrease in PPP loans,
which decreased from $55 million at December 31, 2020 to $7 million at December
31, 2021 . Excluding the decrease in PPP loans, C&I loans increased $21 million
from December 31, 2020 to December 31, 2021 .
Commercial real estate loans consist of commercial mortgages, which generally
are secured by nonresidential and multi-family residential properties, including
hotel/motel and apartment lending. Commercial real estate loans are to many of
the same customers and carry similar industry risks as C&I loans, but have
different collateral risk. Commercial real estate loans remained flat at $1.48
billion at December 31, 2021 . At December 31, 2021 , $12 million of the
commercial real estate loans were for commercial properties under construction.
In order to group loans with similar risk characteristics, the portfolio is further segmented by product types:
•Commercial 1-4 Family loans consist of residential single-family, duplex, triplex, and fourplex rental properties and totaled$107.9 million as ofDecember 31, 2021 . Risk characteristics are driven by rental housing demand as well as economic and employment conditions. These properties exhibit greater risk than multi-family properties due to fewer income sources. •The Hotel portfolio is comprised of all lodging establishments and totaled$311.3 million as ofDecember 31, 2021 . Risk characteristics relate to the demand for both business and personal travel. •Multi-family consists of 5 or more family residential apartment lending. The portfolio totaled$215.7 million as ofDecember 31, 2021 . Risk characteristics are driven by rental housing demand as well as economic and employment conditions. •Non-residential commercial real estate includes properties such as retail, office, warehouse, storage, healthcare, entertainment, religious, and other nonresidential commercial properties. The non-residential product type is further segmented into owner- and non-owner occupied properties. Nonresidential non-owner occupied commercial real 43 -------------------------------------------------------------------------------- estate totaled$639.8 million while nonresidential owner-occupied commercial real estate totaled$204.2 million as ofDecember 31, 2021 . Risk characteristics relate to levels of consumer spending and overall economic conditions. The Company categorizes commercial loans by industry according to the North American Industry Classification System ("NAICS") to monitor the portfolio for possible concentrations in one or more industries. Management monitors industry concentrations against internally established risk-based capital thresholds. As ofDecember 31, 2021 , City National was within its internally designated concentration limits. As ofDecember 31, 2021 , City National's loans to borrowers within the Lessors of Nonresidential Buildings categories exceeded 10% of total loans (14%). No other NAICS industry classification exceeded 10% of total loans as ofDecember 31, 2021 . Management also monitors non-owner occupied commercial real estate as a percent of risk based capital (based upon regulatory guidance). AtDecember 31, 2021 , the Company had$1.4 billion of commercial loans classified as non-owner occupied and was within its designated concentration threshold. Residential real estate loans decreased$39 million fromDecember 31, 2020 to$1.55 billion atDecember 31, 2021 . Residential real estate loans include loans for the purchase or refinance of consumers' residence and first-priority home equity loans allow consumers to borrow against the equity in their home. These loans primarily consist of single family three- and five-year adjustable rate mortgages with terms that amortize up to 30 years. City National also offers fixed-rate residential real estate loans. Residential purchase real estate loans are generally underwritten to comply with Fannie Mae and Freddie Mac guidelines, while first priority home equity loans are underwritten with typically less documentation, lower loan-to-value ratios and shorter maturities. Additionally, the Company periodically purchases residential mortgage loans. The credit and collateral documents for each potential purchased loan are reviewed to ensure the credit metrics are acceptable to management. AtDecember 31, 2021 ,$17 million of the residential real estate loans were for properties under construction. Home equity loans decreased$14 million fromDecember 31, 2020 to$122 million atDecember 31, 2021 . City National's home equity loans represent loans to consumers that are secured by a second (or junior) priority lien on a residential property. Home equity loans allow consumers to borrow against the equity in their home without paying off an existing first priority lien. These loans include home equity lines of credit ("HELOC") and amortized home equity loans that require monthly installment payments. Second priority lien home equity loans are underwritten with less documentation than first priority lien residential real estate loans but typically have similar loan-to-value ratios and other terms as first priority lien residential real estate loans. The amount of credit extended is directly related to the value of the real estate securing the loan at the time the loan is made. All mortgage loans, whether fixed rate or adjustable rate, are originated in accordance with acceptable industry standards and comply with regulatory requirements. Fixed rate mortgage loans are processed and underwritten in accordance with Fannie Mae and Freddie Mac guidelines, while adjustable rate mortgage loans are underwritten in accordance with City National's internal loan policy. Consumer loans may be secured by automobiles, boats, recreational vehicles, certificates of deposit and other personal property, or they may be unsecured. The Company manages the risk associated with consumer loans by monitoring such factors as portfolio size and growth, internal lending policies and pertinent economic conditions. City National's underwriting standards are continually evaluated and modified based upon these factors. Consumer loans decreased$7 million from 2020 to$41 million atDecember 31, 2021 . 44 --------------------------------------------------------------------------------
The following table shows the scheduled maturity of loans outstanding as of
After One But After Five Years
Within Five Through Fifteen After Fifteen
Within One Year Years Years Years Total
Commercial and industrial $ 61,406 $ 125,931 $ 126,094 $ 32,753 $ 346,184
1-4 Family 9,552 13,321 32,864 52,136 107,873
Hotels 20,368 106,155 161,336 23,456 311,315
Multi-family 2,529 36,888 146,775 29,485 215,677
Non Residential Non-Owner Occupied 18,502 158,033 360,609 102,674 639,818
Non Residential Owner Occupied 10,159 39,548 96,391 58,135 204,233
Commercial real estate 61,110 353,945 797,975 265,886 1,478,916
Residential real estate 4,866 29,084 176,536 1,338,479 1,548,965
Home equity 4,475 9,108 16,144 92,618 122,345
Consumer and DDA Overdrafts 2,222 26,540 12,047 6,595 47,404
Total loans $ 134,079 $ 544,608 $
1,128,796
The maturity table above is based on actual loan maturity dates and does not consider prepayments or any other assumptions.
Loans maturing after one year with Fixed until Variable or interest rates that are: Maturity adjustable Total Commercial and industrial$ 100,485 $ 184,293 $ 284,778 1-4 Family 4,779 93,542 98,321 Hotels 45,832 245,115 290,947 Multi-family 20,464 192,684 213,148 Non Residential Non-Owner Occupied 115,237 506,079 621,316 Non Residential Owner Occupied 35,985 158,089 194,074 Commercial real estate 222,297 1,195,509 1,417,806 Residential real estate 178,135 1,365,973 1,544,108 Home equity 13,891 103,971 117,862 Consumer and DDA Overdrafts 36,973 8,208 45,181 Total loans$ 551,781 $ 2,857,954 $ 3,409,735 The maturity table above is based on actual loan maturity dates and does not consider prepayments or any other assumptions. 45
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ALLOWANCE FOR CREDIT LOSSES
The Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" effectiveJanuary 1, 2020 , using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. ASU No. 2016-13 replaced the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new current expected credit losses model ("CECL") applies to the allowance for credit losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. Results for reporting periods beginning afterJanuary 1, 2020 are presented under ASU No. 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Management systematically monitors the loan portfolio and the appropriateness of the allowance for credit losses on a quarterly basis to provide for expected losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors. The Company's estimate of future economic conditions utilized in its provision estimate is primarily dependent on expected unemployment ranges over a two-year period. Beyond two years, a straight line reversion to historical average loss rates is applied over the life of the loan pool in the migration methodology. The vintage methodology applies future average loss rates based on net losses in historical periods where the unemployment rate was within the forecasted range. 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. Determination of the Allowance for Credit Losses "ACL" is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between actual losses and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio. As a result of the Company's quarterly analysis of the adequacy of the ACL, the Company recorded a recovery of credit losses of$3.2 million for the year endedDecember 31, 2021 , compared to a provision for credit losses of$10.7 million for the comparable period in 2020. The determination of the Company's allowance for credit losses is largely dependent on expected unemployment ranges. Due to improvements in the outlook for unemployment ranges utilized by the Company and adjustments to other qualitative and other factors, during 2021 the Company partially recovered a portion of the provision for credit losses incurred in the quarter endedMarch 31, 2020 related to the COVID-19 pandemic. Based on the Company's analysis of the adequacy of the allowance for credit losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for credit losses as ofDecember 31, 2021 is adequate to provide for expected losses inherent in the Company's loan portfolio. Future provisions for credit losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and recoveries of previously charged-off loans, among other factors. 46 -------------------------------------------------------------------------------- TABLE SIX ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES The allocation of the allowance for credit losses by portfolio segment and the percent of loans in each category to total loans is shown in the table below (dollars in thousands). The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. 2021 2020 Percent of Percent of Loans in Loans in Each Each Category to Category to Total Amount Total Loans Amount Loans Commercial and industrial$ 3,480 10 %$ 3,644 10 % 1-4 Family 598 3 771 3 Hotels 2,426 9 4,088 8 Multi-family 483 6 674 6 Non Residential Non-Owner Occupied 2,319 18 3,223 18 Non Residential Owner Occupied 1,485 6 2,241 6 Commercial real estate 7,311 42 10,997 41 Residential real estate 5,716 44 8,093 44 Home equity 517 3 630 4 Consumer 106 1 163 1 DDA overdrafts 1,036 - 1,022 - Allowance for Credit Losses$ 18,166 100 %$ 24,549 100 % The ACL decreased from$24.5 million atDecember 31, 2020 to$18.2 million atDecember 31, 2021 . Below is a summary of the changes in the components of the ACL fromDecember 31, 2020 toDecember 31, 2021 . The allowance attributed to the commercial real estate loan portfolio decreased$3.7 million from$11.0 million atDecember 31, 2020 to$7.3 million atDecember 31, 2021 . This decrease was primarily due to a reduction in the unemployment forecast range, a reduction in qualitative factor adjustments, and a payoff and partial charge-off of a previously identified individually analyzed loan. The allowance attributed to the residential real estate portfolio decreased$2.4 million from$8.1 million atDecember 31, 2020 to$5.7 million atDecember 31, 2021 . This decrease was primarily due to a reduction in the unemployment forecast range, a reduction in qualitative factor adjustments, and a decrease in loan balances. The following table shows asset quality ratios as ofDecember 31, 2021 and 2020: 2021 2020 Net charge offs to average loans 0.09 % 0.10 % (Recovery of) provision for credit losses to average loans (0.09)
0.29
Allowance for credit losses to nonperforming loans 290.15
200.69
Allowance for credit losses to total loans 0.51
0.68
Non-performing assets as a percentage of total loans and OREO 0.21
0.38
47--------------------------------------------------------------------------------
The Company evaluates the recoverability of goodwill and indefinite lived intangible assets annually as ofNovember 30th , or more frequently if events or changes in circumstances warrant, such as a material adverse change in the Company's business.Goodwill is considered to be impaired when the carrying value of a reporting unit exceeds its estimated fair value. Indefinite-lived intangible assets are considered impaired if their carrying value exceeds their estimated fair value. As described in Note One of the Notes to Consolidated Financial Statements, the Company conducts its business activities through one reportable business segment - community banking. Fair values are estimated by reviewing the Company's stock price as it compares to book value and the Company's reported earnings. In addition, the impact of future earnings and activities is considered in the Company's analysis. The Company had approximately$109 million of goodwill atDecember 31, 2021 and 2020, and no impairment was required to be recognized in 2021 or 2020, as the estimated fair value of the Company has continued to exceed its book value.
CERTIFICATES OF DEPOSIT
The Company has time certificates of deposit that meet or exceed the
TABLE SEVEN
MATURITY DISTRIBUTION OF UNINSURED CERTIFICATES OF DEPOSIT
Amounts
Three months or less $ 54,173
Over three months through six months 40,172
Over six months through twelve months 35,802
Over twelve months 21,106
Total $ 151,253
FAIR VALUE MEASUREMENTS
The Company determines the fair value of its financial instruments based on the
fair value hierarchy established in ASC Topic 820, whereby the fair value of
certain assets and liabilities is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. ASC Topic 820 establishes a three-level
hierarchy for disclosure of assets and liabilities recorded at fair value. The
hierarchy classification is based on whether the inputs in the methodology for
determining fair value are observable or unobservable. Observable inputs reflect
market-based information obtained from independent sources (Level 1 or Level 2),
while unobservable inputs reflect management's estimate of market data (Level
3). Assets and liabilities that are actively traded and have quoted prices or
observable market data require a minimal amount of subjectivity concerning fair
value. Management's judgment is necessary to estimate fair value when quoted
prices or observable market data are not available.
At December 31, 2021 , approximately 24% of total assets, or $1.45 billion ,
consisted of financial instruments recorded at fair value. Most of these
financial instruments used valuation methodologies involving observable market
data, collectively Level 1 and Level 2 measurements, to determine fair value. At
December 31, 2021 , approximately $24 million of derivative liabilities were
recorded at fair value using methodologies involving observable market data. The
Company does not believe that any changes in the unobservable inputs used to
value the financial instruments mentioned above would have a material impact on
the Company's results of operations, liquidity, or capital resources. See Note
Seventeen of the Notes to Consolidated Financial Statements for additional
information regarding ASC Topic 820 and its impact on the Company's financial
statements.
LEGAL ISSUES
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 impacts to its financial performance in the period in which these
legal actions are ultimately decided. There can be no assurance that current
actions will have immaterial results, or that no material actions may be
presented in the future.
48
--------------------------------------------------------------------------------RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Note Two , "Recent Accounting Pronouncements," of the Notes to Consolidated
Financial Statements, discusses recently issued new accounting pronouncements
and their expected impact on the Company's consolidated financial statements.
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