City Holding Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results. City Holding is a community bank holding company operating through City National Bank, with 94 offices across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $39.5 million | $38.0 million | $114.9 million | $116.5 million |
| Provision (recovery) for credit losses | ($0.7 million) | $1.0 million | ($3.2 million) | $10.2 million |
| Non-interest income | $17.9 million | $17.0 million | $52.0 million | $65.0 million |
| Non-interest expense | $29.2 million | $28.7 million | $88.6 million | $86.6 million |
| Net income | $22.7 million | $20.1 million | $64.7 million | $67.4 million |
| Diluted EPS | $1.47 | $1.25 | $4.13 | $4.15 |
| Net interest margin | 2.89% | 3.02% | 2.87% | 3.22% |
Q3 net income and diluted EPS increased year over year. For the first nine months, net income declined despite a lower credit-loss provision; 2020 included a $17.8 million pretax gain from selling Visa shares. Excluding the Visa gain and investment-security effects, nine-month non-interest income rose to $51.3 million from $48.8 million, led by bankcard revenue. Nine-month non-interest expense increased 2.3%.
Balance sheet, cash flow and capital
- At September 30, 2021: Total assets were $5.95 billion; deposits $4.89 billion; gross loans $3.52 billion; and shareholders’ equity $677.3 million.
- Compared with December 31, 2020, deposits grew 5.1% and investment securities increased 15.9% to $1.40 billion. Gross loans fell 2.8%; excluding PPP loans, loans declined 2.0%. Management attributed deposit growth largely to government Economic Impact Payments and cited weak loan demand.
- Cash and cash equivalents were $639.5 million. Short-term borrowings were $296.6 million; the balance sheet reported no long-term debt. For the nine months, operating cash flow was $73.7 million, investing cash flow was negative $123.2 million and financing cash flow was positive $160.4 million.
- City Holding’s regulatory capital ratios included CET1 of 16.1%, total capital of 16.6% and Tier 1 leverage of 9.5%. Management said the company and bank met capital requirements and were “well capitalized.”
- Q3 dividends declared were $0.58 per share. The company repurchased 628,809 shares for $48.3 million during the first nine months under a board-authorized one-million-share program.
Asset quality, outlook and risks
- The allowance for credit losses was $18.8 million, or 0.53% of loans, versus $24.5 million and 0.68% at year-end 2020. The company recorded a $3.2 million recovery for the first nine months, reflecting improved economic assumptions and other qualitative factors. Annualized net charge-offs were 0.10% of average loans.
- Nonperforming assets were $9.0 million, or 0.26% of loans and other real estate owned, compared with 0.38% at year-end 2020. COVID-related deferrals had largely concluded: $3 million of mortgage deferrals and $15 million of commercial deferrals remained, including hotel and lodging loans, at September 30.
- The bank had funded approximately $136 million of PPP loans and received approximately $110 million in forgiveness proceeds by quarter-end. Hotel loans totaled $297.3 million, an exposure to travel and lodging conditions.
- Management described liquidity as strong. City National had capacity to borrow $2.0 billion under existing facilities. City Holding estimated annualized common dividends of $35.2 million over the next 12 months and said available cash and bank dividends should meet its needs. No specific earnings or revenue guidance was provided.
- Interest-rate risk is material: management’s model estimated a 15.1% increase in 12-month net income under an immediate 300-basis-point rate increase, subject to assumptions and not a forecast. Market-rate changes also contributed to $16.0 million of nine-month other comprehensive loss, primarily from unrealized securities losses.
- Other stated risks include COVID-19 effects, credit deterioration and collateral values, interest rates, cybersecurity and operational disruptions, competition, regulation, litigation and the ability to grow loans and deposits. The company reported ordinary-course legal matters and said there were no material changes to its previously disclosed risk factors.
Most important facts for investors to verify
- Whether loan demand improves and deposit growth persists after the temporary effects of stimulus payments.
- Credit performance, especially hotel and commercial real estate exposures, remaining COVID-related deferrals, and the adequacy of the allowance as forecasts change.
- Whether margin pressure from lower asset yields is offset by funding costs, loan growth and PPP forgiveness fees.
- The effect of interest-rate movements on securities values, accumulated other comprehensive income and projected earnings.
- The sustainability of dividends and share repurchases relative to earnings, liquidity and capital needs.