City Holding Company — Q2 2020 Form 10-Q
Business context and period. Community banking holding company operating through City National Bank, with 94 offices in West Virginia, Kentucky, Virginia, and southeastern Ohio. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with 2019 unless noted. Amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $38.1 | $40.9 | $78.5 | $81.0 |
| Provision for (recovery of) credit losses | $1.3 | $(0.6) | $9.2 | $(1.4) |
| Non-interest income | $14.6 | $17.8 | $48.0 | $33.8 |
| Non-interest expense | $28.5 | $30.8 | $57.9 | $60.2 |
| Net income | $18.3 | $22.8 | $47.2 | $44.4 |
| Diluted EPS | $1.12 | $1.38 | $2.90 | $2.68 |
| Net interest margin, fully taxable equivalent | 3.13% | 3.66% | 3.33% | 3.66% |
- Reported Q2 revenue—net interest income plus non-interest income—was $52.7 million, versus $58.7 million a year earlier. Six-month reported revenue was $126.5 million versus $114.7 million, including the $17.8 million pretax gain on the January sale of Visa Class B shares.
- Q2 net income fell about 20%; six-month net income rose about 6.5%. The six-month comparison benefited materially from the Visa gain; service charges and interest income declined.
- At June 30, total assets were $5.53 billion, deposits $4.41 billion, and shareholders’ equity $693.8 million. Gross loans were $3.67 billion and net loans $3.64 billion. Cash and cash equivalents were $373.3 million.
- Short-term borrowings, consisting of repurchase agreements, were $282.7 million, up from $211.3 million at year-end. Long-term debt was zero, after repayment of $4.1 million during the first half.
- First-half operating cash flow was $68.0 million; investing cash flow was $(201.1) million and financing cash flow was $366.2 million. Cash increased $233.1 million. The principal financing sources were deposit growth and increased short-term borrowings; securities purchases were the largest investing use.
- Company and bank regulatory capital ratios were well above stated minimums: City Holding’s CET1 ratio was 16.1% and City National’s 14.6%; their Tier 1 leverage ratios were 10.5% and 9.3%, respectively.
Material changes and management commentary
- Net interest income declined as lower loan and investment yields outweighed lower deposit and borrowing costs. Management attributed the rate pressure in part to Federal Reserve rate cuts; the reported net interest margin fell 53 basis points year over year in Q2 and 33 basis points for the first half.
- Deposits rose $335 million from year-end, which management linked to stimulus payments, PPP proceeds, and reduced customer spending. The company placed much of the liquidity into cash and securities amid weak loan demand. Excluding approximately $90 million of PPP loans, total loans declined about $39 million from year-end.
- Allowance for credit losses rose to $25.2 million, or 0.69% of gross loans, from $11.6 million at year-end. The January 1 CECL adoption increased the allowance by $5.8 million and reduced retained earnings by $2.3 million. First-half provision expense was $9.2 million, primarily reflecting COVID-19-related economic assumptions; Q2 provision was $1.3 million and included updated valuations on two credits.
- COVID-19 relief included approximately $555 million of loan payment deferrals at June 30 ($125 million mortgage and $430 million commercial) and approximately $90 million of SBA-approved PPP loans to more than 1,500 customers. Management expected about $3.0 million of PPP processing fees, net of associated expenses, to be recognized over the loan terms. PPP loans were SBA-guaranteed and had no credit-loss reserve at quarter-end.
- Non-performing loans were $13.6 million, or 0.48% of loans and OREO, versus $11.8 million and 0.45% at year-end. Past-due loans declined to $7.1 million from $11.4 million. Management stated the allowance was adequate, while noting future provisions depend on loan composition, quality, losses, and economic conditions.
- Management described liquidity as strong. City National had $2.1 billion of available borrowing capacity; the company reported a net loan-to-asset ratio of 65.8% and deposits funding 79.8% of assets. Management expected holding-company cash and bank dividends to cover its needs over the next 12 months. The filing provides no earnings or revenue guidance.
Outlook, risks, contingencies, and unusual items
- The pandemic’s duration and effects remain uncertain. The company warned of possible material impacts on credit quality, collateral values, demand, funding, operations, interest-rate risk, staffing, and accounting estimates, including the allowance and asset valuations; management said the total financial impact could not yet be reasonably estimated.
- Commercial real estate exposure totaled $1.47 billion, including $295 million in hotel loans. The filing highlights travel demand and broader economic conditions as relevant risk factors. Loan deferrals and unemployment assumptions also warrant monitoring.
- The $17.8 million Visa-share sale gain was a significant, nonrecurring first-half item. Equity securities produced $2.2 million of unrealized losses in the first half, partly offsetting that gain in non-interest income. The company also reclassified $49.0 million of held-to-maturity securities as available-for-sale at the start of 2020; fair-value changes are reflected in other comprehensive income.
- Interest-rate sensitivity estimates indicated net income could increase 21.1% under an immediate 300-basis-point rate increase, but management cautioned that results depend on assumptions and actual rates rarely move in the modeled fashion. Ordinary-course litigation is pending; the filing does not quantify a probable loss. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19-related deferrals, particularly in commercial real estate and hotels, resume payments and develop into delinquencies, non-accruals, or losses.
- Whether the $25.2 million allowance remains adequate as unemployment, collateral values, and borrower performance evolve, and how CECL estimates change.
- Underlying earnings excluding the Visa gain, as well as the effect of lower rates and service-charge declines on future net interest income and margins.
- The persistence and composition of deposit growth, liquidity needs, repurchase-agreement borrowing, and use of available borrowing facilities.
- PPP fee recognition and loan forgiveness timing, and any related effects on reported loan balances and earnings.