City Holding Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. The unaudited consolidated results include the January 10, 2013 acquisition of Community Financial Corporation and reflect the earlier acquisition of Virginia Savings Bancorp.
Financial performance
- Earnings: Net income available to common shareholders was $8.0 million, down from $10.0 million. Diluted EPS was $0.51 versus $0.67. ROA was 0.96% (1.47% prior year) and ROE was 9.0% (12.7%).
- Net interest: Net interest income was $29.6 million, up from $23.5 million. Tax-equivalent net interest income was $29.7 million, up 25.3%; reported net interest margin rose to 4.18% from 3.98%. Excluding $2.2 million of acquisition-related purchase-accounting accretion, Q1 2013 margin was 3.87%.
- Other income and expenses: Noninterest income increased to $14.3 million from $13.1 million. Noninterest expense rose to $29.4 million from $19.5 million, including $5.5 million of Community acquisition and integration costs. Excluding those costs, expense was $23.9 million.
- Credit costs: Provision for loan losses was $1.7 million, versus $2.0 million; net charge-offs were $0.8 million, versus $2.7 million. The allowance for loan losses was $19.7 million, or 110.2% of nonperforming loans.
- Cash flow and liquidity: Operating cash flow was $14.7 million; investing activities provided $44.1 million and financing activities provided $89.9 million. Cash and cash equivalents ended at $233.7 million, up from $85.0 million at December 31, 2012. Management reported $1.0 billion of additional borrowing capacity at the bank and characterized liquidity as strong.
- Balance sheet and capital: Total assets were $3.43 billion, gross loans $2.50 billion, deposits $2.88 billion, and shareholders’ equity $365.8 million. Long-term debt was $16.5 million and short-term borrowings were $116.4 million. City Holding’s total risk-based capital ratio was 12.7%; City National Bank’s was 12.3%. Management said both were well capitalized.
Material changes and business developments
- Community acquisition added eight branches in western Virginia and two in Virginia Beach. Its preliminary purchase-price allocation included $9.5 million of goodwill and $2.7 million of core deposit intangible; valuation estimates remained provisional.
- Gross loans rose $350.7 million from year-end, but the acquisition contributed $370.9 million; excluding it, loans declined $20.2 million. Deposits increased $474.9 million from year-end.
- Reported earnings fell despite higher net interest income, principally as noninterest expense increased following acquisitions and merger costs. The company also reported a $0.5 million reduction in net deferred tax assets related to its expected effective tax rate.
- Nonperforming assets to loans and other real estate owned declined to 1.13% from 1.28% at year-end. However, commercial loans classified as special mention, substandard, or doubtful totaled $102.9 million, compared with $53.4 million at year-end.
Outlook, risks and contingencies
- Management estimated a 33.7% effective tax rate for full-year 2013, compared with 34.3% for 2012. It did not provide earnings or revenue guidance.
- Rate-sensitivity modeling estimated net income would increase 6.7% under an immediate, sustained 400-basis-point rate increase. Management cautioned that results depend on assumptions, including deposit repricing and mix, and are not a forecast of actual results.
- Management anticipated approximately $23.2 million in common dividends over the next 12 months at the March 31 shareholder base, plus approximately $0.6 million of debenture interest. It said parent-company cash and expected bank dividends should cover needs; bank dividends are subject to regulatory limits.
- Investment securities included pooled trust preferred holdings with $6.7 million book value and $3.5 million estimated fair value. Management considered unrealized losses temporary and recognized no Q1 impairment, but warned further collateral deterioration could cause future impairment charges.
- Off-balance-sheet commitments included $408.2 million to extend credit, $16.0 million of standby letters of credit, and $0.4 million of commercial letters of credit. Management did not anticipate material losses. The company also reported ordinary-course legal proceedings whose eventual impact was uncertain.
- Principal stated risks include credit deterioration and charge-offs, interest-rate and economic changes, competition, regulatory changes, growth challenges, expense management, and integration of acquired operations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Community integration proceeds as planned and whether provisional purchase accounting, goodwill, and estimated loan accretion change.
- Underlying margin and earnings trends excluding acquisition-related accretion and the $5.5 million merger cost; reported margin excluding accretion was 3.87%.
- Credit trends, particularly the increase in criticized commercial loans and the performance of acquired and indirect auto loans.
- Valuation and credit performance of pooled trust preferred securities, including the potential for additional impairment.
- Whether deposit growth, liquidity, capital ratios, and anticipated dividends remain sustainable as the acquired business is integrated.