City Holding Company Announces Second Quarter Results

CHARLESTON, W. Va.–(BUSINESS WIRE)–City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $4.9 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $22.8 million and diluted earnings of $1.38 per share for the quarter ended June 30, 2019. For the second quarter of 2019, the Company achieved a return on assets of 1.84% and a return on tangible equity of 17.9%. The Company reported that net interest income increased $7.3 million (21.9%) from the quarter ended June 30, 2018, while net interest income exclusive of accretion from fair value adjustments from acquisitions increased $6.8 million (20.4%) from the quarter ended June 30, 2018.

Charles R. (“Skip”) Hageboeck, the President and Chief Executive Officer of City Holding Company, commented: “City was able to deliver impressive earnings again in the second quarter of 2019. Net income, diluted earnings per share and reported net interest income were all above both the second quarter of 2018 and the first quarter of 2019. Our net interest margin remained steady from the first quarter of 2019 at 3.65%. City’s balance sheet continues to demonstrate strong credit quality at a time when we see some competitors easing underwriting standards in order to make loans of marginal quality. City’s tangible capital of 10.7% grew 33 basis points during the second quarter of 2019, well above our ratio of 9.9% at June 30, 2018, even as we increased our dividend to shareholders over 15% and have repurchased in excess of 235,000 shares of our common stock in the last twelve months. After adjusting for unusual events, non-interest income in the second quarter was strong, and expenses remained well controlled. However, loan balances are down since December 31, 2018, particularly in the commercial loan portfolio. Nevertheless, embedded in that reality is what I think represents some good news. Originations of new loans during the first half of 2019 were very comparable to that of 2018; but loan payoffs in the first half of 2019 have been dramatically above payoff rates in prior years. The increase in commercial loan payoffs can be attributed to several loans that were paid off upon the sale of the underlying commercial real estate collateral. Some of these loans were refinanced by quasi-government entities which provide financing at rates below what most banks can compete with. The good news is that, loan balances within our core markets were very stable with most payoffs being commercial real estate originated in our Columbus or Charlotte markets. Additionally, several loans totaling about $29 million went to competitors when the customers made unacceptable demands for less stringent terms or structure, despite their own weak financial performance and City chose not to acquiesce to their demands and avoided loans that don’t meet our credit standards. As is typical, there are likely to be additional loan payoffs during the remainder of 2019. However, we currently also have a robust pipeline of new loans which have been approved and scheduled to close in the next several months. While some of these new loans are being originated in Columbus and Charlotte, happily a significant number of these loans are being originated in our core markets, and that is good news. Shareholders might appropriately worry that our core markets aren’t adequately robust, however, our commercial loan pipeline suggests that these core markets in fact remain stable. Looking to the future, we anticipate that commercial loan balances will grow in the third quarter, but by December 31, 2019 may or may not exceed commercial balances on the books as of December 31, 2018.”

Net Interest Income

The Company’s net interest income increased from $40.1 million during the first quarter of 2019 to $40.9 million during the second quarter of 2019. During the second quarter of 2019, the Company’s tax equivalent net interest income increased $0.8 million, or 2.1%, from $40.3 million for the first quarter of 2019 to $41.1 million for the second quarter of 2019. Higher loan yields (10 basis points) increased net interest income by $1.3 million but were partially offset by an increase in rates paid on deposits ($0.6 million). The Company’s reported net interest margin remained steady at 3.65% for the second quarter of 2019 compared to 3.66% for the first quarter of 2019. The reported net interest margin during the first quarter is often positively impacted by the shorter number of days in February which increased City’s net interest margin by 2 basis points in the first quarter of 2019. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 3.57% for the quarter ended June 30, 2019 and 3.61% for the quarter ended March 31, 2019.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned improved from 0.43% at March 31, 2019 to 0.41% at June 30, 2019. Total nonperforming assets decreased from $15.4 million at March 31, 2019 to $14.5 million at June 30, 2019. Excluded from this ratio are purchased credit-impaired loans for which the Company estimated cash flows and estimated a credit mark. Such loans would be considered nonperforming loans if the loan’s performance deteriorates below the Company’s initial expectations. Total past due loans decreased from $11.0 million, or 0.31% of total loans outstanding, at March 31, 2019 to $9.5 million, or 0.27% of total loans outstanding, at June 30, 2019.

As a result of the Company’s quarterly analysis of the adequacy of the allowance for loan losses (“ALLL”), the Company recorded a recovery of loan loss provision of $0.6 million in the second quarter of 2019, compared to a recovery of loan loss provision of $2.1 million for the comparable period in 2018 and a recovery of loan loss provision of $0.8 million for the first quarter of 2019. During the periods encompassed in the Company’s historical loss review, charge offs have continued to decline and the Company has recovered significant amounts on loans previously charged off, including a $0.5 million recovery in the second quarter of 2019 from a loan that had previously been charged off during 2014. As a result, the Company’s historical loss rate that is used to compute the allowance not specifically allocated to individual credits has continued to improve and reduced the Company’s ALLL, which resulted in a recovery of loan loss provision in the second quarter of 2019. Changes in the amount of the provision and related allowance are based on the Company’s detailed systematic methodology and are directionally consistent with changes in the composition and quality of the Company’s loan portfolio. The Company believes its methodology for determining the adequacy of its ALLL adequately provides for probable losses inherent in the loan portfolio and produces a provision and allowance for loan losses that is directionally consistent with changes in asset quality and loss experience.

Non-interest Income

Non-interest income was $17.8 million for the second quarter of 2019 as compared to $15.6 million for the second quarter of 2018. During the second quarter of 2019, the Company reported $0.1 million of unrealized fair value gains on the Company’s equity securities compared to $0.5 million of unrealized fair value gains on the Company’s equity securities in the second quarter of 2018. Exclusive of these gains, non-interest income increased from $15.1 million for the second quarter of 2018 to $17.7 million for the second quarter of 2019. This increase was largely attributable to an increase of $1.0 million, or 21.8%, in bankcard revenues and an increase of $0.5 million, or 6.2%, in service charges, with $0.5 million and $0.4 million, respectively, attributable to the late 2018 acquisitions of Poage Bankshares, Inc. (“Poage”) and Farmers Deposit Bancorp, Inc. (“Farmers Deposit”). In addition, other income increased $0.7 million and bank owned life insurance revenues increased $0.4 million due to death benefit proceeds received in the second quarter of 2019. Other income increased due to the completion of the sale of our Virginia Beach, VA branch to Select Bancorp, Inc. on June 28, 2019. As a result of this transaction, the Company recognized a gain of $0.7 million and deposit balances outstanding fell by $25.7 million.

Non-interest Expenses

During the quarter ended June 30, 2019, the Company incurred an additional $0.5 million of acquisition and integration expenses associated with the acquisitions of Poage and Farmers Deposit. Excluding this expense, non-interest expenses increased $5.3 million (21.3% increase), from $24.9 million in the second quarter of 2018 to $30.2 million in the second quarter of 2019. This increase was primarily due to an increase in salaries and employee benefits of $2.2 million due primarily to the acquisitions of Poage and Farmers Deposit ($1.1 million), annual salary adjustments ($0.6 million), and a nonrecurring health insurance expense ($0.4 million). Other expenses increased $1.4 million due largely to the acquisitions of Poage and Farmers Deposit and a partial write-down of one of the Company’s branches during the second quarter of 2019 ($0.2 million). A portion of the branch’s excess space was donated to a local community charity organization. The Company expects to recover this write-down in approximately 3 years via lower operating costs. Primarily as a result of the acquisitions of Poage and Farmers Deposit, bankcard expenses increased $0.5 million, equipment and software related expenses increased $0.3 million and occupancy related expenses increased $0.3 million from the second quarter of 2018 to the second quarter of 2019.

Balance Sheet Trends

Loans have decreased $68.2 million (1.9%) from December 31, 2018 to $3.52 billion at June 30, 2019. Commercial real estate loans decreased $76.8 million (5.3%) and home equity loans decreased $2.8 million (1.8%). These decreases were partially offset by increases in residential real estate loans of $9.2 million (0.6%) and commercial and industrial loans of $2.5 million (0.9%).

As a result of the sale of the Company’s Virginia Beach branch on June 28, 2019, total deposits fell by $25.7 million. Despite the branch sale, total average depository balances increased $68.1 million, or 1.7%, from the quarter ended March 31, 2019 to the quarter ended June 30, 2019 – reflecting the growth of our large customer base and their depository balances. Average savings deposit balances increased $32.8 million, average noninterest-bearing demand deposit balances increased $32.6 million, and average time deposit balances increased $15.6 million. These increases were partially offset by a decrease in interest-bearing demand deposit balances of $12.8 million.

Income Tax Expense

The Company’s effective income tax rate for the second quarter of 2019 was 20.4% compared to 20.5% for the year ended December 31, 2018, and 20.3% for the quarter ended June 30, 2018.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 87.3% and the loan to asset ratio was 71.2% at June 30, 2019. The Company maintained investment securities totaling 17.8% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 53.9% of assets at June 30, 2019. Time deposits fund 27.7% of assets at June 30, 2019, but very few of these deposits are in accounts that have balances of more than $250,000, reflecting the core retail orientation of the Company.

The Company is strongly capitalized. The Company’s tangible equity ratio increased from 10.0% at December 31, 2018 to 10.7% at June 30, 2019. At June 30, 2019, City National Bank’s Leverage Ratio was 9.51%, its Common Equity Tier I ratio was 14.19%, its Tier I Capital ratio was 14.19%, and its Total Risk-Based Capital ratio was 14.63%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On June 26, 2019, the Board of Directors of the Company approved a quarterly cash dividend of $0.53 per share payable July 31, 2019, to shareholders of record as of July 15, 2019. During the quarter ended June 30, 2019, the Company repurchased 107,000 common shares at a weighted average price of $74.81 as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of June 30, 2019, the Company could repurchase approximately 838,000 additional shares under the plan.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 95 branches across West Virginia, Kentucky, Virginia, and Ohio.

Forward-Looking Information

This news release contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements express only management’s beliefs regarding future results or events and are subject to inherent uncertainty, risks, and changes in circumstances, many of which are outside of management’s control. Uncertainty, risks, changes in circumstances and other factors could cause the Company’s actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under “ITEM 1A Risk Factors” and the following: (1) general economic conditions, especially in the communities and markets in which we conduct our business; (2) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for loan losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (3) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (4) changes in the interest rate environment; (5) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (6) changes in technology and increased competition, including competition from non-bank financial institutions; (7) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers’ performance and creditworthiness; (8) difficulty growing loan and deposit balances; (9) our ability to effectively execute our business plan, including with respect to future acquisitions; (10) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (11) deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions; (12) regulatory enforcement actions and adverse legal actions; (13) difficulty attracting and retaining key employees; (14) the expected cost savings and any revenue synergies from the merger of City Holding Company, City National Bank of West Virginia, Poage Bankshares, Inc., Town Square Bank, Farmers Deposit Bancorp, Inc. and Farmers Deposit Bank may not be fully realized within the expected time frames; (15) the disruption from the merger of City Holding Company, City National Bank of West Virginia, Poage Bankshares, Inc., Town Square Bank, Farmers Deposit Bancorp, Inc. and Farmers Deposit Bank may make it more difficult to maintain relationships with clients, associates, or suppliers; and (16) other economic, competitive, technological, operational, governmental, regulatory, and market factors affecting our operations. Forward-looking statements made herein reflect management’s expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. Further, the Company is required to evaluate subsequent events through the filing of its June 30, 2019 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary June 30, 2019 results and will adjust the amounts if necessary.

Contacts

Charles R. Hageboeck, Chief Executive Officer and President

(304) 769-1102

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