CITY HOLDING COMPANY COVID-19 Pandemic/Update
The COVID-19 pandemic has placed significant health, economic and other major pressure throughout the communities the Company serves,the United States and the entire world. The Company has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders that continue through the date of this report, including but not limited to: •We addressed the safety of our branches by following recommended state mandates. During this time, we found ways to service our customers based on their needs; in person, over the phone, via digital banking access and our drive thru facilities. We adapted our delivery channels to meet our customer's needs, including opening deposit accounts and closing loans in our drive thrus. •We provided extensions and deferrals to loan customers affected by COVID-19 provided such customers were not 30 days past due atMarch 19, 2020 . ThroughSeptember 30, 2021 , the Company granted deferrals of approximately$143 million to its mortgage customers. These deferral arrangements ranged from 30 days to 90 days. As ofSeptember 30, 2021 , approximately$3 million of these loans were still deferring, while approximately$140 million have resumed making their normal loan payment. ThroughSeptember 30, 2021 , the Company granted deferrals of approximately$479 million to its commercial customers. These deferral arrangements ranged from one month to six months. As ofSeptember 30, 2021 , approximately$15 million of these loans related to hotel and lodging customers were still deferring, while approximately$464 million have resumed making their normal loan payment. •We chose to participate in the CARES Act Paycheck Protection Program ("PPP") that provided government guaranteed and forgivable loans to our customers. As ofSeptember 30, 2021 , the Company has funded approximately$136 million of SBA-approved PPP loans to over 2,500 customers. The Company started submitting forgiveness applications on behalf of its customers during the fourth quarter of 2020 and as ofSeptember 30, 2021 , has received forgiveness proceeds of approximately$110 million .
The Company continues to closely monitor this pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.
Critical Accounting Policies
The accounting policies of the Company conform withU.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management's estimates. As this information changes, management's estimates and assumptions used to prepare the Company's financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One to the audited financial statements included in the Company's 2020 Annual Report to Shareholders. The information included in this Quarterly Report on Form 10-Q, including the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements and notes thereto included in the 2020 Annual Report of the Company. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses and income taxes to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available. Allowance for Credit Losses - Loans: The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. These evaluations are conducted at least quarterly and more frequently if deemed necessary. Additionally, all commercial loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company's internal loan review process. 35 -------------------------------------------------------------------------------- Table of Contents In evaluating the appropriateness of its allowance for credit losses, the Company stratifies the loan portfolio into six major groupings. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods: Portfolio Segment Measurement Method Commercial and industrial Migration Commercial real estate: 1-4 family Migration Hotels Migration Multi-family Migration Non Residential Non-Owner Occupied Migration Non Residential Owner Occupied Migration Residential real estate Vintage Home equity Vintage Consumer Vintage Migration is an analysis that tracks a closed pool of loans for a configurable period of time and calculates a loss ratio on only those loans in the pool at the start date based on outstanding balance. Vintage is a predictive loss model that includes a reasonable approximation of probable and estimable future losses by tracking each loan's net losses over the life of the loan as compared to its original balance. For demand deposit overdrafts, the allowance for credit losses is measured using the historical loss rate. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable, the expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Expected credit losses are estimated over the contractual term of the loan, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled-debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis. The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors. However, management cannot currently estimate the range of possible change. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state taxing authorities for the years endedDecember 31, 2017 and forward. 36
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Table of Contents
Financial Summary
Nine months ended
The Company's financial performance is summarized in the following table:
Nine months ended September 30,
2021 2020
Net income available to common shareholders (in thousands)
$ 4.13 $ 4.15
Earnings per common share, diluted $ 4.13 $ 4.15
Dividend payout ratio 42.1 % 41.2 %
ROA* 1.47 % 1.68 %
ROE* 12.3 % 12.9 %
ROATCE* 14.8 % 15.6 %
Average equity to average assets ratio 11.9 % 13.0 %
*ROA (Return on Average Assets) is a measure of the effectiveness of asset utilization. ROE (Return on Average Equity) is a measure of the return on shareholders' investment. ROATCE (Return on Average Tangible Common Equity) is a measure of the return on shareholders' equity, less intangible assets.
The Company's net interest income for the nine months endedSeptember 30, 2021 decreased$1.5 million compared to the nine months endedSeptember 30, 2020 (see Net Interest Income). The Company recorded a recovery of credit losses of$3.2 million for the nine months endedSeptember 30, 2021 compared to a provision for credit losses of$10.2 million for the nine months endedSeptember 30, 2020 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest Income and Non-Interest Expense, non-interest income decreased$12.9 million and non-interest expense increased$1.9 million for the nine months endedSeptember 30, 2021 from the nine months endedSeptember 30, 2020 .
Financial Summary
Three months ended
The Company's financial performance is summarized in the following table:
Three months ended September 30,
2021 2020
Net income available to common shareholders (in thousands)
$ 1.47 $ 1.25
Earnings per common share, diluted $ 1.47 $ 1.25
Dividend payout ratio 39.4 % 45.7 %
ROA* 1.53 % 1.46 %
ROE* 13.1 % 11.5 %
ROATCE* 15.7 % 13.8 %
Average equity to average assets ratio 11.7 % 12.7 %
*ROA (Return on Average Assets) is a measure of the effectiveness of asset utilization. ROE (Return on Average Equity) is a measure of the return on shareholders' investment. ROATCE (Return on Average Tangible Common Equity) is a measure of the return on shareholders' equity, less intangible assets.
The Company's net interest income for the three months endedSeptember 30, 2021 increased$1.5 million compared to the three months endedSeptember 30, 2020 (see Net Interest Income). The Company recorded a recovery of credit losses of$0.7 million for the three months endedSeptember 30, 2021 compared to a provision for credit losses of$1.0 million for the three months endedSeptember 30, 2020 (see Allowance for Credit Losses). As further discussed under the caption Non-Interest 37
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Table of Contents Income and Non-Interest Expense, non-interest income increased$1.0 million and non-interest expense increased$0.5 million for the three months endedSeptember 30, 2021 from the three months endedSeptember 30, 2020 .
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