City Holding Company (NASDAQ: CHCO) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. City Holding is a community-banking holding company operating City National Bank, with 95 offices in West Virginia, Kentucky, Virginia, and Ohio. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income (GAAP) | $40.5 million | $35.6 million | $121.5 million | $101.8 million |
| Non-interest income | $16.7 million | $15.8 million | $50.4 million | $45.9 million |
| Net income | $22.4 million | $20.7 million | $66.7 million | $59.3 million |
| Diluted EPS | $1.36 | $1.33 | $4.04 | $3.82 |
| Tax-equivalent net interest margin | 3.59% | 3.54% | 3.64% | 3.52% |
- Q3 net income rose about 8%; nine-month net income rose about 13%. Nine-month basic EPS was $4.05, versus $3.82.
- Q3 return on average assets was 1.81% (1.90% prior year); return on average equity was 13.8% (16.0%). For nine months, ROA was 1.81% (1.86%) and ROE 14.1% (15.6%).
- Operating cash flow was $70.2 million for the first nine months. Investing activities used $52.8 million and financing activities used $24.2 million; cash and equivalents ended at $116.2 million.
Financial position and liquidity
- Total assets were $4.96 billion at September 30, 2019. Gross loans were $3.58 billion, nearly unchanged from year-end 2018; investment securities were $878.2 million, up 8.0% from year-end.
- Deposits totaled $4.03 billion, up $54.0 million from year-end, primarily reflecting savings deposit growth. Short-term borrowings were $202.6 million, all customer repurchase agreements; federal funds purchased fell from $40 million to zero. Long-term debt was $4.1 million.
- Shareholders’ equity was $649.6 million, up $48.8 million from year-end. Regulatory capital ratios exceeded stated minimums: City Holding’s CET1 ratio was 15.6% and City National’s was 14.0%; management considered both well capitalized.
- Management described liquidity as strong. City National reported $1.9 billion of available borrowing capacity; management believed holding-company cash and subsidiary dividends would cover the next 12 months’ needs. Common dividends declared were $1.63 per share for the first nine months; the company repurchased 260,674 shares for $19.4 million.
Material changes and management commentary
- Net interest income increased year over year, supported by the late-2018 Poage and Farmers Deposit acquisitions, loan growth and yields, and larger investment balances. Higher deposit funding costs partly offset the increase. Nine-month tax-equivalent NII rose 19.3%; excluding acquisition fair-value accretion, management reported an $18.0 million increase.
- Non-interest income increased, with higher bankcard revenue and service charges. Non-interest expense also increased, largely due to acquired operations, compensation, and technology, occupancy, and bankcard costs. Nine-month acquisition/integration expense was $0.8 million.
- The Virginia Beach branch sale closed in June 2019. City National retained the loans, the buyer assumed most deposits, and the company recorded a $0.7 million gain; deposits declined $25.7 million from the transaction.
- The allowance for loan losses was $13.2 million, or 0.37% of loans, versus $16.0 million and 0.45% at year-end. The company recorded a $1.2 million loan-loss recovery for the first nine months, but a $0.3 million provision in Q3. Net charge-offs were $1.6 million, compared with $0.6 million in the prior-year period.
- Nonperforming loans were $15.6 million, or 0.50% of loans and OREO; nonaccrual loans were $15.2 million. Past-due loans were $10.2 million, down from $13.1 million at year-end. Management considered the allowance adequate.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management cautioned that nine-month results are not necessarily indicative of full-year results.
- CECL is scheduled for adoption January 1, 2020. Implementation testing was underway; management said adoption could materially increase the allowance but could not yet reasonably estimate the amount.
- Interest-rate modeling estimated net income would change by +2.9% under an immediate, sustained 300-basis-point rate increase and −13.5% under a 200-basis-point decrease. These are model estimates sensitive to assumptions, not forecasts.
- Commitments to extend credit and letters of credit carry credit risk; management did not anticipate material losses. The company also disclosed ordinary-course legal actions and uncertainty around potential Visa litigation-related assessments; the Visa shares have no recorded value because the conversion ratio is uncertain.
- Management identified economic conditions, credit quality and loan concentrations, real estate values, interest rates, cybersecurity, competition, regulation, and execution of acquisitions among forward-looking risks. It reported no material change to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How CECL adoption changes the allowance, regulatory capital, and credit-loss expense when the final estimate is available.
- Whether nonaccrual loans and net charge-offs remain controlled, particularly against the lower allowance-to-loan ratio.
- Whether deposit costs continue to rise and how rate movements affect net interest margin and earnings.
- How acquired operations affect ongoing expense levels and returns after integration costs.
- Developments in ordinary-course legal matters and Visa litigation exposure, as well as the company’s continued capital and liquidity position.