City Holding Company — Q2 2021 Form 10-Q
Business context and reporting period. City Holding is a West Virginia-based financial holding company operating through City National Bank, a community bank with 94 offices across West Virginia, Kentucky, Virginia and southeastern Ohio. The filing reports unaudited results for the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Amounts are in U.S. dollars.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net income | $22.1 million | $18.3 million | $42.0 million | $47.2 million |
| Diluted EPS | $1.41 | $1.12 | $2.66 | $2.90 |
| Net interest income (GAAP) | $37.9 million | $38.1 million | $75.5 million | $78.5 million |
| Provision (recovery) for credit losses | $(2.0) million | $1.3 million | $(2.4) million | $9.2 million |
| Non-interest income | $17.4 million | $14.6 million | $34.1 million | $48.0 million |
| Non-interest expense | $29.6 million | $28.5 million | $59.4 million | $57.9 million |
- Margins and returns: Tax-equivalent net interest margin was 2.81% for Q2 and 2.86% for the first half, down from 3.13% and 3.33%, respectively. Q2 ROA was 1.49% and ROE was 12.6%; first-half ROA was 1.44% and ROE was 11.9%.
- Balance sheet at June 30: Assets were $5.90 billion; gross loans $3.53 billion; deposits $4.80 billion; cash and equivalents $609.9 million; available-for-sale securities $1.34 billion; and shareholders’ equity $695.5 million. Loans declined 2.6% and deposits increased 3.3% from December 31, 2020.
- Debt and liquidity: Short-term borrowings, consisting of customer repurchase agreements, were $311.3 million; no long-term debt was outstanding. Management described liquidity as strong and reported City National borrowing capacity of $2.0 billion through existing facilities. Cash was $609.9 million at period-end.
- Cash flow, first half: Operating activities provided $40.3 million, investing activities used $85.8 million, and financing activities provided $126.7 million. Cash increased $81.2 million to $609.9 million. Financing inflows primarily reflected deposit growth; share repurchases and dividends used $22.8 million and $18.4 million.
- Credit and capital: Allowance for credit losses was $20.0 million, 0.57% of loans. Nonperforming loans were $10.0 million and nonperforming assets were $11.4 million, or 0.32% of loans and OREO. City Holding’s CET1 ratio was 16.4% and City National’s was 14.8%; both were reported well capitalized.
Material changes versus comparable periods
- Q2 net income rose 21% and diluted EPS increased from $1.12 to $1.41. The quarter included a $2.0 million credit-loss recovery versus a $1.3 million provision in Q2 2020, while net interest income was nearly flat.
- First-half net income fell 11% and EPS declined from $2.90 to $2.66. The 2020 comparison included a $17.8 million pretax gain from the sale of Visa shares; excluding that item, management reported first-half ROA of 1.44% versus 1.29% and return on tangible equity of 14.3% versus 11.8%.
- Lower asset yields reduced net interest income and margin. Management cited lower loan and securities yields, partly offset by lower deposit costs and growth in average securities balances.
- First-half non-interest income fell $13.9 million, largely because the prior-year Visa gain did not recur. Excluding Visa and net securities/equity-security gains and losses, non-interest income increased 3.7%. Q2 non-interest income rose, led by bankcard revenue and service charges; bankcard revenue reached a quarterly record of $7.2 million.
- Deposits increased $152 million from year-end, which management attributed largely to government Economic Impact Payments and weak loan demand. Securities increased $159 million while gross loans declined $93 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said results for the first half are not necessarily indicative of full-year results and continued to monitor the evolving COVID-19 situation.
- COVID-related deferrals had largely ended for mortgage borrowers: of $144 million granted, about $2 million remained deferred. Of $479 million granted to commercial customers, $92 million—related to hotels and lodging—remained deferred. The company had funded about $136 million in PPP loans and received about $86 million in forgiveness proceeds by June 30.
- Hotel and lodging exposure remains a notable credit sensitivity: hotel loans totaled $290.1 million. Other identified risks include economic conditions, loan quality and collateral values, interest-rate changes, cybersecurity and operational risks, competition, and regulatory or legal developments.
- Management’s interest-rate sensitivity model estimated that an immediate, sustained 100–400 basis-point rise could increase net income over 12 months by 9.6%–17.6%. These estimates depend on assumptions about deposit repricing, loan prepayments, competition and business volumes; management cautioned they are not forecasts or guarantees.
- The company repurchased 292,016 shares during the first half at a weighted-average price of $78.22 under a new authorization for up to one million shares. The board declared dividends of $1.16 per share for the first half.
- Management stated that investment-security unrealized losses were temporary, did not intend to sell the impaired securities, and recorded no credit-related investment impairment losses. Ordinary-course litigation could nevertheless have positive or negative financial effects; outcomes are uncertain.
Most important facts for investors to verify
- Whether loan demand and net interest margin stabilize after first-half declines, and how deposit pricing responds if rates change.
- Whether hotel borrowers resume normal payments and whether credit quality, allowance adequacy and nonperforming loans remain stable.
- How much PPP forgiveness, government-related deposit growth and elevated liquidity affect future loan growth and asset yields.
- Whether fee-income growth, particularly bankcard revenue, offsets expense increases and pressure on net interest income.
- How share repurchases and dividends affect capital and per-share results, and whether actual outcomes differ from management’s interest-rate sensitivity assumptions.