City Holding Company Announces Record Quarterly Results

City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $5.1 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $29.0 million and diluted earnings of $1.78 per share for the quarter ended March 31, 2020. The results for the quarter ending March 31, 2020, include $17.8 million, or $0.84 diluted per share on an after-tax basis, from the Company’s sale of 86,605 shares of Visa Inc. Class B common stock.

Highlights of the Company’s performance and results for the quarter ended March 31, 2020 include the following:

• Return on assets and return on tangible equity of 2.29% and 20.6%, respectively. Excluding the gain from the sale of Visa shares, return on assets and return on tangible equity would have been 1.21% and 10.9%, respectively.
• Reported net interest income increased $0.6 million (1.4%) from the quarter ended December 31, 2019, while net interest income exclusive of accretion from fair value adjustments on recent acquisitions decreased $0.1 million (0.3%) from the quarter ended December 31, 2019.
• Reported a provision for credit losses of $8.0 million for the quarter ended March 31, 2020, primarily due to the potential economic impact of the COVID-19 pandemic.
• Using capital created from the sale of Visa stock, City repurchased 182,000 common shares at a weighted average price of $71.31 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. City maintained its quarterly dividend of $0.57 per share payable on April 30, 2020 to shareholders of record on April 15, 2020. Increased our tangible equity ratio from 11.0% at December 31, 2019 to 11.4% at March 31, 2020.
• Repaid $4.1 million of Junior Subordinated Deferrable Interest Debentures assumed by the Company in conjunction with the acquisition of Poage Bankshares, Inc. (“Poage”).

City’s CEO Charles Hageboeck stated that, “In recent weeks, we have seen our communities, country and world disrupted by the onset of a global pandemic, COVID-19, which has also resulted in an economic crisis. Although many of the markets in which City operates have had relatively low exposure to COVID-19, in order to protect our staff and customers, we began taking necessary steps to revise our operations and customer service protocols in mid-March. Operating in slightly different manners than our historic norm, our innovative staff have found many ways to continue providing exceptional customer service to our customers and communities in a timely and safe manner. As a result, we are conducting the majority of our customer service transactions at our drive-thrus and via electronic capabilities – interactive-teller machines (ITMs), automated-teller machines (ATMs), mobile banking, on-line banking, and interactive voice response systems. We temporarily closed seven of our locations that do not have drive-thru facilities.”

“When necessary, our staff have also been assisting customers with loan payment deferrals for up to six months for customers whose job or business have been impacted by stay at home actions taken by federal, state and local authorities. As of April 24, 2020 we have granted deferrals of approximately $82.2 million for mortgage borrowers and approximately $377.9 million for commercial borrowers. City is also participating in the Paycheck Protection Program loans administered by the Small Business Administration (“SBA”). Although internal deposit growth has been strong, the Company may utilize the Federal Reserve’s Paycheck Protection Program Liquidity Fund to fund these loans.”

“As a result of the COVID-19 crisis, and the associated increase in unemployment, businesses and consumers across the nation are experiencing economic challenges. Heavily impacted industries include hotels, restaurants, entertainment establishments, multi-family housing, energy, healthcare, senior housing, and unsecured credit (particularly credit cards). As of March 31, 2020, the Company had loans totaling $1.78 billion secured by residential residences (49.6% of total loans); $434.2 million secured by nonresidential commercial properties (12.0% of total loans); $340.9 million secured by multi-family housing (9.4% of total loans); and $292.1 million secured by hotel and lodging real estate (8.1% of total loans). City has very limited lending exposure to restaurants, energy, hospital, or senior housing industries. Additionally, City has no exposure to credit losses in unsecured credit cards. City’s loan portfolio is mostly in markets where City has branch distribution, and these are markets experiencing relatively less impact by COVID-19 than the nation as a whole. As of April 24, 2020, principal and interest deferrals total $222.4 million for hotel and lodging real estate and $9.8 million for restaurants. The Company will continue to closely monitor the risks associated with these portfolios and will work with our customers to minimize our losses in these and all segments of our loan portfolio.”

“Although these times are challenging, we remain committed to serving our customers and communities and, together, we will get through these tough times.”

Net Interest Income

The Company’s net interest income increased from $39.9 million during the fourth quarter of 2019 to $40.4 million during the first quarter of 2020. During the first quarter of 2020, the Company’s tax equivalent net interest income increased $0.6 million, or 1.4%, from $40.0 million for the fourth quarter of 2019 to $40.6 million for the first quarter of 2020. Lower rates paid on interest-bearing liabilities lowered interest expense by $1.1 million during the quarter ended March 31, 2020. In addition, accretion from favorable fair value adjustments on recent acquisitions increased $0.7 million from the quarter ended December 31, 2019. These increases were partially offset by lower interest income from loans ($1.0 million) due to lower yields (6 basis points). The Company’s reported net interest margin increased from 3.46% for the fourth quarter of 2019 to 3.54% for the first quarter of 2020. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 3.40% for the quarter ended March 31, 2020 and 3.38% for the quarter ended December 31, 2019.

As a result of the COVID-19 crisis, on March 15th, the Federal Reserve cut the target range for Fed Funds Rate to a range of 0-25 basis points, which had the impact of lowering interest rates on variable rate loans tied to Prime, Libor or Fed Funds as well as the decreases in deposit rates discussed above for the last 15 days in the first quarter. City’s loan portfolio has historically included a significant portion of adjustable rate residential mortgage loans made in markets where City has a presence, and significant commercial loans collateralized with real estate.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned improved modestly from 0.45% at December 31, 2019 to 0.44% at March 31, 2020. Total nonperforming assets decreased from $16.4 million at December 31, 2019 to $16.0 million at March 31, 2020. Total past due loans decreased from $11.4 million, or 0.32% of total loans outstanding, at December 31, 2019 to $10.0 million, or 0.28% of total loans outstanding, at March 31, 2020.

The Company adopted ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” effective January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. ASU No. 2016-16 replaced 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. Results for reporting periods beginning after January 1, 2020 are presented under ASU No. 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As a result of adopting ASU No. 2016-13, the Company increased its allowance for credit losses (“ACL”) by $3.0 million and decreased retained earnings by $2.3 million on January 1, 2020. In addition, the adoption of ASU No. 2016-13 required the Company to “gross up” its previously purchased credit impaired loans through the allowance at January 1, 2020. As a result, the Company increased its ACL and loan balances as of January 1, 2020, by $2.7 million.

As a result of the Company’s quarterly analysis of the adequacy of the ACL, the Company recorded a provision for credit losses of $8.0 million in the first quarter of 2020, compared to a recovery of loan loss provision of $0.8 million for the comparable period in 2019 and a recovery of loan loss provision of $0.1 million for the fourth quarter of 2019. The provision for credit losses recorded in the first quarter of 2020 largely reflects the expected economic impact from the COVID-19 pandemic. The Company’s estimate of future economic conditions used in its CECL estimates is primarily dependent on expected unemployment ranges. As a result of COVID-19, expected unemployment ranges have significantly increased and resulted in an increase in the Company’s ACL of $4.1 million. Additionally, adjustments in qualitative and other factors due to COVID-19 added $3.4 million. Due to changes in the Company’s loan portfolio and loss rates, exclusive of COVID-19, the Company’s ACL increased $1.1 million. During the quarter ended March 31, 2020, the downgrade of a hotel/motel related credit (located in North Central West Virginia) due to occupancy rates continuing to decline as a result of a slowdown in the oil and gas industry resulted in an increase to the ACL of $0.25 million. Partially offsetting these increases in the ACL, were payoffs from purchase credit-impaired loans that released $0.85 million of ACL reserves.

Non-interest Income

During the quarter ended March 31, 2020, the Company sold the entirety of its Visa Inc. Class B common shares (86,605) in a cash transaction which resulted in a pre-tax gain of $17.8 million, or $0.84 diluted per share on an after-tax basis. Additionally, the Company reported $2.4 million of unrealized fair value losses on the Company’s equity securities compared to $0.1 million of unrealized fair value gains on the Company’s equity securities during the first quarter of 2019. The Company’s portfolio of equity securities consists primarily of holdings in First National Corporation (a commercial banking company headquartered in Strasburg, VA) and Eagle Financial Services (a commercial banking company headquartered in Berryville, VA). Exclusive of these items, non-interest income increased from $15.8 million for the first quarter of 2019 to $17.8 million for the first quarter of 2020. This increase was largely attributable to an increase of $0.7 million, or 88.7%, in other income primarily due to fees from loan interest rate swap originations and bank owned life insurance revenues increased $0.7 million due to death benefit proceeds received in the first quarter of 2020. Additionally, service charges increased $0.4 million (5.5%) and trust and investment management fee income increased $0.2 million (9.6%). While revenues for service fees and bankcard revenues for the quarter ending March 31, 2020, were only modestly impacted by COVID-19, such revenues are likely to trend downward for the quarter ended June 30, 2020. Through mid-April 2020, the run rate for these revenues has decreased approximately 25% due to reductions in discretionary spending from our customer base likely attributable to “stay at home” requirements in most markets in which City has a presence.

Non-interest Expenses

During the quarter ended March 31, 2019, the Company incurred $0.3 million of acquisition and integration expenses associated with the acquisitions of Poage and Farmers Deposit Bancorp, Inc. Excluding this expense, non-interest expenses increased $0.3 million, or 1.0%, from $29.2 million in the first quarter of 2019 to $29.5 million in the first quarter of 2020. Salaries and employee benefits increased $0.6 million due primarily to annual salary adjustments, bankcard expense increased $0.3 million, and equipment and software related expenses increased $0.2 million. These increases were partially offset by lower FDIC insurance expense ($0.3 million), occupancy related expense ($0.2 million), and telecommunication expense ($0.2 million).

Balance Sheet Trends

Loans remained stable from December 31, 2019 to March 31, 2020 at $3.61 billion. Increases in commercial real estate loans of $11.2 million (0.8%) were mostly offset by a decrease in residential loans of $10.8 million (0.7%).

Total average depository balances increased $17.3 million, or 0.4%, from the quarter ended December 31, 2019 to the quarter ended March 31, 2020. Average noninterest-bearing demand increased $14.2 million, average time deposit balances increased $3.0 million, and average savings deposit balances increased $2.8 million. These increases were partially offset by lower interest-bearing demand deposit balances of $2.7 million. Following the reduction in the target fed funds rate in mid-March, in order to provide our wealth management clients the best possible return, City transferred approximately $135 million in cash invested on behalf of City’s wealth management customers previously held in bank deposits into a higher yielding investment vehicle not on the bank’s balance sheet.

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2020 was 20.2% compared to 21.3% for the year ended December 31, 2019, and 21.2% for the quarter ended March 31, 2019.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 89.2% and the loan to asset ratio was 71.0% at March 31, 2020. The Company maintained investment securities totaling 18.9% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 52.8% of assets at March 31, 2020. Time deposits fund 26.9% of assets at March 31, 2020, 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 also strongly capitalized. The Company’s tangible equity ratio increased from 11.0% at December 31, 2019 to 11.4% at March 31, 2020. At March 31, 2020, City National Bank’s Leverage Ratio was 9.98%, its Common Equity Tier I ratio was 14.32%, its Tier I Capital ratio was 14.32%, and its Total Risk-Based Capital ratio was 14.82%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 25, 2020, the Board of Directors of the Company approved a quarterly cash dividend of $0.57 per share payable April 30, 2020, to shareholders of record as of April 15, 2020. During the quarter ended March 31, 2020, the Company repurchased 182,000 common shares at a weighted average price of $71.31 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of March 31, 2020, the Company could repurchase approximately 557,000 additional shares under the current program.

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, 2019 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) theuncertainties on the Company’s business, results of operations and financial condition, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on financial markets, the effectiveness of the Company’s work from home arrangements and staffing levels in operational facilities, the impact of market participants on which the Company relies and actions taken by governmental authorities and other third parties in response to the pandemic; (3) 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; (4) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (5) changes in the interest rate environment; (6) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (7) changes in technology and increased competition, including competition from non-bank financial institutions; (8) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers’ performance and creditworthiness; (9) difficulty growing loan and deposit balances; (10) our ability to effectively execute our business plan, including with respect to future acquisitions; (11) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (12) 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; (13) regulatory enforcement actions and adverse legal actions; (14) difficulty attracting and retaining key employees; (15) 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 March 31, 2020 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2020 results and will adjust the amounts if necessary.