City Holding Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 11, 2019. City Holding is a community bank holding company operating primarily through City National Bank across West Virginia, Kentucky, Virginia and southeastern Ohio.
Financial results and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net interest income | $138.2 million | $126.1 million |
| Net income available to common shareholders | $70.0 million | $54.3 million |
| Diluted EPS | $4.49 | $3.48 |
| Income before income taxes | $88.0 million | $90.7 million |
| Net interest margin | 3.52% | 3.46% |
| Return on average assets / equity | 1.63% / 13.6% | 1.33% / 11.0% |
| Operating cash flow | $73.1 million | $77.8 million |
- Year-end assets were $4.90 billion, gross loans $3.59 billion, deposits $3.98 billion and shareholders’ equity $600.8 million. Loans grew 14.7% and deposits 19.9%; acquisitions accounted for substantial portions of both increases.
- Cash and cash equivalents were $123.0 million, up $40.5 million. The bank reported $1.9 billion of additional borrowing capacity under existing facilities.
- Year-end short-term borrowings were $261.9 million; long-term debt was $4.1 million, down from $16.5 million after repayment of debentures and assumption of Poage debt.
- City Holding’s regulatory CET1, Tier 1, total capital and leverage ratios were 15.1%, 15.2%, 15.7% and 11.4%, respectively. Management considered the company and bank well capitalized.
- Dividends declared were $1.98 per share, up from $1.78. The allowance for loan losses was $16.0 million, or 0.45% of gross loans.
Changes and unusual items
- Net income rose 28.9%, although pretax income declined 3.0%. The effective tax rate fell to 20.5% from 40.2%; the 2017 comparison included a $7.1 million charge to remeasure deferred taxes after the Tax Cuts and Jobs Act reduced the federal corporate tax rate.
- Net interest income increased 9.6%; reported margin improved to 3.52% from 3.46%. Management cited loan yield increases and higher earning-asset balances, partly offset by rising funding costs. Excluding acquisition fair-value accretion, margin was 3.49% versus 3.40%.
- Non-interest expense included $13.3 million of merger-related costs for the Poage and Farmers Deposit acquisitions. Excluding these costs, expenses increased 4.0%.
- The company completed both acquisitions on December 7, 2018. Consideration was approximately $108.8 million; acquired loans were $362.5 million and deposits $471.5 million. Preliminary goodwill and core deposit intangibles totaled $33.4 million and $11.4 million, respectively.
- Loan-loss recovery was $2.3 million, compared with a $3.0 million provision in 2017. Management attributed the recovery primarily to liquidation proceeds from a repossessed asset and improved estimated loss rates. Net charge-offs fell to $0.6 million from $3.9 million.
- Credit indicators were mixed: nonperforming assets rose to 0.54% of loans and OREO from 0.45%; nonperforming loans increased to $14.8 million from $10.6 million.
- Q4 net income was $10.7 million versus $9.7 million a year earlier; diluted EPS was $0.68 versus $0.62. Q4 pretax income fell to $13.6 million from $25.0 million, with merger costs contributing to the decline.
Outlook, risks and contingencies
- No formal earnings guidance is provided. Management expected 2019 common dividends of $2.12 per share, about $35.1 million annualized, and believed parent cash plus bank dividends would meet parent funding needs over the next 12 months.
- A sale of the Virginia Beach branch was announced in January 2019 and was expected to close in Q2 2019, subject to approvals. After branch consolidations and the sale, the company expected 94 branches.
- Management described liquidity as strong and said it expected to meet fully phased-in Basel III capital requirements. Interest-rate sensitivity modeling estimated net income changes over 12 months of +1.6% for a 300-basis-point increase and −16.3% for a 200-basis-point decrease; management cautioned that estimates rely on assumptions and are not forecasts.
- Key risks include regional economic weakness, especially energy and coal industry pressures; real-estate lending and collateral exposure; credit losses; deposit competition and funding costs; interest-rate changes; cybersecurity and third-party technology risks; regulation; and execution, integration and realization of acquisition benefits.
- Commitments to extend credit included $207.5 million of home-equity lines, $68.6 million of commercial real-estate commitments and $201.7 million of other commitments. Management did not anticipate material losses. Ordinary-course legal matters could affect results, but the filing does not provide a clear quantified exposure.
- CECL was scheduled for adoption January 1, 2020; management was evaluating its impact. The company reported no goodwill impairment in 2018.
Important facts for investors to verify
- How much of 2018 earnings growth reflects the lower tax rate and acquisition-related changes versus recurring operating performance.
- Post-acquisition integration costs, expected cost savings, branch consolidation plans and the final purchase-price allocations.
- Whether rising deposit and borrowing costs pressure net interest margin, and how actual rate exposure compares with modeled scenarios.
- Trends in nonperforming loans, past-due loans and allowance adequacy, particularly as acquired loans season and regional economic conditions change.
- Completion and financial impact of the Virginia Beach branch sale, and the company’s ability to sustain planned dividends and repurchases while preserving capital and liquidity.