# CITY HOLDING CO (CHCO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CITY HOLDING CO's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/726854/000072685423000015/chco-20221231.htm
Accession: 0000726854-23-000015
Filing date: 2023-02-22
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CHCO/
All MD&A years: /company/CHCO/mda/
Previous year: /company/CHCO/mda/fy2021/ (FY 2021)
Next year: /company/CHCO/mda/fy2023/ (FY 2023)

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations 

Statistical Information

    The information noted below is provided pursuant to Guide 3 -- Statistical Disclosure by Bank Holding Companies.

[[GREPCENT_TABLE]]
[["Description of Information","","PageReference"],["Item I.","Distribution of Assets, Liabilities and Stockholders'"],["","Equity; Interest Rates and Interest Differential"],["","a.","Average Balance Sheets","33"],["","b.","Analysis of Net Interest Earnings","34"],["","c.","Rate Volume Analysis of Changes in Interest Income and Expense","34"],["II.","Investment Portfolio"],["","a.","Maturity Schedule of Investments","43"],["III.","Loan Portfolio"],["","a.","Types of Loans","43"],["","b.","Maturities and Sensitivity to Changes in Interest Rates","43"],["","c.","Other Interest Bearing Assets","None"],["","d.","Risk Elements","73"],["V.","Deposits"],["","a.","Breakdown of Deposits by Categories, Average Balance and Average Rate Paid","33"],["","b.","Maturity Schedule of Uninsured Time Certificates of Deposit","49"],["VI.","Return on Equity and Assets","31"],["VII.","Short-term Borrowings","39"]]
[[/GREPCENT_TABLE]]

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CITY HOLDING COMPANY

City Holding Company (the "Company"), a West Virginia corporation headquartered in Charleston, West Virginia, is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 94 bank branches in West Virginia (58), Kentucky (19), Virginia (13) and Ohio (4). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities including Charleston (WV), Huntington (WV), Martinsburg (WV), Ashland (KY), Lexington (KY), Winchester (VA) and Staunton (VA). In the Company's key markets, the Company's primary subsidiary, City National, often 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 and Winchester, VA/WV Eastern Panhandle 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. 

On October 18, 2022, the Company announced that City Holding had signed a definitive agreement in which City Holding will acquire Citizens Commerce Bancshares, Inc., ("Citizens") the parent company of Citizens Commerce Bank, Inc., Versailles, Kentucky. Upon completion of the merger, the subsidiary bank of Citizens will merge with and into City National. The Boards of Directors of City and Citizens have approved the Merger, Bank Merger and the Merger Agreement. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, Citizens shareholders will have the right to receive 0.1666 City common shares, par value of $2.50 per share for each Citizens common share, no par value. Cash will be paid in lieu of fractional shares and for unexercised Citizens options at closing. The Merger is expected to close in the first quarter of 2023, pending customary closing conditions, including receipt of required regulatory approvals and the approval by the shareholders of Citizens.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies of the Company conform to 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 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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[[GREPCENT_TABLE]]
[["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"]]
[[/GREPCENT_TABLE]]

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, 2022 estimate, the Company assumed an unemployment forecast range of 3.7% to 4.9%, compared to a range of 3.5% to 5.2% utilized in the December 31, 2021 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, 2021 and December 31, 2022 resulted in a decrease in the ACL of approximately $0.2 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 $1.9 million impact on the reserve allocation. Changing each factor by 0.01% (moderate improvement or decline) would have a $3.8 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, 2021 and December 31, 2022, management assigned a "decline," or 1.5 basis point increase, to the interest rate risk factor for all pools due to the rising rate environment. In total, the qualitative changes increased the ACL by approximately $0.5 million for the year ended December 31, 2022.

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 ended December 31, 2019 and forward.

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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:

[[GREPCENT_TABLE]]
[["","2022","2021","2020"],["Net income available to common shareholders (in thousands)","$","102,071","","$","88,080","","$","89,595"],["Earnings per common share, basic","$","6.81","","$","5.67","","$","5.55"],["Earnings per common share, diluted","$","6.80","","$","5.66","","$","5.55"],["Cash dividends declared","$","2.50","","$","2.34","","$","2.29"],["Book value per share","$","39.08","","$","45.22","","$","44.47"],["Dividend payout ratio","36.8","%","41.3","%","41.2","%"],["ROA*","1.71","%","1.49","%","1.66","%"],["ROE*","16.5","%","12.7","%","12.9","%"],["ROATCE*","20.3","%","15.3","%","15.6","%"]]
[[/GREPCENT_TABLE]]

*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

    Select balance sheet fluctuations and ratios are summarized in the following table (in millions):

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","2021","$ Change","% Change"],["Cash and cash equivalents","$","200.0","","$","634.6","","$","(434.6)","","(68)","%"],["Investment securities","1,529.3","","1,433.7","","95.6","","7","%"],["Gross loans","3,646.3","","3,543.8","","102.4","","3","%"],["Total deposits","$","4,869.9","","$","4,925.3","","$","(55.4)","","(1)","%"],["Tangible equity to tangible assets","8.02","%","9.58","%"]]
[[/GREPCENT_TABLE]]

Cash and cash equivalents decreased $434.6 million, from $634.6 million at December 31, 2021, to $200.0 million at December 31, 2022 primarily due to an increase in loans and investment securities and a decrease in deposits.

Investment securities increased $95.6 million, from $1.43 billion at December 31, 2021, to $1.53 billion at December 31, 2022 as the Company has put its excess funding to work.

Loans increased $102.4 million (2.9%) from December 31, 2021 to $3.64 billion at December 31, 2022. PPP loans of $6.6 million at December 31, 2021 were fully repaid during 2022. Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans increased $109.0 million, (3.1%), from December 31, 2021 to $3.64 billion at December 31, 2022. Residential real estate loans increased $144.6 million (9.3%); commercial and industrial loans increased $34.3 million (10.1%) (excluding PPP loans); home equity loans increased $12.0 million (9.8%); and consumer loans increased $7.9 million (19.3%). These increases were partially offset by decreases in commercial real estate loans ($86.6 million, or 5.9%).

Total deposits decreased $55.4 million from December 31, 2021 to $4.87 billion at December 31, 2022. Time deposits decreased $180.8 million and noninterest bearing demand deposits decreased $21.7 million. These decreases were

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partially offset by an increase in interest bearing demand deposits of $97.6 million and an increase in savings deposits of $49.4 million.

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TABLE ONE

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(In thousands)

[[GREPCENT_TABLE]]
[["","2022","","2021","","2020"],["","Average Balance","Interest","Yield/ Rate","","Average Balance","Interest","Yield/ Rate","","Average Balance","Interest","Yield/ Rate"],["Assets"],["Loan portfolio(1):"],["Residential real estate(2),(3)","$","1,755,772","","$","68,208","","3.88","%","","$","1,658,710","","$","64,492","","3.89","%","","$","1,768,789","","$","74,452","","4.21","%"],["Commercial, financial, and agriculture(3)","1,781,132","","75,390","","4.23","","","1,838,560","","68,784","","3.74","","","1,816,658","","72,128","","3.97"],["Installment loans to individuals(3),(4)","46,622","","2,567","","5.51","","","48,708","","2,831","","5.81","","","56,163","","3,319","","5.91"],["Previously securitized loans(5)","\u2014","","373","","\u2014","","","\u2014","","568","","\u2014","","","\u2014","","599","","\u2014"],["Total loans","3,583,526","","146,538","","4.09","","","3,545,978","","136,675","","3.85","","","3,641,610","","150,498","","4.13"],["Securities:"],["Taxable","1,288,252","","34,445","","2.67","","","1,075,550","","23,071","","2.15","","","890,771","","23,355","","2.62"],["Tax-exempt(6)","218,588","","6,217","","2.84","","","242,125","","6,362","","2.63","","","164,740","","4,954","","3.01"],["Total securities","1,506,840","","40,662","","2.70","","","1,317,675","","29,433","","2.23","","","1,055,511","","28,309","","2.68"],["Deposits in depository institutions","357,184","","3,794","","1.06","","","568,928","","693","","0.12","","","230,043","","492","","0.21"],["Total interest-earning assets","5,447,550","","190,994","","3.51","","","5,432,581","","166,801","","3.07","","","4,927,164","","179,299","","3.64"],["Cash and due from banks","88,581","","","","","92,847","","","","","76,173"],["Bank premises and equipment","72,590","","","","","76,069","","","","","77,670"],["Goodwill and intangible assets","116,469","","","","","117,899","","","","","119,471"],["Other assets","271,685","","","","","216,493","","","","","221,864"],["Less: allowance for credit losses","(17,687)","","","","","(21,922)","","","","","(22,770)"],["Total assets","$","5,979,188","","","","","$","5,913,967","","","","","$","5,399,572"],["Liabilities"],["Interest-bearing demand deposits","$","1,150,007","","1,234","","0.11","%","","$","1,071,628","","504","","0.05","%","","$","912,306","","1,005","","0.11","%"],["Savings deposits","1,414,727","","1,544","","0.11","","","1,291,225","","689","","0.05","","","1,071,727","","1,591","","0.15"],["Time deposits(3)","983,046","","4,666","","0.47","","","1,157,502","","8,213","","0.71","","","1,329,841","","19,927","","1.50"],["Short-term borrowings","284,611","","2,211","","0.78","","","298,413","","489","","0.16","","","253,456","","993","","0.39"],["Long-term debt","\u2014","","\u2014","","\u2014","","","\u2014","","\u2014","","\u2014","","","830","","100","","12.05"],["Total interest-bearing liabilities","3,832,391","","9,655","","0.25","","","3,818,768","","9,895","","0.26","","","3,568,160","","23,616","","0.66"],["Noninterest-bearing demand deposits","1,429,415","","","","","1,315,801","","","","","1,035,801"],["Other liabilities","98,553","","","","","84,377","","","","","100,166"],["Total shareholders\u2019 equity","618,829","","","","","695,021","","","","","695,445"],["Total liabilities and shareholders\u2019 equity","$","5,979,188","","","","","$","5,913,967","","","","","$","5,399,572"],["Net interest income","","$","181,339","","","","","$","156,906","","","","","$","155,683"],["Net yield on earning assets","","","3.33","%","","","","2.89","%","","","","3.16","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","2022","2021","2020"],["Loan fees, net","$","568","","$","3,550","","$","1,842"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","2022","2021","2020"],["Residential real estate","$","298","","$","620","","$","630"],["Commercial, financial, and agriculture","642","","1,198","","2,445"],["Installment loans to individuals","45","","87","","143"],["Time deposits","83","","193","","622"],["Total","$","1,068","","$","2,098","","$","3,840"]]
[[/GREPCENT_TABLE]]

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%.

34

TABLE TWO

RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

(In thousands)

[[GREPCENT_TABLE]]
[["","2022 vs. 2021 Increase (Decrease) Due to Change In:","2021 vs. 2020 Increase (Decrease) Due to Change In:"],["","Volume","Rate","Net","Volume","Rate","Net"],["Interest-earning assets:"],["Loan portfolio"],["Residential real estate","$","3,774","","$","(58)","","$","3,716","","$","(4,633)","","$","(5,327)","","$","(9,960)"],["Commercial, financial, and agriculture","(2,148)","","8,754","","6,606","","870","","(4,214)","","(3,344)"],["Installment loans to individuals","(121)","","(143)","","(264)","","(441)","","(47)","","(488)"],["Previously securitized loans","\u2014","","(195)","","(195)","","\u2014","","(31)","","(31)"],["Total loans","1,505","","8,358","","9,863","","(4,204)","","(9,619)","","(13,823)"],["Securities:"],["Taxable","4,563","","6,811","","11,374","","4,845","","(5,129)","","(284)"],["Tax-exempt(1)","(618)","","473","","(145)","","2,327","","(919)","","1,408"],["Total securities","3,945","","7,284","","11,229","","7,172","","(6,048)","","1,124"],["Deposits in depository institutions","(258)","","3,359","","3,101","","725","","(524)","","201"],["Total interest-earning assets","$","5,192","","$","19,001","","$","24,193","","$","3,693","","$","(16,191)","","$","(12,498)"],["Interest-bearing liabilities:"],["Interest-bearing demand deposits","$","37","","$","693","","$","730","","$","176","","$","(677)","","$","(501)"],["Savings deposits","66","","789","","855","","326","","(1,228)","","(902)"],["Time deposits","(1,238)","","(2,309)","","(3,547)","","(2,582)","","(9,132)","","(11,714)"],["Short-term borrowings","(23)","","1,745","","1,722","","176","","(680)","","(504)"],["Long-term debt","\u2014","","\u2014","","\u2014","","(100)","","\u2014","","(100)"],["Total interest-bearing liabilities","(1,158)","","918","","(240)","","(2,004)","","(11,717)","","(13,721)"],["Net Interest Income","$","6,350","","$","18,083","","$","24,433","","$","5,697","","$","(4,474)","","$","1,223"]]
[[/GREPCENT_TABLE]]

1.Fully federal taxable equivalent using a tax rate of approximately 21%.

NET INTEREST INCOME

[[GREPCENT_TABLE]]
[["","2022","2021","2020"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Total interest income","$","189,688","","","$","165,467","","","$","178,259"],["Total interest expense","9,655","","","9,894","","","23,615"],["Net interest income","180,033","","","155,573","","","154,644"]]
[[/GREPCENT_TABLE]]

2022 vs. 2021

    The Company’s net interest income increased from $155.6 million for the year ended December 31, 2021 to $180.0 million for the year ended December 31, 2022. The Company’s tax equivalent net interest income increased $24.4 million, or 15.6%, from $156.9 million for the year ended December 31, 2021 to $181.3 million for the year ended December 31, 2022. Net interest income increased by $12.0 million, $7.3 million and $3.4 million, respectively, due to increases in the yields on loans (net of loan fees and accretion), investments, and deposits in depository institutions, of 35 basis points, 47 basis points and 94 basis points, respectively, all due primarily to increases in the Federal Funds rate during 2022. In addition, higher average investment and loan balances ($189.2 million and $37.5 million, respectively) increased net interest income by $3.9 million and $1.8 million, respectively. These increases were partially offset by a decrease in loan fees associated with PPP loans of $3.5 million from 2021 and a decrease in accretion from fair value adjustments of $1.0 million. The Company’s reported net interest margin increased from 2.89% for the year ended December 31, 2021 to 3.33% for the year ended December 31, 2022.

35

2021 vs. 2020

    The Company’s net interest income increased from $154.6 million for the year ended December 31, 2020 to $155.6 million for the year ended December 31, 2021. The Company’s tax equivalent net interest income increased $1.2 million, or 0.8%, from $155.7 million for the year ended December 31, 2020 to $156.9 million for the year ended December 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 ended December 31, 2020 to 2.89% for the year ended December 31, 2021.

Non-GAAP Financial Measures

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

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TABLE THREE

NON-GAAP FINANCIAL MEASURES

(In thousands)

[[GREPCENT_TABLE]]
[["","2022","2021","2020"],["Net interest income (\"GAAP\")","$","180,033","","$","155,573","","$","154,644"],["Taxable equivalent adjustment","1,306","","1,333","","1,039"],["Net interest income, fully taxable equivalent","$","181,339","","$","156,906","","$","155,683"],["Average total interest earning assets","$","5,447,550","","$","5,432,581","","$","4,927,164"],["Net interest margin","3.33","%","2.89","%","3.16","%"],["Accretion related to fair value adjustments","(0.02)","","(0.04)","","(0.08)"],["Net interest margin (excluding accretion)","3.31","%","2.85","%","3.08","%"],["Equity to assets (\"GAAP\")","9.83","%","11.34","%","12.18","%"],["Effect of goodwill and other intangibles, net","(1.81)","","(1.76)","","(1.85)"],["Tangible common equity to tangible assets","8.02","%","9.58","%","10.33","%"],["Return on tangible equity (\"GAAP\")","20.3","%","15.3","%","15.6","%"],["Impact of sale of VISA shares","\u2014","","\u2014","","(2.4)"],["Return on tangible equity, excluding the above items","20.3","%","15.3","%","13.2","%"],["Return on assets (\"GAAP\")","1.71","%","1.49","%","1.66","%"],["Impact of sale of VISA shares","\u2014","","\u2014","","(0.24)"],["Return on assets, excluding the above items","1.71","%","1.49","%","1.42","%"]]
[[/GREPCENT_TABLE]]

37

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

2022 vs. 2021

    Selected income statement fluctuations and ratios are summarized in the following table (dollars in millions):

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2022","2021","$ Change","% Change"],["Unrealized (losses) gains recognized on equity securities still held","$","(1.6)","","$","0.5","","$","(2.1)","","(420)","%"],["Non-interest income, excluding net investment securities (losses) gains","73.7","","68.8","","4.9","","7","%"],["Non-interest expense","124.3","","117.2","","7.1","","6","%"],["Efficiency ratio","48.2","","51.3"],["Full-time equivalent employees","909","905"]]
[[/GREPCENT_TABLE]]

    Non-interest income was $72.1 million for 2022 as compared to $69.6 million for 2021. The Company reported $1.6 million of unrealized fair value losses on the Company’s equity securities during 2022 compared to $0.3 million of realized security gains on the sale of investments and $0.5 million of unrealized fair value gains on the Company’s equity securities during 2021. Exclusive of these realized and unrealized gains and losses, non-interest income increased from $68.8 million for the year ended December 31, 2021 to $73.7 million for the year ended December 31, 2022. This increase was largely attributable to an increase of $2.8 million, or 10.9%, in service charges and a $1.7 million, or 42.7%, increase in bank owned life insurance due to higher death benefit proceeds received in 2022 compared to 2021. In addition, trust and investment management fee income and bankcard revenues each increased $0.4 million from the year ended December 31, 2021. These increases were partially offset by a decrease of $0.4 million in other income.

Non-interest expenses increased from $117.2 million for 2021 to $124.3 million for 2022. This increase was primarily due to an increase in salaries and employee benefit expenses ($4.7 million, due to higher salary adjustments during 2022, increased incentive compensation, and increased health insurance) and equipment and software related expenses ($1.3 million). In addition, occupancy related expenses increased $0.6 million, advertising increased $0.3 million, and merger-related expenses increased $0.3 million.

2021 vs. 2020

    Selected income statement fluctuations are summarized in the following table (dollars in millions):

[[GREPCENT_TABLE]]
[["","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","\u2014","","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"]]
[[/GREPCENT_TABLE]]

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

38

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).

INCOME TAXES

    Selected information regarding the Company's income taxes is presented in the table below (dollars in millions):

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2022","2021","2020"],["Income tax expense","$","25.3","","$","23.1","","$","21.7"],["Effective tax rate","19.8","%","20.8","%","19.5","%"]]
[[/GREPCENT_TABLE]]

    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 ($44.9 million) at December 31, 2022 and a net deferred tax asset position ($0.1 million) at December 31, 2021. The increase in 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 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 associated with unrealized securities losses is the tax impact of the unrealized 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 (Loss) Income.  This deferred tax asset would be realized if the unrealized securities losses on the Company's securities were realized from the sales of the related securities. 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 of December 31, 2022 or 2021.

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. At December 31, 2022, City National could pay dividends up to $59.2 million without prior regulatory permission.

During 2022, 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.

The Parent Company anticipates continuing the payment of dividends, which are expected to approximate $38.4 million on an annualized basis for 2023 based on common shareholders of record at December 31, 2022 at a dividend rate of $2.60 per share for 2023.  However, dividends to shareholders can, if necessary, be suspended. In addition to these

39

anticipated cash needs, the Parent Company has operating expenses and other contractual obligations, which are estimated to require $1.5 million of additional cash over the next 12 months. As of December 31, 2022, the Parent Company reported a cash balance of $54.6 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 2023.

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 December 31, 2022, 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 of December 31, 2022, City National had the capacity to borrow an additional $2.0 billion from the FHLB and other financial institutions under existing borrowing facilities. City National maintains a contingency funding plan, incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systemic financial industry crisis. Also, although it has no current intention to do so, City National could liquidate its unpledged securities, if necessary, to provide an additional funding source.  City National also segregates certain mortgage loans, mortgage-backed securities, and other investment securities in a separate subsidiary so that it can separately monitor the asset quality of these primarily mortgage-related assets, which could be used to raise cash through securitization transactions or obtain additional equity or debt financing if necessary.

 The Company manages its asset and liability mix to balance its desire to maximize net interest income against its desire to minimize risks associated with capitalization, interest rate volatility, and liquidity. With respect to liquidity, the Company has chosen a conservative posture and believes that its liquidity position is strong. As illustrated in the Consolidated Statements of Cash Flows, the Company generated $115.8 million of cash from operating activities during 2022, 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 $1.53 billion at December 31, 2022, and that greatly exceeded the Company’s non-deposit sources of borrowing, which totaled $291 million.

The Company’s net loan to asset ratio is 61.7% as of December 31, 2022 and deposit balances fund 82.8% of total assets as compared to 79.8% for its peers (Bank Holding Company Peer Group, as of the most recent data available as of September 30, 2022, 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 67.7% of the Company’s total assets and the Company uses time deposits over $250,000 to fund 4.6% of total assets compared to its peers, which fund 8.9% of total assets with such deposits.

Capital Resources 

During 2022, Shareholders’ Equity decreased $103 million, or 15.2%, from $681 million at December 31, 2021 to $578 million at December 31, 2022.  This decrease was primarily due to other comprehensive loss of $146 million (due to a decrease in the Company's investment valuation), cash dividends declared of $37 million, and common share repurchases of $26 million, partially offset by net income of $102 million.

During the year ended December 31, 2022, the Company repurchased approximately 325,000 common shares at a weighted average price of $81.50 per share as part of a one million share repurchase plan authorized by the Board of Directors in May 2022. At December 31, 2022, the Company could repurchase approximately 817,000 shares under the current plan.

    The Basel III Capital Rules require City Holding and City National to maintain minimum CET 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in 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

40

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 Company’s regulatory capital ratios for both City Holding and City National include the 2.5% capital conservation buffer and are illustrated in the following tables (in thousands):

[[GREPCENT_TABLE]]
[["December 31, 2022","Actual","","Minimum Required - Basel III","","Required to be Considered Well Capitalized"],["Capital Amount","","Ratio","","Capital Amount","","Ratio","","Capital Amount","","Ratio"],["CET 1 Capital"],["City Holding Company","$","598,068","","","16.2","%","","$","257,965","","","7.0","%","","$","239,538","","","6.5","%"],["City National Bank","508,586","","","13.9","%","","256,520","","","7.0","%","","238,197","","","6.5","%"],["Tier 1 Capital"],["City Holding Company","598,068","","","16.2","%","","313,243","","","8.5","%","","294,817","","","8.0","%"],["City National Bank","508,586","","","13.9","%","","311,488","","","8.5","%","","293,166","","","8.0","%"],["Total Capital"],["City Holding Company","612,654","","","16.6","%","","386,947","","","10.5","%","","368,521","","","10.0","%"],["City National Bank","523,172","","","14.3","%","","384,780","","","10.5","%","","366,457","","","10.0","%"],["Tier 1 Leverage Ratio"],["City Holding Company","598,068","","","10.0","%","","238,954","","","4.0","%","","298,692","","","5.0","%"],["City National Bank","508,586","","","8.6","%","","237,973","","","4.0","%","","297,466","","","5.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["December 31, 2021","Actual","","Minimum Required - Basel III","","Required to be Considered Well Capitalized"],["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","%"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022, 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, 2022, management believes that City Holding and City National meet all capital adequacy requirements.

41

    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.

TABLE FOUR

CONTRACTUAL OBLIGATIONS

    The composition of the Company's contractual obligations as of December 31, 2022 is presented in the following table (in thousands):

[[GREPCENT_TABLE]]
[["","Contractual Maturity in"],["","Less than One Year","Greater than One Year","Total"],["Noninterest-bearing demand deposits","$","1,351,415","","$","\u2014","","$","1,351,415"],["Interest-bearing demand deposits(1)","1,232,651","","\u2014","","1,232,651"],["Savings deposits(1)","1,396,310","","\u2014","","1,396,310"],["Time deposits(1)","537,349","","357,828","","895,177"],["Short-term borrowings(1)","297,942","","\u2014","","297,942"],["Low income housing tax credits (\"LIHTCs\") funding commitments","8,522","","16,851","","25,373"],["Supplemental employee retirement plans","918","","5,656","","6,574"],["Deferred compensation plans","\u2014","","2,586","","2,586"],["Real estate leases","1,051","","4,383","","5,434"],["Total Contractual Obligations","$","4,826,158","","$","387,304","","$","5,213,462"]]
[[/GREPCENT_TABLE]]

(1)Includes interest on both fixed- and variable-rate obligations. The interest associated with variable-rate obligations is based upon interest rates in effect at December 31, 2022. 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 at December 31, 2022 was $1.6 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

42

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 2022 and 2021, 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 Ginnie Mae (“GNMA”).

The Company's municipal bond portfolio of $268 million as of December 31, 2022 has an average tax equivalent yield of 2.73% with an average maturity of 12.8 years. The average dollar amount invested in each security is $1.2 million. The portfolio has 93% 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 27% of the portfolio, while 73% 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 56% of the portfolio, while the remaining 44% were general obligation bonds. Geographically, the portfolio supports the Company's footprint, with 18% of the portfolio being from municipalities throughout West Virginia, and the remainder from communities in Texas, Washington, Ohio and various other states.

The weighted average yield of the Company's investment portfolio is presented in the following table (dollars in thousands):

[[GREPCENT_TABLE]]
[["","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","$","2,883","","3.02","%","$","27,877","","3.06","%","$","52,412","","3.40","%","$","185,143","","2.13","%"],["Mortgage-backed securities:"],["U.S. government agencies","13","","4.14","","10,195","","2.43","","424,773","","3.01","","767,298","","2.57"],["Private label","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","7,231","","3.92"],["Trust preferred securities","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","3,828","","6.26"],["Corporate securities","\u2014","","\u2014","","10,329","","4.92","","13,538","","2.82","","\u2014","","\u2014"],["Total Debt Securities available-for-sale","2,896","","3.02","","48,401","","3.32","","490,723","","3.04","","963,500","","2.51"]]
[[/GREPCENT_TABLE]]

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.

43

TABLE FIVE

LOAN PORTFOLIO

    Loans increased $102.4 million (2.9%) from December 31, 2021 to $3.64 billion at December 31, 2022. PPP loans of $6.6 million at December 31, 2021 were fully repaid during 2022. Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans increased $109.0 million, (3.1%), from December 31, 2021 to $3.64 billion at December 31, 2022. Residential real estate loans increased $144.6 million (9.3%); commercial and industrial loans increased $34.3 million (10.1%) (excluding PPP loans); home equity loans increased $12.0 million (9.8%); and consumer loans increased $7.9 million (19.3%). These increases were partially offset by decreases in commercial real estate loans ($86.6 million, or 5.9%). The composition of the Company’s loan portfolio as of the dates indicated follows (in thousands):

[[GREPCENT_TABLE]]
[["","2022","2021"],["Commercial and industrial","$","373,890","","$","346,184"],["1-4 Family","116,192","","107,873"],["Hotels","340,404","","311,315"],["Multi-family","174,786","","215,677"],["Non Residential Non-Owner Occupied","585,964","","639,818"],["Non Residential Owner Occupied","174,961","","204,233"],["Commercial real estate","1,392,307","","1,478,916"],["Residential real estate","1,693,523","","1,548,965"],["Home equity","134,317","","122,345"],["Consumer","48,806","","40,901"],["DDA overdrafts","3,415","","6,503"],["Total loans","$","3,646,258","","$","3,543,814"]]
[[/GREPCENT_TABLE]]

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. Excluding PPP loans, C&I loans increased $34 million from December 31, 2021 to December 31, 2022.

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 decreased $87 million to $1.39 billion at December 31, 2022.  At December 31, 2022, $4 million of the commercial real estate loans were for commercial properties under construction. 

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

◦Commercial 1-4 Family loans consist of residential single-family, duplex, triplex, and fourplex rental properties and totaled $116.2 million as of December 31, 2022. 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 $340.4 million as of December 31, 2022. 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 $174.8 million as of December 31, 2022. 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

44

estate totaled $586.0 million while nonresidential owner-occupied commercial real estate totaled $175.0 million as of December 31, 2022. 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 of December 31, 2022, City National was within its internally designated concentration limits. As of December 31, 2022, 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 of December 31, 2022. Management also monitors non-owner occupied commercial real estate as a percent of risk based capital (based upon regulatory guidance). At December 31, 2022, the Company had $1.2 billion of commercial loans classified as non-owner occupied and was within its designated concentration threshold.

Residential real estate loans increased $145 million from December 31, 2021 to $1.69 billion at December 31, 2022. 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. At December 31, 2022, $21 million of the residential real estate loans were for properties under construction.

Home equity loans increased $12 million from December 31, 2021 to $134 million at December 31, 2022. 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 increased $8 million from 2021 to $49 million at December 31, 2022.

45

    The following table shows the scheduled maturity of loans outstanding as of December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","Within One Year","After One But Within Five Years","After Five Years Through Fifteen Years","After Fifteen Years","Total"],["Commercial and industrial","$","68,125","","$","210,746","","$","85,628","","$","9,391","","$","373,890"],["1-4 Family","8,347","","14,337","","30,113","","63,395","","116,192"],["Hotels","18,447","","135,878","","157,964","","28,115","","340,404"],["Multi-family","631","","26,173","","114,900","","33,082","","174,786"],["Non Residential Non-Owner Occupied","9,208","","134,857","","322,519","","119,380","","585,964"],["Non Residential Owner Occupied","11,081","","31,795","","73,989","","58,096","","174,961"],["Commercial real estate","47,714","","343,040","","699,485","","302,068","","1,392,307"],["Residential real estate","4,917","","19,476","","174,668","","1,494,462","","1,693,523"],["Home equity","2,182","","8,563","","23,414","","100,158","","134,317"],["Consumer and DDA Overdrafts","789","","12,128","","9,235","","30,069","","52,221"],["Total loans","$","123,727","","$","593,953","","$","992,430","","$","1,936,148","","$","3,646,258"],["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 interest rates that are:","Fixed until Maturity","Variable or adjustable","Total"],["Commercial and industrial","$","130,189","","$","175,577","","$","305,766"],["1-4 Family","4,525","","103,320","","107,845"],["Hotels","101,940","","220,017","","321,957"],["Multi-family","23,649","","150,506","","174,155"],["Non Residential Non-Owner Occupied","80,997","","495,759","","576,756"],["Non Residential Owner Occupied","24,831","","139,049","","163,880"],["Commercial real estate","235,942","","1,108,651","","1,344,593"],["Residential real estate","280,399","","1,408,207","","1,688,606"],["Home equity","20,641","","111,494","","132,135"],["Consumer and DDA Overdrafts","46,007","","5,424","","51,431"],["Total loans","$","713,178","","$","2,809,353","","$","3,522,531"]]
[[/GREPCENT_TABLE]]

The maturity table above is based on actual loan maturity dates and does not consider prepayments or any other

assumptions.

46

ALLOWANCE FOR CREDIT LOSSES

The Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" effective January 1, 2020, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. ASU No. 2016-13 replaced the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The 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.

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 analysis of the adequacy of the Allowance for Credit Losses, the Company recorded a provision for credit losses of $0.5 million for the year ended December 31, 2022, compared to a recovery of credit losses of $3.2 million for year ended December 31, 2021. The provision for the year ended December 31, 2022 was a result of net charge-offs for the year that were partially offset by the repayment of a loan from a previous acquisition and release of the associated credit mark.

Based on the Company’s analysis of the adequacy of the allowance for credit losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for credit losses as of December 31, 2022 is adequate to provide for expected losses inherent in the Company’s loan portfolio. Future provisions for credit losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and recoveries of previously charged-off loans, among other factors.

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TABLE SIX

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.

[[GREPCENT_TABLE]]
[["","2022","2021"],["","Amount","Percent of Loans in Each Category to Total Loans","Amount","Percent of Loans in Each Category to Total Loans"],["Commercial and industrial","$","3,568","","10","%","$","3,480","","10","%"],["1-4 Family","566","","3","%","598","","3"],["Hotels","2,332","","10","%","2,426","","9"],["Multi-family","380","","5","%","483","","6"],["Non Residential Non-Owner Occupied","2,019","","16","%","2,319","","18"],["Non Residential Owner Occupied","1,315","","5","%","1,485","","6"],["Commercial real estate","6,612","","39","%","7,311","","42"],["Residential real estate","5,427","","46","%","5,716","","44"],["Home equity","290","","4","%","517","","3"],["Consumer","110","","1","%","106","","1"],["DDA overdrafts","1,101","","0","%","1,036","","\u2014"],["Allowance for Credit Losses","$","17,108","","100","%","$","18,166","","100","%"]]
[[/GREPCENT_TABLE]]

The ACL decreased from $18.2 million at December 31, 2021 to $17.1 million at December 31, 2022. The allowance attributed to the commercial real estate loan portfolio decreased $0.7 million from $7.3 million at December 31, 2021 to $6.6 million at December 31, 2022. This decrease was primarily due to a reduction in the unemployment forecast range, upgrades of certain loans previously downgraded due to impacts of the pandemic, and payoffs of multiple large commercial real estate relationships.

The following table shows asset quality ratios as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","2022","2021"],["Net charge offs to average loans","0.04","%","0.09","%"],["Provision for (recovery of) credit losses to average loans","0.01","","(0.09)"],["Allowance for credit losses to nonperforming loans","317.28","","290.15"],["Allowance for credit losses to total loans","0.47","","0.51"],["Non-performing assets as a percentage of total loans and OREO","0.17","","0.21"]]
[[/GREPCENT_TABLE]]

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GOODWILL

The Company evaluates the recoverability of goodwill and indefinite lived intangible assets annually as of November 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 at December 31, 2022 and 2021, and no impairment was required to be recognized in 2022 or 2021, 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 FDIC insurance limit of $250,000 totaling an estimated $271.5 million. Scheduled maturities of uninsured time certificates of deposit are estimated at December 31, 2022 and are summarized in the table below (in thousands).

TABLE SEVEN

MATURITY DISTRIBUTION OF UNINSURED CERTIFICATES OF DEPOSIT

[[GREPCENT_TABLE]]
[["","Amounts"],["Three months or less","$","19,150"],["Over three months through six months","18,946"],["Over six months through twelve months","26,579"],["Over twelve months","44,819"],["Total","$","109,494"]]
[[/GREPCENT_TABLE]]

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, 2022, approximately 27% of total assets, or $1.6 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, 2022, approximately $65 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.

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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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