City Holding Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. City Holding is a community-banking holding company operating through City National Bank, with 95 offices across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial performance
| Metric | Q1 2020 | Comparable / change |
|---|---|---|
| Net interest income | $40.4 million | $40.1 million in Q1 2019; tax-equivalent net interest income was $40.6 million, up 0.8% |
| Net interest margin | 3.54% | 3.67% in Q1 2019 |
| Provision for credit losses | $8.0 million | $0.85 million recovery in Q1 2019 |
| Net income | $29.0 million | $21.6 million in Q1 2019 |
| Diluted EPS | $1.78 | $1.30 in Q1 2019 |
| Operating cash flow | $40.6 million | $20.1 million in Q1 2019 |
Return on average assets was 2.29% versus 1.76%; return on equity was 17.0% versus 14.1%. These headline earnings include a $17.8 million pre-tax gain from selling the company’s Visa Class B shares, which had no carrying cost. Management’s non-GAAP comparison excluding the Visa gain showed return on assets of 1.21% versus 1.78% and return on tangible equity of 10.9% versus 17.8%. Net interest margin declined as asset yields fell; lower funding costs partly offset the effect.
Balance sheet, liquidity and capital
- Total assets were $5.09 billion at March 31, up from $5.02 billion at year-end 2019. Gross loans were $3.61 billion, essentially flat; deposits were $4.05 billion, down 0.6%.
- Investment securities totaled $960.9 million, up $73.3 million from year-end. Cash and cash equivalents were $110.6 million, down from $140.1 million.
- Short-term borrowings were $234.1 million, including $9.9 million of FHLB advances and $224.2 million of repurchase agreements. Long-term debt was zero, compared with $4.1 million at year-end.
- Shareholders’ equity was $685.2 million, up from $658.0 million. The company repurchased 181,899 shares for $13.0 million during the quarter and declared dividends of $0.57 per share.
- Management described liquidity as strong and reported $2.0 billion of borrowing capacity at the bank under existing facilities. Consolidated deposits funded 79.6% of assets. The parent company reported $9.6 million cash and expected annualized common dividends of approximately $36.8 million.
- At March 31, the holding company’s and bank’s CET1 ratios were 16.0% and 14.3%, respectively; management said both were well capitalized.
Material changes, outlook and risks
- COVID-19 and credit reserves: The company adopted CECL on January 1, increasing the allowance by $5.8 million and reducing retained earnings by $2.3 million. The quarter-end allowance was $24.4 million, or 0.68% of loans, compared with $11.6 million and 0.32% at year-end. The $8.0 million quarterly provision largely reflected increased unemployment assumptions and other COVID-related adjustments.
- Nonperforming loans were $12.1 million, versus $11.8 million at year-end; nonperforming assets were $16.0 million, down from $16.4 million. Net charge-offs were $0.9 million, versus $0.5 million in Q1 2019.
- As of May 1, 2020, the company had granted payment deferrals on approximately $99.0 million of mortgage loans and $391.3 million of commercial loans; none were considered TDRs at that date. The company also participated in the CARES Act Paycheck Protection Program.
- Management said service-charge and bankcard revenue had been modestly affected in Q1, but the run rate for those revenues had fallen about 25% through the end of April, with further weakness possible. The filing provides no specific earnings or revenue guidance and says the full financial impact of COVID-19 could not then be reasonably estimated.
- The company sold all 86,605 Visa Class B shares in January for a $17.8 million pre-tax gain. Unrealized losses on equity securities were $2.4 million, compared with $0.1 million of unrealized gains in Q1 2019. Investment securities increased partly as management sought to support net interest income; securities were reclassified from held-to-maturity to available-for-sale effective January 1.
- Key uncertainties include pandemic duration and economic effects, borrower credit quality and collateral values, interest-rate changes, deposit and funding conditions, and the resulting adequacy of credit-loss estimates. Ordinary-course litigation is disclosed; the filing does not quantify a likely material outcome.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time Visa gain, and how underlying fee income and expenses develop.
- Subsequent trends in loan deferrals, PPP lending, delinquencies, charge-offs, hotel and other commercial real-estate exposure, and the allowance for credit losses.
- Whether deposit movements, borrowing levels, liquidity capacity and capital ratios remain strong as the pandemic’s effects unfold.
- The effect of lower interest rates on asset yields, deposit costs and net interest margin, and whether equity-security valuation changes persist.