City Holding Co: Form 10-Q for the period ended Jun 30, 2024

Critical Accounting Policies and Estimates

The accounting policies of the Company conform with U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare the Company’s financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One to the audited financial statements included in the Company’s 2023 Annual Report to Shareholders. The information included in this Quarterly Report on Form 10-Q, including the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements and notes thereto included in the 2023 Annual Report of the Company. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified: (i) the determination of the allowance for credit losses (ii) income taxes and (iii) acquisition and preliminary purchase price accounting to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

Allowance for Credit Losses

The allowance for credit losses 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 in the future. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These evaluations are conducted at least quarterly and more frequently if deemed necessary. Additionally, all commercial loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process.

In evaluating the appropriateness of its allowance for credit losses, the Company stratifies the loan portfolio into six major groupings. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:

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 restructured loan will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

The Company uses a number of economic variables in its scenarios to estimate the allowance for credit losses (ACL), with the most significant drivers being an unemployment rate forecast and qualitative adjustments. In the June 30, 2024 estimate, the Company assumed a 2-year unemployment forecast range of 4.0% to 4.7%, changed from 3.9% to 4.7% for the March 31, 2024 estimate. Historical loss rates from periods where the average unemployment rate matches the forecast range are considered when calculating the forecast period loss rate. The change had no material impact.

Based on sensitivity analysis of all portfolios, a 0.0050% change (slight improvement or decline on bank's scale) in all 11 qualitative risk factors (where assigned) would have a $2.1 million impact on the reserve allocation. Changing each factor by 0.01% (moderate improvement or decline) would have a $4.3 million impact. Management recognizes that these are extreme scenarios and it is very unlikely that all risk factors would change by 0.005% or 0.01% simultaneously. For the June 30, 2024 estimate, no changes were made to the qualitative factors utilized in the previous quarter.

Income Taxes

The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis. The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors. However, management cannot currently estimate the range of possible change. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state taxing authorities for the years ended December 31, 2021 and forward.

The effective tax rate is calculated by taking the statutory rate and adjusting for permanent and discrete items. The discrete items can vary between periods but historically have remained consistent.

Acquisition and Preliminary Purchase Price Allocation

The calculation of the Company's acquisition and preliminary purchase price allocation is considered a critical accounting estimate as it involves a significant level of estimation and uncertainty, particularly in relation to the fair value and goodwill calculations. Under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair value of acquired assets and liabilities. The measurement period ends as soon as the Company receives information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. Any subsequent adjustments to the fair value of the acquired assets and liabilities, intangible assets or other purchase accounting adjustments will result in adjustments to the goodwill recorded. As of June 30, 2024, twelve months have occurred since the date of acquisition on March 10, 2023, and the measurement period is now complete.

Financial Summary

Six months ended June 30, 2024 vs. 2023

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

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

The Company's net interest income for the six months ended June 30, 2024 increased $0.1 million compared to the six months ended June 30, 2023 (see Net Interest Income). The Company recorded a provision for credit losses of $0.3 million for the six months ended June 30, 2024 compared to a provision of credit losses of $3.3 million for the six months ended June 30, 2023 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest Income and Non-Interest Expense, non-interest income decreased $2.1 million and non-interest expense decreased $0.7 million for the six months ended June 30, 2024 from the six months ended June 30, 2023.

Financial Summary

Three months ended June 30, 2024 vs. 2023

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

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

The Company's net interest income for the three months ended June 30, 2024 decreased $0.9 million compared to the three months ended June 30, 2023 (see Net Interest Income). The Company recorded a $0.5 million provision for credit losses for the three months ended June 30, 2024 compared to a $0.4 million provision for credit losses for the three months ended June 30, 2023 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest Income and Non-Interest

Expense, non-interest income decreased $1.4 million and non-interest expense increased $2.0 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Balance Sheet Analysis

Selected balance sheet fluctuations from the year ended December 31, 2023 are summarized in the following table (in millions, except percentages):

Cash and cash equivalents increased $61.7 million (39.5%) from December 31, 2023 to $218.0 million at June 30, 2024, due to a decrease in gross loans, an increase in FHLB long-term advances, and an increase in deposit balances. These increasing impacts were partially offset by an increase in investment securities and a decrease in federal funds purchased.

Total investment securities increased $118.8 million (8.7%) from December 31, 2023 to $1.49 billion at June 30, 2024, primarily due to security purchases that were partially offset by maturities and calls.

Gross loans decreased $13.0 million (0.3%) from December 31, 2023 to $4.11 billion at June 30, 2024. Commercial and industrial loans decreased $18.6 million (4.4%), commercial real estate loans decreased $11.8 million (0.7%), and consumer loans decreased $2.9 million (4.4%) during the first six months of 2024. These decreases were partially offset by an increase home equity loans of $12.4 million (7.4%) and an increase in residential real estate loans of $9.1 million (0.5%).

Total deposits increased $133.0 million (2.7%) from December 31, 2023 to $5.1 billion at June 30, 2024. Time deposit balances increased $104.6 million, interest-bearing demand deposit balances increased $42.2 million, and noninterest-bearing demand deposit balances increased $11.9 million. These increases were partially offset by a decrease in savings deposit balances of $25.6 million.

FHLB long-term advances increased $50.0 million from December 31, 2023 to June 30, 2024. During the first six months of 2024, the Company borrowed $50.0 million from the Federal Home Loan Bank at a rate of 4.39%.

Net Interest Income

Six months ended June 30, 2024 vs. 2023

The Company’s net interest income increased from $109.0 million for the six months ended June 30, 2023 to $109.1 million for the six months ended June 30, 2024. The Company’s tax equivalent net interest income remained flat at $109.5 million for both the six months ended June 30, 2024 and the six months ended June 30, 2023. Due to increases in the Federal Funds rate, net interest income increased by $22.7 million due to an increase in loan yields (net of loan fees and accretion) of 121 basis points and by $3.4 million due to an increase in investment yields of 47 basis points. In addition, an increase of 110 basis points in the yield on deposits in depository institutions increased net interest income by $0.7 million. These increases were essentially offset by an increase in the cost of interest bearing liabilities (113 basis points) which decreased net interest income by $20.2 million and a decrease in average loans ($121.9 million) which lowered interest income by $3.3 million. The Company’s reported net interest margin decreased from 4.02% for the six months ended June 30, 2023 to 3.91% for the six months ended June 30, 2024.

Table One

Average Balance Sheets and Net Interest Income

(in thousands, except percentages)

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Table Two

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

(in thousands)

(1) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 21%.

Net Interest Income

Three months ended June 30, 2024 vs. 2023

The Company’s net interest income decreased from $55.5 million for the three months ended June 30, 2023 to $54.6 million for the three months ended June 30, 2024. The Company’s tax equivalent net interest income decreased $0.9 million, or 1.64%, from $55.8 million for the second quarter of 2023 to $54.9 million for the second quarter of 2024. The Company's net interest income declined by $7.5 million due to an increase in the cost of interest bearing liabilities of 84 basis points and by $1.7 million due to an increase in the average balance of interest bearing liabilities ($163.3 million).

These decreases in net interest income were partially offset by an increase in loan yields (44 basis points) and an increase in average loan balances ($196.2 million), which increased net interest income $4.2 million and $2.7 million, respectively. In addition, an increase of 60 basis points in the yield on investment securities increased net interest income by $2.1 million. Due to an increase in average interest-earning liabilities, the Company’s reported net interest margin decreased from 4.00% for the second quarter of 2023 to 3.87% for the second quarter of 2024.

Table One

Average Balance Sheets and Net Interest Income

(in thousands, except percentages)

46

Table Two

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

(in thousands)

(1) Computed on a fully federal taxable equivalent using a tax rate of 21%.

Non-GAAP Financial Measures

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

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Loans

Table Three

Loan Portfolio

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

Loan balances decreased $13.1 million from December 31, 2023 to June 30, 2024.

The commercial and industrial ("C&I") loan portfolio consists of loans to corporate borrowers that are primarily in small to mid-size industrial and commercial companies. Collateral securing these loans includes equipment, machinery, inventory, receivables and vehicles. C&I loans are considered to contain a higher level of risk than other loan types, although care is taken to minimize these risks. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. C&I loans decreased $18.6 million from December 31, 2023 to June 30, 2024.

Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties, including hotel/motel and apartment lending. Commercial real estate loans are made to many of the same customers and carry similar industry risks as C&I loans. Commercial real estate loans decreased $11.8 million from December 31, 2023 to June 30, 2024. At June 30, 2024, $2.2 million of the commercial real estate loans were for commercial properties under construction.

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

• Commercial 1-4 Family loans decreased $10.2 million from December 31, 2023 to June 30, 2024. Commercial 1-4 Family loans consist of residential single-family, duplex, triplex, and fourplex rental properties and totaled $196.0 million as of June 30, 2024. Risk characteristics are driven by rental housing demand as well as economic and employment conditions. These properties exhibit greater risk than multi-family properties due to fewer income sources.
• Hotel loans increased $13.8 million from December 31, 2023 to June 30, 2024. The Hotel portfolio is comprised of all lodging establishments and totaled $371.0 million as of June 30, 2024. Risk characteristics relate to the demand for travel.
• Multi-family loans increased $1.2 million from December 31, 2023 to June 30, 2024. Multi-family consists of 5 or more family residential apartment lending. The portfolio totaled $190.4 million as of June 30, 2024. Risk characteristics are driven by rental housing demand as well as economic and employment conditions.
• Non-residential commercial real estate includes properties such as retail, office, warehouse, storage, healthcare, entertainment, religious, and other nonresidential commercial properties. The non-residential product type is further segmented into owner- and non-owner occupied properties. Nonresidential non-owner occupied commercial real estate totaled $668.3 million at June 30, 2024 and decreased $12.3 million from December 31, 2023 to June 30, 2024.

Nonresidential owner-occupied commercial real estate totaled $236.0 million at June 30, 2024 and decreased $4.3 million from December 31, 2023. Risk characteristics relate to levels of consumer spending and overall economic conditions.

Residential real estate loans increased $9.1 million from December 31, 2023 to June 30, 2024. Residential real estate loans represent loans to consumers that are secured by a first lien on residential property. Residential real estate loans provide for the purchase or refinance of a residence and first-lien home equity loans allow consumers to borrow against the equity in their home. These loans primarily consist of single family 3, 5 and 7 year adjustable rate mortgages with terms that amortize up to 30 years. The Company also offers fixed-rate residential real estate loans that are generally sold in the secondary market that are not included on the Company's balance sheet; the Company does not retain the servicing rights to these loans. Residential mortgage loans are generally underwritten to comply with Fannie Mae guidelines, while the home equity loans are underwritten with typically less documentation, but with lower loan-to-value ratios and shorter maturities. At June 30, 2024, $9.8 million of the residential real estate loans were for properties under construction.

Home equity loans increased $12.4 million during the first six months of 2024. The Company's home equity loans represent loans to consumers that are secured by a second (or junior) lien on a residential property. Home equity loans allow consumers to borrow against the equity in their home without paying off an existing first lien. These loans consist of home equity lines of credit ("HELOC") and amortized home equity loans that require monthly installment payments. Home equity loans are underwritten with less documentation, lower loan-to-value ratios and for shorter terms than residential mortgage loans. The amount of credit extended is directly related to the value of the real estate at the time the loan is made.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property or they may be unsecured. The Company monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Consumer loans decreased by $2.9 million during the first six months of 2024.

Allowance for Credit Losses

Management systematically monitors the loan portfolio and the appropriateness of the allowance for credit losses on a quarterly basis to provide for expected losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors. The Company's estimate of future economic conditions utilized in its provision estimate is primarily dependent on expected unemployment ranges over a two-year period. Beyond two years, a straight line reversion to historical average loss rates is applied over the life of the loan pool in the migration methodology. The vintage methodology applies future average loss rates based on net losses in historical periods where the unemployment rate was within the forecasted range. As a result of the Company’s quarterly analysis of the adequacy of the Allowance for Credit Losses, the Company recorded a $0.5 million provision for credit losses in the second quarter of 2024 and recorded a provision for credit losses of $0.4 million in the second quarter of 2023.

Individual credits in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance.

Determination of the Allowance for Credit Losses is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between actual losses and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio.

Based on the Company’s analysis of the adequacy of the allowance for credit losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for credit losses as of June 30, 2024 is adequate to provide for expected losses inherent in the Company’s loan portfolio. Future provisions for credit losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and recoveries of previously charged-off loans, among other factors.

Table Four

Allocation of the Allowance for Credit Losses

The allocation of the allowance for credit losses is shown in the table below (in thousands). The allocation of a portion of the allowance in one portfolio loan classification does not preclude its availability to absorb losses in other portfolio segments.

The Allowance for Credit Losses decreased slightly from $22.7 million at December 31, 2023 to $22.7 million at June 30, 2024. The Company recorded a provision for credit losses of $0.5 million in the second quarter of 2024, compared to a provision for credit losses of $0.4 million for the comparable period in 2023, and a recovery of credit losses of $0.2 million for the first quarter of 2024. The provision for credit losses in the second quarter was primarily due to an increase in the loss rate for residential real estate loans.

Non-Interest Income and Non-Interest Expense

Six months ended June 30, 2024 vs. 2023

(in millions, except percentages)

Non-Interest Income: Non-interest income was $36.9 million for the six months ended June 30, 2024, as compared to $39.0 million for the six months ended June 30, 2023. During the six months ended June 30, 2024, the Company reported $0.2 million of unrealized fair value gains on the Company's equity securities compared to $0.8 million of realized fair value gains during the six months ended June 30, 2023.

Excluding net investment securities gains, non-interest income decreased from $38.1 million for the six months ended June 30, 2023 to $36.7 million for the six months ended June 30, 2024. The decrease was largely attributable to a decrease in bank owned life insurance revenues ($2.3 million) and a decrease in other income ($0.8 million). These decreases were partially offset by an increase in trust and investment management fee income of $0.8 million (or 17.3%), increase in service charges of $0.5 million (or 4.1%), and increase in bankcard revenues of $0.3 million (or 1.8%).

Non-Interest Expense: Non-interest expenses, less merger related expenses, increased $5.0 million (7.4%), from $67.7 million in the first six months of 2023 to $72.7 million in the first six months of 2024 primarily due to an increase in salaries and employee benefits ($1.5 million), other expenses ($1.4 million), and bankcard expenses ($1.1 million).

Income Tax Expense: The Company’s effective income tax rate for the six months ended June 30, 2024 was 19.6% compared to 19.9% for the six months ended June 30, 2023.

Non-Interest Income and Non-Interest Expense

Three months ended June 30, 2024 vs. 2023

(in millions, except percentages)

Non-Interest Income: Non-interest income was $18.9 million during the quarter ended June 30, 2024, as compared to $20.3 million during the quarter ended June 30, 2023. During the second quarter of 2024, the Company reported $0.4 million of unrealized fair value gains on the Company’s equity securities as compared to $0.3 million of unrealized fair value losses on the Company’s equity securities during the second quarter of 2023.

Exclusive of these items, non-interest income decreased $2.1 million, or 10.2%, from $20.6 million for the second quarter of 2023 to $18.5 million for the second quarter of 2024. This decrease was largely attributable to a decrease of $2.4 million in bank owned life insurance due to lower death benefit proceeds. This decrease was partially offset by an increase of $0.4 million, or 18.1%, in trust and investment management fee income.

Non-Interest Expense: Non-interest expenses increased $2.0 million, or 5.7%, from $34.8 million in the second quarter of 2023 to $36.8 million in the second quarter of 2024. This increase was largely due to an increase in other expenses of $0.9 million and bankcard expenses of $0.6 million. In addition, salaries and employee benefits increased $0.3 million and equipment and software related expenses increased $0.2 million.

Income Tax Expense: The Company's effective income tax rate for the three months ended June 30, 2024 and June 30, 2023 was 19.7%, and 19.4%, respectively.

Risk Management

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

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

In order to measure and manage its interest rate risk, the Company uses an asset/liability management and simulation software model to periodically update the interest sensitivity position of the Company’s balance sheet. The model is also used to perform analyses that measure the impact on net interest income and capital as a result of various changes in the interest rate environment. Such analyses quantify the effects of various interest rate scenarios on projected net interest income.

The Company’s policy objective is to avoid negative fluctuations in net income or the economic value of equity of more than 15% within a 12-month period, assuming an immediate parallel increase or decrease of 100 to 300 basis points. The

Company measures the long-term risk associated with sustained increases and decreases in rates through analysis of the impact to changes in rates on the economic value of equity.

The following table summarizes the sensitivity of the Company’s net income to various interest rate scenarios. The results of the sensitivity analyses presented below differ from the results used internally by ALCO in that, in the analyses below, interest rates are assumed to have an immediate and sustained parallel shock. The Company recognizes that rates are volatile, but rarely move with immediate and parallel effects. Internally, the Company considers a variety of interest rate scenarios that are deemed possible while considering the level of risk it is willing to assume in “worst-case” scenarios such as shown by the following:

These estimates are highly dependent upon assumptions made by management, including, but not limited to, assumptions regarding the manner in which interest-bearing demand deposit and savings deposit accounts reprice in different interest rate scenarios, changes in the composition of deposit balances, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the estimates above will be achieved in the event that interest rates increase or decrease during the remainder of 2024 and beyond. The estimates above do not necessarily imply that the Company will experience increases in net income if market interest rates rise. The table above indicates how the Company’s net income behaves relative to an increase in rates compared to what would otherwise occur if rates remain stable.

Liquidity and Capital Resources

Liquidity

The Company evaluates the adequacy of liquidity at both the City Holding level and at the City National level. At the City Holding level, the principal source of cash is dividends from City National. Dividends paid by City National to City Holding are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. At June 30, 2024, City National could pay dividends up to $98.4 million plus net profits for the remainder of 2024, as defined by statute, up to the dividend declaration date without prior regulatory permission.

Additionally, City Holding anticipates continuing the payment of dividends on its common stock, which are expected to approximate $42.0 million on an annualized basis over the next 12 months based on common shares outstanding at June 30, 2024. However, dividends to shareholders can, if necessary, be suspended. In addition to these anticipated cash needs, City Holding has operating expenses and other contractual obligations, which are estimated to require $1.9 million of additional cash over the next 12 months. As of June 30, 2024, City Holding reported a cash balance of $29.1 million and management believes that City Holding’s available cash balance, together with cash dividends from City National, will be adequate to satisfy its funding and cash needs over the next 12 months.

As illustrated in the consolidated statements of cash flows, the Company generated $60.5 million of cash from operating activities during the first six months of 2024, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. The Company used $130.4 million of cash in investing activities during the first six months of 2024, primarily due to purchases of available-for-sale securities of $192.6 million, payments for low income housing credits of $8.3 million and purchases of premises and equipment of $1.1 million. These increases were partially offset by proceeds from maturities and calls of $57.7 million and a decrease in loans of $13.6 million. The Company generated $131.6 million of cash in financing activities during the first six months of 2024, principally as a result of an increase in interest-bearing deposits of $121.2 million, proceeds from long-term debt of $50.0 million, and an increase in non-interest-bearing deposits of $11.9 million. These increases were partially offset by a decrease in dividends paid of $21.4 million, purchases of treasury stock of $17.9 million, and a decrease in short-term borrowings of $12.2 million.

City National has borrowing facilities with the Federal Reserve Bank and the Federal Home Loan Bank that can be accessed as necessary to fund operations and to provide contingency funding. These borrowing facilities are collateralized by various loans held on City National’s balance sheet. As of June 30, 2024, City National had the capacity to borrow an additional $1.6 billion from these existing borrowing facilities. In addition, approximately $710 million of City National’s investment securities were pledged to collateralize customer repurchase agreements and various deposit accounts, leaving approximately $780 million of City National’s investment securities unpledged at June 30, 2024. City National also segregates certain mortgage loans, mortgage-backed securities, and other investment securities in a separate subsidiary so that it can separately monitor the asset quality of these primarily mortgage-related assets, which could be used to raise cash through securitization transactions or obtain additional equity or debt financing if necessary.

The Company manages its asset and liability mix to balance its desire to maximize net interest income against its desire to minimize risks associated with capitalization, interest rate volatility, and liquidity. With respect to liquidity, the Company has chosen a conservative posture and believes that its liquidity position is strong. The Company’s net loan to asset ratio is 64.5% as of June 30, 2024 and deposit balances fund 79.9% of total assets. The Company has obligations to extend credit, but these obligations are primarily associated with existing home equity loans that have predictable borrowing patterns across the portfolio. The Company has investment security balances with carrying values that totaled $1.5 billion at June 30, 2024, and that exceeded the Company’s non-deposit sources of borrowing, which totaled $472.7 million. Further, the Company’s deposit mix has a high proportion of transaction and savings accounts that fund 61.8% of the Company’s total assets. As interest rates increase, deposit balances may decline or the composition of the deposit portfolio may shift to higher yielding deposit products, such as money market accounts or time deposits.

As the following table reflects, less than 15% (estimated) of the Company's deposits were uninsured (either with balances above $250,000 or not collateralized by investment securities) as of June 30, 2024.

Estimated Uninsured Deposits by Deposit Type

The amounts listed above represent management's best estimate as of the respective period shown of uninsured deposits (either with balances above $250,000 or not collateralized by investment securities).

Capital Resources

Shareholders' equity increased $9.7 million for the six months ended June 30, 2024, primarily due to net income of $58.6 million. This increase was partially offset by cash dividends declared of $21.4 million, the repurchase of 178,529 common shares at a weighted average price of $100.24 per share ($17.9 million) as part of a one million share repurchase plan authorized by the Board of Directors in January 2024, and other comprehensive loss of $11.8 million.

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 the Company.

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

As of June 30, 2024, 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 June 30, 2024, management believes that City Holding and City National have met all capital adequacy requirements.

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. 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.

The information called for by this item is provided under the caption “Risk Management” under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023.