City Holding Company — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018 unless noted. City Holding is a community-banking company operating through City National Bank, with 97 offices across West Virginia, Kentucky, Virginia and southeastern Ohio. Q1 2019 results include the effects of the Poage and Farmers Deposit acquisitions, completed in December 2018; therefore, year-over-year comparisons reflect a larger business.
Financial performance and position
- Earnings: Net income available to common shareholders was $21.6 million, versus $17.6 million. Diluted EPS was $1.30, versus $1.13; dividends declared were $0.53 per share, versus $0.46.
- Interest income and margin: Interest income was $48.9 million, versus $37.6 million. Net interest income was $40.1 million, up from $32.6 million; net interest margin rose to 3.66% from 3.51% (3.61% versus 3.48% excluding acquisition-related accretion).
- Other income and expenses: Non-interest income was $15.9 million, versus $14.5 million. Non-interest expense was $29.4 million, versus $24.9 million, including $0.25 million of merger-related costs. Income before taxes was $27.4 million; income tax expense was $5.8 million, an effective rate of 21.2%.
- Returns: Return on average assets was 1.76%, return on average equity 14.1%, and return on average tangible common equity 17.7%; all were higher than the comparable-year reported figures.
- Balance sheet at March 31: Total assets were $4.92 billion; gross loans $3.56 billion; deposits $4.04 billion; shareholders’ equity $619.2 million. Cash and cash equivalents were $143.9 million. Compared with December 31, 2018, deposits rose $67.4 million, while gross loans fell $28.3 million.
- Credit quality: The allowance for loan losses was $14.6 million, or 0.41% of loans, compared with $16.0 million, or 0.45%, at year-end. The company recorded an $0.85 million recovery of provision, versus a $0.18 million provision in Q1 2018; net charge-offs were $0.47 million. Nonperforming assets were $15.4 million, or 0.43% of loans and OREO, versus $19.4 million and 0.54% at year-end.
- Cash flow: Operating activities provided $20.4 million and investing activities provided $12.6 million; financing activities used $12.1 million. Cash and cash equivalents increased $20.9 million during the quarter.
- Debt and capital: Short-term borrowings were $194.7 million, consisting of customer repurchase agreements; federal funds purchased were zero. Long-term debt was $4.1 million. City Holding’s regulatory CET1, Tier 1 and total capital ratios were 15.6%, 15.7% and 16.1%, respectively; management said the company and bank subsidiary were well capitalized.
Material changes and management commentary
- Management attributed higher net interest income principally to the acquisitions, higher loan yields and increased securities balances and yields, partly offset by higher deposit costs. The reported margin improved year over year.
- Non-interest income growth reflected higher bankcard revenue and service charges, with portions attributable to the acquired businesses. Expenses rose with acquisition-related staffing and operating costs, salary adjustments, and higher equipment, software and occupancy expenses.
- Management said the loan-loss recovery reflected improved historical loss rates used in the allowance analysis and a modest reduction in loans outstanding. It considered the allowance adequate, while noting future provision needs depend on loan mix, credit quality, loss trends and other factors.
- The company announced a definitive agreement to sell its Virginia Beach branch; the buyer is to assume most deposits and acquire selected assets, while City Holding retains the loans. The sale was subject to regulatory approvals and customary conditions and was expected to close in Q2 2019.
- The Board authorized repurchases of up to 1 million shares in February 2019. The company repurchased 54,740 shares in March at an average $74.69 per share; 945,260 remained under the program at quarter-end.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management described liquidity as strong: City National had capacity to borrow an additional $1.9 billion under existing facilities. Management believed holding-company cash and dividends from City National would cover projected needs over the next 12 months, subject to regulatory limits on bank dividends.
- Interest-rate modeling estimated net income would rise 2.5% under an immediate, sustained 300-basis-point increase and fall 17.1% under a 200-basis-point decrease. Management cautioned that estimates depend on assumptions and may not predict actual results.
- The expected-credit-loss standard (CECL) was scheduled for adoption January 1, 2020. Management could not estimate the impact but said adoption could materially increase the allowance for loan losses.
- Key disclosed risks include local economic conditions, credit quality and real-estate collateral values, loan concentrations, interest-rate changes, deposit and loan growth, competition, cybersecurity and operational events, regulation, and realizing expected merger cost savings and synergies.
- Off-balance-sheet commitments included home-equity lines, commercial real-estate and other credit commitments, and letters of credit. Management did not anticipate material losses from these commitments. The company also reported ordinary-course legal actions and cautioned that outcomes could affect results.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying organic growth in loans, deposits, revenue and expenses.
- Track whether the lower allowance and provision recovery remain appropriate as credit quality, commercial real-estate exposures and local economic conditions evolve.
- Monitor deposit pricing and the effect of interest-rate changes on net interest margin, given higher deposit costs and the disclosed rate-sensitivity estimates.
- Confirm the Virginia Beach branch sale’s closing, regulatory approval and final financial impact.
- Assess CECL implementation progress and the eventual effect on the allowance and capital.
- Review repurchase activity, dividend capacity and regulatory capital alongside acquisition integration costs and expected synergies.