City Holding Company (NASDAQ: CHCO) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. City Holding is a West Virginia community banking holding company operating primarily through City National Bank, with 95 offices across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $40.9m | $33.6m | $81.0m | $66.2m |
| Net income | $22.8m | $21.0m | $44.4m | $38.6m |
| Diluted EPS | $1.38 | $1.35 | $2.68 | $2.48 |
| Net interest margin, fully taxable equivalent | 3.65% | 3.56% | 3.66% | 3.54% |
Q2 net income rose about 8%; six-month net income rose about 15%. Six-month net interest income grew 22% on a fully taxable equivalent basis, reflecting the late-2018 Poage and Farmers Deposit acquisitions, higher loan yields and larger average loan and securities balances. Higher deposit funding costs partly offset the growth. Noninterest income was $17.8m for Q2 and $33.8m for six months; noninterest expense was $30.8m and $60.2m, respectively. The six-month effective tax rate was 20.8%, versus 20.2% a year earlier.
For the six-month period, return on average assets was 1.80% versus 1.85%, return on equity 14.3% versus 15.4%, and return on tangible common equity 17.8% versus 18.3%. Q2 figures were 1.84%, 14.4% and 17.9%, respectively, compared with 2.00%, 16.8% and 19.9%.
Financial position, cash flow and credit
- Assets and funding: Total assets were $4.94bn at June 30, 2019, versus $4.90bn at year-end 2018. Deposits increased 1.4% to $4.03bn. Cash and cash equivalents rose to $168.7m from $123.0m.
- Loans and securities: Gross loans declined 1.9% to $3.52bn, primarily from a $76.8m decrease in commercial real estate loans. Investment securities rose 8.0% to $877.6m.
- Debt: Short-term borrowings were $207.0m, all customer repurchase agreements, compared with $261.9m at year-end, including $40.0m in federal funds purchased. Long-term debt was $4.1m.
- Cash flow: Six-month operating cash flow was $46.7m; investing activities provided $0.9m and financing activities used $1.9m. Cash increased $45.7m to $168.7m.
- Credit quality: The allowance for loan losses fell to $13.8m from $16.0m, or 0.39% of loans versus 0.45%. The company recorded a $1.4m provision recovery for the first half. Net charge-offs were $0.7m. Nonperforming assets declined to $14.5m from $19.4m; nonperforming loans were 0.41% of loans and OREO, down from 0.54%.
- Capital and liquidity: City Holding’s CET1, Tier 1, total capital and leverage ratios were 15.9%, 16.0%, 16.5% and 10.7%; City National’s were 14.2%, 14.2%, 14.6% and 9.5%. Both were reported well capitalized. The bank had borrowing capacity of $1.9bn under existing facilities.
Material changes, outlook and risks
- Poage and Farmers Deposit were acquired in December 2018; growth in interest income and operating expenses in 2019 reflects their inclusion. The company recorded $0.8m of merger and integration costs in the first half.
- The Virginia Beach branch sale closed June 28, 2019. City National retained the loans, the buyer assumed most deposits, deposits declined by $25.7m, and the company recognized a $0.7m gain.
- The company repurchased 161,950 shares for $12.1m in the first half under a board-authorized 1.0m-share program. It declared dividends of $1.06 per share for the first half.
- Management said liquidity was strong and expected available parent cash and bank dividends to cover parent funding needs for the next 12 months. It anticipated annualized common dividends of approximately $34.8m, but dividends could be suspended. No earnings guidance was provided.
- Management expects the January 1, 2020 CECL adoption could materially increase the loan-loss allowance, but it cannot yet reasonably estimate the impact. The company was still implementing the standard.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 300-basis-point increase would raise net income 1.4% over 12 months, while a 200-basis-point decrease would reduce it 15.0%. Management cautioned that the estimates depend on assumptions about deposit repricing, customer behavior and other factors.
- Key disclosed risks include local economic conditions, credit and real-estate exposure, interest-rate changes, competition, cybersecurity and operational disruptions, regulation, and realizing expected merger benefits. The filing reported no material change to the risk factors in the 2018 Form 10-K. Ordinary-course legal proceedings were disclosed; their eventual financial effects were uncertain.
Important facts for investors to verify
- Whether loan growth resumes and commercial real estate exposure, credit grades and the allowance remain appropriate as the portfolio changes.
- Whether deposit costs continue to rise and how changing interest rates affect net interest margin and earnings relative to management’s model.
- The realized integration costs, expense savings and operating performance of the Poage and Farmers Deposit acquisitions.
- The eventual CECL allowance impact and implementation assumptions ahead of the 2020 adoption.
- Capital allocation, including share repurchases and dividends, against earnings, liquidity and regulatory requirements.