City Holding Company Announces Record Annual Earnings | Q4 2019

CHARLESTON, W. Va.–(BUSINESS WIRE)–City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $5.0 billion bank holding company headquartered in Charleston, West Virginia, today announced net income of $89.4 million and diluted earnings of $5.42 per share for the year ended December 31, 2019.

Highlights of the Company’s performance and results for the year ended December 31, 2019 include the following:

• Reported diluted earnings per share increased from $4.49 for 2018 to $5.42 for 2019. Excluding acquisition and integration expenses, diluted earnings per share would have been $5.16 for 2018 and $5.46 for 2019.
• Return on assets and return on tangible equity of 1.80% and 17.3%, respectively. Excluding certain acquisition and integration expenses, return on assets and return on tangible equity would have been 1.82% and 17.4%, respectively.
• Reported net interest income increased $23.2 million (16.8%) from the year ended December 31, 2018, while net interest income exclusive of accretion from fair value adjustments on recent acquisitions increased $21.0 million (15.3%) from the year ended December 31, 2018 due primarily to the acquisitions of Poage Bankshares, Inc. (“Poage”) and Farmers Deposit Bancorp, Inc. (“Farmers”).
• Reported a recovery of loan loss provision of $1.3 million for the year ended December 31, 2019, primarily due to lower historical loss rates and recoveries from loans previously charged off.
• During 2019, the Company repurchased 261,000 common shares at a weighted average price of $74.54 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. City also increased its quarterly dividend by 7.5% in the third quarter of 2019 to $0.57 per share. In spite of these capital uses, the Company was still able to increase its tangible equity ratio from 10.0% at December 31, 2018 to 11.0% at December 31, 2019.
• For the second consecutive year, received the highest ranking in customer satisfaction in the north central region in J.D. Power’s 2019 U.S. Retail Banking Satisfaction Study.

Net Interest Income

The Company’s net interest income increased from $138.2 million for the year ended December 31, 2018 to $161.4 million for the year ended December 31, 2019. The Company’s tax equivalent net interest income increased $23.2 million, or 16.7%, from $139.0 million for the year ended December 31, 2018 to $162.2 million for the year ended December 31, 2019. The acquisitions of Poage and Farmers accounted for $18.3 million of this increase, while higher loan yields on residential real estate and commercial loans increased net interest income $5.7 million and $1.5 million, respectively, and higher average balances on commercial loans ($51.7 million) increased interest income by $2.3 million as compared to the year ended December 31, 2018. In addition, higher average investment balances ($98.1 million) increased investment income by $3.1 million and an increase in accretion from fair value adjustments increased interest income by $2.2 million during the year ended December 31, 2019. These increases were partially offset by increased interest expense on interest bearing liabilities ($8.5 million), primarily due to an increase in the cost of funds. The Company’s reported net interest margin increased from 3.54% for the year ended December 31, 2018 to 3.59% for the year ended December 31, 2019. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.51% for the year ended December 31, 2019 and 3.50% for the year ended December 31, 2018.

The Company’s net interest income decreased from $40.5 million during the third quarter of 2019 to $39.8 million during the fourth quarter of 2019. During the fourth quarter of 2019, the Company’s tax equivalent net interest income decreased $0.7 million, or 1.7%, to $40.0 million from $40.7 million during the third quarter of 2019. Lower loan yields (17 basis points) decreased net interest income by $1.5 million and a decrease in accretion from fair value adjustments decreased net interest income by $0.3 million. These decreases were partially offset by higher average loan balances ($63.3 million) that increased interest income by $0.8 million and lower interest rates on deposit accounts which decreased interest expense by $0.5 million. This resulted in the Company’s reported net interest margin declining from 3.59% for the third quarter of 2019 to 3.46% for the fourth quarter of 2019. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.38% for the quarter ended December 31, 2019 and 3.48% for the quarter ended September 30, 2019.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased from 0.54% at December 31, 2018 to 0.45% at December 31, 2019. Total nonperforming assets decreased from $19.4 million at December 31, 2018 to $16.4 million at December 31, 2019. Excluded from this ratio are purchased credit-impaired loans in 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 $13.1 million, or 0.37% of total loans outstanding, at December 31, 2018 to $11.4 million, or 0.32% of total loans outstanding, at December 31, 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 losses of $0.1 million in the fourth quarter of 2019 and $1.3 million for the year ended December 31, 2019, compared to a recovery of loan losses of $0.4 million and $2.3 million for the comparable periods in 2018. The recovery of loan loss provision during 2019 reflects a general improvement in the Company’s historical loss rates used to compute the allowance not specifically allocated to individual credits as charge offs have declined over the periods encompassed in the Company’s historical loss review. In addition, the Company recovered significant amounts on loans previously charged off, including a $0.5 million recovery from a loan that had previously been charged off during 2014. Changes in the amount of the allowance and related provision 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.

The Company will adopt ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” effective January 1, 2020, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. As a result of adopting ASU No. 2016-13, the Company expects the increase in its allowance on January 1, 2020, to be in the range of $2.3 million to $4.1 million. In addition, the adoption of ASU No. 2016-13 will require the Company to “gross up” its previously purchased credit impaired loans through the allowance at January 1, 2020. As a result, the Company expects an increase in its allowance and loan balances as of January 1, 2020, to be in the range of $2.2 million to $3.2 million. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, internal controls, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date.

Non-interest Income

Non-interest income was $68.5 million for 2019 as compared to $60.6 million for 2018. During 2019, the Company reported $0.9 million of unrealized fair value gains on the Company’s equity securities compared to $0.1 million of unrealized fair value losses on the Company’s equity securities during 2018. Exclusive of these unrealized fair value gains and losses, non-interest income increased from $60.7 million for the year ended December 31, 2018 to $67.5 million for the year ended December 31, 2019. This increase was primarily attributable to an increase of $2.7 million, or 14.8%, in bankcard revenues, and an increase of $1.8 million, or 6.1%, in service charges, with $1.4 million and $1.6 million, respectively, attributable to the late 2018 acquisitions of Poage and Farmers. Additionally, other income increased by $1.0 million (due largely to the $0.7 million gain from the sale of our Virginia Beach, VA branch to Select Bank & Trust Company during the second quarter of 2019), bank owned life insurance revenues increased $0.7 million due to higher death benefit proceeds received during 2019 compared to 2018, and trust and investment management fee income increased $0.6 million.

Non-interest income was $18.0 million during the quarter ended December 31, 2019 as compared to $14.7 million during the quarter ended December 31, 2018. During the fourth quarter of 2019, the Company reported $0.9 million of unrealized fair value gains on the Company’s equity securities compared to $1.2 million of unrealized fair value losses on the Company’s equity securities during the fourth quarter of 2018. Exclusive of these unrealized fair value gains and losses, non-interest income increased from $16.0 million for the fourth quarter of 2018 to $17.1 million for the fourth quarter of 2019. This increase was largely attributable to an increase of $0.3 million, or 7.0%, in bankcard revenues and an increase of $0.3 million, or 3.9%, in service charges, due to the late 2018 acquisitions of Poage and Farmers. In addition, trust and investment management fee income increased $0.3 million.

Non-interest Expenses

During 2019 and 2018, the Company recognized $0.8 million and $13.3 million, respectively, of acquisition and integration expenses associated with the completed acquisitions of Poage and Farmers. Excluding these expenses, non-interest expenses increased from $99.8 million for 2018 to $116.8 million for 2019. This increase was primarily due to an increase in salaries and employee benefits of $7.7 million that was largely attributable to the acquisitions of Poage and Farmers ($4.3 million), annual salary adjustments, and increased incentive compensation. Primarily due to the acquisitions of Poage and Farmers, other expenses increased $4.5 million, occupancy related expenses increased $1.3 million, equipment and software related expenses increased $1.2 million and bankcard expenses increased $1.1 million, from 2018 to 2019. Partially offsetting these increases was a decrease of $0.6 million in FDIC insurance expense. As the Deposit Insurance Fund (“DIF”) reserve ratio exceeded 1.38% at June 30, 2019, the Company received a Small Bank Assessment Credit for the full amount of its Federal Deposit Insurance Corporation (“FDIC”) assessment for the third and fourth quarters of 2019.

During the quarter ended December 31, 2018, the Company recognized $13.0 million of acquisition and integration expenses associated with the completed acquisitions of Poage and Farmers. Excluding these expenses, non-interest expenses increased $3.9 million from $25.1 million in the quarter ended December 31, 2018 to $29.0 million in the quarter ended December 31, 2019. This increase was primarily due to an increase in salaries and employee benefits of $1.9 million due to the acquisitions of Poage and Farmers ($0.8 million), annual salary adjustments ($0.5), and accruals for incentive compensation ($0.6 million). Due to the acquisitions of Poage and Farmers, other expenses increased $0.9 million, occupancy related expenses increased $0.3 million, equipment and software related expenses increased $0.3 million, and advertising expense increased $0.2 million from the fourth quarter of 2018 to the fourth quarter of 2019. Partially offsetting these increases was a decrease of $0.3 million in FDIC insurance expense.

Balance Sheet Trends

For the year ending December 31, 2019, period end loan balances increased $28.5 million (0.8%) to $3.62 billion. Commercial loans increased $26.5 million (1.5%) and residential real estate loans increased $5.1 million (0.3%) from December 31, 2018 to December 31, 2019.

Total average depository balances for the year ended December 31, 2019 increased $582.7 million, or 16.8%, as compared to the year ended December 31, 2018. This growth was largely attributable to deposits acquired from Poage and Farmers ($441.0 million). Exclusive of these contributions, the Company experienced increases in time deposits ($58.6 million), savings deposits ($47.3 million), noninterest bearing demand deposits ($28.8 million) and interest bearing demand deposits ($7.0 million).

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2019 was 21.8% and 21.3%, respectively, compared to 19.8% and 20.5% for the comparable periods in 2018.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 88.7% and the loan to asset ratio was 72.0% at December 31, 2019. The Company maintained investment securities totaling 17.7% of assets as of the same date. The Company’s deposit mix is weighted toward checking and saving accounts that fund 54.0% of assets at December 31, 2019. Time deposits fund 27.2% of assets at December 31, 2019, but very few of these deposits are in accounts that have balances of more than $250,000.

The Company is strongly capitalized. The Company’s tangible equity ratio increased from 10.0% at December 31, 2018 to 11.0% at December 31, 2019. At December 31, 2019, City National Bank’s Leverage Ratio was 9.51%, its Common Equity Tier I ratio was 13.92%, its Tier I Capital ratio was 13.92%, and its Total Risk-Based Capital ratio was 14.28%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On December 18, 2019, the Board approved a quarterly cash dividend of $0.57 cents per share payable January 31, 2020, to shareholders of record as of January 15, 2020. During the year ended December 31, 2019, the Company repurchased 261,000 common shares at a weighted average price of $74.54 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of December 31, 2019, the Company could repurchase approximately 739,000 shares under the current plan.

On January 22, 2020, City announced that City National Bank had entered into an agreement to sell 86,605 shares of Visa Inc. Class B common stock at a pre-tax gain of approximately $17.8 million on January 17, 2020. The carrying value of the Visa Class B shares on City National Bank’s balance sheet was $0, as the Bank had no historical cost basis in the shares. This transaction settled in January 2020 and will be reported as a gain in the Company’s first quarter 2020 results.

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; and (14) 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 Form 10-K for the fiscal year ended December 31, 2019. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2019 results and will adjust the amounts if necessary.