Business Context and Reporting Period
Company: City Holding Company (West Virginia bank holding company)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Filing Date: November 5, 2009
The Company operates primarily through its subsidiary, City National Bank. The report covers the third quarter and the first nine months of 2009, comparing results to the same periods in 2008. The Company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Income | $10,497 | $(2,557) | $31,567 | $23,860 |
| Diluted EPS | $0.66 | $(0.16) | $1.98 | $1.47 |
| Total Assets | $2,596,236 | - | - | - |
| Total Deposits | $2,127,037 | - | - | - |
| Net Loans | $1,777,729 | - | - | - |
| Shareholders' Equity | $301,452 | - | - | - |
| Net Interest Income | $23,656 | $26,281 | $71,848 | $75,674 |
| Provision for Loan Losses | $1,675 | $2,350 | $5,475 | $5,083 |
| Non-Interest Income | $12,340 | $(12,758) | $39,060 | $18,755 |
| Non-Interest Expense | $18,802 | $19,246 | $57,972 | $57,906 |
| Cash Flow from Operations (9mo) | - | - | $16,001 | $39,169 |
Key Ratios (9 Months 2009): Return on Average Assets (ROA) was 1.62%; Return on Average Equity (ROE) was 14.5%. Net Interest Margin decreased to 4.22% from 4.61% in the prior year period.
Material Changes vs. Prior Period
- Profitability Improvement: The Company reported a net income of $10.5 million for Q3 2009, a significant turnaround from a net loss of $2.6 million in Q3 2008. For the nine-month period, net income increased 32% to $31.6 million.
- Investment Impairments: Investment impairment losses dropped significantly. The Company recorded $4.4 million in impairments for the nine months ended Sept 30, 2009, compared to $27.5 million in the same period in 2008. The 2008 losses were driven by agency preferreds (Fannie Mae/Freddie Mac conservatorship) and Lehman Brothers securities.
- Net Interest Income Decline: Net interest income decreased $3.8 million (5.0%) for the nine-month period due to lower yields on loans and investments outpacing the decline in interest expense on deposits. The yield on loans decreased 105 basis points in Q3 2009 compared to Q3 2008.
- Loan Portfolio: Gross loans decreased slightly by $15.0 million (0.8%) from year-end 2008. Real estate loans comprise 82.6% of the portfolio.
- Non-Performing Assets: Non-performing assets totaled $28.9 million (1.59% of total loans and OREO) as of Sept 30, 2009, down from 1.76% in Q2 2009. Approximately 47% of non-performing loans are tied to speculative home builders at the Greenbrier Resort.
Guidance, Outlook, Risks, and Unusual Items
- FDIC Assessments: Insurance and regulatory expenses increased $1.3 million due to a special FDIC assessment to rebuild the Deposit Insurance Fund. Management expects this expense to increase approximately $0.7 million per quarter starting in Q4 2009.
- Investment Portfolio Risks: The Company holds $109.7 million in perpetual callable preferred and trust preferred securities with unrealized losses of $5.3 million. Management believes these losses are temporary but notes that further impairments could occur if market conditions deteriorate.
- Greenbrier Resort Exposure: The Company has specific exposure to loans for speculative home builders at the Greenbrier Resort ($13.5 million portfolio). While the resort was purchased by the Justice Family Group in May 2009, uncertainty remains regarding the ultimate collectability of these loans.
- Share Repurchases: In October 2009, the Board authorized a new program to repurchase up to 1,000,000 shares of common stock. During the first nine months of 2009, the Company repurchased 105,686 shares.
- Interest Rate Risk: The Company's net income is positively correlated with rising interest rates. Sensitivity analysis indicates a +300 basis point increase in rates would increase net income by 10.0% over 12 months.
- Capital Resources: The Company remains "well-capitalized" under regulatory guidelines, with a Total Capital ratio of 14.1% and Tier 1 Risk-based ratio of 13.0%.
Investor Verification Checklist
- FDIC Assessment Impact: Verify the exact timing and magnitude of the anticipated $0.7 million quarterly increase in regulatory expenses starting Q4 2009.
- Greenbrier Loan Quality: Monitor the specific performance of the $13.5 million portfolio of loans to speculative builders at the Greenbrier Resort and the adequacy of the $1.8 million specific reserve.
- Investment Impairments: Review the quarterly status of the $109.7 million portfolio of trust preferred and perpetual preferred securities for potential "other-than-temporary" impairment charges.
- Net Interest Margin: Assess the sustainability of the 4.22% net interest margin given the low interest rate environment and the Company's reliance on variable-rate loans.
- Dividend Policy: Confirm the Parent Company's ability to receive dividends from City National Bank to fund shareholder dividends and debt service, noting that regulatory approval is required for dividends exceeding retained earnings.