CITY HOLDING CO [CHCO] Filings

10-Q 1 chco-20230930.htm 10-Q chco-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to _____________

Commission file number 0-11733

CITY HOLDING COMPANY

(Exact name of registrant as specified in its charter)


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

25 Gatewater Road,	Charleston,	West Virginia	25313
(Address of Principal Executive Offices)			(Zip Code)

(304) 769-1100

Registrant's telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $2.50 par value	CHCO	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer	x	Accelerated filer	o
Non accelerated filer	o	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had outstanding 14,831,817 shares of common stock as of November 1, 2023.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements express only management's beliefs regarding future results or events and are subject to inherent uncertainty, risks, and changes in circumstances, many of which are outside of management's control. Uncertainty, risks, changes in circumstances and other factors could cause the Company's (as hereinafter defined) actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to, those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 under “ITEM 1A Risk Factors” and the following: (1) general economic conditions, especially in the communities and markets in which we conduct our business; (2) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for credit losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (3) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (4) changes in the interest rate environment; (5) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (6) changes in technology and increased competition, including competition from non-bank financial institutions; (7) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers' performance and creditworthiness; (8) difficulty growing loan and deposit balances; (9) our ability to effectively execute our business plan, including with respect to future acquisitions; (10) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries, including changes in deposit insurance premium levels; (11) deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions; (12) regulatory enforcement actions and adverse legal actions; (13) difficulty attracting and retaining key employees; and (14) other economic, competitive, technological, operational, governmental, regulatory, geopolitical, and market factors affecting our operations. Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

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Index

City Holding Company and Subsidiaries


PART I	Financial Information	Pages

Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
Item 4.	Controls and Procedures	59

PART II	Other Information

Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

Signatures		62

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Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

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Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)


	(Unaudited)
	September 30, 2023		December 31, 2022
Assets
Cash and due from banks	$	62,085	$	68,333
Interest-bearing deposits in depository institutions	48,631		131,667
Cash and Cash Equivalents	110,716		200,000

Investment securities available for sale, at fair value (amortized cost $1,572,696 and $1,673,864, net of allowance for credit losses of $0 at September 30, 2023 and December 31, 2022, respectively)	1,358,219		1,505,520
Other securities	29,022		23,807
Total Investment Securities	1,387,241		1,529,327

Gross loans	4,007,482		3,646,258
Allowance for credit losses	(23,128)		(17,108)
Net Loans	3,984,354		3,629,150

Bank owned life insurance	117,979		120,674
Premises and equipment, net	72,682		70,786
Accrued interest receivable	19,223		18,287
Deferred tax assets, net	58,811		44,884
Goodwill and other intangible assets, net	163,461		115,735
Other assets	161,659		149,263
Total Assets	$	6,076,126	$	5,878,106

Liabilities
Deposits:
Noninterest-bearing	$	1,333,474	$	1,351,415
Interest-bearing:
Demand deposits	1,319,783		1,233,482
Savings deposits	1,282,642		1,396,869
Time deposits	1,009,235		888,100
Total Deposits	4,945,134		4,869,866

Customer repurchase agreements	278,671		290,964
FHLB long-term advances	100,000		—
Other liabilities	142,187		139,424
Total Liabilities	5,465,992		5,300,254

Commitments and contingencies - see Note I

Shareholders’ Equity
Preferred stock, par value $25 per share: 500,000 shares authorized; none issued	—		—
Common stock, par value $2.50 per share: 50,000,000 shares authorized; 19,047,548 shares issued at September 30, 2023 and December 31, 2022, less 4,146,125 and 4,259,399 shares in treasury, respectively	47,619		47,619
Capital surplus	177,113		170,980
Retained earnings	763,425		706,696
Cost of common stock in treasury	(211,430)		(215,955)
Accumulated other comprehensive (loss) income:
Unrealized (loss) on securities available-for-sale	(163,171)		(128,066)
Underfunded pension liability	(3,422)		(3,422)
Total Accumulated Other Comprehensive (Loss)	(166,593)		(131,488)
Total Shareholders’ Equity	610,134		577,852
Total Liabilities and Shareholders’ Equity	$	6,076,126	$	5,878,106

To be read with the attached notes to consolidated financial statements.

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Consolidated Statements of Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands, except earnings per share data)


Interest Income	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022

Interest and fees on loans	$	55,582	$	38,493	$	154,939	$	103,575
Interest and dividends on investment securities:
Taxable	12,432		9,556		35,999		23,327
Tax-exempt	910		1,228		3,022		3,650
Interest on deposits in depository institutions	1,265		1,530		5,440		2,549
Total Interest Income	70,189		50,807		199,400		133,101

Interest Expense
Interest on deposits	10,551		1,585		24,808		4,433
Interest on customer repurchase agreements	2,990		440		8,334		677
Interest on FHLB long-term advances	1,034		—		1,683		—
Total Interest Expense	14,575		2,025		34,825		5,110
Net Interest Income	55,614		48,782		164,575		127,991
Provision for (recovery of) credit losses	200		730		3,543		(26)
Net Interest Income After Provision for (Recovery of) Credit Losses	55,414		48,052		161,032		128,017

Non-Interest Income
(Losses) gains on sale of investment securities, net	(730)		—		43		—
Unrealized gains (losses) recognized on equity securities still held, net	—		1		67		(1,322)
Service charges	7,124		7,487		20,593		21,281
Bankcard revenue	7,058		7,052		20,851		20,558
Trust and investment management fee income	2,409		2,158		7,000		6,455
Bank owned life insurance	807		754		4,819		3,746
Other income	742		792		3,020		2,825
Total Non-Interest Income	17,410		18,244		56,393		53,543

Non-Interest Expense
Salaries and employee benefits	18,289		17,398		54,391		49,386
Occupancy related expense	2,950		2,664		8,401		7,993
Equipment and software related expense	2,830		2,949		8,805		8,452
FDIC insurance expense	919		416		2,054		1,259
Advertising	790		854		2,524		2,603
Bankcard expenses	2,188		1,405		5,433		4,676
Postage, delivery, and statement mailings	668		578		1,911		1,765
Office supplies	457		466		1,468		1,303
Legal and professional fees	529		532		1,557		1,584
Telecommunications	568		651		1,797		1,988
Repossessed asset losses (gains), net of expenses	40		(3)		78		4
Merger related expenses	2		—		5,647		—
Other expenses	4,798		3,591		14,346		10,701
Total Non-Interest Expense	35,028		31,501		108,412		91,714
Income Before Income Taxes	37,796		34,795		109,013		89,846

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Income tax expense	7,957		7,421		22,100		18,438
Net Income Available to Common Shareholders	$	29,839	$	27,374	$	86,913	$	71,408



Average shares outstanding, basic	14,922		14,776		14,906		14,878
Effect of dilutive securities	23		24		22		23
Average shares outstanding, diluted	14,945		14,800		14,928		14,901

Basic earnings per common share	$	1.98	$	1.84	$	5.78	$	4.75
Diluted earnings per common share	$	1.98	$	1.83	$	5.77	$	4.75

To be read with the attached notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

Net income available to common shareholders	$	29,839	$	27,374	$	86,913	$	71,408

Available-for-Sale Securities
Unrealized (losses) on available-for-sale securities arising during the period	(48,273)		(81,133)		(46,132)		(210,741)
Reclassification adjustment for losses (gains)	730		—		(43)		—
Other comprehensive (loss) income before income taxes	(47,543)		(81,133)		(46,175)		(210,741)
Tax effect	11,398		19,634		11,070		50,999
Other comprehensive (loss) income, net of tax	(36,145)		(61,499)		(35,105)		(159,742)

Comprehensive Income (Loss), Net of Tax	$	(6,306)	$	(34,125)	$	51,808	$	(88,334)

To be read with the attached notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Three Months Ended September 30, 2023 and 2022

(in thousands, except share amounts)


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive (Loss)		Total Shareholders’ Equity
Balance at June 30, 2022	$	47,619	$	169,557	$	667,933	$	(209,133)	$	(83,983)	$	591,993
Net income	—		—		27,374		—		—		27,374
Other comprehensive loss, net of tax	—		—		—		—		(61,499)		(61,499)
Cash dividends declared ($0.65 per share)	—		—		(9,650)		—		—		(9,650)
Stock-based compensation expense	—		754		—		—		—		754
Restricted awards granted	—		(163)		—		163		—		—
Exercise of 556 stock options	—		(10)		—		46		—		36
Purchase of 8,971 treasury shares	—		—		—		(720)		—		(720)
Balance at September 30, 2022	$	47,619	$	170,138	$	685,657	$	(209,644)	$	(145,482)	$	548,288


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive (Loss)		Total Shareholders’ Equity
Balance at June 30, 2023	$	47,619	$	176,746	$	744,248	$	(201,973)	$	(130,448)	$	636,192
Net income	—		—		29,839		—		—		29,839
Other comprehensive loss, net of tax	—		—		—		—		(36,145)		(36,145)
Cash dividends declared ($0.72 per share)	—		—		(10,662)		—		—		(10,662)
Stock-based compensation expense	—		681		—		—		—		681
Restricted awards granted	—		(314)		—		314		—		—

Purchase of 109,382 treasury shares	—		—		—		(9,771)		—		(9,771)
Balance at September 30, 2023	$	47,619	$	177,113	$	763,425	$	(211,430)	$	(166,593)	$	610,134

To be read with the attached notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Nine Months Ended September 30, 2023 and 2022

(in thousands, except share amounts)


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2021	$	47,619	$	170,942	$	641,826	$	(193,542)	$	14,260	$	681,105
Net income	—		—		71,408		—		—		71,408
Other comprehensive loss, net of tax	—		—		—		—		(159,742)		(159,742)
Cash dividends declared ($1.85 per share)	—		—		(27,577)		—		—		(27,577)
Stock-based compensation expense	—		2,412		—		—		—		2,412
Restricted awards granted	—		(2,821)		—		2,821		—		—
Exercise of 13,634 stock options	—		(395)		—		1,092		—		697
Purchase of 255,421 treasury shares	—		—		—		(20,015)		—		(20,015)
Balance at September 30, 2022	$	47,619	$	170,138	$	685,657	$	(209,644)	$	(145,482)	$	548,288


	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2022	$	47,619	$	170,980	$	706,696	$	(215,955)	$	(131,488)	$	577,852
Adoption of ASU No. 2022-02	—		—		175		—		—		175
Balances at January 1, 2023	47,619		170,980		706,871		(215,955)		(131,488)		578,027
Net income	—		—		86,913		—		—		86,913
Other comprehensive loss, net of tax	—		—		—		—		(35,105)		(35,105)
Cash dividends declared ($2.02 per share)	—		—		(30,359)		—		—		(30,359)
Stock-based compensation expense	—		2,407		—		—		—		2,407
Restricted awards granted	—		(3,848)		—		3,848		—		—
Purchase of 596,969 treasury shares	—		—		—		(53,827)		—		(53,827)
Acquisition of Citizens Commerce Bancshares, Inc.	—		7,574		—		54,504		—		62,078
Balance at September 30, 2023	$	47,619	$	177,113	$	763,425	$	(211,430)	$	(166,593)	$	610,134

To be read with the attached notes to consolidated financial statements.

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Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)


	Nine months ended September 30,
	2023		2022
Net income	$	86,913	$	71,408
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and (accretion), net	6,496		8,607
Provision for (recovery of) credit losses	3,543		(26)
Depreciation of premises and equipment	3,452		4,033
Deferred income tax (benefit) expense	(1,491)		1,181
Net periodic employee benefit cost	39		192
Unrealized and realized investment securities (gains) losses, net	(110)		1,322
Stock-compensation expense	2,407		2,412
Excess tax expense (benefit) from stock-compensation	203		189
Increase in value of bank-owned life insurance	(4,819)		(3,746)
Loans held for sale
Loans originated for sale	(9,591)		(29,139)
Proceeds from the sale of loans originated for sale	9,713		29,422
Gain on sale of loans	(122)		(283)
Change in accrued interest receivable	(69)		(1,629)
Change in other assets	12,068		(11,312)
Change in other liabilities	(4,588)		9,136
Net Cash Provided by Operating Activities	104,044		81,767

Net decrease (increase) in loans	(107,988)		(85,289)
Securities available-for-sale
Purchases	(56,734)		(488,401)
Proceeds from sales of securities available-for-sale	103,249		—
Proceeds from maturities and calls	93,927		177,875
Other investments
Purchases	(5,970)		(280)
Proceeds from sales	77		116
Proceeds from maturities and calls	747		—
Purchases of premises and equipment	(2,392)		(1,677)
Proceeds from the disposals of premises and equipment	283		189
Proceeds from bank-owned life insurance policies	207		3,623
Payments for low income housing tax credits	(6,577)		(2,144)
Acquisition of Citizens Commerce Bancshares, Inc.	14,013		—
Net Cash Provided by (Used in) Investing Activities	32,842		(395,988)

Net (decrease) increase in non-interest-bearing deposits	(78,236)		56,156
Net (decrease) increase in interest-bearing deposits	(145,344)		(23,625)
Net (decrease) increase in short-term borrowings	(18,793)		(7,651)
Proceeds from long-term debt	100,000		—
Purchases of treasury stock	(53,827)		(20,015)
Proceeds from exercise of stock options	—		697
Lease payments	(609)		(572)
Dividends paid	(29,361)		(27,047)
Net Cash (Used in) Provided by Financing Activities	(226,170)		(22,057)
Decrease in Cash and Cash Equivalents	(89,284)		(336,278)
Cash and cash equivalents at beginning of period	200,000		634,631
Cash and Cash Equivalents at End of Period	$	110,716	$	298,353

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Supplemental Cash Flow Information:
Cash paid for interest	$	32,525	$	5,299
Cash paid for income taxes	26,162		17,834
Acquisition
Identifiable assets acquired (net of purchase consideration)	$	319,738	$	—
Liabilities assumed	307,113		—
Goodwill	41,175		—
Core deposit intangible	8,278		—

To be read with the attached notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)

September 30, 2023

Note A - Background and Basis of Presentation

City Holding Company ("City Holding"), a West Virginia corporation headquartered in Charleston, West Virginia, is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 99 banking offices in West Virginia (58), Kentucky (24), Virginia (13) and southeastern Ohio (4). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities including Charleston (WV), Huntington (WV), Martinsburg (WV), Ashland (KY), Lexington (KY), Winchester (VA) and Staunton (VA). In addition to its branch network, City National's delivery channels include automated-teller-machines ("ATMs"), interactive-teller machines ("ITMs"), mobile banking, debit cards, interactive voice response systems, and Internet technology. The Company’s business activities are currently limited to one reportable business segment, which is community banking.

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding and its wholly-owned subsidiaries (collectively, the "Company"). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2023. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information, with the instructions to Form 10-Q and Article 10 of Regulation S-X, and with Industry Guide 3, Statistical Disclosure by Bank Holding Companies. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management’s estimates.

The consolidated balance sheet as of December 31, 2022 has been derived from audited financial statements included in the Company’s 2022 Annual Report to Shareholders. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2022 Annual Report of the Company.

Note B - Recent Accounting Pronouncements

Recently Adopted

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 would 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. In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The adoption of ASU No. 2020-04 did not have a material impact on the Company's financial statements.

In March 2022, the FASB issued ASU No. 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method." The amendments in this update allow nonprepayable financial assets to be included in a closed

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portfolio hedged using the portfolio layer method. This expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. This ASU became effective for the Company on January 1, 2023. The adoption of ASU No. 2022-01 did not have a material impact on the Company's financial statements.

In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. This ASU became effective for the Company on January 1, 2023. The Company adopted ASU No. 2022-02 using the modified retrospective method, which resulted in a $0.2 million adjustment to shareholders' equity and the allowance for credit losses. See Note F for additional information.

In July 2023, the FASB issued ASU No. 2023- 03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023- 03 amends various SEC paragraphs within the Codification to conform to past SEC staff announcements and guidance issued by the SEC, including Staff Accounting Bulletin No. 120. These updates were immediately effective and did not have a material impact on our financial statements.

Pending Adoption

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The FASB issued this ASU to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this ASU also require the following disclosures for equity securities subject to contractual sale restrictions: (1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; (2) the nature and remaining duration of the restriction(s); and (3) the circumstances that could cause a lapse in the restriction(s). This ASU will become effective for the Company on January 1, 2024. The adoption of ASU No. 2022-03 is not expected to have a material impact to our consolidated financial statements.

In March 2023, the FASB issued ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures using the Proportional Amortization Method." The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. This ASU will become effective for the Company on January 1, 2024. The adoption of ASU No. 2023-02 is not expected to have a material impact on the Company's financial statements.

Note C - Acquisition and Preliminary Purchase Price Allocation

On March 10, 2023, the Company acquired 100% of the outstanding common shares of Citizens Commerce Bancshares, Inc. ("Citizens") and its principal banking subsidiary, Citizens Commerce Bank of Versailles, Kentucky, in order to strengthen the Company's market presence in the Lexington, Kentucky area. The acquisition of Citizens was structured as a stock transaction in which the Company issued approximately 0.7 million shares, valued at approximately $62.1 million.

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The following table summarizes the consideration paid for Citizens and the amounts of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):


Consideration:
Common stock	$	61,570
Stock option buyout	495
Cash	13
	62,078

Identifiable assets:
Cash and cash equivalents	14,013
Investment securities	41,008
FHLB stock	620
Loans	251,406
Fixed assets	3,237
Bank owned life insurance	2,966
Deferred tax assets, net	1,481
Other assets	5,007
Total identifiable assets	319,738

Identifiable liabilities:
Deposits	299,251
Short-term borrowings	6,500
Other liabilities	1,362
Total identifiable liabilities	307,113

Net identifiable assets (liabilities)	12,625
Goodwill	41,175
Core deposit intangible	8,278
	$	62,078

319,738

Investment Securities

The gain on the sale of investment securities recognized in the first nine months of 2023 was primarily due to the sale of Citizens investment portfolio of approximately $41 million shortly after the acquisition date.

Acquired Loans

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that there was not deterioration of credit at the date of acquisition. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit deteriorated loans, which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans with a fair value of $246.4 million on the date of acquisition.

In connection with the completion of the acquisition of Citizens during the nine months ended September 30, 2023, the Company recorded $2.0 million of credit loss expense associated with loans acquired from Citizens in its total provision for credit losses.

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The fair value of purchased financial assets with credit deterioration ("PCD") was $4.9 million on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial asset with credit deterioration was $8.5 million. The Company estimates, on the date of acquisition, that $3.6 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.

Acquired Deposits

The fair values of non-time deposits approximated their carrying value at the acquisition date. For time deposits, the fair values were estimated based on discounted cash flows, using interest rates that were being offered at the time of acquisition compared to the contractual interest rates. Based on this analysis, management recorded a premium on time deposits acquired of $0.6 million which is being amortized over 5 years.

Core Deposit Intangible

The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with the acquisition, the Company recorded a core deposit intangible asset of $8.3 million. The core deposit intangible asset represents 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, deposit retention and the cost of the deposit base. The core deposit intangible is being amortized over 10 years.

Goodwill

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. Among the items that are still preliminary at September 30, 2023 is the finalization of the final tax return, which management anticipates completing during 2023. Given the form of the transaction, the $41.2 million goodwill preliminarily recorded in conjunction with the Citizens acquisition is not expected to be deductible for tax purposes. The following table summarizes adjustments to goodwill subsequent to December 31, 2022 (in thousands):


	Goodwill
Balance at December 31, 2022	$	108,941
Adjustment to goodwill acquired in conjunction with the acquisition of Citizens	41,175
Balance at September 30, 2023	$	150,116

Merger Related Costs

During the nine months ended September 30, 2023, the Company incurred $5.6 million of merger-related costs in connection with the acquisition of Citizens, primarily for professional fees ($1.6 million), severance ($1.4 million), and data processing costs ($1.3 million).

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Note D - 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.


	September 30, 2023								December 31, 2022
	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:
Obligations of states and
political subdivisions	$	230,270	$	3	$	29,825	$	200,448	$	292,293	$	346	$	24,324	$	268,315
Mortgage-backed securities:
U.S. government agencies	1,302,747		3		181,147		1,121,603		1,342,666		299		140,686		1,202,279
Private label	7,035		—		490		6,545		7,695		—		464		7,231
Trust preferred securities	4,597		—		290		4,307		4,590		—		762		3,828
Corporate securities	28,047		—		2,731		25,316		26,620		—		2,753		23,867
Total Securities Available-for-Sale	$	1,572,696	$	6	$	214,483	$	1,358,219	$	1,673,864	$	645	$	168,989	$	1,505,520

The Company's other investment securities include marketable equity securities and non-marketable equity securities held for investment. At September 30, 2023 and December 31, 2022, the Company held $7.6 million in marketable equity securities. Changes in the fair value of the marketable equity securities are recorded in "unrealized gains (losses) 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 September 30, 2023 and December 31, 2022, the Company held $21.4 million and $15.5 million, respectively, in non-marketable equity securities. These securities are carried at cost due to the restrictions placed on their transferability. The Company held no certificates of deposits for investment at September 30, 2023 and $0.7 million at December 31, 2022.

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 September 30, 2023 and December 31, 2022 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 September 30, 2023 and December 31, 2022. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):


	September 30, 2023
	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	$	25,076	$	1,132	$	171,897	$	28,693	$	196,973	$	29,825
Mortgage-backed securities:
U.S. Government agencies	46,028		15,895		795,988		165,252		842,016		181,147
Private label	—		—		6,446		490		6,446		490
Trust preferred securities	—		—		4,307		290		4,307		290
Corporate securities	1,520		48		23,796		2,683		25,316		2,731
Total available-for-sale	$	72,624	$	17,075	$	1,002,434	$	197,408	$	1,075,058	$	214,483

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	December 31, 2022
	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	$	203,173	$	21,929	$	13,359	$	2,395	$	216,532	$	24,324
Mortgage-backed securities:
U.S. Government agencies	533,611		50,268		376,778		90,418		910,389		140,686
Private label	7,126		464		—		—		7,126		464
Trust preferred securities	—		—		3,828		762		3,828		762
Corporate securities	22,972		2,648		895		105		23,867		2,753
Total available-for-sale	$	766,882	$	75,309	$	394,860	$	93,680	$	1,161,742	$	168,989

As of September 30, 2023, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of September 30, 2023, management believes the unrealized losses detailed in the table above are temporary and therefore no allowance for credit losses has been recognized on the Company’s securities. 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 three months ended September 30, 2023 and 2022, the Company had no credit-related net investment impairment losses.

The amortized cost and estimated fair value of debt securities at September 30, 2023, 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.


	Amortized Cost		Estimated Fair Value
Available-for-Sale Debt Securities
Due in one year or less	$	2,783	$	2,686
Due after one year through five years	71,423		66,477
Due after five years through ten years	480,331		429,944
Due after ten years	1,018,159		859,112
Total	$	1,572,696	$	1,358,219

Proceeds from sales, gross gains and gross losses recognized by the Company from investment security transactions are summarized in the table below (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Proceeds on sales of available for sale securities	$	17,690	$	—	$	103,249	$	—

Gross realized gains on securities sold	$	—	$	—	$