City Holding Company — Q1 2022 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2022. City Holding is a West Virginia financial holding company operating through City National Bank, a community bank with 94 offices across West Virginia, Kentucky, Virginia and southeastern Ohio. Community banking is its sole reportable segment.
Financial performance
- Profit: Net income was $21.3 million, up 7.7% from $19.8 million in Q1 2021. Diluted EPS was $1.41 versus $1.25. ROA was 1.42% versus 1.38%; ROE was 12.6% versus 11.2%.
- Interest income and margin: GAAP net interest income increased to $37.9 million from $37.5 million. Tax-equivalent net interest income was $38.2 million versus $37.9 million. Net interest margin declined to 2.82% from 2.91%, reflecting lower loan and securities yields, partly offset by lower deposit costs and higher securities balances.
- Other income and expenses: Noninterest income rose to $17.4 million from $16.6 million; excluding securities gains and losses, it increased 11% to $18.2 million. Noninterest expense declined 1% to $29.5 million. The effective tax rate was 19.7%, compared with 20.1%.
- Credit costs: The company recorded a $0.8 million recovery of credit losses, compared with a $0.4 million recovery in Q1 2021. The allowance for credit losses was $17.3 million at quarter-end, down from $18.2 million at year-end 2021. Management considered the allowance adequate.
- Balance sheet and funding: Total assets were $6.01 billion. Gross loans were $3.56 billion, up $16.1 million (0.5%) from year-end; residential real estate loans grew $39.9 million. Deposits were $5.00 billion, up $73.5 million (1.5%). Repurchase-agreement borrowings were $288.5 million, down $24.0 million.
- Cash flow and liquidity: Operating activities provided $28.3 million; investing activities used $102.4 million, principally for securities purchases; financing activities provided $37.5 million. Cash and cash equivalents ended at $598.0 million, down from $634.6 million at year-end. Management described liquidity as strong and reported $2.1 billion of available borrowing capacity at City National.
- Capital and shareholder returns: Shareholders’ equity was $632.4 million, down $48.7 million during the quarter. City Holding and City National were reported as well capitalized; CET1 ratios were 16.2% and 14.8%, respectively. The company declared $0.60 per share in dividends and repurchased 38,207 shares for approximately $3.0 million.
Material changes and unusual items
- Available-for-sale securities had $58.6 million of gross unrealized losses at March 31, 2022, versus $5.4 million at December 31, 2021. Net-of-tax other comprehensive loss was $59.0 million, driving accumulated other comprehensive income (loss) from positive $14.3 million to negative $44.7 million. Management attributed the securities losses primarily to rate changes and market volatility, said it did not intend to sell the impaired securities, and judged losses temporary; no securities credit-loss allowance was recorded.
- Q1 2022 included $0.7 million of unrealized losses on equity securities still held, versus $0.1 million of losses in Q1 2021. Higher service charges and bank-owned life insurance income partly offset this.
- Management expects salaries and employee benefits to increase in subsequent quarters. No full-year earnings or revenue guidance is provided in the filing.
Outlook, risks and contingencies
- Management’s interest-rate simulation estimated net income would be 5.5% to 9.7% higher over 12 months under immediate, sustained rate increases of 100 to 400 basis points as of March 31, 2022. The filing cautions these estimates depend on assumptions about deposit repricing, loan prepayments and other factors and are not assured outcomes.
- Key disclosed risks include credit quality and loan concentrations, commercial real estate and hotel exposure, interest-rate changes, deposit and loan growth, cybersecurity and operational disruptions, competition, COVID-19 uncertainty, and geopolitical and economic conditions. The company specifically noted potential customer and cyber risks related to the Russia-Ukraine conflict.
- COVID-era mortgage deferrals totaled approximately $144 million; about $1 million remained in deferral at quarter-end, and all outstanding commercial deferrals had resumed regular payments. Loan commitments and letters of credit are off-balance-sheet exposures; management did not anticipate material losses from them.
- The company is involved in ordinary-course legal actions and cannot assure their financial impact will be immaterial. Three executives entered into change-in-control agreements effective May 4, 2022, providing specified severance and health coverage in qualifying circumstances.
Most important facts for investors to verify
- Whether net interest margin stabilizes or continues to decline as rates and deposit costs change.
- Whether unrealized securities losses remain temporary and how they affect equity, liquidity and capital if securities must be sold.
- Trends in commercial real estate and hotel credit quality, nonperforming loans, and adequacy of the allowance for credit losses.
- Whether loan growth and deposit mix support earnings and liquidity, while monitoring repurchase-agreement funding and planned shareholder returns.
- Developments in disclosed legal matters, off-balance-sheet commitments, and executive change-in-control obligations.