City Holding Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. City Holding is a community banking holding company operating City National Bank, with 94 offices across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net income | $22.7 million | $22.1 million | $44.0 million | $42.0 million |
| Diluted EPS | $1.51 | $1.41 | $2.92 | $2.66 |
| Net interest income | $41.3 million | $37.9 million | $79.2 million | $75.5 million |
| Net interest margin | 3.04% | 2.81% | 2.93% | 2.86% |
| Net interest income after credit-loss recovery | $41.3 million | $39.9 million | $80.0 million | $77.9 million |
| Non-interest income | $17.8 million | $17.4 million | $35.3 million | $34.1 million |
| Non-interest expense | $30.7 million | $29.6 million | $60.2 million | $59.4 million |
Q2 return on average assets was 1.51%, return on average equity 14.7%, and return on average tangible common equity 18.1%. For the first half, those measures were 1.47%, 13.6% and 16.6%, respectively. The filing attributes stronger net interest income mainly to higher average securities balances and lower time-deposit costs; Q2 margin also benefited from higher yields on loans and deposits at banks. Service charges were a key driver of higher non-interest income. Salaries and benefits drove most of the expense increase.
Financial position, cash flow and capital
- Assets and lending: Total assets were $6.24 billion at June 30, up from $6.00 billion at December 31, 2021. Gross loans rose 0.6% to $3.57 billion; excluding Paycheck Protection Program loans, management reported 0.8% growth. Residential real estate loans increased $102.0 million, partly offset by a $97.0 million decline in commercial real estate loans.
- Funding and liquidity: Deposits rose 4.4% to $5.14 billion, including growth in noninterest-bearing and savings deposits; time deposits fell $83.4 million. Customer repurchase agreements increased $89.9 million to $402.4 million. Cash and cash equivalents were $697.0 million. Management described liquidity as strong and reported $2.1 billion of borrowing capacity at City National under existing facilities.
- Cash flow, first half: Operating activities provided $45.4 million; investing activities used $252.4 million, mainly for $362.8 million of securities purchases; financing activities provided $269.4 million, including deposit growth and increased short-term borrowings. Cash increased $62.3 million to $697.0 million.
- Credit and securities: The allowance for credit losses was $17.0 million, down from $18.2 million at year-end. The company recorded no credit-loss provision in Q2 and a $0.8 million recovery for the first half. Nonaccrual loans totaled approximately $5.8 million, versus $6.2 million at year-end. Management considered the allowance adequate.
- Shareholders and capital: Shareholders’ equity fell $89.1 million to $592.0 million, primarily due to a $98.2 million after-tax other comprehensive loss on available-for-sale securities, as well as repurchases and dividends. The company repurchased 246,450 shares for $19.3 million in the first half and declared $17.9 million of dividends. At June 30, City Holding and City National were reported well capitalized; their CET1 ratios were 15.9% and 14.8%, respectively.
Changes, outlook and risks
- Available-for-sale securities had $107.5 million of gross unrealized losses at June 30, compared with $5.4 million at December 31, 2021. The resulting after-tax securities loss reduced shareholders’ equity through accumulated other comprehensive loss. Management attributed the losses primarily to interest-rate changes, credit spreads and market volatility; it said it did not intend to sell the impaired securities and did not expect to be required to sell them before recovery.
- The filing provides no numerical earnings or revenue guidance. Management said results for the first half are not necessarily indicative of full-year results and described its liquidity position as strong. Its interest-rate sensitivity model estimated net income changes over 12 months of +1.4% under an immediate 100-basis-point rise, +0.4% under 200 basis points, and -2.8% under 300 basis points. Management cautioned that results depend on assumptions about deposit repricing, competition, prepayments and business volumes.
- Key disclosed risks include credit deterioration and loan concentrations, real estate values, interest-rate changes, deposit and loan growth, cybersecurity and operational events, competition, regulation, COVID-19 effects and geopolitical disruption. The company specifically noted potential effects of the Russia-Ukraine conflict on commercial borrowers and cyber risk.
- Off-balance-sheet commitments included $226.2 million of home-equity lines, $70.6 million of commercial real estate commitments, $228.2 million of other commitments, and letters of credit. Management did not anticipate material losses from these commitments. Ordinary-course legal matters are ongoing; outcomes and potential impacts are not quantified.
- The board authorized a new repurchase program of up to 1,000,000 shares in May 2022, with no stated time limit. The filing also reports change-in-control agreements for three executives, providing specified compensation and health coverage in qualifying circumstances.
Important facts for investors to verify
- How rising rates and deposit repricing affect net interest margin and funding costs, particularly given the disclosed sensitivity under a 300-basis-point shock.
- Whether securities’ unrealized losses remain temporary and whether any future sales or credit impairment could affect earnings or capital.
- Loan growth and credit quality by portfolio, especially commercial real estate and hotel exposures, and whether the allowance remains adequate as economic forecasts change.
- The sustainability of deposit growth, increased customer repurchase funding, and the company’s access to contingent borrowing capacity.
- Ongoing repurchases, dividends and capital ratios, including their effects on equity after the securities-related decline in accumulated other comprehensive income.