City Holding Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. City Holding is a financial holding company operating through City National Bank, a community bank with 86 offices in West Virginia, Virginia, Kentucky, and Ohio. The company reports one segment: community banking.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net interest income (GAAP) | $32.6 million | $30.4 million; up 7.2% |
| Net income | $17.6 million | $16.0 million; up 9.9% |
| Diluted EPS | $1.13 | $1.04 |
| Net interest margin | 3.51% | 3.45%; 3.48% excluding accretion versus 3.42% |
| Return on average assets / equity | 1.69% / 14.0% | 1.60% / 13.7% |
| Operating cash flow | $12.4 million | $20.4 million |
| Total assets | $4.20 billion | $4.13 billion at Dec. 31, 2017 |
| Gross loans / deposits | $3.14 billion / $3.45 billion | $3.13 billion / $3.32 billion at Dec. 31, 2017 |
| Long-term debt | $16.5 million | Unchanged from Dec. 31, 2017 |
Interest income rose 10.0% to $37.6 million, while interest expense rose 32.6% to $5.0 million. The provision for loan losses was $0.2 million, down from $0.7 million. Pre-tax income declined to $22.0 million from $23.7 million, but income tax expense fell to $4.4 million from $7.6 million; the effective tax rate was 20.0% versus 32.3%. The filing attributes the lower tax rate principally to the federal corporate tax-rate reduction effective in 2018.
Non-interest income was $14.5 million versus $18.5 million, primarily because Q1 2017 included $4.3 million of investment gains. Excluding those gains, non-interest income increased 2.1%. Non-interest expense increased 1.2% to $24.9 million. Cash and cash equivalents were $123.8 million at quarter-end. Financing activities provided $53.6 million, led by deposit growth; investing activities used $24.7 million.
Shareholders’ equity was $491.9 million, down 2.1% from year-end, reflecting $14.0 million of share repurchases, dividends declared of $7.1 million, and an $8.2 million after-tax other comprehensive loss, partly offset by net income. The company repurchased 204,327 shares at a weighted-average $68.50 per share and declared dividends of $0.46 per share. Regulatory capital ratios remained above “well capitalized” thresholds: company CET1 15.1% and total capital 16.3%; bank CET1 12.6% and total capital 13.3%.
Changes and credit quality
- Deposits increased $131.4 million, or 4.0%, from year-end. Federal funds purchased declined by $54.0 million to zero as deposit growth exceeded loan and securities growth; customer repurchase agreements remained $195.4 million.
- Loans increased $10.3 million, chiefly from $18.7 million of commercial real estate growth, partly offset by declines in commercial and industrial and residential loans.
- The allowance for loan losses decreased to $18.4 million, or 0.59% of gross loans, from $18.8 million at year-end. Net charge-offs were $0.6 million versus $1.2 million in Q1 2017.
- Nonperforming loans were $9.7 million, or 0.43% of loans, compared with $10.6 million and 0.45% at year-end. Nonperforming assets were $13.6 million; past-due loans were $8.3 million, or 0.26% of loans.
- Unrealized losses on available-for-sale securities increased; the quarter recorded an $8.2 million after-tax OCI loss. Management characterized debt-security losses as temporary and reported no investment impairment losses during the quarter.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management described liquidity as strong: the bank had capacity to borrow an additional $1.7 billion under existing facilities, and management believed holding-company cash plus bank dividends would meet needs over the next 12 months. Expected annualized common dividends were approximately $28.4 million. The bank could pay up to $86.4 million plus qualifying 2018 net profits in dividends to the holding company without prior regulatory approval.
Interest-rate risk is a key exposure. The company’s modeled 12-month net income sensitivity ranged from +4.8% under an immediate +400-basis-point shock to −14.4% under a −100-basis-point shock. Management cautioned that these estimates depend on assumptions about deposit repricing, customer behavior, loan prepayments, and business volumes. Other stated risks include credit deterioration and charge-offs, competition, expense management, loan and deposit growth, legal matters, economic and regulatory changes, and securities valuation. The company said there were no material changes to the risk factors in its 2017 Form 10-K. Ordinary-course legal proceedings are pending; outcomes and effects are uncertain.
Accounting changes included adoption of the revenue-recognition standard, which management said did not significantly change revenue recognition, and adoption of the financial-instruments standard, which moved equity-security fair-value changes into earnings. The latter led to a $2.7 million net-of-tax transfer from accumulated OCI to retained earnings and a $0.2 million fair-value gain in Q1 income. The company expects the CECL credit-loss standard to take effect January 1, 2020 and was evaluating its impact. It had accrued a planned $1.6 million pension-plan contribution expected in late 2018 or early 2019.
Important facts for investors to verify
- Whether growth in net interest income and margin can continue as deposit funding costs rise.
- Whether the allowance and improving nonperforming-loan measures adequately reflect portfolio risks, including commercial real estate exposure and troubled debt restructurings.
- How interest-rate movements affect securities fair values, OCI, deposit costs, and modeled earnings sensitivity.
- Whether reported earnings comparisons are understood in light of Q1 2017’s $4.3 million investment gain and the lower 2018 tax rate.
- Whether capital returns, including repurchases and dividends, remain consistent with capital requirements and liquidity needs.