City Holding Company — Q1 2021 Form 10-Q
Business context and period: Community-banking holding company operating City National Bank, with 94 branches across West Virginia, Kentucky, Virginia, and southeastern Ohio. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Comparable / prior amount |
|---|---|---|
| Net interest income | $37.5 million | $40.4 million in Q1 2020 |
| Net interest margin | 2.91% | 3.54% in Q1 2020 |
| Provision / (recovery) for credit losses | $(0.4) million | $8.0 million provision in Q1 2020 |
| Noninterest income | $16.6 million | $33.3 million in Q1 2020 |
| Noninterest expense | $29.8 million | $29.5 million in Q1 2020 |
| Net income available to common shareholders | $19.8 million | $29.0 million in Q1 2020 |
| Diluted earnings per share | $1.25 | $1.78 in Q1 2020 |
| Operating cash flow | $19.4 million | $23.1 million in Q1 2020 |
- Net income declined about 32%. Q1 2020 included a $17.8 million pretax gain on the sale of Visa shares; Q1 2021 did not. Excluding that sale, management reported return on assets of 1.38% versus 1.21% in Q1 2020, and return on tangible equity of 13.5% versus 10.9%.
- Tax-equivalent net interest income fell 6.7% year over year. Lower loan yields and lower average loan balances reduced interest income, partly offset by lower deposit and borrowing costs. Tax-equivalent net interest income excluding acquisition-related accretion was $37.4 million, compared with $39.0 million.
- Noninterest income excluding securities gains and the Visa sale was $16.4 million, down $1.4 million year over year, mainly due to lower service charges and swap-origination fees. Bankcard revenue rose 21.5% to a company-record $6.2 million. Noninterest expense increased 1.0%, principally due to higher FDIC insurance expense.
Balance sheet, liquidity, and capital
- Total assets were $5.89 billion at March 31, 2021, versus $5.76 billion at year-end. Cash and cash equivalents increased to $756.8 million from $528.7 million.
- Gross loans were $3.55 billion, down $75.4 million (2.1%) from year-end; excluding PPP loans, loans declined $82.8 million. Total deposits increased $144.6 million (3.1%) to $4.80 billion, largely attributed to pandemic-related economic impact payments. Customer repurchase agreements were $316.0 million, up $20.0 million.
- Short-term borrowings were $316.0 million; the balance sheet reported no long-term debt. The company reported $19.4 million of operating cash flow, $58.7 million of investing cash flow, and $150.1 million of financing cash flow in the quarter. Cash increased $228.1 million overall, primarily reflecting deposit growth and loan runoff.
- Management characterized liquidity as strong. City National had capacity to borrow $2.0 billion under existing facilities. The company reported a 59.8% net-loan-to-asset ratio and deposits funding 81.4% of assets.
- City Holding’s CET1, Tier 1, total capital, and Tier 1 leverage ratios were 16.8%, 16.8%, 17.3%, and 10.1%, respectively. City National’s corresponding ratios were 14.8%, 14.8%, 15.3%, and 8.9%. Management said both entities were well capitalized.
- Shareholders’ equity was $691.7 million, down $9.4 million from year-end, primarily due to $15.6 million of other comprehensive loss, dividends declared, and share repurchases, partly offset by net income. The quarter included $9.4 million of declared dividends and repurchases of 75,110 shares for $5.8 million.
Credit quality and material changes
- The allowance for credit losses was $24.1 million, or 0.68% of loans, versus $24.5 million at year-end. The quarter included a $0.4 million recovery, compared with an $8.0 million provision in Q1 2020; management attributed the recovery mainly to lower loan balances and improved economic conditions in its markets. Net charge-offs were negligible.
- Nonperforming loans were $12.4 million, and nonperforming assets were $14.0 million, or 0.39% of loans and OREO. Past-due loans totaled $6.6 million. Commercial and hotel exposure remains relevant: hotel loans totaled $293.2 million.
- COVID-19 deferrals granted through quarter-end included $145 million to mortgage customers, of which $3 million remained deferred, and $480 million to commercial customers, of which $115 million remained deferred, including $105 million in hotel and lodging loans.
- The company had funded approximately $128 million of PPP loans to more than 2,800 customers and received approximately $65 million in forgiveness proceeds by quarter-end.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said results for the quarter are not necessarily indicative of full-year results and will continue to monitor the evolving pandemic.
- Management’s interest-rate sensitivity model estimated net income would be 25.3% higher over 12 months under an immediate, sustained 300-basis-point rate increase relative to a flat-rate scenario. This is model-based and depends on assumptions about deposit repricing, competition, prepayments, and business volumes; management cautioned actual results may differ.
- Key risks cited include COVID-19’s effects on customers and operations, credit quality and collateral values, loan and deposit growth, interest-rate changes, cybersecurity and operational failures, competition, regulation, and PPP loan-related risks.
- Available-for-sale securities generated a $15.6 million after-tax other comprehensive loss in Q1, reducing accumulated other comprehensive income; management attributed unrealized debt-security losses mainly to interest rates, credit spreads, and market volatility and said it did not intend or expect to be required to sell impaired securities before recovery.
- The company disclosed ordinary-course legal actions and stated their ultimate financial effects could be positive or negative. It reported no material changes to the risk factors in its 2020 Form 10-K and no material control changes during the quarter.
- On March 31, 2021, the board authorized a new share-repurchase program for up to 1 million shares, replacing the prior program. The company also stated it anticipated annualized common dividends of approximately $36.5 million over the next 12 months, subject to its ability to suspend dividends if necessary.
Important facts for investors to verify
- Whether loan demand and balances stabilize, and how lower loan yields affect net interest income and margin.
- Whether hotel-related commercial deferrals resume regular payments and whether further COVID-19 effects change credit-loss estimates.
- How deposit growth, including pandemic-related inflows, develops and whether excess liquidity can be deployed profitably.
- Whether securities valuation changes, interest-rate movements, or other comprehensive losses materially affect equity and capital.
- Whether the new repurchase program and stated dividend plans remain consistent with earnings, liquidity, and regulatory capital requirements.