NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE ONE – SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Summary of Significant Accounting and Reporting Policies: The accounting and reporting policies of City Holding Company and its subsidiaries (the "Company") conform with U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. Actual results could differ from management’s estimates. The following is a summary of the more significant policies.
Principles of Consolidation: The consolidated financial statements include the accounts of City Holding Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity in conformity with U. S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiary, Town Square Statutory Trust I, is a VIE for which the Company is not the primary beneficiary. The Company also invests in certain limited partnerships that operate qualified low-income housing tax credit developments. These investments are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no impact on total shareholders’ equity or net income for any period.
Description of Principal Markets and Services: The Company is a registered financial holding company under the Bank Holding Company Act headquartered in Charleston, West Virginia, and conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 94 banking offices in West Virginia, Kentucky, Virginia and southeastern Ohio. City National provides credit, deposit, and trust and investment management services to its customers. In addition to its branch network, City National's delivery channels include automated-teller-machines ("ATMs"), interactive-teller-machines ("ITMs"), mobile banking, debit cards, interactive voice response systems and Internet technology. The Company conducts its business activities through one reportable business segment - community banking.
Cash and Due from Banks: The Company considers cash, due from banks, and interest-bearing deposits in depository institutions as cash and cash equivalents. City National is required to maintain an average reserve balance with the Federal Reserve Bank of Richmond to compensate for services provided by the Federal Reserve and to meet statutory required reserves for demand deposits.
Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities to maturity, they are classified as investment securities held-to-maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Debt securities which the Company may not hold to maturity are classified as investment securities available-for-sale. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in comprehensive income. Securities classified as available-for-sale include securities that management intends to use as part of its asset/liability and liquidity management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. Certain investment securities that do not have readily determinable fair values and for which the Company does not exercise significant influence are carried at cost and classified as other investment securities on the Consolidated Balance Sheets. These cost-method investments are reviewed for impairment at least annually or sooner if events or changes in circumstances indicate the carrying value may not be recoverable. Marketable equity securities that consist of investments made by the Company in equity positions of various
community banks are also classified as other investment securities on the Consolidated Balance Sheets. Changes in the fair value of the marketable equity securities are recorded in the Consolidated Statements of Income.
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Management employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings. Although the regional community bank stocks that are owned by the Company are publicly traded, the trading activity for these stocks is minimal. As part of management's review process for these securities, management reviews the financial condition of each respective community bank for any indications of financial weakness.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
The specific identification method is used to determine the cost basis of securities sold.
Fair Value of Financial Instruments: ASC Topic 825 "Financial Instruments," as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Loans: Loans, excluding previously securitized loans, which are discussed separately below, are reported at the principal amount outstanding, net of unearned income. Portfolio loans include those for which management has the intent and the Company has the ability to hold for the foreseeable future, or until maturity or payoff. The foreseeable future is based upon management’s judgment of current business strategies and market conditions, the type of loan, asset/liability management, and liquidity.
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types. However, any loan may be placed on non-accrual status if the Company receives information that indicates that it is probable a borrower will be unable to meet the contractual terms of their respective loan agreement. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for credit losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in process of collection.
Generally for all loan classes, payments during the period the loan is non-performing are recorded on a cash basis. Payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment. Furthermore, all loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance.
Allowance for Credit Losses: 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.
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
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Measurement Method
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Commercial and industrial
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Migration
|
Commercial real estate:
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|
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’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring ("TDR") in accordance with ASU 2011-02, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt
(including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.
In March of 2020, in response to the COVID-19 pandemic, regulatory guidance was issued that clarified the accounting for loan modifications. Modifications of loan terms do not automatically result in a TDR. Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time the modification program was implemented. In addition, modifications or deferrals pursuant to the CARES Act do not represent TDRs. However, these deferrals do not absolve the company from performing its normal risk rating and therefore a loan could be current and have a less than satisfactory risk rating.
Bank Owned Life Insurance: The Company has purchased life insurance on certain executive officers and employees. The Company receives the cash surrender value of each policy upon its termination or benefits are payable upon the death of the insured. These policies are recorded on the Consolidated Balance Sheets at their net cash surrender value. Changes in the net cash surrender value are recognized in Bank Owned Life Insurance in the Consolidated Statements of Income.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the term of the respective lease or the estimated useful life of the respective asset. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of premises and equipment are capitalized and depreciated over the estimated remaining life of the asset.
Other Real Estate Owned: Other real estate owned ("OREO") is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is included in Other Assets at fair value less estimated selling costs. Changes to the value subsequent to transfer are recorded in non-interest expense, along with direct operating expenses. Gains or losses not previously recognized from sales of OREO are recognized in non-interest expense on the date of the sale. As of December 31, 2020 and 2019, the amount of OREO included in Other Assets was $1.7 million and $4.7 million, respectively. Physical possession of property collateralizing a loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Goodwill and Other Intangible Assets: Goodwill is the excess of the cost of an acquisition over the fair value of tangible and intangible assets acquired. Goodwill is not amortized. Intangible assets represent purchased assets that also lack physical substance, but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Intangible assets with determinable useful lives, such as core deposits, are amortized over their estimated useful lives.
The Company performs an annual review for impairment in the recorded value of goodwill and indefinite lived intangible assets. Goodwill is tested for impairment between the annual tests if an event occurs or circumstances change that more than likely reduce the fair value of a reporting unit below its carrying value. An indefinite-lived intangible asset is tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired.
Securities Sold Under Agreements to Repurchase: Securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold plus accrued interest. Securities sold primarily consists of U.S. government, federal agency, and municipal securities pledged as collateral under these financing arrangements and cannot be repledged or sold, unless replaced by the secured party.
Derivative Financial Instruments: Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship, and further, by the type of hedging relationship. The Company primarily utilizes non-hedging derivative financial instruments with commercial banking customers to facilitate their interest
rate management strategies. For these instruments, the Company acts as an intermediary for its customers and has offsetting contracts with financial institution counterparties. Changes in the fair value of these underlying derivative contracts generally offset each other and do not significantly impact the Company's results of operations. The Company also utilizes fair value hedge agreements to reduce the interest rate risk associated with the change in fair value of certain securities. The gains or losses on these hedges are recognized in current earnings as fair value changes.
Long-Term Debt: As part of its December 2018 acquisition of Poage Bankshares, Inc. ("Poage"), the Company assumed Poage's subordinated debentures ($4.1 million). During the first quarter of 2020, the Company repaid these debentures at a price of 100% of the principal amount. The weighted average rate of these debentures was 3.74% for the year ended December 31, 2019.
Trust Assets: Assets held in a fiduciary or agency capacity for customers are not included in the accompanying financial statements since such items are not assets of the Company.
Income Taxes: The consolidated provision for income taxes is based upon reported income and expense. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities, computed using enacted tax rates. The income tax effects related to settlements of share-based compensation awards are reported in earnings as an increase (or decrease) to income tax expense. The Company files a consolidated income tax return. The respective subsidiaries generally provide for income taxes on a separate return basis and remit amounts determined to be currently payable to the Parent Company.
The Company and its subsidiaries are subject to examinations and challenges from federal and state taxing authorities regarding positions taken in returns. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination. These positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority and assuming full knowledge of the position and all relevant facts by the taxing authority.
The Company invests in certain limited partnerships that operate qualified low-income housing tax credit developments. The tax credits are reflected in the Consolidated Statements of Income as a reduction in income tax expense. The unamortized amount of the investments is recorded within Other Assets within the Consolidated Balance Sheets. The Company’s investments in affordable housing limited partnerships were $14.4 million and $10.1 million at December 31, 2020 and 2019, respectively. The unfunded commitments associated with these investments were $6.8 million and $3.2 million at December 31, 2020 and 2019, respectively, and were recorded within Other Liabilities within the Consolidated Balance Sheets.
Advertising Costs: Advertising costs are expensed as incurred.
Stock-Based Compensation: Compensation expense related to stock options and restricted stock awards issued to employees is based upon the fair value of the award at the date of grant. The fair value of stock options is estimated utilizing a Black Scholes pricing model, while the fair value of restricted stock awards is based upon the stock price at the date of grant. Compensation expense is recognized on a straight line basis over the vesting period for options and the respective period for stock awards. Forfeitures are recognized as they occur, rather than estimated over the life of the award.
Basic and Diluted Earnings per Common Share: Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, excluding participating securities. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares outstanding, excluding participating securities, increased by the number of shares of common stock which would be issued assuming the exercise of stock options and other common stock equivalents.
NOTE TWO – RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted:
CECL
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model ("CECL") will apply to the allowance for credit losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses." This amendment clarifies the scope of the guidance in ASU No. 2016-13. In December 2018, the federal bank regulators issued a final rule that would provide an optional three-year phase-in period for the day-one regulatory capital effects of the adoption of ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, on January 1, 2020. In April 2020, federal bank regulators issued an interim final rule which provided banking organizations that implement CECL before the end of 2020 the option to delay for two more years an estimate of CECL's effect on regulatory capital, followed by the three-year transition period as previously issued. Management has elected to utilize the five-year interim final rule.
The Company adopted 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet ("OBS") credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The Company adopted 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased-credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether the PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $2.7 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income over the remaining life of the asset.
The following table illustrates the impact of ASC 326 (in thousands):
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|
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As Reported Under
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Pre-ASC 326
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Impact of ASC 326
|
|
ASC 326
|
Adoption
|
Adoption
|
|
|
|
|
Gross Loans
|
$
|
3,618,825
|
|
$
|
3,616,099
|
|
$
|
2,726
|
|
Allowance for Credit Losses
|
(17,349)
|
|
(11,589)
|
|
(5,760)
|
|
Deferred Tax Assets, net
|
7,380
|
|
6,669
|
|
711
|
|
|
|
|
|
Shareholders' Equity
|
655,648
|
|
657,983
|
|
(2,335)
|
|
Others
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This amendment simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2017-04 did not have a material impact on the Company's financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." This amendment expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU became effective for the Company on January 1, 2019. The adoption of this ASU did not have a material impact on the Company's financial statements. In April 2019, the FASB
issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." This amendment clarifies the guidance in ASU No. 2017-12. This amendment became effective for the Company on January 1, 2020. Effective January 1, 2020, the Company reclassified its held-to-maturity securities as available-for-sale utilizing the transition guidance under ASU 2019-04, and the unrealized gains/losses on these investments has been recorded through Other Comprehensive Income.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." This amendment removes, modifies, and clarifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-13 did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-15 did not have a material impact on the Company's financial statements.
In October 2018, the FASB issued ASU No. 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." This amendment permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Federal Funds Effective Rate, and the SIFMA Municipal Swap Rate. This ASU became effective for the Company on January 1, 2019 with anticipation the LIBOR index will be phased out by the end of 2021. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This amendment provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and is effective as of March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU No. 2021-01, "Reference Rate Reform (Topic 848): Scope," which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Management has reviewed the loan portfolio and taken the appropriate steps to prepare for the change from LIBOR to SOFR.
In October 2018, the FASB issued ASU No. 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities." This amendment simplifies the analysis of fees paid to decision makers or service providers in determining variable interest entities. This ASU became effective for the Company on January 1, 2020. The adoption of ASU No. 2018-17 did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." This amendment removes, modifies, and clarifies certain disclosure requirements for defined benefit plans and other post-employment benefit plans. This ASU became effective for the Company on December 31, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company's financial statements.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. This ASU became effective for the Company on January 1, 2021. The adoption of ASU No. 2019-12 is not expected to have a material impact on the Company's financial statements.
NOTE THREE – RESTRICTIONS ON CASH AND DUE FROM BANKS
City National was previously required to maintain an average reserve balance with the Federal Reserve Bank of Richmond to compensate for services provided by the Federal Reserve and to meet statutory required reserves for demand deposits. The average amount of the reserve balance for the year ended December 31, 2019 was approximately $47.3 million. On March 15, 2020, the Board of Governors of the Federal Reserve waived the average reserve balance requirement effective March 26, 2020.
NOTE FOUR – INVESTMENTS
The aggregate carrying and approximate fair values of investment securities follow (in thousands). Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.
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|
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|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. Treasuries and U.S.
|
|
|
|
|
|
|
|
|
government agencies
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
500
|
|
$
|
2
|
|
$
|
—
|
|
$
|
502
|
|
Obligations of states and
|
|
|
|
|
|
|
|
|
political subdivisions
|
266,483
|
|
11,467
|
|
139
|
|
277,811
|
|
112,393
|
|
4,800
|
|
6
|
|
117,187
|
|
Mortgage-backed securities:
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|
|
|
|
|
|
|
|
U.S. government agencies
|
815,682
|
|
34,807
|
|
105
|
|
850,384
|
|
631,637
|
|
12,292
|
|
1,825
|
|
642,104
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|
Private label
|
9,976
|
|
916
|
|
—
|
|
10,892
|
|
10,896
|
|
589
|
|
—
|
|
11,485
|
|
Trust preferred securities
|
4,557
|
|
—
|
|
457
|
|
4,100
|
|
4,781
|
|
27
|
|
347
|
|
4,461
|
|
Corporate securities
|
31,465
|
|
2,146
|
|
1
|
|
33,610
|
|
31,669
|
|
500
|
|
43
|
|
32,126
|
|
Total Debt Securities
|
1,128,163
|
|
49,336
|
|
702
|
|
1,176,797
|
|
791,876
|
|
18,210
|
|
2,221
|
|
807,865
|
|
Certificates of deposit held for investment
|
1,992
|
|
—
|
|
—
|
|
1,992
|
|
2,241
|
|
—
|
|
—
|
|
2,241
|
|
Total Securities
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
$
|
1,130,155
|
|
$
|
49,336
|
|
$
|
702
|
|
$
|
1,178,789
|
|
$
|
794,117
|
|
$
|
18,210
|
|
$
|
2,221
|
|
$
|
810,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
49,036
|
|
$
|
1,562
|
|
—
|
|
$
|
50,598
|
|
Total Securities
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
49,036
|
|
$
|
1,562
|
|
$
|
—
|
|
$
|
50,598
|
|
Effective January 1, 2020, the Company reclassified its held-to-maturity securities as available-for-sale utilizing the transition guidance under ASU 2019-04, and the unrealized gains/losses on these investments has been recorded through Other Comprehensive Income.
The Company's other investment securities include marketable and non-marketable equity securities. At December 31, 2020 and 2019, the Company held $11.8 million and $12.6 million, respectively, in marketable equity securities. Marketable equity securities mainly consist of investments made by the Company in equity positions of various community banks. Included within this portfolio are ownership positions in the following community bank holding companies: First National Corporation ("FXNC") (4%) and Eagle Financial Services, Inc. ("EFSI") (1.5%). Changes in the fair value of the marketable equity securities are recorded in "unrealized (losses) gains recognized on equity securities still held" in the consolidated statements of income. The Company's non-marketable securities consist of securities with limited marketability, such as stock in the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank ("FHLB"). At December 31, 2020 and 2019, the Company held $15.5 million and $15.9 million, respectively, in non-marketable equity securities. These securities are carried at cost due to the restrictions placed on their transferability.
The Company's mortgage-backed U.S. government agency securities consist of both residential and commercial securities, all of which are guaranteed by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), or Ginnie Mae ("GNMA"). At December 31, 2020 and 2019, there were no securities of any non-governmental issuer whose aggregate carrying value or estimated fair value exceeded 10% of shareholders' equity.
Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities) as of December 31, 2020 and 2019. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Less Than Twelve Months
|
Twelve Months or Greater
|
Total
|
|
Estimated Fair Value
|
Unrealized Loss
|
Estimated Fair Value
|
Unrealized Loss
|
Estimated Fair Value
|
Unrealized Loss
|
Securities available-for-sale:
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
10,578
|
|
$
|
139
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,578
|
|
$
|
139
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
U.S. Government agencies
|
62,412
|
|
105
|
|
35
|
|
—
|
|
62,447
|
|
105
|
|
Trust preferred securities
|
—
|
|
—
|
|
4,100
|
|
457
|
|
4,100
|
|
457
|
|
Corporate securities
|
488
|
|
1
|
|
—
|
|
—
|
|
488
|
|
1
|
|
Total available-for-sale
|
$
|
73,478
|
|
$
|
245
|
|
$
|
4,135
|
|
$
|
457
|
|
$
|
77,613
|
|
$
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less Than Twelve Months
|
Twelve Months or Greater
|
Total
|
|
Estimated Fair Value
|
Unrealized Loss
|
Estimated Fair Value
|
Unrealized Loss
|
Estimated Fair Value
|
Unrealized Loss
|
Securities available-for-sale:
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
230
|
|
$
|
—
|
|
$
|
1,439
|
|
$
|
6
|
|
$
|
1,669
|
|
$
|
6
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
U.S. Government agencies
|
123,289
|
|
1,247
|
|
34,746
|
|
578
|
|
158,035
|
|
1,825
|
|
Trust preferred securities
|
4,200
|
|
347
|
|
—
|
|
—
|
|
4,200
|
|
347
|
|
Corporate securities
|
11,248
|
|
43
|
|
—
|
|
—
|
|
11,248
|
|
43
|
|
Total available-for-sale
|
$
|
138,967
|
|
$
|
1,637
|
|
$
|
36,185
|
|
$
|
584
|
|
$
|
175,152
|
|
$
|
2,221
|
|
There were no held-to-maturity securities in an unrealized loss position as of December 31, 2019.
As of December 31, 2020, management does not intend to sell any securities that are in an unrealized loss position and it is not more than likely that it will be required to sell the securities before the recovery of the amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of December 31, 2020, management believes the unrealized losses detailed in the table above are temporary and no allowance for credit losses for available-for-sale securities has been recognized in the Company’s consolidated income statement. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income. During the years ended December 31, 2020, 2019 and 2018, the Company had no credit-related net investment impairment losses.
The amortized cost and estimated fair value of debt securities at December 31, 2020, by contractual maturity, is shown in the following table (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.
|
|
|
|
|
|
|
|
|
|
Cost
|
Estimated Fair Value
|
Securities Available-for-Sale
|
|
|
Due in one year or less
|
$
|
5,211
|
|
$
|
5,307
|
|
Due after one year through five years
|
32,776
|
|
34,499
|
|
Due after five years through ten years
|
276,898
|
|
293,388
|
|
Due after ten years
|
813,278
|
|
843,603
|
|
|
$
|
1,128,163
|
|
$
|
1,176,797
|
|
Gross gains and gross losses realized by the Company from investment security transactions are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
2019
|
2018
|
|
|
|
|
Gross unrealized gains recognized on equity securities still held
|
$
|
223
|
|
$
|
888
|
|
$
|
208
|
|
Gross unrealized losses recognized on equity securities still held
|
(1,086)
|
|
—
|
|
(298)
|
|
Net unrealized (losses) gains recognized on equity securities still held
|
$
|
(863)
|
|
$
|
888
|
|
$
|
(90)
|
|
|
|
|
|
Gross realized gains
|
$
|
139
|
|
$
|
226
|
|
$
|
—
|
|
Gross realized losses
|
(77)
|
|
(157)
|
|
—
|
|
Net realized investment security gains
|
$
|
62
|
|
$
|
69
|
|
$
|
—
|
|
During January 2020, the Company sold the entirety of its Visa Inc. Class B common shares (86,605) in a cash transaction which resulted in a pre-tax gain of $17.8 million. The carrying value of the Visa Class B shares on the Company’s balance sheet was $0, as City National had no historical cost basis in the shares.
The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $644 million and $518 million at December 31, 2020 and 2019, respectively.
NOTE FIVE – LOANS
The following summarizes the Company’s major classifications for loans (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
|
|
|
Commercial and industrial
|
$
|
372,989
|
|
$
|
308,015
|
|
|
|
|
1-4 Family
|
109,812
|
|
N/R
|
Hotels
|
294,464
|
|
N/R
|
Multi-family
|
215,671
|
|
N/R
|
Non Residential Non-Owner Occupied
|
641,351
|
|
N/R
|
Non Residential Owner Occupied
|
213,484
|
|
N/R
|
Commercial real estate
|
1,474,782
|
|
1,459,737
|
|
|
|
|
Residential real estate
|
1,587,694
|
|
1,640,396
|
|
Home equity
|
136,469
|
|
148,928
|
|
Consumer
|
47,688
|
|
54,263
|
|
DDA overdrafts
|
2,497
|
|
4,760
|
|
Gross loans
|
3,622,119
|
|
3,616,099
|
|
Allowance for credit losses
|
(24,549)
|
|
(11,589)
|
|
Net loans
|
$
|
3,597,570
|
|
$
|
3,604,510
|
|
|
|
|
Construction loans included in:
|
|
|
Residential real estate
|
$
|
27,078
|
|
$
|
29,033
|
|
Commercial real estate
|
40,449
|
|
64,049
|
|
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
|
The Company's commercial and residential real estate construction loans are primarily secured by real estate within the Company's principal markets. These loans were originated under the Company's loan policy, which is focused on the risk characteristics of the loan portfolio, including construction loans. In the judgment of the Company's management, adequate consideration has been given to these loans in establishing the Company's allowance for credit losses.
Paycheck Protection Program
The Company originated loans to its customers under the Paycheck Protection Program ("PPP") administered by the Small Business Administration ("SBA") under the provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Loans covered by the PPP may be eligible for loan forgiveness. The remaining loan balances, if any, after the loan forgiveness, are fully guaranteed by the SBA. Through December 31, 2020, the Company has funded approximately $90 million of SBA-approved PPP loans to over 1,500 customers. Under the terms of the program, the SBA paid the lender a processing fee tiered by the size of the loan (5% for loans less than $350,000; 3% for loans greater than $350,000 but less than $2.0 million; and 1% for loans greater than $2.0 million). The Company started submitting forgiveness applications on behalf of its customers during the fourth quarter of 2020 and as of December 31, 2020, has received forgiveness proceeds of approximately $30 million.
NOTE SIX – ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the activity in the allowance for credit losses, by portfolio loan classification, for the years ended December 31, 2020, 2019 and 2018 (in thousands). The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
Commercial real estate
|
Residential real estate
|
Home equity
|
Consumer
|
DDA overdrafts
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,059
|
|
$
|
2,606
|
|
$
|
3,448
|
|
$
|
1,187
|
|
$
|
975
|
|
$
|
1,314
|
|
$
|
11,589
|
|
Impact of adopting CECL
|
1,715
|
|
3,254
|
|
2,139
|
|
(598)
|
|
(810)
|
|
60
|
|
5,760
|
|
Charge-offs
|
(843)
|
|
(1,113)
|
|
(1,250)
|
|
(420)
|
|
(192)
|
|
(2,345)
|
|
(6,163)
|
|
Recoveries
|
91
|
|
525
|
|
184
|
|
136
|
|
238
|
|
1,467
|
|
2,641
|
|
Provision for (recovery of) credit
losses
|
622
|
|
5,725
|
|
3,572
|
|
325
|
|
(48)
|
|
526
|
|
10,722
|
|
Ending balance
|
$
|
3,644
|
|
$
|
10,997
|
|
$
|
8,093
|
|
$
|
630
|
|
$
|
163
|
|
$
|
1,022
|
|
$
|
24,549
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
4,060
|
|
$
|
4,495
|
|
$
|
4,116
|
|
$
|
1,268
|
|
$
|
319
|
|
$
|
1,708
|
|
$
|
15,966
|
|
Charge-offs
|
(261)
|
|
(1,358)
|
|
(787)
|
|
(294)
|
|
(1,177)
|
|
(2,777)
|
|
(6,654)
|
|
Recoveries
|
764
|
|
624
|
|
369
|
|
—
|
|
265
|
|
1,505
|
|
3,527
|
|
(Recovery of) provision for credit
losses
|
(2,504)
|
|
(1,155)
|
|
(250)
|
|
213
|
|
1,568
|
|
878
|
|
(1,250)
|
|
Ending balance
|
$
|
2,059
|
|
$
|
2,606
|
|
$
|
3,448
|
|
$
|
1,187
|
|
$
|
975
|
|
$
|
1,314
|
|
$
|
11,589
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
4,571
|
|
$
|
6,183
|
|
$
|
5,212
|
|
$
|
1,138
|
|
$
|
62
|
|
$
|
1,670
|
|
$
|
18,836
|
|
Charge-offs
|
(733)
|
|
(369)
|
|
(682)
|
|
(219)
|
|
(769)
|
|
(2,701)
|
|
(5,473)
|
|
Recoveries
|
2,152
|
|
732
|
|
367
|
|
—
|
|
166
|
|
1,496
|
|
4,913
|
|
(Recovery of) provision for credit
losses
|
(1,930)
|
|
(2,051)
|
|
(781)
|
|
349
|
|
860
|
|
1,243
|
|
(2,310)
|
|
Ending balance
|
$
|
4,060
|
|
$
|
4,495
|
|
$
|
4,116
|
|
$
|
1,268
|
|
$
|
319
|
|
$
|
1,708
|
|
$
|
15,966
|
|
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 provision for credit losses recorded during the year ended December 31, 2020 largely reflects the expected economic impact from the COVID-19 pandemic. 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. As a result of COVID-19, expected unemployment ranges have significantly increased and resulted in an increase in the Company's provision for credit losses.
Individual credits in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance.
Non-Performing Loans
The following tables present the amortized cost basis of loans on non-accrual status and loans past due over 90 days still accruing as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual With No
|
Non-accrual With
|
Loans Past Due
|
|
Allowance for
|
Allowance for
|
Over 90 Days
|
|
Credit Losses
|
Credit Losses
|
Still Accruing
|
Commercial & Industrial
|
$
|
172
|
|
$
|
596
|
|
$
|
—
|
|
|
|
|
|
1-4 Family
|
—
|
|
2,056
|
|
—
|
|
Hotels
|
—
|
|
2,951
|
|
—
|
|
Multi-family
|
—
|
|
—
|
|
—
|
|
Non Residential Non-Owner Occupied
|
—
|
|
508
|
|
—
|
|
Non Residential Owner Occupied
|
2,297
|
|
589
|
|
—
|
|
Commercial Real Estate
|
2,297
|
|
6,104
|
|
—
|
|
|
|
|
|
Residential Real Estate
|
21
|
|
2,947
|
|
—
|
|
Home Equity
|
—
|
|
95
|
|
—
|
|
Consumer
|
—
|
|
—
|
|
—
|
|
Total
|
$
|
2,490
|
|
$
|
9,742
|
|
$
|
—
|
|
The following table presents the Company's loans on non-accrual status and loans past due over 90 days still accruing as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Loans Past Due
|
|
|
Over 90 Days
|
|
Non-accrual
|
Still Accruing
|
Commercial and industrial
|
$
|
1,182
|
|
$
|
184
|
|
Commercial real estate
|
6,384
|
|
—
|
|
Residential real estate
|
3,393
|
|
83
|
|
Home equity
|
531
|
|
—
|
|
Consumer
|
—
|
|
—
|
|
Total
|
$
|
11,490
|
|
$
|
267
|
|
The Company recognized less than $0.1 million of interest income on nonaccrual loans during each of the years ended December 31, 2020 and 2019, respectively.
The following presents the aging of the amortized cost basis in past-due loans as of December 31, 2020 and 2019 by class of loan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
30-59
Past Due
|
60-89
Past Due
|
90+
Past Due
|
Total
Past Due
|
Current
Loans
|
Non-accrual
|
Total
Loans
|
Commercial and industrial
|
$
|
1,213
|
|
$
|
27
|
|
$
|
—
|
|
$
|
1,240
|
|
$
|
370,981
|
|
$
|
768
|
|
$
|
372,989
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
484
|
|
—
|
|
—
|
|
484
|
|
107,272
|
|
2,056
|
|
109,812
|
|
Hotels
|
—
|
|
—
|
|
—
|
|
—
|
|
291,513
|
|
2,951
|
|
294,464
|
|
Multi-family
|
—
|
|
—
|
|
—
|
|
—
|
|
215,671
|
|
—
|
|
215,671
|
|
Non Residential Non-Owner Occupied
|
119
|
|
—
|
|
—
|
|
119
|
|
640,724
|
|
508
|
|
641,351
|
|
Non Residential Owner Occupied
|
22
|
|
—
|
|
—
|
|
22
|
|
210,576
|
|
2,886
|
|
213,484
|
|
Commercial real estate
|
625
|
|
—
|
|
—
|
|
625
|
|
1,465,756
|
|
8,401
|
|
1,474,782
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
5,177
|
|
816
|
|
—
|
|
5,993
|
|
1,578,733
|
|
2,968
|
|
1,587,694
|
|
Home equity
|
575
|
|
—
|
|
—
|
|
575
|
|
135,799
|
|
95
|
|
136,469
|
|
Consumer
|
63
|
|
50
|
|
—
|
|
113
|
|
47,575
|
|
—
|
|
47,688
|
|
Overdrafts
|
334
|
|
7
|
|
—
|
|
341
|
|
2,156
|
|
—
|
|
2,497
|
|
Total
|
$
|
7,987
|
|
$
|
900
|
|
$
|
—
|
|
$
|
8,887
|
|
$
|
3,601,000
|
|
$
|
12,232
|
|
$
|
3,622,119
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
30-59
Past Due
|
60-89
Past Due
|
90+
Past Due
|
Total
Past Due
|
Current
Loans
|
Non-accrual
|
Total
Loans
|
Commercial and industrial
|
$
|
243
|
|
$
|
31
|
|
$
|
184
|
|
$
|
458
|
|
$
|
306,375
|
|
$
|
1,182
|
|
$
|
308,015
|
|
Commercial real estate
|
1,514
|
|
66
|
|
—
|
|
1,580
|
|
1,451,773
|
|
6,384
|
|
1,459,737
|
|
Residential real estate
|
5,758
|
|
1,643
|
|
83
|
|
7,484
|
|
1,629,519
|
|
3,393
|
|
1,640,396
|
|
Home equity
|
840
|
|
116
|
|
—
|
|
956
|
|
147,441
|
|
531
|
|
148,928
|
|
Consumer
|
156
|
|
32
|
|
—
|
|
188
|
|
54,075
|
|
—
|
|
54,263
|
|
Overdrafts
|
644
|
|
86
|
|
—
|
|
730
|
|
4,030
|
|
—
|
|
4,760
|
|
Total
|
$
|
9,155
|
|
$
|
1,974
|
|
$
|
267
|
|
$
|
11,396
|
|
$
|
3,593,213
|
|
$
|
11,490
|
|
$
|
3,616,099
|
|
The following table presents the amortized cost basis of individually evaluated impaired collateral-dependent loans as of December 31, 2020 (in thousands). Changes in the fair value of the collateral for collateral-dependent loans are reported as credit loss expense or a reversal of credit loss expense in the period of change.
|
|
|
|
|
|
|
|
|
|
Secured by
|
|
Real Estate
|
Equipment
|
Commercial and industrial
|
$
|
173
|
|
$
|
—
|
|
|
|
|
1-4 Family
|
—
|
|
N/A
|
Hotels
|
2,837
|
|
N/A
|
Multi-family
|
—
|
|
N/A
|
Non Residential Non-Owner Occupied
|
—
|
|
N/A
|
Non Residential Owner Occupied
|
2,296
|
|
N/A
|
Commercial real estate
|
5,133
|
|
N/A
|
Total
|
$
|
5,306
|
|
N/A
|
The following table presents the Company’s individually evaluated impaired loans, by class (in thousands) as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Unpaid
|
|
|
Recorded
|
Principal
|
Related
|
|
Investment
|
Balance
|
Allowance
|
With no related allowance recorded:
|
|
|
|
Commercial and industrial
|
$
|
501
|
|
$
|
501
|
|
$
|
—
|
|
Commercial real estate
|
3,546
|
|
3,572
|
|
—
|
|
Total
|
$
|
4,047
|
|
$
|
4,073
|
|
$
|
—
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Commercial real estate
|
2,644
|
|
2,644
|
|
87
|
|
Total
|
$
|
2,644
|
|
$
|
2,644
|
|
$
|
87
|
|
The following table presents information related to the average recorded investment and interest income recognized on the Company's impaired loans, by class (in thousands), for the years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
December 31, 2018
|
|
Average
|
Interest
|
Average
|
Interest
|
|
Recorded
|
Income
|
Recorded
|
Income
|
|
Investment
|
Recognized
|
Investment
|
Recognized
|
With no related allowance recorded:
|
|
|
|
|
Commercial and industrial
|
$
|
578
|
|
$
|
—
|
|
$
|
845
|
|
$
|
—
|
|
Commercial real estate
|
4,388
|
|
41
|
|
4,623
|
|
39
|
|
Total
|
$
|
4,966
|
|
$
|
41
|
|
$
|
5,468
|
|
$
|
39
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Commercial real estate
|
4,261
|
|
162
|
|
5,043
|
|
220
|
|
Total
|
$
|
4,261
|
|
$
|
162
|
|
$
|
5,043
|
|
$
|
220
|
|
If the Company's non-accrual and impaired loans had been current in accordance with their original terms, less than $0.2 million of interest income would have been recognized during the years ended December 31, 2019 and 2018. There were no commitments to provide additional funds on non-accrual or impaired loans at December 31, 2020.
Troubled Debt Restructurings ("TDRs")
The following tables set forth the Company’s TDRs (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
Commercial and industrial
|
$
|
—
|
|
$
|
—
|
|
|
|
|
1-4 Family
|
121
|
|
N/R
|
Hotels
|
2,634
|
|
N/R
|
Multi-family
|
1,883
|
|
N/R
|
Non Residential Non-Owner Occupied
|
—
|
|
N/R
|
Non Residential Owner Occupied
|
—
|
|
N/R
|
Commercial real estate
|
4,638
|
|
4,973
|
|
|
|
|
Residential real estate
|
19,226
|
|
21,029
|
|
Home equity
|
2,001
|
|
3,628
|
|
Consumer
|
277
|
|
—
|
|
Total TDRs
|
$
|
26,142
|
|
$
|
29,630
|
|
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
|
The Company has allocated $1.6 million and $0.8 million of the allowance for credit losses for these loans as of December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020, the Company has not committed to lend any additional in relation to these loans.
The Company had one TDR that subsequently defaulted in 2019. The loan balance was approximately $3.0 million and the subsequent default resulted in a charge-off of $0.7 million and the remaining balance was transferred to OREO during 2019. The Company has had no significant TDRs that subsequently defaulted in 2020.
The following table presents loans by class, modified as TDRs, that occurred during the years ended December 31, 2020, 2019 and 2018, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New TDRs
|
New TDRs
|
New TDRs
|
|
For the year ended
|
For the year ended
|
For the year ended
|
|
December 31, 2020
|
December 31, 2019
|
December 31, 2018
|
|
Pre
|
Post
|
|
Pre
|
Post
|
|
Pre
|
Post
|
|
Modification
|
Modification
|
|
Modification
|
Modification
|
|
Modification
|
Modification
|
|
Outstanding
|
Outstanding
|
|
Outstanding
|
Outstanding
|
|
Outstanding
|
Outstanding
|
Number of
|
Recorded
|
Recorded
|
Number of
|
Recorded
|
Recorded
|
Number of
|
Recorded
|
Recorded
|
Contracts
|
Investment
|
Investment
|
Contracts
|
Investment
|
Investment
|
Contracts
|
Investment
|
Investment
|
Commercial and industrial
|
—
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
—
|
|
—
|
|
—
|
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
Hotels
|
—
|
|
—
|
|
—
|
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
Multi-family
|
—
|
|
—
|
|
—
|
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
Non Owner Non-Owner Occupied
|
—
|
|
—
|
|
—
|
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
Non Owner Owner Occupied
|
—
|
|
—
|
|
—
|
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
N/R
|
Commercial real estate
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
29
|
|
2,724
|
|
2,720
|
|
31
|
|
2,531
|
|
2,531
|
|
33
|
|
2,326
|
|
2,326
|
|
Home equity
|
3
|
|
94
|
|
94
|
|
10
|
|
967
|
|
967
|
|
10
|
|
274
|
|
274
|
|
Consumer
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total
|
32
|
|
$
|
2,818
|
|
$
|
2,814
|
|
41
|
|
$
|
3,498
|
|
$
|
3,498
|
|
43
|
|
$
|
2,600
|
|
$
|
2,600
|
|
N/R = Not reported. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
|
The TDRs above increased the allowance for credit losses by less than $0.1 million for each of the years ended of December 31, 2020, 2019 and 2018 and resulted in charge-offs of less than $0.2 million during those same time periods.
Most TDRs above are reported due to filing Chapter 7 banktruptcy. Regulatory guidance requires that loans be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court and the borrower has not reaffirmed the debt. The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of debt by the bankruptcy court is deemed to be a concession granted to the borrower.
COVID-19 Pandemic
In March of 2020, in response to the COVID-19 pandemic, regulatory guidance was issued that clarified the accounting for loan modifications. Modifications of loan terms do not automatically result in a TDR. Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time the modification program was implemented. In addition, modifications or deferrals pursuant to the CARES Act do not represent TDRs. However, these deferrals do not absolve the company from performing its normal risk rating and therefore a loan could be current and have a less than satisfactory risk rating.
During the year ended December 31, 2020, the Company granted deferrals of approximately $135 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As of December 31, 2020, approximately $9 million of these loans were still deferring, while approximately $126 million have resumed making their normal loan payment. As of December 30, 2020, approximately $4 million of these deferrals were previously and currently considered TDRs due to Chapter 7 bankruptcies.
During the year ended December 31, 2020, the Company granted deferrals of approximately $455 million to its commercial customers. These deferral arrangements ranged from one month to six months. As of December 31, 2020, approximately $99 million of these loans were still deferring (including $88 million for hotel and lodging related loans), while approximately $356 million have resumed making their normal loan payment.
Credit Quality Indicators
All commercial loans within the portfolio are subject to internal risk rating. All non-commercial loans are evaluated based on payment history. The Company’s internal risk ratings for commercial loans are: Exceptional, Good, Acceptable, Pass/Watch, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields; ratios and leverage; cash flow spread and coverage; prior history; capability of management; market position/industry; potential impact of changing economic, legal, regulatory or environmental conditions; purpose; structure; collateral support; and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of expected loss.
The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity and overall collateral position, along with other economic trends and historical payment performance. The risk rating for each credit is updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review and credit administration departments, or the loan becomes delinquent or impaired. The risk grades are updated a minimum of annually for loans rated Exceptional, Good, Acceptable, or Pass/Watch. Loans rated Special Mention, Substandard or Doubtful are reviewed at least quarterly. The Company uses the following definitions for its risk ratings:
|
|
|
|
|
|
Risk Rating
|
Description
|
Pass Ratings:
|
|
(a) Exceptional
|
Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy. Loans rated within this category pose minimal risk of loss to the bank.
|
(b) Good
|
Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans in this category generally have a low chance of loss to the bank.
|
(c) Acceptable
|
Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles. Loans within this category generally have a low risk of loss to the bank.
|
(d) Pass/watch
|
Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk. A borrower in this category poses a low to moderate risk of loss to the bank.
|
Special mention
|
Loans classified as special mention have a potential weakness(es) that deserves management’s close attention. The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date. A loan rated in this category poses a moderate loss risk to the bank.
|
Substandard
|
Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt. Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower.
|
Doubtful
|
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable. Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position.
|
Based on the most recent analysis performed, the risk category of loans by class of loans at December 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
|
|
|
Term Loans
|
Loans
|
|
|
Amortized Cost Basis by Origination Year and Risk Level
|
Amortized
|
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
Prior
|
Cost Basis
|
Total
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
Pass
|
$
|
123,920
|
|
$
|
51,972
|
|
$
|
59,152
|
|
$
|
30,440
|
|
$
|
16,673
|
|
$
|
6,942
|
|
$
|
75,018
|
|
$
|
364,117
|
|
Special mention
|
72
|
|
27
|
|
13
|
|
47
|
|
—
|
|
433
|
|
508
|
|
1,100
|
|
Substandard
|
783
|
|
1,553
|
|
918
|
|
589
|
|
268
|
|
1,733
|
|
1,928
|
|
7,772
|
|
Total
|
$
|
124,775
|
|
$
|
53,552
|
|
$
|
60,083
|
|
$
|
31,076
|
|
$
|
16,941
|
|
$
|
9,108
|
|
$
|
77,454
|
|
$
|
372,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Pass
|
$
|
312,363
|
|
$
|
296,876
|
|
$
|
179,038
|
|
$
|
142,678
|
|
$
|
147,772
|
|
$
|
280,107
|
|
$
|
25,560
|
|
$
|
1,384,394
|
|
Special mention
|
442
|
|
5,288
|
|
1,196
|
|
127
|
|
159
|
|
3,370
|
|
—
|
|
10,582
|
|
Substandard
|
1,159
|
|
22,224
|
|
1,855
|
|
13,734
|
|
9,574
|
|
30,938
|
|
322
|
|
79,806
|
|
Total
|
$
|
313,964
|
|
$
|
324,388
|
|
$
|
182,089
|
|
$
|
156,539
|
|
$
|
157,505
|
|
$
|
314,415
|
|
$
|
25,882
|
|
$
|
1,474,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
Pass
|
$
|
19,970
|
|
$
|
17,540
|
|
$
|
8,217
|
|
$
|
7,444
|
|
$
|
6,158
|
|
$
|
33,075
|
|
$
|
10,274
|
|
$
|
102,678
|
|
Special mention
|
192
|
|
—
|
|
—
|
|
—
|
|
159
|
|
753
|
|
—
|
|
1,104
|
|
Substandard
|
119
|
|
343
|
|
—
|
|
863
|
|
102
|
|
4,603
|
|
—
|
|
6,030
|
|
Total
|
$
|
20,281
|
|
$
|
17,883
|
|
$
|
8,217
|
|
$
|
8,307
|
|
$
|
6,419
|
|
$
|
38,431
|
|
$
|
10,274
|
|
$
|
109,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
Hotels
|
|
|
|
|
|
|
|
|
Pass
|
$
|
23,886
|
|
$
|
95,269
|
|
$
|
26,206
|
|
$
|
42,593
|
|
$
|
21,490
|
|
$
|
43,686
|
|
$
|
—
|
|
$
|
253,130
|
|
Substandard
|
343
|
|
15,412
|
|
—
|
|
6,750
|
|
4,465
|
|
14,364
|
|
—
|
|
41,334
|
|
Total
|
$
|
24,229
|
|
$
|
110,681
|
|
$
|
26,206
|
|
$
|
49,343
|
|
$
|
25,955
|
|
$
|
58,050
|
|
$
|
—
|
|
$
|
294,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
Pass
|
$
|
81,127
|
|
$
|
56,371
|
|
$
|
2,688
|
|
$
|
20,730
|
|
$
|
23,873
|
|
$
|
27,009
|
|
$
|
1,363
|
|
$
|
213,161
|
|
Special mention
|
—
|
|
1,883
|
|
551
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,434
|
|
Substandard
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
76
|
|
—
|
|
76
|
|
Total
|
$
|
81,127
|
|
$
|
58,254
|
|
$
|
3,239
|
|
$
|
20,730
|
|
$
|
23,873
|
|
$
|
27,085
|
|
$
|
1,363
|
|
$
|
215,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
|
|
|
Term Loans
|
Loans
|
|
|
Amortized Cost Basis by Origination Year and Risk Level
|
Amortized
|
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
Prior
|
Cost Basis
|
Total
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
Non Residential Non-Owner Occupied
|
|
|
|
|
|
|
|
Pass
|
$
|
155,937
|
|
$
|
101,011
|
|
$
|
115,524
|
|
$
|
51,329
|
|
$
|
76,219
|
|
$
|
125,349
|
|
$
|
8,825
|
|
$
|
634,194
|
|
Special mention
|
16
|
|
504
|
|
592
|
|
37
|
|
—
|
|
147
|
|
—
|
|
1,296
|
|
Substandard
|
580
|
|
1,385
|
|
1,159
|
|
52
|
|
1,187
|
|
1,338
|
|
160
|
|
5,861
|
|
Total
|
$
|
156,533
|
|
$
|
102,900
|
|
$
|
117,275
|
|
$
|
51,418
|
|
$
|
77,406
|
|
$
|
126,834
|
|
$
|
8,985
|
|
$
|
641,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate -
|
|
|
|
|
|
|
|
|
Non Residential Owner Occupied
|
|
|
|
|
|
|
|
Pass
|
$
|
31,443
|
|
$
|
26,685
|
|
$
|
26,403
|
|
$
|
20,582
|
|
$
|
20,032
|
|
$
|
50,988
|
|
$
|
5,098
|
|
$
|
181,231
|
|
Special mention
|
234
|
|
2,901
|
|
53
|
|
90
|
|
—
|
|
2,470
|
|
—
|
|
5,748
|
|
Substandard
|
117
|
|
5,084
|
|
696
|
|
6,069
|
|
3,820
|
|
10,557
|
|
162
|
|
26,505
|
|
Total
|
$
|
31,794
|
|
$
|
34,670
|
|
$
|
27,152
|
|
$
|
26,741
|
|
$
|
23,852
|
|
$
|
64,015
|
|
$
|
5,260
|
|
$
|
213,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
Performing
|
$
|
407,135
|
|
$
|
233,709
|
|
$
|
176,523
|
|
$
|
134,425
|
|
$
|
102,828
|
|
$
|
416,473
|
|
$
|
113,633
|
|
$
|
1,584,726
|
|
Non-performing
|
—
|
|
—
|
|
—
|
|
164
|
|
41
|
|
1,184
|
|
1,579
|
|
2,968
|
|
Total
|
$
|
407,135
|
|
$
|
233,709
|
|
$
|
176,523
|
|
$
|
134,589
|
|
$
|
102,869
|
|
$
|
417,657
|
|
$
|
115,212
|
|
$
|
1,587,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
|
|
|
|
|
|
Performing
|
$
|
9,038
|
|
$
|
6,241
|
|
$
|
5,375
|
|
$
|
2,126
|
|
$
|
1,309
|
|
$
|
11,573
|
|
$
|
100,712
|
|
$
|
136,374
|
|
Non-performing
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
95
|
|
95
|
|
Total
|
$
|
9,038
|
|
$
|
6,241
|
|
$
|
5,375
|
|
$
|
2,126
|
|
$
|
1,309
|
|
$
|
11,573
|
|
$
|
100,807
|
|
$
|
136,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Performing
|
$
|
15,342
|
|
$
|
14,977
|
|
$
|
9,229
|
|
$
|
3,154
|
|
$
|
1,688
|
|
$
|
1,422
|
|
$
|
1,876
|
|
$
|
47,688
|
|
Non-performing
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total
|
$
|
15,342
|
|
$
|
14,977
|
|
$
|
9,229
|
|
$
|
3,154
|
|
$
|
1,688
|
|
$
|
1,422
|
|
$
|
1,876
|
|
$
|
47,688
|
|
The following table presents the Company's commercial loans by credit quality indicators, by portfolio loan classification (in thousands), as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
Commercial real estate
|
Total
|
Pass
|
$
|
276,847
|
|
$
|
1,408,644
|
|
$
|
1,685,491
|
|
Special mention
|
2,472
|
|
13,838
|
|
16,310
|
|
Substandard
|
28,696
|
|
37,255
|
|
65,951
|
|
Doubtful
|
—
|
|
—
|
|
—
|
|
Total
|
$
|
308,015
|
|
$
|
1,459,737
|
|
$
|
1,767,752
|
|
The following table presents the Company's non-commercial loans by payment performance, by portfolio loan classification (in thousands), as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
Non-Performing
|
Total
|
Residential real estate
|
$
|
1,636,920
|
|
$
|
3,476
|
|
$
|
1,640,396
|
|
Home equity
|
148,397
|
|
531
|
|
148,928
|
|
Consumer
|
54,263
|
|
—
|
|
54,263
|
|
DDA overdrafts
|
4,760
|
|
—
|
|
4,760
|
|
Total
|
$
|
1,844,340
|
|
$
|
4,007
|
|
$
|
1,848,347
|
|
NOTE SEVEN – PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
2020
|
2019
|
|
|
|
|
Land
|
|
$
|
34,185
|
|
$
|
34,185
|
|
Buildings and improvements
|
10 to 30 yrs.
|
97,091
|
|
95,662
|
|
Equipment
|
3 to 7 yrs.
|
46,307
|
|
43,135
|
|
|
|
177,583
|
|
172,982
|
|
Less: accumulated depreciation
|
|
(100,658)
|
|
(96,017)
|
|
|
|
$
|
76,925
|
|
$
|
76,965
|
|
The depreciation expense for the years ended December 31, 2020, 2019, and 2018 was $5.8 million, $5.0 million, and $5.1 million, respectively.
NOTE EIGHT – GOODWILL AND OTHER INTANGIBLE ASSETS
The Company completed its annual assessment of the carrying value of goodwill during 2020 and concluded that its carrying value was not impaired. The Company's reporting unit had positive equity and a qualitative assessment was completed, indicating that it was not more likely than not that goodwill was impaired. The following table presents a roll forward of the Company's goodwill activity (in thousands):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
|
|
Beginning balance
|
$
|
108,941
|
|
$
|
109,567
|
|
Goodwill and adjustments acquired in conjunction with the acquisition of Poage
|
—
|
|
(583)
|
|
Goodwill and adjustments acquired in conjunction with the acquisition of Farmers Deposit
|
—
|
|
(43)
|
|
Ending balance
|
$
|
108,941
|
|
$
|
108,941
|
|
The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with acquisitions, the Company recorded a core deposit intangible, which represented the value that the acquiree had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered the type of deposit, estimated deposit retention, the cost of the deposit base and an alternate cost of funds. The following tables present the details of the Company's core deposit intangibles (in thousands):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
|
|
Gross carrying amount
|
$
|
21,190
|
|
$
|
21,190
|
|
Accumulated amortization
|
(11,539)
|
|
(9,890)
|
|
|
$
|
9,651
|
|
$
|
11,300
|
|
|
|
|
Beginning balance
|
$
|
11,300
|
|
$
|
13,281
|
|
Amortization expense
|
(1,649)
|
|
(1,981)
|
|
Ending balance
|
$
|
9,651
|
|
$
|
11,300
|
|
The core deposit intangibles are being amortized over 10 years. The estimated amortization expense for core deposit intangible assets for each of the next five years is as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
1,472
|
|
2022
|
1,386
|
|
2023
|
1,220
|
|
2024
|
1,209
|
|
2025
|
1,185
|
|
Thereafter
|
3,179
|
|
|
$
|
9,651
|
|
NOTE NINE – SCHEDULED MATURITIES OF TIME DEPOSITS
Scheduled maturities of the Company's time deposits outstanding at December 31, 2020 are summarized as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
931,862
|
|
2022
|
201,922
|
|
2023
|
87,440
|
|
2024
|
22,252
|
|
2025
|
16,097
|
|
Over five years
|
449
|
|
|
$
|
1,260,022
|
|
The Company's time deposits that meet or exceed the FDIC insurance limit of $250,000 were $171.3 million and $184.4 million at December 31, 2020 and 2019, respectively.
NOTE TEN – SHORT-TERM DEBT
A summary of the Company's short-term borrowings is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
|
|
|
Balance at end of year:
|
|
|
|
Federal Home Loan Bank advances
|
$
|
—
|
|
$
|
—
|
|
$
|
40,000
|
|
Securities sold under agreements to repurchase
|
295,956
|
|
211,255
|
|
221,911
|
|
Federal Funds purchased
|
—
|
|
—
|
|
—
|
|
|
|
|
|
Avg. outstanding during the year:
|
|
|
|
Federal Home Loan Bank advances
|
$
|
151
|
|
$
|
10,752
|
|
$
|
74,102
|
|
Securities sold under agreements to repurchase
|
253,289
|
|
200,697
|
|
190,702
|
|
Federal Funds purchased
|
16
|
|
3
|
|
353
|
|
|
|
|
|
Max. outstanding at any month end:
|
|
|
|
Federal Home Loan Bank advances
|
$
|
9,900
|
|
$
|
154,000
|
|
$
|
185,000
|
|
Securities sold under agreements to repurchase
|
295,956
|
|
226,603
|
|
221,911
|
|
Federal Funds purchased
|
—
|
|
—
|
|
10,000
|
|
|
|
|
|
Weighted-average interest rate:
|
|
|
|
During the year:
|
|
|
|
Federal Home Loan Bank advances
|
0.85
|
%
|
2.72
|
%
|
2.21
|
%
|
Securities sold under agreements to repurchase
|
0.39
|
|
1.59
|
|
0.93
|
|
Federal Funds purchased
|
0.83
|
|
2.84
|
|
2.10
|
|
End of the year:
|
|
|
|
Federal Home Loan Bank advances
|
0.41
|
%
|
1.85
|
%
|
2.76
|
%
|
Securities sold under agreements to repurchase
|
0.34
|
|
1.51
|
|
0.80
|
|
Federal Funds purchased
|
—
|
|
—
|
|
—
|
|
Through City National, the Company has approximately 37,000 shares of Federal Home Loan Bank ("FHLB") stock at par value as of December 31, 2020. Purchases of FHLB stock are required based on City National’s maximum borrowing capacity with the FHLB. Additionally, FHLB stock entitles the Company to dividends declared by the FHLB and provides an additional source of short-term and long-term funding in the form of collateralized advances. Financing obtained from the FHLB is based, in part, on the amount of qualifying collateral available, specifically 1-4 family residential mortgages, other residential mortgages, and commercial real estate and other non-residential mortgage loans. Collateral pledged to the FHLB included approximately $2.2 billion at December 31, 2020 and $2.3 billion at December 31, 2019 in investment securities and 1-4 family residential property loans. In addition to the short-term financing discussed above, City National had an additional $2.0 billion and $1.9 billion available from unused portions of lines of credit with the FHLB and other financial institutions at December 31, 2020 and 2019, respectively.
Securities sold under agreements to repurchase include interests in government agency and municipal securities. These agreements mature daily at par.
NOTE ELEVEN – DERIVATIVE INSTRUMENTS
As of December 31, 2020 and 2019, the Company primarily utilizes non-hedging derivative financial instruments with commercial banking customers to facilitate their interest rate management strategies. For these instruments, the Company acts as an intermediary for its customers and has offsetting contracts with financial institution counterparties. Changes in the fair value of these underlying derivative contracts generally offset each other and do not significantly impact the Company's results of operations.
The following table summarizes the notional and fair value of these derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Non-hedging interest rate derivatives:
|
|
|
|
|
|
|
|
Customer counterparties:
|
|
|
|
|
|
|
|
Loan interest rate swap - assets
|
$
|
647,613
|
|
|
$
|
52,364
|
|
|
$
|
377,534
|
|
|
$
|
16,094
|
|
Loan interest rate swap - liabilities
|
37,721
|
|
|
562
|
|
|
189,803
|
|
|
3,214
|
|
|
|
|
|
|
|
|
|
Non-hedging interest rate derivatives:
|
|
|
|
|
|
|
|
Financial institution counterparties:
|
|
|
|
|
|
|
|
Loan interest rate swap - assets
|
37,721
|
|
|
562
|
|
|
189,803
|
|
|
3,214
|
|
Loan interest rate swap - liabilities
|
661,866
|
|
|
52,607
|
|
|
382,566
|
|
|
16,133
|
|
The following table summarizes the change in fair value of these derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
2019
|
2018
|
Change in Fair Value Non-Hedging Interest Rate Derivatives:
|
|
|
|
Other income - derivative assets
|
$
|
27,240
|
|
$
|
4,342
|
|
$
|
1,316
|
|
Other income - derivative liabilities
|
(27,240)
|
|
(4,342)
|
|
(1,316)
|
|
Other expense - derivative liabilities
|
206
|
|
165
|
|
50
|
|
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association ("ISDA") master agreements which include "right of setoff" provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes.
Pursuant to the Company's agreements with certain of its derivative financial institution counterparties, the Company may receive collateral or post collateral, which may be in the form of cash or securities, based upon mark-to-mark positions. The Company has posted collateral with a value of $68.4 million as of December 31, 2020.
Loans associated with a customer counterparty loan interest rate swap agreement may be subject to a make whole penalty upon termination of the agreement. The dollar amount of the make whole penalty varies based on the remaining term of the agreement and market rates at that time. The make whole penalty is secured by equity in the specific collateral securing the loan. The Company estimates the make whole penalty when determining if there is sufficient collateral to pay off both the potential make whole penalty and the outstanding loan balance at the origination of the loan. In the event of a customer default, the make whole penalty is capitalized into the existing loan balance; however, no guarantees can be made that the collateral will be sufficient to cover both the make whole provision and the outstanding loan balance at the time of foreclosure.
During the year ended December 31, 2020, the Company entered into a series of fair value hedge agreements to reduce the interest rate risk associated with the change in fair value of certain securities. The total notional amount of these agreements was $150 million. The gains or losses on these hedges are recognized in current earnings as fair value changes.
NOTE TWELVE – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Allowance for credit losses
|
$
|
5,883
|
|
$
|
2,708
|
|
Deferred compensation payable
|
3,165
|
|
2,912
|
|
Underfunded pension liability
|
1,784
|
|
1,912
|
|
Accrued expenses
|
2,218
|
|
1,196
|
|
Other
|
4,543
|
|
8,570
|
|
Total Deferred Tax Assets
|
17,593
|
|
17,298
|
|
|
|
|
Unrealized securities gains
|
11,637
|
|
3,709
|
|
Other
|
9,158
|
|
6,920
|
|
Total Deferred Tax Liabilities
|
20,795
|
|
10,629
|
|
Net Deferred Tax (Liabilities)/Assets
|
$
|
(3,202)
|
|
$
|
6,669
|
|
No material valuation allowances for deferred tax assets were recorded at December 31, 2020 or 2019 as the Company believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.
Significant components of the provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Current:
|
|
|
|
Federal
|
$
|
16,599
|
|
$
|
16,636
|
|
$
|
16,846
|
|
State
|
2,478
|
|
2,560
|
|
2,413
|
|
Total current tax expense
|
19,077
|
|
19,196
|
|
19,259
|
|
|
|
|
|
Total deferred tax expense
|
2,640
|
|
4,939
|
|
(1,244)
|
|
Income tax expense
|
$
|
21,717
|
|
$
|
24,135
|
|
$
|
18,015
|
|
A reconciliation of the significant differences between the federal statutory income tax rate and the Company’s effective income tax rate is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
|
|
|
Computed federal taxes at statutory rate
|
$
|
23,376
|
|
$
|
23,832
|
|
$
|
18,483
|
|
State income taxes, net of federal tax benefit
|
2,070
|
|
2,376
|
|
1,730
|
|
Tax effects of:
|
|
|
|
Tax-exempt interest income
|
(944)
|
|
(733)
|
|
(694)
|
|
Bank-owned life insurance
|
(929)
|
|
(791)
|
|
(649)
|
|
Income tax credits
|
(1,113)
|
|
(889)
|
|
(575)
|
|
Other items, net
|
(743)
|
|
340
|
|
(280)
|
|
Income tax expense
|
$
|
21,717
|
|
$
|
24,135
|
|
$
|
18,015
|
|
The entire amount of the Company’s unrecognized tax benefits, if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that it will release $0.6 million over the next 12 months. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
|
|
Beginning balance
|
$
|
1,807
|
|
$
|
1,811
|
|
Additions for current year tax positions
|
413
|
|
115
|
|
Additions for prior year tax positions
|
434
|
|
377
|
|
Decreases related to lapse of applicable statute of limitation
|
(565)
|
|
(496)
|
|
Ending balance
|
$
|
2,089
|
|
$
|
1,807
|
|
Interest and penalties on income tax uncertainties are included in income tax expense. During 2020, 2019 and 2018, the provision related to interest and penalties was approximately $0.2 million, $0.6 million, and $0.2 million, respectively. The balance of accrued interest and penalties at December 31, 2020 and 2019 was $0.9 million and $0.7 million, respectively.
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state taxing authorities for the years ended December 31, 2017 and forward.
NOTE THIRTEEN – EMPLOYEE BENEFIT PLANS
Pursuant to the terms of the City Holding Company 2013 Incentive Plan (the "2013 Plan"), the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights ("SARs"), or stock awards (collectively, the "awards") to employees, directors and individuals who provide service to the Company (collectively, "Plan Participants"). The 2013 Plan was approved by the shareholders in April 2013. A maximum of 750,000 shares of the Company’s common stock may be issued under the 2013 Plan, subject to certain limitations. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of the awards granted, including the number of shares, vesting periods, exercise prices (for stock options) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the stock option grants equals the market price of the Company’s stock on the date of grant. All incentive stock options and SARs will be exercisable up to 10 years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement. Upon a change-in-control of the Company, as defined in the 2013 Plan, all outstanding awards shall immediately vest. As of December 31, 2020, approximately 407,000 shares were still available to be issued under the 2013 Plan.
Stock Options
A summary of the Company’s stock option activity and related information is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
Options
|
Weighted-Average Exercise Price
|
Options
|
Weighted-Average Exercise Price
|
Options
|
Weighted-Average Exercise Price
|
Outstanding at January 1
|
46,251
|
|
$
|
52.74
|
|
57,972
|
|
$
|
51.15
|
|
87,605
|
|
$
|
47.15
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Exercised
|
(4,921)
|
|
45.17
|
|
(11,721)
|
|
44.87
|
|
(29,633)
|
|
39.31
|
|
Forfeited
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Outstanding at December 31
|
41,330
|
|
$
|
53.64
|
|
46,251
|
|
$
|
52.74
|
|
57,972
|
|
$
|
51.15
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
21,459
|
|
$
|
50.45
|
|
8,063
|
|
$
|
44.48
|
|
2,697
|
|
$
|
45.13
|
|
|
|
|
|
|
|
|
Nonvested at beginning of year
|
38,188
|
|
54.42
|
|
55,275
|
|
51.40
|
|
79,718
|
|
48.08
|
|
Granted during the year
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Vested during the year
|
(18,317)
|
|
51.66
|
|
(17,087)
|
|
44.65
|
|
(24,443)
|
|
40.58
|
|
Forfeited during the year
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Nonvested at end of year
|
19,871
|
|
$
|
56.97
|
|
38,188
|
|
$
|
54.42
|
|
55,275
|
|
$
|
51.40
|
|
Information regarding stock option exercises and stock-based compensation expense associated with stock options is provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
2019
|
2018
|
Proceeds from stock option exercises
|
$
|
223
|
|
$
|
526
|
|
$
|
1,164
|
|
Intrinsic value of stock options exercised
|
93
|
|
368
|
|
944
|
|
|
|
|
|
Stock-based compensation expense associated with stock options
|
$
|
60
|
|
$
|
119
|
|
$
|
178
|
|
Income tax benefit recognized related to stock-based compensation
|
5
|
|
12
|
|
19
|
|
|
|
|
|
At period-end:
|
2020
|
|
|
Unrecognized stock-based compensation expense
|
$
|
24
|
|
|
|
Weighted average period in which the above amount is expected to be recognized
|
0.9
|
years
|
|
Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During 2020, 2019 and 2018, all shares issued in connection with stock option exercises and restricted stock awards were issued from available treasury stock. For the stock options that have performance-based criteria, management has evaluated those criteria and has determined that, as of December 31, 2020, the criteria were probable of being met.
Restricted Shares, Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)
The Company measures compensation expense with respect to restricted shares, RSUs and PSUs (collectively, the "restricted shares") in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is charged to expense over the respective vesting periods.
Restricted shares are generally forfeited if officers and employees terminate employment with the Company prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, and generally have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. For the restricted shares that have performance-based criteria, management has evaluated those criteria and has determined that, as of December 31, 2020, the criteria were probable of being met.
In 2018, the Board of Directors granted the named executive officers ("NEOs") of the Company restricted stock units ("RSUs") and performance share units ("PSUs"). The RSUs vest in three separate annual installments of approximately 33.33% per installment on the first, second and third anniversaries of the grant date, subject to a two-year holding period. The PSUs vest on the third anniversary of the grant date. The payout for the PSUs will be determined based on two factors: (1) the Company's three-year average return on assets ("ROA") during the three-year performance period relative to the ROA for the selected peer companies and (2) the Company's total shareholder return ("TSR") during the three-year performance period relative to the TSR of the selected peer companies. Until the time these shares transfer to the participant, the participant does not have the right to vote these shares, nor does the participant receive dividends during the outstanding period (however, dividends are accrued and payable upon transfer). For the restricted shares that have performance-based criteria, management periodically evaluates those criteria and adjusts the number of shares awarded, if necessary.
A summary of the Company’s restricted shares activity and related information is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
Restricted Awards
|
Average Market Price at Grant
|
Restricted Awards
|
Average Market Price at Grant
|
Restricted Awards
|
Average Market Price at Grant
|
|
|
|
|
|
|
|
Outstanding at January 1
|
148,083
|
|
149,692
|
|
170,033
|
|
Granted
|
44,696
|
$
|
69.28
|
|
44,598
|
$
|
77.78
|
|
28,363
|
$
|
69.94
|
|
Forfeited/Vested
|
(34,225)
|
|
|
(46,207)
|
|
|
(48,704)
|
|
|
Outstanding at December 31
|
158,554
|
|
148,083
|
|
149,692
|
|
Information regarding stock-based compensation associated with restricted shares is provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
2019
|
2018
|
Stock-based compensation expense associated with restricted shares
|
$
|
2,836
|
|
$
|
2,022
|
|
$
|
1,609
|
|
|
|
|
|
At period-end:
|
2020
|
|
|
Unrecognized stock-based compensation expense
|
$
|
5,278
|
|
|
|
Weighted average period in which the above amount is expected to be recognized
|
2.9
|
years
|
|
401(k) Plan
The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (the "401(k) Plan"), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). Information regarding the Company’s 401(k) plan is provided in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
2019
|
2018
|
Expense associated with the Company's 401(k) Plan
|
$
|
1,061
|
|
$
|
1,023
|
|
$
|
905
|
|
|
|
|
|
At period-end:
|
|
|
|
Number of shares of the Company's common stock held by the 401(k) Plan
|
198,300
|
|
203,989
|
|
229,276
|
|
Defined Benefit Plans
The Company maintains two defined benefit pension plans (the "Defined Benefit Plans"), which were inherited from the Company's acquisition of the plan sponsors (Horizon Bancorp, Inc. and Community Financial Corporation). The Horizon Defined Benefit Plan was frozen in 1999 and maintains a December 31st year-end for purposes of computing its benefit obligations. The Community Defined Benefit Plan was frozen in 2012 and was terminated during the year-ended December 31, 2018.
Primarily as a result of the interest rate environment over the past several years and mortality table revisions, the benefit obligation exceeded the estimated fair value of plan assets as of December 31, 2020 and 2019. The following table summarizes activity within the Company's Defined Benefit Plans (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
2020
|
2019
|
|
|
|
Change in fair value of plan assets:
|
|
|
Fair value at beginning of measurement period
|
$
|
11,884
|
|
$
|
12,041
|
|
Actual gain on plan assets
|
1,324
|
|
880
|
|
Contributions
|
450
|
|
—
|
|
Benefits paid
|
(1,029)
|
|
(1,037)
|
|
Fair value at end of measurement period
|
12,629
|
|
11,884
|
|
|
|
|
Change in benefit obligation:
|
|
|
Benefit obligation at beginning of measurement period
|
(15,219)
|
|
(14,222)
|
|
Interest cost
|
(448)
|
|
(561)
|
|
Actuarial gain (loss)
|
83
|
|
(21)
|
|
Assumption changes
|
(944)
|
|
(1,452)
|
|
Benefits paid
|
1,029
|
|
1,037
|
|
Settlement loss
|
—
|
|
—
|
|
Benefit obligation at end of measurement period
|
(15,499)
|
|
(15,219)
|
|
|
|
|
Funded status
|
$
|
(2,870)
|
|
$
|
(3,335)
|
|
|
|
|
Weighted-average assumptions for benefit obligation:
|
|
|
Discount rate
|
2.21
|
%
|
3.05
|
%
|
Expected long-term rate of return
|
6.75
|
%
|
6.75
|
%
|
|
|
|
Weighted-average assumptions for net periodic pension cost:
|
|
|
Discount rate
|
3.05
|
%
|
4.10
|
%
|
Expected long-term rate of return
|
6.75
|
%
|
6.75
|
%
|
Based on the funding status of the Horizon Defined Benefit Plan, no contributions were required during the years ended December 31, 2020 and 2019. The Company made a $1.0 million contribution to the plan in January 2021.
During 2017, the Company initiated the process to terminate the Community Defined Benefit plan. The Company made a $1.5 million terminal contribution in 2018 to terminate the plan.
The following table presents the components of the net periodic pension cost of the Company's Defined Benefit Plans, which is recognized in Other Expenses in the Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
|
|
|
Components of net periodic benefit:
|
|
|
|
Interest cost
|
$
|
448
|
|
$
|
561
|
|
$
|
590
|
|
Expected return on plan assets
|
(814)
|
|
(856)
|
|
(1,080)
|
|
Settlement
|
—
|
|
—
|
|
71
|
|
Net amortization and deferral
|
1,089
|
|
917
|
|
890
|
|
Net Periodic Pension Cost
|
$
|
723
|
|
$
|
622
|
|
$
|
471
|
|
Amounts related to the Company's Defined Benefit Pension Plans recognized as a component of other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Net actuarial gain (loss)
|
$
|
737
|
|
$
|
(530)
|
|
$
|
(1,092)
|
|
Deferred tax (expense) benefit
|
(128)
|
|
131
|
|
254
|
|
Other comprehensive income (loss), net of tax
|
$
|
609
|
|
$
|
(399)
|
|
$
|
(838)
|
|
Amounts recognized as a component of accumulated other comprehensive loss as of December 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Net actuarial loss
|
$
|
7,445
|
|
$
|
8,182
|
|
Deferred tax benefit
|
(1,784)
|
|
(1,912)
|
|
Amounts included in accumulated other comprehensive income (loss), net of tax
|
$
|
5,661
|
|
$
|
6,270
|
|
The following table summarizes the expected benefits to be paid in each of the next five years and in the aggregate for the five years thereafter (in thousands):
|
|
|
|
|
|
Plan Year Ending December 31,
|
Expected Benefits to be Paid
|
|
|
2021
|
$
|
986
|
|
2022
|
984
|
|
2023
|
989
|
|
2024
|
978
|
|
2025
|
993
|
|
2026 through 2029
|
4,680
|
|
The major categories of assets in the Company’s Defined Benefit Plans as of year-end are presented in the following table (in thousands). Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (See Note Eighteen).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
2020
|
|
|
|
|
Cash and cash equivalents
|
$
|
146
|
|
$
|
146
|
|
$
|
—
|
|
$
|
—
|
|
U.S. government agencies
|
100
|
|
—
|
|
100
|
|
|
Common stocks
|
10,101
|
|
10,101
|
|
—
|
|
—
|
|
Corporate bonds
|
2,282
|
|
—
|
|
2,282
|
|
—
|
|
Total
|
$
|
12,629
|
|
$
|
10,247
|
|
$
|
2,382
|
|
$
|
—
|
|
|
|
|
|
|
2019
|
|
|
|
|
Cash and cash equivalents
|
$
|
79
|
|
$
|
79
|
|
$
|
—
|
|
$
|
—
|
|
Common stocks
|
6,787
|
|
6,787
|
|
—
|
|
—
|
|
Corporate bonds
|
5,018
|
|
—
|
|
5,018
|
|
—
|
|
Total
|
$
|
11,884
|
|
$
|
6,866
|
|
$
|
5,018
|
|
$
|
—
|
|
Horizon Defined Benefit Plan (Investment Strategy)
During the fourth quarter of 2018, the Company changed the administrator of The Horizon Defined Benefit Plan to its trust department. The Company's pension committee has revised the plan's investment strategy and set a target allocation of 75% equity securities and 25% fixed income securities. The assets will be reallocated periodically to meet the above target allocations. A range is developed around each of these target allocations such that at any given time the actual allocation may be higher or lower than stated above (+ or - 10%). The overall investment return goal is to achieve a rate of return greater than a blended index of the S&P 500 and the Barclay's Capital Aggregate Bond Index, which is tailored to the same asset mix of the retirement plans assets, by 1/2 or 1% annualized after fees over a rolling five year moving average basis. At December 31, 2020, the plan assets were invested in equity securities (80%), fixed income securities (19%), and cash and cash equivalents (1%), which are in the allowable allocation range under the policy.
Pentegra Defined Benefit Plan
The Company and its subsidiary participate in the Pentegra Defined Benefit Plan for Financial Institutions ("The Pentegra DB Plan"), a tax-qualified defined benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. The funded statuses below are as of July 1, 2020 (the latest available valuation report). It is the policy of the Company to fund the normal cost of the Pentegra DB Plan on an annual basis. Other than for normal plan expenses, no contributions were required for the years ended December 31, 2020, 2019 and 2018. The benefits of the original Pentegra Defined Benefit Plan were frozen prior to the acquisition of Classic Bancshares ("Classic") in 2005, and the benefits of the Poage Pentegra Defined Benefit Plan were frozen prior to the acquisition of Poage in 2018. It is the intention of the Company to fund benefit amounts when assets of the plan are not sufficient.
|
|
|
|
|
|
Pentegra DB Plan's Employer Identification Number
|
13-5645888
|
Plan Number
|
333
|
|
|
Funded status for plan inherited with Classic acquisition
|
89.16%
|
Funded status for plan inherited with Poage acquisition
|
91.56%
|
Employment Contracts
The Company has entered into employment contracts with certain of its current executive officers. The employment contracts provide for, among other things, the payment of termination compensation in the event an executive officer either voluntarily or involuntarily terminates his employment with the Company for other than "Just Cause" as defined in the applicable employment contract. Certain of the employment contracts provide for a termination benefit that became fully vested in 2005 and is payable if and when the executive officer terminates his employment with the Company. The termination benefit grows each year at an amount equal to the one-year constant maturity treasury rate and cannot be forfeited except where the executive officer personally profits from willful fraudulent activity that materially and adversely affects the Company. The costs of this vested termination benefit have been fully accrued and expensed by the Company as of December 31, 2020. The liability was $2.2 million and $2.1 million at December 31, 2020 and 2019, respectively.
Other Post-Retirement Benefit Plans
Certain entities previously acquired by the Company had entered into individual deferred compensation and supplemental retirement agreements with certain current and former directors and officers. The Company has assumed the liabilities associated with these agreements, the cost of which is being accrued over the period of active service from the date of the respective agreement. To assist in funding these liabilities, the acquired entities had insured the lives of certain current and former directors and officers. The Company is the current owner and beneficiary of those insurance policies. The following table presents a summary of the Company's other post-retirement benefit plans (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
|
|
2020
|
2019
|
2018
|
Cost of other post-retirement benefits
|
$
|
278
|
|
$
|
304
|
|
$
|
280
|
|
|
|
|
|
At period-end:
|
|
|
|
Other post-retirement benefit liability (included in Other Liabilities)
|
6,093
|
|
6,570
|
|
6,923
|
|
Cash surrender value of insurance policies (included in Other Assets)
|
5,916
|
|
6,544
|
|
6,807
|
|
NOTE FOURTEEN – RELATED PARTY TRANSACTIONS
City National has granted loans to certain non-executive officers and directors of the Company and its subsidiaries, and to their associates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
Principal
|
|
|
December 31, 2019
|
Additions
|
Reductions
|
December 31, 2020
|
Related Party Loans
|
$
|
20,382
|
|
$
|
9,299
|
|
$
|
(10,214)
|
|
$
|
19,467
|
|
Unfunded commitments
|
$
|
13,006
|
|
|
|
$
|
12,819
|
|
NOTE FIFTEEN – COMMITMENTS AND CONTINGENCIES
COVID-19
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, the effects could have a material adverse impact on the Company in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as well as financial statement related risk associated with critical accounting estimates such as the allowance for credit losses or valuation impairments on the Company's goodwill, intangible assets and deferred taxes.
Credit Related Financial Instruments
The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The Company has entered into agreements with its customers to extend credit or provide conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. Overdraft protection commitments, which are included with other commitments below, are uncollateralized and are paid at the Company’s discretion. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The majority of the Company's commitments have variable interest rates. The funded portion of these financial instruments is reflected in the Company’s balance sheet, while the unfunded portion of these commitments is not reflected in the balance sheet.
The table below presents a summary of the contractual obligations of the Company resulting from significant commitments (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
|
|
|
Commitments to extend credit:
|
|
|
Home equity lines
|
$
|
215,619
|
|
$
|
214,715
|
|
Commercial real estate
|
65,828
|
|
56,941
|
|
Other commitments
|
245,647
|
|
213,904
|
|
Standby letters of credit
|
6,460
|
|
6,748
|
|
Commercial letters of credit
|
610
|
|
1,249
|
|
Loan commitments and standby and commercial letters of credit have credit risks essentially the same as those involved in extending loans to customers and are subject to the Company’s standard credit policies. Collateral is obtained based on management’s credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments.
Litigation
In addition, the Company is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.
NOTE SIXTEEN – PREFERRED STOCK
The Company’s Board of Directors has the authority to issue preferred stock, and to determine the designation, preferences, rights, dividends and all other attributes of such preferred stock, without any vote or action by the shareholders. As of December 31, 2020, no such shares were outstanding, nor were any expected to be issued.
NOTE SEVENTEEN – REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and cash for City Holding (the "Parent Company") is dividends from 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. Approval is also required if dividends declared would cause City National’s regulatory capital to fall below specified minimum levels. At December 31, 2020, City National could pay dividends up to $67.7 million without prior regulatory permission.
During 2020, 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. As of December 31, 2020, the Parent Company reported a cash balance of approximately $22.3 million. Management believes that the Parent Company’s available cash balance, together with cash dividends from City National, is adequate to satisfy its funding and cash needs in 2021.
As of January 1, 2019, the Basel III Capital Rules require City Holding and City National to maintain minimum CET 1, Tier 1 and Total Capital ratios, along with a capital conservation buffer, effectively resulting in new minimum capital ratios (which are shown in the table below). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and does not have any current applicability to City Holding Company or City National Bank.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
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
|
$
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
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
|
$
|
532,640
|
|
|
16.0
|
%
|
|
$
|
232,358
|
|
|
7.0
|
%
|
|
$
|
215,761
|
|
|
6.5
|
%
|
City National Bank
|
459,006
|
|
|
13.9
|
%
|
|
230,808
|
|
|
7.0
|
%
|
|
214,322
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
City Holding Company
|
536,640
|
|
|
16.2
|
%
|
|
282,150
|
|
|
8.5
|
%
|
|
265,552
|
|
|
8.0
|
%
|
City National Bank
|
459,006
|
|
|
13.9
|
%
|
|
280,267
|
|
|
8.5
|
%
|
|
263,781
|
|
|
8.0
|
%
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
City Holding Company
|
548,291
|
|
|
16.5
|
%
|
|
348,538
|
|
|
10.5
|
%
|
|
331,941
|
|
|
10.0
|
%
|
City National Bank
|
470,656
|
|
|
14.3
|
%
|
|
346,213
|
|
|
10.5
|
%
|
|
329,726
|
|
|
10.0
|
%
|
Tier 1 Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
City Holding Company
|
536,640
|
|
|
11.0
|
%
|
|
195,558
|
|
|
4.0
|
%
|
|
244,448
|
|
|
5.0
|
%
|
City National Bank
|
459,006
|
|
|
9.5
|
%
|
|
193,074
|
|
|
4.0
|
%
|
|
241,342
|
|
|
5.0
|
%
|
As of December 31, 2020, management believes that City Holding Company, and its banking subsidiary, City National, were "well capitalized." City Holding is subject to regulatory capital requirements administered by the Federal Reserve, while City National is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). Regulatory agencies can initiate certain mandatory actions if either City Holding or City National fails to meet the minimum capital requirements, as shown above. As of December 31, 2020, 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.
NOTE EIGHTEEN –FAIR VALUE MEASUREMENTS
Fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are less active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company bases fair value of assets and liabilities on quoted market prices, prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. If such information is not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty creditworthiness, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amount presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Financial Assets and Liabilities
The Company used the following methods and significant assumptions to estimate fair value for financial assets and liabilities measured on a recurring basis.
Securities Available for Sale. Securities available for sale are reported at fair value utilizing Level 1, Level 2, and Level 3 inputs. The fair value of securities available for sale is determined by utilizing a market approach by obtaining quoted prices on nationally recognized securities exchanges (other than forced or distressed transactions) that occur in sufficient volume or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. If such measurements are unavailable, the security is classified as Level 3. Significant judgment is required to make this determination.
The Company utilizes a third party pricing service provider to value its Level 1 and Level 2 investment securities. Annually, the Company obtains an independent auditor’s report from its third party pricing service provider regarding its controls over investment securities. Although an unqualified opinion regarding the design and operating effectiveness of controls was issued, the report did contain caveats and disclaimers regarding the pricing information, such as the Company should review market values for reasonableness. On a quarterly basis, the Company reprices its debt securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes a market approach by obtaining dealer quotations to value its customer interest rate swaps. The Company’s derivatives are included within "other assets" and "other liabilities" in the accompanying consolidated balance sheets. Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Company pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Company considers factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Company's Asset and Liability Committee ("ALCO") are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, if necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Company to estimate its own credit risk in derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any undercollateralized position. There was no significant change in the value of derivative assets and liabilities attributed to credit risk that would have resulted in a derivative credit risk valuation adjustment at December 31, 2020.
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. Financial assets measured at fair value on a nonrecurring basis include impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using inputs based on observable market data. The following table presents the Company's assets and liabilities measured at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total Gains (Losses)
|
December 31, 2020
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
U.S. Government agencies
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Obligations of states and political subdivisions
|
277,811
|
|
—
|
|
277,811
|
|
—
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
U.S. Government agencies
|
850,384
|
|
—
|
|
850,384
|
|
—
|
|
|
Private label
|
10,892
|
|
—
|
|
6,061
|
|
4,831
|
|
|
Trust preferred securities
|
4,100
|
|
—
|
|
4,100
|
|
—
|
|
|
Corporate securities
|
33,610
|
|
—
|
|
29,606
|
|
4,004
|
|
|
Marketable equity securities
|
11,839
|
|
6,800
|
|
5,039
|
|
—
|
|
|
Certificates of deposit held for investment
|
1,992
|
|
—
|
|
1,992
|
|
—
|
|
|
Derivative assets
|
53,166
|
|
—
|
|
53,166
|
|
—
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
Derivative liabilities
|
53,288
|
|
—
|
|
53,288
|
|
—
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
Impaired loans
|
$
|
7,634
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,634
|
|
$
|
(1,118)
|
|
Non-Financial Assets
|
|
|
|
|
|
Other real estate owned
|
1,650
|
|
—
|
|
—
|
|
1,650
|
|
(292)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total Gains (Losses)
|
December 31, 2019
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
U.S. Government agencies
|
$
|
502
|
|
$
|
—
|
|
$
|
502
|
|
$
|
—
|
|
|
Obligations of states and political subdivisions
|
117,187
|
|
—
|
|
117,187
|
|
—
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
U.S. Government agencies
|
642,104
|
|
—
|
|
642,104
|
|
—
|
|
|
Private label
|
11,485
|
|
—
|
|
11,485
|
|
—
|
|
|
Trust preferred securities
|
4,461
|
|
—
|
|
4,461
|
|
—
|
|
|
Corporate securities
|
32,126
|
|
—
|
|
32,126
|
|
—
|
|
|
Marketable equity securities
|
12,634
|
|
7,787
|
|
4,847
|
|
—
|
|
|
Certificates of deposit held for investment
|
2,241
|
|
—
|
|
2,241
|
|
—
|
|
|
Derivative assets
|
19,310
|
|
—
|
|
19,310
|
|
—
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
Derivative liabilities
|
19,380
|
|
—
|
|
19,380
|
|
—
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
Impaired loans
|
$
|
8,925
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,925
|
|
$
|
(87)
|
|
Non-Financial Assets
|
|
|
|
|
|
Other real estate owned
|
4,670
|
|
—
|
|
—
|
|
4,670
|
|
(470)
|
|
Other assets
|
100
|
|
—
|
|
—
|
|
100
|
|
(297)
|
|
The Company's financial assets and liabilities measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) include impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for credit losses based upon the fair value of the underlying collateral (in thousands). The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to discounts applied to the customers’ reported amount of collateral. The amount of collateral discount depends upon the marketability of the underlying collateral. During the years ended December 31, 2020 and 2019, collateral discounts ranged from 15% to 30%. During the years ended December 31, 2020 and 2019, the Company had no Level 2 financial assets and liabilities that were measured on a nonrecurring basis.
Non-Financial Assets and Liabilities
The Company has no non-financial assets or liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include other real estate owned ("OREO"), which is measured at the lower of cost or fair value, and goodwill and other intangible assets, which are measured at fair value for impairment assessments.
Fair Value of Financial Instruments
ASC Topic 825 "Financial Instruments," as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain
financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following table represents the estimates of fair value of financial instruments (in thousands). This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
December 31, 2020
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
528,659
|
|
$
|
528,659
|
|
$
|
528,659
|
|
$
|
—
|
|
$
|
—
|
|
Securities available-for-sale
|
1,178,789
|
|
1,178,789
|
|
—
|
|
1,169,954
|
|
8,835
|
|
Marketable equity securities
|
11,839
|
|
11,839
|
|
6,800
|
|
5,039
|
|
—
|
|
Net loans
|
3,597,570
|
|
3,578,013
|
|
—
|
|
—
|
|
3,578,013
|
|
Accrued interest receivable
|
15,793
|
|
15,793
|
|
15,793
|
|
—
|
|
—
|
|
Derivative assets
|
53,166
|
|
53,166
|
|
—
|
|
53,166
|
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Deposits
|
4,652,216
|
|
4,665,905
|
|
3,392,194
|
|
1,273,711
|
|
—
|
|
Short-term debt
|
295,956
|
|
295,956
|
|
—
|
|
295,956
|
|
—
|
|
Accrued interest payable
|
1,586
|
|
1,586
|
|
1,586
|
|
—
|
|
—
|
|
Derivative liabilities
|
53,288
|
|
53,288
|
|
—
|
|
53,288
|
|
—
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
140,144
|
|
$
|
140,144
|
|
$
|
140,144
|
|
$
|
—
|
|
$
|
—
|
|
Securities available-for-sale
|
810,106
|
|
810,106
|
|
—
|
|
810,106
|
|
—
|
|
Securities held-to-maturity
|
49,036
|
|
50,598
|
|
—
|
|
50,598
|
|
—
|
|
Marketable equity securities
|
12,634
|
|
12,634
|
|
7,787
|
|
4,847
|
|
—
|
|
Net loans
|
3,604,510
|
|
3,574,435
|
|
—
|
|
—
|
|
3,574,435
|
|
Accrued interest receivable
|
11,569
|
|
11,569
|
|
11,569
|
|
—
|
|
—
|
|
Derivative assets
|
19,310
|
|
19,310
|
|
—
|
|
19,310
|
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Deposits
|
4,075,894
|
|
4,094,493
|
|
2,711,323
|
|
1,383,170
|
|
—
|
|
Short-term debt
|
211,255
|
|
211,255
|
|
—
|
|
211,255
|
|
—
|
|
Long-term debt
|
4,056
|
|
4,124
|
|
—
|
|
4,124
|
|
—
|
|
Accrued interest payable
|
2,849
|
|
2,849
|
|
2,849
|
|
—
|
|
—
|
|
Derivative liabilities
|
19,380
|
|
19,380
|
|
—
|
|
19,380
|
|
—
|
|
NOTE NINETEEN – CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets
The following table presents the condensed balance sheets of City Holding Company, parent company only (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2020
|
2019
|
|
|
|
Assets
|
|
|
Cash
|
$
|
22,335
|
|
$
|
26,171
|
|
Securities available-for-sale
|
5,267
|
|
6,286
|
|
Investment in subsidiaries
|
681,744
|
|
638,490
|
|
Loans
|
624
|
|
663
|
|
Fixed assets
|
15
|
|
23
|
|
Other assets
|
932
|
|
643
|
|
Total Assets
|
$
|
710,917
|
|
$
|
672,276
|
|
|
|
|
Liabilities
|
|
|
Junior subordinated debentures
|
$
|
—
|
|
$
|
4,056
|
|
Dividends payable
|
9,145
|
|
9,293
|
|
Deferred tax liability
|
298
|
|
534
|
|
Other liabilities
|
368
|
|
410
|
|
Total Liabilities
|
9,811
|
|
14,293
|
|
|
|
|
Total Shareholders’ Equity
|
701,106
|
|
657,983
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
710,917
|
|
$
|
672,276
|
|
On January 29, 2020, the Board of Directors of the Company authorized repayment of its Subordinated Debentures assumed by the Company as part of its acquisition of Poage at a price of 100% of the principal amount. Town Square Statutory Trust I repaid its Capital Securities on March 16, 2020 at a price of 100%.
Condensed Statements of Comprehensive Income
The following table presents the condensed statements of comprehensive income of City Holding Company, parent company only (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2020
|
2019
|
2018
|
|
|
|
|
Income
|
|
|
|
Dividends from subsidiaries
|
$
|
74,300
|
|
$
|
58,000
|
|
$
|
50,000
|
|
Realized and unrealized investment securities (losses) gains
|
(1,018)
|
|
425
|
|
208
|
|
Other income
|
183
|
|
151
|
|
130
|
|
|
73,465
|
|
58,576
|
|
50,338
|
|
Expenses
|
|
|
|
Interest expense
|
100
|
|
182
|
|
880
|
|
Merger related expenses
|
—
|
|
—
|
|
1,899
|
|
Other expenses
|
1,810
|
|
1,794
|
|
1,842
|
|
|
1,910
|
|
1,976
|
|
4,621
|
|
Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries
|
71,555
|
|
56,600
|
|
45,717
|
|
Income tax benefit
|
(760)
|
|
(455)
|
|
(1,114)
|
|
Income Before Equity in Undistributed Net Income of Subsidiaries
|
72,315
|
|
57,055
|
|
46,831
|
|
Equity in undistributed net income of subsidiaries
|
17,280
|
|
32,297
|
|
23,171
|
|
Net Income
|
$
|
89,595
|
|
$
|
89,352
|
|
$
|
70,002
|
|
|
|
|
|
Total Comprehensive Income
|
$
|
114,988
|
|
$
|
109,674
|
|
$
|
63,821
|
|
Condensed Statements of Cash Flows
The following table presents the condensed statements of cash flows of City Holding Company, parent company only (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
2020
|
2019
|
2018
|
Operating Activities
|
|
|
|
Net income
|
$
|
89,595
|
|
$
|
89,352
|
|
$
|
70,002
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Unrealized and realized investment securities losses (gains)
|
1,018
|
|
(425)
|
|
(208)
|
|
(Benefit) provision for deferred income taxes
|
(255)
|
|
173
|
|
(88)
|
|
Depreciation, amortization and accretion, net
|
1
|
|
3
|
|
1
|
|
Stock based compensation
|
3,253
|
|
2,516
|
|
2,151
|
|
Asset write down
|
—
|
|
—
|
|
193
|
|
Change in other assets
|
(284)
|
|
2,696
|
|
2,668
|
|
Change in other liabilities
|
(2,936)
|
|
(2,060)
|
|
(1,816)
|
|
Equity in undistributed net income
|
(17,280)
|
|
(32,297)
|
|
(23,171)
|
|
Net Cash Provided by Operating Activities
|
73,112
|
|
59,958
|
|
49,732
|
|
|
|
|
|
Investing Activities
|
|
|
|
Proceeds from sales of available for sale securities
|
—
|
|
6
|
|
—
|
|
Net decrease in loans
|
39
|
|
38
|
|
—
|
|
Acquisition of Farmers Deposit Bancorp, Inc., net of cash acquired of $946
|
—
|
|
—
|
|
(23,954)
|
|
Acquisition of Poage Bankshares, Inc., net of cash acquired of $518
|
—
|
|
—
|
|
502
|
|
Net Cash Provided by (Used in) Investing Activities
|
39
|
|
44
|
|
(23,452)
|
|
|
|
|
|
Financing Activities
|
|
|
|
Repayment of long-term debt
|
(4,056)
|
|
—
|
|
(16,495)
|
|
Proceeds from sale of capital securities
|
—
|
|
—
|
|
495
|
|
Dividends paid
|
(36,673)
|
|
(35,547)
|
|
(29,583)
|
|
Purchases of treasury stock
|
(36,481)
|
|
(19,431)
|
|
(20,271)
|
|
Exercise of stock options
|
223
|
|
526
|
|
1,164
|
|
Net Cash Used in Financing Activities
|
(76,987)
|
|
(54,452)
|
|
(64,690)
|
|
(Decrease) Increase in Cash and Cash Equivalents
|
(3,836)
|
|
5,550
|
|
(38,410)
|
|
Cash and cash equivalents at beginning of year
|
26,171
|
|
20,621
|
|
59,031
|
|
Cash and Cash Equivalents at End of Year
|
$
|
22,335
|
|
$
|
26,171
|
|
$
|
20,621
|
|
NOTE TWENTY – SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly financial information (unaudited) is presented below (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter*
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|
|
|
|
|
2020
|
|
|
|
|
Interest income
|
$
|
48,217
|
|
$
|
44,312
|
|
$
|
43,231
|
|
$
|
42,499
|
|
Taxable equivalent adjustment
|
188
|
|
217
|
|
301
|
|
333
|
|
Interest income (FTE)
|
48,405
|
|
44,529
|
|
43,532
|
|
42,832
|
|
Interest expense
|
7,801
|
|
6,242
|
|
5,254
|
|
4,318
|
|
Net interest income
|
40,604
|
|
38,287
|
|
38,278
|
|
38,514
|
|
Provision for credit losses
|
7,972
|
|
1,250
|
|
1,026
|
|
474
|
|
Non-interest income
|
33,343
|
|
14,631
|
|
16,985
|
|
17,721
|
|
Non-interest expense
|
29,469
|
|
28,468
|
|
28,712
|
|
28,641
|
|
Income before income tax expense
|
36,506
|
|
23,200
|
|
25,525
|
|
27,120
|
|
Income tax expense
|
7,322
|
|
4,732
|
|
5,098
|
|
4,565
|
|
Taxable equivalent adjustment
|
(188)
|
|
(217)
|
|
(301)
|
|
(333)
|
|
Net income available to common shareholders
|
$
|
28,996
|
|
$
|
18,251
|
|
$
|
20,126
|
|
$
|
22,222
|
|
|
|
|
|
|
Net earnings allocated to common shareholders
|
$
|
28,736
|
|
$
|
18,051
|
|
$
|
19,929
|
|
$
|
21,992
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
1.79
|
|
$
|
1.12
|
|
$
|
1.25
|
|
$
|
1.40
|
|
Diluted earnings per common share
|
1.78
|
|
1.12
|
|
1.25
|
|
1.40
|
|
Average common shares outstanding:
|
|
|
|
|
Basic
|
16,080
|
|
16,081
|
|
15,950
|
|
15,708
|
|
Diluted
|
16,101
|
|
16,097
|
|
15,970
|
|
15,733
|
|
*During this quarter the Company sold the entirety of its Visa Inc. Class B common 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.
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
Interest income
|
$
|
48,933
|
|
$
|
50,238
|
|
$
|
49,981
|
|
$
|
48,548
|
|
Taxable equivalent adjustment
|
208
|
|
202
|
|
192
|
|
189
|
|
Interest income (FTE)
|
49,141
|
|
50,440
|
|
50,173
|
|
48,737
|
|
Interest expense
|
8,867
|
|
9,327
|
|
9,444
|
|
8,701
|
|
Net interest income
|
40,274
|
|
41,113
|
|
40,729
|
|
40,036
|
|
(Recovery of) provision for credit losses
|
(849)
|
|
(600)
|
|
274
|
|
(75)
|
|
Non-interest income
|
15,925
|
|
17,825
|
|
16,698
|
|
18,042
|
|
Non-interest expense
|
29,411
|
|
30,772
|
|
28,397
|
|
29,034
|
|
Income before income tax expense
|
27,637
|
|
28,766
|
|
28,756
|
|
29,119
|
|
Income tax expense
|
5,810
|
|
5,813
|
|
6,193
|
|
6,319
|
|
Taxable equivalent adjustment
|
(208)
|
|
(202)
|
|
(192)
|
|
(189)
|
|
Net income available to common shareholders
|
$
|
21,619
|
|
$
|
22,751
|
|
$
|
22,371
|
|
$
|
22,611
|
|
|
|
|
|
|
Net earnings allocated to common shareholders
|
$
|
21,433
|
|
$
|
22,553
|
|
$
|
22,188
|
|
$
|
22,372
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
1.31
|
|
$
|
1.38
|
|
$
|
1.36
|
|
$
|
1.38
|
|
Diluted earnings per common share
|
1.30
|
|
1.38
|
|
1.36
|
|
1.38
|
|
Average common shares outstanding:
|
|
|
|
|
Basic
|
16,411
|
|
16,368
|
|
16,271
|
|
16,207
|
|
Diluted
|
16,429
|
|
16,386
|
|
16,289
|
|
16,230
|
|
NOTE TWENTY-ONE – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
2019
|
2018
|
|
|
|
|
Net income available to common shareholders
|
$
|
89,595
|
|
$
|
89,352
|
|
$
|
70,002
|
|
Less: earnings allocated to participating securities
|
(887)
|
|
(806)
|
|
(654)
|
|
Net earnings allocated to common shareholders
|
$
|
88,708
|
|
$
|
88,546
|
|
$
|
69,348
|
|
|
|
|
|
Distributed earnings allocated to common shares outstanding
|
$
|
35,745
|
|
$
|
35,542
|
|
$
|
32,483
|
|
Undistributed earnings allocated to common shares outstanding
|
52,963
|
|
53,004
|
|
36,865
|
|
Net earnings allocated to common shareholders
|
$
|
88,708
|
|
$
|
88,546
|
|
$
|
69,348
|
|
|
|
|
|
Average shares outstanding, basic
|
15,975
|
|
16,314
|
|
15,421
|
|
Effect of dilutive securities
|
20
|
|
19
|
|
18
|
|
Average shares outstanding, diluted
|
15,995
|
|
16,333
|
|
15,439
|
|
|
|
|
|
Basic earnings per share
|
$
|
5.55
|
|
$
|
5.43
|
|
$
|
4.50
|
|
Diluted earnings per share
|
$
|
5.55
|
|
$
|
5.42
|
|
$
|
4.49
|
|
Anti-dilutive options are not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore, the effect would have been anti-dilutive. Anti-dilutive options were not significant for any of the periods shown above.
NOTE TWENTY-TWO – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The activity in accumulated other comprehensive income (loss) is presented in the tables below (in thousands). The activity is shown net of tax, which is calculated using a combined Federal and state income tax rate approximating 24% for 2020 and 23% for 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
Unrealized
|
|
|
|
Gains (Losses) on
|
|
|
Defined Benefit
|
Securities
|
|
|
Pension Plans
|
Available-for-Sale
|
Total
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(5,871)
|
|
$
|
(8,611)
|
|
$
|
(14,482)
|
|
|
|
|
|
Other comprehensive (loss) income before reclassifications
|
(399)
|
|
20,775
|
|
20,376
|
|
Amounts reclassified from other comprehensive income (loss)
|
—
|
|
(54)
|
|
(54)
|
|
|
(399)
|
|
20,721
|
|
20,322
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
(6,270)
|
|
$
|
12,110
|
|
$
|
5,840
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
609
|
|
23,643
|
|
24,252
|
|
Amounts reclassified from other comprehensive income (loss)
|
—
|
|
(47)
|
|
(47)
|
|
Reclassification of unrealized gains on held-to-maturity securities to available-for-sale
|
—
|
|
1,188
|
|
1,188
|
|
|
609
|
|
24,784
|
|
25,393
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
(5,661)
|
|
$
|
36,894
|
|
$
|
31,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from Other Comprehensive Income (Loss)
|
Affected line item
|
|
December 31,
|
in the Consolidated
|
|
2020
|
2019
|
2018
|
Statements of Income
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
Net securities gains reclassified into earnings
|
$
|
(62)
|
|
$
|
(69)
|
|
$
|
—
|
|
Net gains on sale of investment securities
|
Related income tax expense
|
15
|
|
15
|
|
—
|
|
Income tax expense
|
Net effect on accumulated other comprehensive income (loss)
|
$
|
(47)
|
|
$
|
(54)
|
|
$
|
—
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
Gain on termination of defined benefit plan
|
$
|
—
|
|
$
|
—
|
|
$
|
163
|
|
Other expenses
|
Related income tax expense
|
—
|
|
—
|
|
(38)
|
|
Income tax expense
|
Net effect on accumulated other comprehensive income (loss)
|
$
|
—
|
|
$
|
—
|
|
$
|
125
|
|
|
NOTE TWENTY-THREE – CONTRACTS WITH CUSTOMERS
The Company's largest source of revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), and non-interest income. The Company's significant sources of non-interest income are: service charges, bankcard revenue, trust and investment management fee income and bank owned life insurance (which is also excluded from ASC 606).
The Company's significant policies related to contracts with customers are discussed below.
Service Charges: Service charges consist of service charges on deposit accounts (monthly service fees, account analysis fees, non-sufficient funds ("NSF") fees and other deposit account related fees). For transaction based fees, the Company's performance obligation is generally satisfied, and the related revenue recognized, at a point in time. For nontransaction based fees, the Company's performance obligation is generally satisfied, and the related revenue recognized, over the period in which the service is provided (typically a month). Generally, payments are received immediately through a direct charge to the customer's account.
Bankcard Revenue: Bankcard revenue is primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company's debit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a non-Company cardholder uses a Company ATM or when a Company cardholder uses a non-Company ATM. The Company's performance obligation for bankcard revenue is generally satisfied, and the related revenue recognized, when the services are rendered. Generally, payments are received immediately or in the following month.
Trust and Investment Management Fee Income: Trust and investment management fee income is primarily comprised of fees earned from the management and administration of customer assets. The Company's performance obligation is generally satisfied over time (typically a quarter), and the related revenue recognized, based upon the quarter-end market value of the assets under management and the applicable fee rate. Generally, payments are received a few days after quarter-end through a direct charge to the customer's account.
The following table illustrates the disaggregation by the Company's major revenue streams (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Point of Revenue
|
|
|
|
|
Recognition
|
2020
|
2019
|
2018
|
Major revenue streams
|
|
|
|
|
Service charges
|
At a point in time and over time
|
$
|
25,733
|
|
$
|
31,515
|
|
$
|
29,704
|
|
Bankcard revenue
|
At a point in time
|
23,059
|
|
21,093
|
|
18,369
|
|
Trust and investment management fee income
|
Over time
|
7,736
|
|
7,159
|
|
6,529
|
|
Other income
|
At a point in time and over time
|
4,692
|
|
4,000
|
|
2,851
|
|
Net revenue from contracts with customers
|
|
61,220
|
|
63,767
|
|
57,453
|
|
Non-interest income within the scope of other GAAP topics
|
|
21,460
|
|
4,723
|
|
3,111
|
|
Total non-interest income
|
|
$
|
82,680
|
|
$
|
68,490
|
|
$
|
60,564
|
|