City Holding Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. City Holding is a bank holding company; its results principally reflect lending, deposit-taking, and investment activities. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $23.6 | $23.2 | $68.9 | $71.3 |
| Net income | $11.6 | $9.0 | $31.0 | $29.1 |
| Diluted EPS | $0.76 | $0.58 | $2.02 | $1.84 |
| Net interest margin, tax-equivalent | 3.93% | 3.94% | 3.89% | 4.10% |
| Return on average assets | 1.71% | 1.36% | 1.53% | 1.46% |
| Return on average equity | 14.6% | 11.4% | 13.1% | 12.3% |
The filing does not report a single consolidated revenue figure; it presents interest income and non-interest income separately. Q3 income before taxes was $17.4 million versus $13.2 million. Nine-month income before taxes was $46.8 million versus $43.3 million.
- Balance sheet at September 30: Total assets were $2.685 billion; gross loans $1.926 billion; deposits $2.194 billion; shareholders’ equity $309.9 million; cash and cash equivalents $83.8 million.
- Loans and credit reserve: Gross loans increased $60.8 million, or 3.3%, from year-end 2010. The allowance for loan losses was $19.8 million, up from $18.2 million; allowance-to-gross-loans was approximately 1.03%. Nine-month provision was $2.4 million, compared with $4.8 million, and net charge-offs were $0.7 million versus $4.9 million.
- Cash flow, nine months: Operating activities generated $42.3 million; investing activities used $26.1 million; financing activities provided $1.3 million. Cash and cash equivalents increased $17.4 million to $83.8 million.
- Debt and liquidity: Long-term debt was $16.5 million; short-term borrowings included $127.6 million of customer repurchase agreements and $0.3 million of FHLB borrowings. The bank reported capacity to borrow a further $814 million under existing facilities. Deposits funded 81.7% of assets, and available-for-sale securities totaled $393.3 million.
Material changes versus comparable periods
- Q3 net income rose 28% year over year, supported by lower interest expense, no loan-loss provision (versus $1.8 million in Q3 2010), and lower investment impairment losses. Nine-month net income increased despite lower net interest income.
- Nine-month net interest income declined $2.4 million; tax-equivalent net interest margin fell to 3.89% from 4.10%. Management cited lower yields, reduced income from previously securitized loans and interest-rate floors, partly offset by lower funding costs.
- Nine-month non-interest income, excluding investment-security gains and losses, declined $1.1 million, largely as service charges fell following Regulation E changes and weaker consumer spending. Non-interest expense increased $2.1 million, primarily due to legal and professional fees and employee costs.
- Non-performing assets rose to $31.0 million from $21.0 million at year-end 2010; the non-performing-assets ratio increased from 1.12% to 1.60%. The increase was principally linked to a large commercial relationship that deteriorated and went on non-accrual.
- Shareholders’ equity declined $5.0 million from year-end, mainly reflecting $21.4 million of share repurchases and $15.4 million of dividends, partly offset by earnings of $31.0 million.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said liquidity was strong and the allowance was adequate, while noting that future provisions depend on loan growth, portfolio mix, credit quality, loss experience, and recoveries.
- A borrower’s life-insurance proceeds enabled the company to recover $1.9 million of previously charged-off loans in Q3, materially affecting recoveries and credit costs.
- The company recorded a $3.0 million litigation reserve in Q2 2011. In the Casto overdraft-fee class action, a preliminary settlement provides for a $3.0 million payment to the class and its attorneys and forgiveness of $2.5 million in charged-off overdraft accounts; final approval was scheduled for January 6, 2012. A related Clay action remained unresolved, and the company could not estimate a loss or range of loss.
- Available-for-sale securities included trust preferred securities with significant unrealized losses. Five pooled trust preferred securities had $7.5 million book value and $3.2 million estimated fair value. The company recorded $0.4 million of credit-related impairment in the first nine months and warned that further collateral deterioration could result in additional impairment.
- Interest-rate simulations estimated that an immediate 400-basis-point increase could raise 12-month net income by 15.9% and economic value of equity by 21.0%; management cautioned that these model results depend on assumptions and are not forecasts. Principal risks cited include credit deterioration, legal exposure, interest-rate changes, economic and regulatory conditions, competition, and market disruption.
Important facts for investors to verify
- Whether the large commercial credit and higher non-performing assets stabilize, and whether the $19.8 million allowance remains adequate.
- Final terms and approval of the Casto settlement, and the potential exposure in the Clay litigation.
- Performance and impairment assumptions for pooled trust preferred securities and other investments with unrealized losses.
- Whether margin pressure continues as loan and securities yields change, and how deposit costs respond to interest-rate movements.
- Capital and liquidity levels after dividends and repurchases; bank regulatory ratios remained above minimums, though below year-end 2010 levels.