City Holding Company — Q3 2017 Form 10-Q
Business context and period. City Holding is a West Virginia financial holding company operating City National Bank, a community bank with 86 offices across West Virginia, Virginia, Kentucky and Ohio. The filing covers the quarter and nine months ended September 30, 2017; results are unaudited. Community banking is its sole reportable segment.
Financial results and key metrics
Amounts are in millions except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income (GAAP) | $32.0 | $29.8 | $93.7 | $88.6 |
| Provision for loan losses | $1.4 | $1.4 | $2.6 | $3.1 |
| Non-interest income | $14.6 | $16.7 | $48.0 | $44.5 |
| Non-interest expense | $24.3 | $25.3 | $73.1 | $73.7 |
| Net income available to common shareholders | $13.9 | $13.2 | $44.6 | $37.5 |
| Diluted EPS | $0.89 | $0.88 | $2.86 | $2.48 |
| Tax-equivalent net interest margin | 3.45% | 3.48% | 3.46% | 3.52% |
- For the first nine months, return on average assets was 1.46%, return on equity 12.2%, and return on average tangible common equity 14.6%; respective 2016 figures were 1.31%, 11.7%, and 14.4%. The dividend payout ratio declined to 45.7% from 51.0%.
- At September 30, total assets were $4.10 billion, gross loans $3.11 billion, deposits $3.26 billion, and shareholders’ equity $500.3 million. Gross loans rose 2.0% and deposits 0.8% from year-end 2016. Available-for-sale and held-to-maturity investment securities totaled $592.6 million; total investment securities including other securities were $608.6 million.
- Cash and cash equivalents were $83.2 million, versus $88.1 million at year-end 2016. Short-term borrowings were $281.5 million and long-term debt $16.5 million. Long-term debt consists of junior subordinated debentures due 2038.
- Nine-month operating cash flow was $54.5 million; investing cash outflow was $126.3 million and financing cash inflow $66.8 million. Cash declined $5.0 million over the period.
- At September 30, City Holding’s CET1, Tier 1, total capital and leverage ratios were 15.1%, 15.7%, 16.4% and 11.1%; City National’s were 12.7%, 12.7%, 13.4% and 9.0%. Management reported both entities as well capitalized.
Material changes versus comparable periods
- Nine-month net income increased 19.1% year over year. GAAP net interest income grew 5.8%; the company cited higher average commercial and residential loan balances and larger investment balances. Higher funding costs and lower acquisition-related accretion partly offset the increase.
- Tax-equivalent net interest margin was 3.46%, down from 3.52% for nine months. Excluding acquisition-related accretion, margin was 3.41% versus 3.43%.
- Nine-month non-interest income rose to $48.0 million, including $4.3 million of investment gains, versus $3.5 million of gains in the prior-year period. Gains were partial recoveries of prior impairment charges on pooled trust preferred securities; the company sold its remaining pooled trust preferred securities. Excluding gains, non-interest income increased 7.1%.
- In Q3, non-interest income fell from $16.7 million to $14.6 million, primarily because the prior-year quarter included $2.7 million of investment gains; excluding gains, Q3 non-interest income increased 3.5%. Q3 net income increased 5.3%.
- Gross loans increased $59.7 million from year-end, led by commercial real estate (+$31.4 million) and commercial and industrial loans (+$19.1 million). Investment securities grew $69.0 million. Deposit growth lagged asset growth, and federal funds purchased increased $15.7 million.
- Shareholders’ equity rose $57.9 million, reflecting earnings and $28.4 million of common-stock issuance, partly offset by $20.7 million of dividends declared.
Credit, liquidity, outlook and risks
- The allowance for loan losses was $19.6 million, 0.63% of total loans, versus $19.7 million and 0.65% at year-end. Nine-month net charge-offs were $2.8 million, or 0.12% of average loans on an annualized basis.
- Non-performing loans were $10.7 million (0.47% of loans and other real estate owned), down from $14.1 million (0.61%) at year-end. Non-performing assets totaled $14.7 million. Accruing troubled debt restructurings rose to $32.1 million from $29.1 million at year-end; total TDRs were $32.2 million.
- A $25.8 million shared national credit was downgraded in the OCC review and contributed to the provision and commercial-and-industrial allowance. The loan was reported performing to terms with acceptable debt-service coverage; an additional $6.4 million commitment was outstanding.
- Liquidity: management characterized the position as strong. City National had stated capacity to borrow an additional $1.6 billion under existing facilities. The company reported a 75.3% net-loan-to-asset ratio and deposits funding 79.4% of assets. Off-balance-sheet credit commitments and standby/commercial letters of credit totaled approximately $463.3 million; management did not anticipate material losses from them.
- City Holding expected to continue common dividends, estimated at approximately $27.5 million over the next 12 months at the then-current share count. Management said parent-company cash and expected bank dividends would be adequate for anticipated funding needs. The filing gives no earnings or revenue guidance.
- Interest-rate sensitivity modeling estimated net income would rise 8.2% under an immediate, sustained 400-basis-point increase and fall 12.4% under a 100-basis-point decrease. Management cautioned that these estimates depend on assumptions and are not forecasts of actual results.
- Principal stated risks include credit deterioration and charge-offs, interest-rate changes, competition and customer retention, economic conditions, expense management, regulation and capital requirements, and legal actions. Ordinary-course legal proceedings are pending; their financial impact is uncertain. The company reported no material change to the risk factors in its 2016 Form 10-K.
- Management identified CECL adoption, effective January 1, 2020, as under evaluation. Revenue-recognition and several other accounting standards were scheduled for adoption beginning in 2018; management generally did not expect material impacts.
Important facts for investors to verify
- Whether loan growth and funding costs sustain net interest income while margin remains under pressure.
- Subsequent credit performance of the downgraded shared national credit, including its $6.4 million additional commitment, and trends in commercial real estate exposure, TDRs and impaired loans.
- Whether the reported allowance remains adequate as portfolio composition, economic conditions and charge-offs change.
- How continued asset growth is funded, including deposit trends, short-term borrowings, liquidity availability and capital ratios.
- The recurring contribution to earnings from core non-interest income versus one-off investment gains and bank-owned life insurance death benefits.
- Actual dividend and equity-issuance activity, and any material developments in legal proceedings or interest-rate exposure.