CITY HOLDING CO quarterly report, Q2 FY2019

City Holding Company (NASDAQ: CHCO) — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. City Holding is a West Virginia community banking holding company operating primarily through City National Bank, with 95 offices across West Virginia, Kentucky, Virginia and southeastern Ohio.

Financial performance

MetricQ2 2019Q2 2018Six months 2019Six months 2018
Net interest income$40.9m$33.6m$81.0m$66.2m
Net income$22.8m$21.0m$44.4m$38.6m
Diluted EPS$1.38$1.35$2.68$2.48
Net interest margin, fully taxable equivalent3.65%3.56%3.66%3.54%

Q2 net income rose about 8%; six-month net income rose about 15%. Six-month net interest income grew 22% on a fully taxable equivalent basis, reflecting the late-2018 Poage and Farmers Deposit acquisitions, higher loan yields and larger average loan and securities balances. Higher deposit funding costs partly offset the growth. Noninterest income was $17.8m for Q2 and $33.8m for six months; noninterest expense was $30.8m and $60.2m, respectively. The six-month effective tax rate was 20.8%, versus 20.2% a year earlier.

For the six-month period, return on average assets was 1.80% versus 1.85%, return on equity 14.3% versus 15.4%, and return on tangible common equity 17.8% versus 18.3%. Q2 figures were 1.84%, 14.4% and 17.9%, respectively, compared with 2.00%, 16.8% and 19.9%.

Financial position, cash flow and credit

  • Assets and funding: Total assets were $4.94bn at June 30, 2019, versus $4.90bn at year-end 2018. Deposits increased 1.4% to $4.03bn. Cash and cash equivalents rose to $168.7m from $123.0m.
  • Loans and securities: Gross loans declined 1.9% to $3.52bn, primarily from a $76.8m decrease in commercial real estate loans. Investment securities rose 8.0% to $877.6m.
  • Debt: Short-term borrowings were $207.0m, all customer repurchase agreements, compared with $261.9m at year-end, including $40.0m in federal funds purchased. Long-term debt was $4.1m.
  • Cash flow: Six-month operating cash flow was $46.7m; investing activities provided $0.9m and financing activities used $1.9m. Cash increased $45.7m to $168.7m.
  • Credit quality: The allowance for loan losses fell to $13.8m from $16.0m, or 0.39% of loans versus 0.45%. The company recorded a $1.4m provision recovery for the first half. Net charge-offs were $0.7m. Nonperforming assets declined to $14.5m from $19.4m; nonperforming loans were 0.41% of loans and OREO, down from 0.54%.
  • Capital and liquidity: City Holding’s CET1, Tier 1, total capital and leverage ratios were 15.9%, 16.0%, 16.5% and 10.7%; City National’s were 14.2%, 14.2%, 14.6% and 9.5%. Both were reported well capitalized. The bank had borrowing capacity of $1.9bn under existing facilities.

Material changes, outlook and risks

  • Poage and Farmers Deposit were acquired in December 2018; growth in interest income and operating expenses in 2019 reflects their inclusion. The company recorded $0.8m of merger and integration costs in the first half.
  • The Virginia Beach branch sale closed June 28, 2019. City National retained the loans, the buyer assumed most deposits, deposits declined by $25.7m, and the company recognized a $0.7m gain.
  • The company repurchased 161,950 shares for $12.1m in the first half under a board-authorized 1.0m-share program. It declared dividends of $1.06 per share for the first half.
  • Management said liquidity was strong and expected available parent cash and bank dividends to cover parent funding needs for the next 12 months. It anticipated annualized common dividends of approximately $34.8m, but dividends could be suspended. No earnings guidance was provided.
  • Management expects the January 1, 2020 CECL adoption could materially increase the loan-loss allowance, but it cannot yet reasonably estimate the impact. The company was still implementing the standard.
  • Interest-rate sensitivity modeling estimated that an immediate, sustained 300-basis-point increase would raise net income 1.4% over 12 months, while a 200-basis-point decrease would reduce it 15.0%. Management cautioned that the estimates depend on assumptions about deposit repricing, customer behavior and other factors.
  • Key disclosed risks include local economic conditions, credit and real-estate exposure, interest-rate changes, competition, cybersecurity and operational disruptions, regulation, and realizing expected merger benefits. The filing reported no material change to the risk factors in the 2018 Form 10-K. Ordinary-course legal proceedings were disclosed; their eventual financial effects were uncertain.

Important facts for investors to verify

  • Whether loan growth resumes and commercial real estate exposure, credit grades and the allowance remain appropriate as the portfolio changes.
  • Whether deposit costs continue to rise and how changing interest rates affect net interest margin and earnings relative to management’s model.
  • The realized integration costs, expense savings and operating performance of the Poage and Farmers Deposit acquisitions.
  • The eventual CECL allowance impact and implementation assumptions ahead of the 2020 adoption.
  • Capital allocation, including share repurchases and dividends, against earnings, liquidity and regulatory requirements.