City Holding Company Announces Annual Earnings

City Holding Company Announces Annual Earnings

City Holding Company (“Company” or “City”) (NASDAQ: CHCO), a $4.9 billion bank holding company headquartered in Charleston, West Virginia, today announced net income of $70.0 million and diluted earnings of $4.49 per share for the year ended December 31, 2018. The results for the year ending December 31, 2018, include $13.3 million, or $0.67 diluted per share on an after tax basis, of acquisition and integration expenses related to the acquisitions of Poage Bankshares, Inc. (“Poage”) and its principal banking subsidiary, Town Square Bank of Ashland, Kentucky, and Farmers Deposit Bancorp, Inc. (“Farmers Deposit”) of Cynthiana, Kentucky and its principal banking subsidiary, Farmers Deposit Bank of Cynthiana, Kentucky, which were completed on December 7, 2018.

Highlights of the Company’s performance and results for the year ended December 31, 2018 include the following:

• Return on assets and return on tangible equity of 1.63% and 16.2%, respectively. Excluding the acquisition and integration expenses, return on assets and return on tangible equity would have been 1.87% and 18.6%, respectively.
• Reported net interest income increased $12.1 million (9.6%) from the year ended December 31, 2017, while net interest income exclusive of accretion from fair value adjustments on recent acquisitions increased $12.6 million (10.1%) from the year ended December 31, 2017.
• Reported a recovery of loan loss provision of $2.3 million for the year ended December 31, 2018, primarily due to a significant recovery from a commercial customer.
• Excluding the acquisitions of Poage and Farmers Deposit, total loan growth of $98.4 million (3.1%) from December 31, 2017 to December 31, 2018.
• During 2018, the Company repurchased 290,000 common shares at a weighted average price of $69.78 per share as part of a one million share repurchase plan authorized by the Board of Directors in September 2014. The Company still ended 2018 with a tangible equity ratio of 10.0%.
• Received the highest ranking in customer satisfaction in the north central region in J.D. Power’s 2018 U.S. Retail Banking Satisfaction Study.
• Charles “Skip” Hageboeck, Chief Executive Officer & President, was named Community Banker of the Year by the American Banker.

Highlights of the Company’s fourth quarter performance include the following:

• Return on assets and return on tangible equity of 0.96% and 9.6%, respectively. Excluding the acquisition and integration expenses, return on assets and return on tangible equity would have been 1.88% and 18.8%, respectively.
• Reported net interest income increased $0.9 million from the quarter ended September 30, 2018, while net interest income exclusive of accretion from fair value adjustments increased $0.6 million from the quarter ended September 30, 2018.
• Excluding the acquisitions of Poage and Farmers Deposit, total loan growth of $79.1 million (10.1% annualized) from September 30, 2018 to December 31, 2018.
• Repaid $16.5 million of Junior Subordinated Deferrable Interest Debentures issued by the Company and held by City Holding Capital Trust III at a price of 100.00% of principal.
• Completed the acquisitions of Poage and Farmers Deposit on December 7, 2018.
• Opened a new banking office in the Columbus suburb of Worthington, Ohio in December 2018.

City’s CEO Charles Hageboeck stated that, “2018 was a very successful year for City with reported earnings of $4.49 per diluted share, despite merger related expenses of $13.3 million ($0.67 per diluted share on an after tax basis). Excluding these costs, earnings for 2018 would have been $5.16 per diluted share. As a result of the acquisitions of Poage and Farmers Deposit, we were able to strengthen our market presence in the Ashland, Kentucky area and expand our market presence in Lexington, Kentucky and surrounding areas. The acquisitions also added $362 million in loans and $472 million in deposits to City. Although Poage and Farmers Deposit were only part of our 2018 results for less than a month, we were pleased with their contributions and expect them to contribute approximately $10 million on an after tax basis in 2019. To complete the acquisition of Poage, 1.17 million shares of Company stock were issued, while the Company paid $24.9 million in cash to complete the Farmers Deposit acquisition. Similar to previous acquisitions, the acquisitions of Poage and Farmers Deposit produced a decline in our credit metrics. We have plans in place for our credit and lending teams to workout problem loans and implement our credit culture with new members of our lending team during 2019.”

“In addition to the successful acquisitions in 2018, City also produced positive results in many other ways. Excluding our acquisitions, reported net interest income grew $10.7 million, or 8.5%, due to both improvements in our net interest margin and loan growth, while noninterest income exclusive of security gains and (losses) improved $1.5 million, or 2.6%. We also continued to judiciously manage our capital in 2018. We repurchased 290,000 shares of our common stock during 2018 and repaid our trust preferred securities in December 2018. In addition, City’s Board approved an increase in our quarterly cash dividend to 53 cents per share in the third quarter of 2018 (a 15.2% increase from the dividend paid in the second quarter of 2018). I am incredibly proud of the efforts of our exceptional employees that made 2018 a highly successful year in many ways and look forward to continuing to take advantage of the opportunities in the future.”

Net Interest Income

The Company’s net interest income increased from $126.1 million for the year ended December 31, 2017 to $138.2 million for the year ended December 31, 2018. The Company’s tax equivalent net interest income increased $11.4 million, or 8.9%, from $127.6 million for the year ended December 31, 2017 to $139.0 million for the year ended December 31, 2018. Exclusive of the impact of the acquisitions of Poage and Farmers Deposit, increased yields on commercial and residential real estate loans increased net interest income $7.8 million and $4.8 million, respectively, while higher average balances on commercial loans ($40.0 million) and residential real estate loans ($20.4 million) increased interest income by $1.6 million and $0.8 million, respectively, as compared to the year ended December 31, 2017. In addition, higher average investment balances ($68.6 million) increased investment income by $2.0 million, while interest income from deposits in depository institutions also increased $1.6 million as the Company elected to improve its on-balance sheet liquidity during the year ended December 31, 2018. These increases were partially offset by increased interest expense on interest bearing liabilities ($7.7 million), primarily due to an increase in the cost of funds. The Company’s reported net interest margin increased from 3.46% for the year ended December 31, 2017 to 3.52% for the year ended December 31, 2018. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.49% for the year ended December 31, 2018 and 3.40% for the year ended December 31, 2017.

The Company’s net interest income increased from $35.6 million during the third quarter of 2018 to $36.4 million during the fourth quarter of 2018. During the fourth quarter of 2018, the Company’s tax equivalent net interest income increased $0.9 million, or 2.5%, to $36.6 million from $35.7 million during the third quarter of 2018. The acquisitions of Poage and Farmers Deposit added $1.4 million of net interest income during the quarter ended December 31, 2018. In addition, investment income increased $0.8 million and increased loan yields added $0.5 million to net interest income. These increases were partially offset by lower loan prepayment fees of $1.1 million during the quarter ended December 31, 2018, and increased interest expense of $0.8 million as a result of higher interest rates on interest bearing liabilities. The Company’s reported net interest margin increased from 3.54% for the third quarter of 2018 to 3.55% for the fourth quarter of 2018. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.50% for the quarter ended December 31, 2018 and 3.51% for the quarter ended September 30, 2018.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased from 0.45% at December 31, 2017 to 0.54% at December 31, 2018. Total nonperforming assets increased from $14.1 million at December 31, 2017 to $19.4 million at December 31, 2018. 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 increased from $11.0 million, or 0.35% of total loans outstanding, at December 31, 2017 to $13.1 million, or 0.37% of total loans outstanding, at December 31, 2018. Acquired past due loans from Poage and Farmers Deposit represent approximately 37% of total past dues at December 31, 2018.

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 $0.4 million in the fourth quarter of 2018 and $2.3 million for the year ended December 31, 2018, compared to a provision for loan losses of $0.4 million and $3.0 million for the comparable periods in 2017. During the year ended December 31, 2018, City National Bank of West Virginia (“City National”), the Company’s primary banking subsidiary, liquidated repossessed assets associated with the Kentucky Fuels Corporation credit. As a result of the proceeds from this liquidation, City National recovered $1.3 million related to this credit. Additionally, as a result of this recovery, the historical loss rate used to compute the allowance not specifically allocated to individual credits in the Company’s commercial and industrial mining and energy sector (per the North American Industry Classification System (“NAICS”)) improved and an additional release of reserve of $1.7 million was recognized during the year ended December 31, 2018. The Company also received a $0.4 million recovery through a settlement from a commercial customer during the quarter ending December 31, 2018. 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.

Non-interest Income

Non-interest income was $60.6 million for 2018 as compared to $63.6 million for 2017. During 2017, the Company realized investment gains of $4.5 million that represented partial recoveries of impairment charges previously recognized on pools of trust preferred securities. Exclusive of these gains, non-interest income increased from $59.1 million for the year ended December 31, 2017 to $60.6 million for the year ended December 31, 2018. This increase was primarily attributable to an increase of $1.2 million, or 7.3%, in bankcard revenues and an increase of $1.1 million, or 4.0%, in service charges. These increases were partially offset by a decrease of $1.1 million in bank owned life insurance revenues due to lower death benefit proceeds received during 2018 compared to 2017.

Non-interest income was $14.7 million during the quarter ended December 31, 2018 as compared to $15.6 million during the quarter ended December 31, 2017. During the fourth quarter of 2017, the Company realized investment gains of $0.2 million which represented partial recoveries of impairment charges previously recognized on pools of trust preferred securities. Exclusive of this gain, non-interest income decreased from $15.4 million for the fourth quarter of 2017 to $14.7 million for the fourth quarter of 2018. This decrease was mainly due to unrealized fair value losses on the Company’s equity securities of $1.2 million during the fourth quarter of 2018 and a decrease of $0.5 million in bank owned life insurance revenues due to lower death benefit proceeds from the fourth quarter of 2017. These decreases were partially offset by an increase of $0.6 million, or 7.7%, in service charges and an increase of $0.5 million, or 11.8%, in bankcard revenues from the fourth quarter of 2017.

Non-interest Expenses

During 2018, the Company recognized $13.3 million of acquisition and integration expenses associated with the completed acquisitions of Poage and Farmers Deposit. Excluding these expenses, non-interest expenses increased from $96.0 million for 2017 to $99.8 million for 2018. This increase was primarily due to an increase in salaries and employee benefits of $3.4 million that was largely attributable to annual salary adjustments, including an adjustment to wages for approximately 50% of the Company’s employees late in the first quarter of 2018 to make salaries more competitive in the current employment environment. Additionally, the Company experienced increases in bankcard expenses of $0.6 million and other expenses of $0.4 million.

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 Deposit. Excluding these expenses, non-interest expenses increased $2.3 million from $22.9 million in the quarter ended December 31, 2017 to $25.2 million in the quarter ended December 31, 2018. This increase was primarily due to an increase in salaries and employee benefits of $2.2 million due to annual salary adjustments and an increase in bankcard expenses of $0.3 million.

Balance Sheet Trends

For the year ending December 31, 2018, period end loan balances increased $459.7 million (14.7%) to $3.59 billion, primarily due to the Company’s acquisitions of Poage and Farmers Deposit ($304.0 million and $57.9 million, respectively). Excluding these acquisitions, loans increased $98.4 million (3.1%) from December 31, 2017 to $3.23 billion at December 31, 2018. Commercial loans increased $57.2 million (3.9%) and residential real estate loans increased $32.7 million (2.2%) from December 31, 2017 to December 31, 2018.

Total average depository balances increased $161.9 million, or 4.9%, from the year ended December 31, 2017 to the year ended December 31, 2018. This growth was partially attributable to deposits acquired from Poage and Farmers Deposit ($379.3 million and $92.2 million, respectively). Exclusive of these contributions, the Company experienced increases in interest bearing deposits ($81.8 million) and time deposits ($63.7 million) that were partially offset by a decrease in savings deposits ($19.8 million).

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2018 was 19.8% and 20.5%, respectively, compared to 60.8% and 40.2% for the comparable periods in 2017. On December 22, 2017, the President signed the TCJA into law. Among other things, the Tax Cuts and Jobs Act (“TCJA”) reduced the corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of this decrease in the corporate income tax rate, the Company reassessed its deferred tax assets and liabilities, which resulted in a charge to earnings in the fourth quarter of 2017 of $7.1 million. In addition, during the years ended December 31, 2018 and December 31, 2017, the Company reduced income tax expense by $0.4 million and $0.3 million, respectively, due to the recognition of previously unrecognized tax positions subsequent to the close of the statute of limitations for previous tax years. Exclusive of these items, the Company’s tax rate from operations was 22.8% and 20.9% for the quarter and year ended December 31, 2018, respectively, compared to 33.4% and 32.7% for the comparable periods in 2017.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 90.2% and the loan to asset ratio was 73.2% at December 31, 2018. The Company maintained investment securities totaling 16.6% of assets as of the same date. The Company’s deposit mix is weighted toward checking and saving accounts that fund 53.5% of assets at December 31, 2018. Time deposits fund 27.6% of assets at December 31, 2018, but very few of these deposits are in accounts that have balances of more than $250,000.

The Company continues to be strongly capitalized. While the Company completed the acquisitions of both Poage and Farmers Deposit in December 2018, the Company’s tangible equity ratio only decreased from 10.5% at December 31, 2017 to 10.0% at December 31, 2018. At December 31, 2018, City National Bank’s Leverage Ratio was 9.81%, its Common Equity Tier I ratio was 13.05%, its Tier I Capital ratio was 13.05%, and its Total Risk-Based Capital ratio was 13.55%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On December 19, 2018, the Board approved a quarterly cash dividend of $0.53 cents per share payable January 31, 2019, to shareholders of record as of January 15, 2019. During the quarter ended December 31, 2018, the Company repurchased 69,000 common shares at a weighted average price of $72.89 per share as part of a one million share repurchase plan authorized by the Board of Directors in September 2014. During the year ended December 31, 2018, the Company repurchased 290,000 common shares at a weighted average price of $69.78 per share. As of December 31, 2018, the Company could repurchase approximately 112,000 shares under the current plan.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 100 branches across West Virginia, Virginia, Kentucky and Ohio. During the first quarter of 2019, City National Bank has plans in place to reduce its branches by four through the consolidation of branches that overlap due to the recently completed acquisition of Poage.

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. Such information involves risks and uncertainties that could result in the Company’s actual results differing materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company could have adverse legal actions of a material nature; (4) the Company may face competitive loss of customers; (5) the Company may be unable to manage its expense levels; (6) the Company may have difficulty retaining key employees; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balances; (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 resulting in either actual losses or other than temporary impairments on such investments; (12) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject the Company and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; (13) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; (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 risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those risk factors included in the disclosures under the heading “ITEM 1A Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. 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, 2018. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2018 results and will adjust the amounts if necessary.