CITY HOLDING CO annual report, FY2020

City Holding Company — 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020; filed February 24, 2021. This is an annual report, not a fourth-quarter-only filing. City Holding operates a single community-banking segment through City National Bank, with 94 branches across West Virginia, Kentucky, Virginia and southeastern Ohio.

Financial performance and position

Metric20202019Change / context
Net interest income$154.6 million$161.4 millionDown 4.2%
Non-interest income$82.7 million$68.5 millionUp 20.7%, including $17.8 million gain from Visa share sale
Net income available to common shareholders$89.6 million$89.4 millionUp 0.3%
Diluted EPS$5.55$5.42Up 2.4%
Net interest margin3.16%3.59%Down 43 basis points
Return on average assets / equity1.66% / 12.9%1.80% / 14.0%Both declined
Operating cash flow$89.8 million$105.0 millionCash and cash equivalents ended at $528.7 million
Total assets / deposits$5.76 billion / $4.65 billion$5.02 billion / $4.08 billionAssets up 15%; deposits up 14%
Loans / allowance for credit losses$3.62 billion / $24.5 million$3.62 billion / $11.6 millionGross loans broadly flat; allowance more than doubled

Non-interest expense was $115.3 million, down from $117.6 million. The efficiency ratio rose to 51.3% from 50.0%. Provision for credit losses was $10.7 million, versus a $1.3 million recovery in 2019; net charge-offs were $3.5 million, or 0.10% of average loans.

Liquidity was supported by deposit growth and substantial cash and securities. Short-term borrowings were $296.0 million, primarily customer repurchase agreements; long-term debt was zero after repayment of $4.1 million of subordinated debentures. The bank reported $2.0 billion of additional borrowing capacity under existing facilities. City National could pay $67.7 million in dividends to the parent without prior regulatory approval.

Capital remained above regulatory thresholds: City Holding’s CET1 and total capital ratios were 16.2% and 16.8%; City National’s were 14.1% and 14.7%. The company declared dividends of $2.29 per share and repurchased approximately 573,000 shares for $36.5 million. Management expected 2021 dividends to approximate $36.6 million, based on a $2.32 per-share rate, while noting dividends could be suspended if necessary.

Material changes and notable items

  • Net interest income fell as lower loan and investment yields outweighed lower funding costs and higher average balances. Net interest margin contracted to 3.16% from 3.59%.
  • The $17.8 million pre-tax Visa share-sale gain materially supported 2020 non-interest income and equaled $0.84 per diluted share after tax. Excluding the sale and equity-security valuation changes, non-interest income declined about 3%, with lower service charges a key factor.
  • COVID-19-related deposits and weak loan demand drove higher cash and investment securities. Excluding PPP loans, total loans declined $49.4 million, or 1.4%.
  • CECL was adopted January 1, 2020. The transition increased the allowance by $5.8 million and reduced retained earnings by $2.3 million. Pandemic-related economic forecasts and qualitative adjustments contributed to the year’s higher provision.
  • Fourth-quarter 2020 net income available to common shareholders was $22.2 million and diluted EPS was $1.40. First-quarter results included the Visa gain.

Outlook, risks and contingencies

  • The filing provides no specific earnings, loan-growth or margin guidance. Management said it continued to monitor COVID-19 and anticipated adapting operations as conditions evolved.
  • During 2020, the company granted approximately $135 million of mortgage deferrals and $455 million of commercial deferrals. At year-end, $9 million of mortgage loans and $99 million of commercial loans remained deferred; $88 million of the commercial deferrals related to hotels and lodging.
  • The company had funded approximately $90 million of SBA-approved PPP loans to over 1,500 customers and had received approximately $30 million of forgiveness proceeds by year-end. Risks include borrower repayment and forgiveness eligibility, SBA processing or guarantee disputes, and potential litigation.
  • Credit and concentration risks include the economic effects of COVID-19, real-estate collateral values, and commercial real estate exposure. Residential mortgage and home equity loans were about 48% of the loan portfolio; hotel loans totaled $294.5 million. Loans to lessors of nonresidential buildings were 13% of total loans.
  • Other principal risks include interest-rate sensitivity, LIBOR transition, cybersecurity and third-party vendor exposure, competition, regulatory change, and the uncertainty of credit-loss estimates. The filing describes ordinary-course legal proceedings but does not quantify a material loss exposure.
  • The company estimated that a parallel 300-basis-point rate increase would raise net income by 21.5% over 12 months under its model; management cautioned that results depend on assumptions and are not a forecast.
  • Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for credit losses and CECL estimates were identified as a critical audit matter.

Important facts for investors to verify

  • How much of reported earnings and EPS depended on the one-time Visa gain, and what underlying fee-income trends followed?
  • Whether hotel and other deferred commercial borrowers resume regular payments, and how pandemic conditions affect charge-offs and the credit-loss allowance.
  • PPP loan forgiveness, SBA reimbursement timing and any related servicing, guarantee or litigation exposure.
  • Whether margin pressure persists as asset yields, deposit costs and loan demand change.
  • Deposit composition and stability, available borrowing capacity, and the parent company’s dependence on bank dividends to fund shareholder returns.
  • Changes in capital ratios, share repurchases, and the sustainability of the indicated 2021 dividend rate.