City Holding Company — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 24, 2022. City Holding is a West Virginia-based financial holding company operating through City National Bank, with one reportable segment: community banking. The bank had 94 branches across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial performance and position
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net income | $88.1 million | $89.6 million | Down 1.7% |
| Diluted EPS | $5.66 | $5.55 | Up 2.0% |
| Net interest income | $155.6 million | $154.6 million | Up 0.6%; net interest margin fell to 2.89% from 3.16% |
| Non-interest income | $69.6 million | $82.7 million | Declined mainly because 2020 included a $17.8 million Visa-share sale gain |
| Non-interest expense | $117.2 million | $115.3 million | Up 1.6%; efficiency ratio was 51.3%, unchanged |
| Operating cash flow | $102.3 million | $89.8 million | Cash and cash equivalents ended at $634.6 million |
At year-end, total assets were $6.00 billion, deposits were $4.93 billion, gross loans were $3.54 billion, and investment securities were $1.43 billion. Deposits grew 6%; loans declined 2.2%, or 0.8% excluding PPP loan runoff. The allowance for credit losses fell to $18.2 million from $24.5 million, and the company recorded a $3.2 million recovery of credit losses versus a $10.7 million provision in 2020. Net charge-offs were 0.09% of average loans.
Short-term borrowings, primarily repurchase agreements, were $312.5 million; the company reported no long-term debt at year-end. Shareholders’ equity was $681.1 million, down $20.0 million, reflecting $58.7 million of share repurchases, $36.2 million of dividends, and $17.0 million of other comprehensive loss, partly offset by net income. Tangible common equity to tangible assets was 9.58%, down from 10.33%.
Regulatory capital remained above well-capitalized thresholds: City Holding’s CET1 ratio was 16.1% and City National’s was 14.4%; Tier 1 leverage ratios were 9.4% and 8.5%, respectively. Management described liquidity as strong; the bank reported $2.1 billion of additional borrowing capacity under existing facilities.
Material changes and fourth-quarter results
- Net income declined slightly year over year, while diluted EPS increased as average shares outstanding decreased.
- Net interest income improved modestly, supported by lower deposit and borrowing costs and higher investment balances. Lower loan and securities yields and lower average loan balances partly offset those benefits; reported net interest margin contracted.
- Underlying non-interest income, excluding securities items and the Visa gain, rose to $68.8 million from $65.6 million, driven notably by bankcard revenue and trust fees.
- Fourth-quarter 2021 net income was $23.4 million and diluted EPS was $1.54, compared with $22.2 million and $1.40 in fourth-quarter 2020. Fourth-quarter net interest income was $41.0 million; there was no credit-loss recovery or provision reported for the quarter.
- Deposits increased while loans contracted, contributing to a $227.5 million increase in investment securities. PPP balances declined to $6.6 million from $55.4 million.
Outlook, risks and unusual items
The filing provides no earnings or growth guidance. Management expected to continue quarterly dividends, estimating approximately $36.1 million of shareholder dividends in 2022 at a stated annual rate of $2.40 per share, subject to board and regulatory constraints. Management believed parent-company cash and expected bank dividends would meet needs over the next 12 months.
- Management cited continuing COVID-19 uncertainty and possible effects on borrowers, collateral, operations and financial estimates. Pandemic-related payment deferrals had largely ended by year-end: approximately $2 million of mortgage deferrals remained, and commercial deferrals had resumed normal payments.
- Credit and concentration risks include real estate exposure and commercial lending. Residential mortgage and home-equity loans represented about 47% of the portfolio; commercial and industrial and commercial real estate together represented about 52%. “Lessors of Nonresidential Buildings” accounted for 14% of total loans. Management said concentrations were within internal limits.
- Interest-rate movements are a key risk. The company’s model estimated net income would increase 8.5% under an immediate, sustained 100-basis-point rate increase and 13.4% under a 400-basis-point increase; these are model estimates, not guidance, and depend on assumptions.
- The company stopped originating LIBOR-based loans after December 31, 2021 and planned to transition affected contracts to SOFR or another index by June 30, 2023.
- Unusual items included the $17.8 million pre-tax Visa-share gain in 2020 (not repeated in 2021) and a $17.0 million after-tax other comprehensive loss in 2021, primarily reflecting lower investment-security valuations. Goodwill impairment was not recorded. Ordinary-course legal matters were disclosed without a clear quantified potential exposure.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for credit losses, particularly its qualitative adjustments, was identified as a critical audit matter.
Important facts for investors to verify
- Whether loan growth, deposit mix and net interest margin stabilize as PPP runoff continues and market rates change.
- Whether the reduced allowance for credit losses remains adequate, especially for hotel and other commercial real estate exposures, as economic conditions evolve.
- How effectively the company completes its LIBOR contract transition and manages interest-rate sensitivity, deposit repricing and securities valuation changes.
- Whether dividends and repurchases remain consistent with earnings, capital needs and regulatory limits; the filing reported 315,000 shares remaining under the repurchase plan at year-end.
- The timing and financial impact, if any, of ordinary-course litigation, tax uncertainties and off-balance-sheet commitments. The filing lists $514.1 million of commitments to extend credit, plus letters of credit, and management did not anticipate material losses from them.