City Holding Company Announces Quarterly Results | Q3 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 quarterly net income of $22.4 million and diluted earnings of $1.36 per share for the quarter ended September 30, 2019. For the third quarter of 2019, the Company achieved a return on assets of 1.81% and a return on tangible equity of 17.0%.

Charles R. (“Skip”) Hageboeck, the President and Chief Executive Officer of City Holding Company, commented: “The third quarter of 2019 saw City once again deliver impressive earnings, along with strong loan growth. Loans grew over $63 million, or 7.2% annualized, from June 30, 2019 to September 30, 2019. Our commercial loan portfolio rebounded this quarter and grew $62 million with growth being generated throughout our footprint, including our core markets. Net income, diluted earnings per share and reported net interest income were all strong again in the third quarter of 2019 despite two 25 basis point interest rate decreases implemented by the Federal Open Market Committee in the third quarter of 2019. Excluding the impact of acquisitions, non-interest income during the third quarter remained strong with year over year upticks in bankcard revenues and service fees while expenses remained well managed. City’s tangible capital of 10.9% increased 23 basis points from the second quarter of 2019, even as we increased our dividend to shareholders 7.5% during the quarter to $2.28 annually and repurchased 99,000 shares of our common stock during the third quarter of 2019.”

Net Interest Income

The Company’s net interest income decreased modestly from $40.9 million during the second quarter of 2019 to $40.5 million during the third quarter of 2019, and the Company’s tax equivalent net interest income decreased $0.4 million, or 0.9%, from $41.1 million for the second quarter of 2019 to $40.7 million for the third quarter of 2019. Lower loan yields (13 basis points) decreased net interest income by $0.7 million but were partially offset by an increase in accretion from fair value adjustments ($0.3 million). As a result, the Company’s reported net interest margin declined to 3.59% for the third quarter of 2019 compared to 3.65% for the second quarter of 2019. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 3.48% for the quarter ended September 30, 2019 and 3.57% for the quarter ended June 30, 2019.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased from 0.41% at June 30, 2019 to 0.50% at September 30, 2019. Total nonperforming assets increased from $14.5 million at June 30, 2019 to $18.0 million at September 30, 2019 primarily as a result of a loan secured by a residence located at the Greenbrier Sporting Club being placed on nonaccrual status. 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 increased modestly from $9.5 million, or 0.27% of total loans outstanding, at June 30, 2019 to $10.2 million, or 0.28% of total loans outstanding, at September 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 provision for loan losses of $0.3 million in the third quarter of 2019, compared to no provision for loan losses for the comparable period in 2018 and a recovery of loan loss provision of $0.6 million for the second quarter of 2019. The Company’s historical loss rate that is used to compute the allowance not specifically allocated to individual credits improved slightly during the quarter ended September 30, 2019, and reduced the Company’s ALLL, but was essentially offset by an increase in loan balances during the quarter. During the third quarter of 2019, the Company recorded a $0.3 million provision for loan loss expense related to a purchased credit impaired loan. 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 $16.7 million for the third quarter of 2019 as compared to $15.8 million for the third quarter of 2018. During the third quarter of 2019, the Company reported $0.2 million of unrealized fair value losses on the Company’s equity securities compared to $0.4 million of unrealized fair value gains on the Company’s equity securities in the third quarter of 2018. Exclusive of these unrealized fair value gains and losses, non-interest income increased from $15.4 million for the third quarter of 2018 to $17.0 million for the third quarter of 2019. This increase was largely attributable to an increase of $0.8 million, or 16.3%, in bankcard revenues and an increase of $0.6 million, or 7.7%, in service charges, with $0.4 million and $0.5 million, respectively, attributable to the late 2018 acquisitions of Poage Bankshares, Inc. (“Poage”) and Farmers Deposit Bancorp, Inc. (“Farmers Deposit”). In addition, trust and investment management fee income increased $0.2 million.

Non-interest Expenses

Non-interest expenses increased $3.4 million (13.4% increase), from $25.0 million in the third quarter of 2018 to $28.4 million in the third quarter of 2019. This increase was predominantly due to an increase in salaries and employee benefits of $1.6 million due to the acquisitions of Poage and Farmers Deposit ($1.2 million) and annual salary adjustments ($0.6 million), that were partially offset by lower health insurance expenses ($0.3 million). Primarily due to the acquisitions of Poage and Farmers Deposit, other expenses increased $1.0 million, bankcard expenses increased $0.4 million, occupancy related expenses increased $0.4 million and equipment and software related expenses increased $0.3 million from the third quarter of 2018 to the third quarter of 2019. Partially offsetting these increases was a decrease of $0.3 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.

Balance Sheet Trends

During the quarter ended September 30, 2019, loans increased $63.2 million (1.8%) from the quarter ended June 30, 2019. Commercial real estate loans increased $53.9 million (3.9%) and commercial and industrial loans increased $8.1 million (2.8%). Loan balances of $3.58 billion at September 30, 2019 are down $5.0 million (0.1%) from December 31, 2018. For the nine months ended September 30, 2019, commercial real estate loans have declined $23.0 million (1.6%) and home equity loans have decreased $2.7 million (1.7%). These decreases have been partially offset by increases in commercial and industrial loans of $10.6 million (3.7%) and residential real estate loans of $8.1 million (0.5%).

Primarily due to the sale of the Company’s Virginia Beach branch on June 28, 2019, total average depository balances decreased $13.7 million, or 0.3%, from the quarter ended June 30, 2019 to the quarter ended September 30, 2019. This branch had total deposits of $25.7 million at the date of the sale, with approximately $15.0 million held in time deposits. During the third quarter of 2019, average time deposit balances decreased $23.6 million and average savings deposit balances decreased $1.9 million. These decreases were partially offset by increases in average interest-bearing demand deposit balances of $7.4 million and in average noninterest-bearing deposit balances of $4.3 million.

Income Tax Expense

The Company’s effective income tax rate for the third quarter of 2019 was 21.7% compared to 20.5% for the year ended December 31, 2018, and 21.3% for the quarter ended September 30, 2018.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 88.9% and the loan to asset ratio was 72.3% at September 30, 2019. The Company maintained investment securities totaling 17.7% of assets as of the same date. Checking and saving accounts fund 54.0% of assets while time deposits fund 27.3% of assets at September 30, 2019. Time deposits are comprised mostly of accounts that have balances under $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 10.9% at September 30, 2019. At September 30, 2019, City National Bank’s Leverage Ratio was 9.7%, its Common Equity Tier I ratio was 14.0%, its Tier I Capital ratio was 14.0%, and its Total Risk-Based Capital ratio was 14.4%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On September 25, 2019, the Board of Directors of the Company approved a quarterly cash dividend of $0.57 per share payable October 31, 2019, to shareholders of record as of October 15, 2019. This dividend increase represents a 7.5% increase from the $0.53 per share paid on July 31, 2019. During the quarter ended September 30, 2019, the Company repurchased 99,000 common shares at a weighted average price of $74.17 as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of September 30, 2019, the Company could repurchase approximately 739,000 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; 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 September 30, 2019 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary September 30, 2019 results and will adjust the amounts if necessary.