City Holding Company Announces Second Quarter Results

City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $5.5 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $18.3 million and diluted earnings of $1.12 per share for the quarter ended June 30, 2020. For the second quarter of 2020, the Company achieved a return on assets of 1.35% and a return on tangible equity of 12.6%.

Charles R. (“Skip”) Hageboeck, the President and Chief Executive Officer of City Holding Company, commented: “As the impact of COVID-19 continues to disrupt the communities that we serve and economic conditions of the United States and worldwide, City was able to produce results that we believe will compare very favorably amongst our peers. As we operate under these conditions, our staff members continue to provide excellent service to our customers via our drive-thrus, limited in-person branch appointments and our various electronic options, including our mobile platform which recently underwent a successful and well received upgrade. For the third year in a row, J.D. Power recognized City for its exceptional customer service by naming City for providing the highest level of customer satisfaction in the north central region of the U.S.”

“In early April our retail and commercial staff were very busy assisting our customers in obtaining Paycheck Protection Program (“PPP”) loans administered by the Small Business Administration (“SBA”). As a result of these efforts and the demand level of our customers, City originated over 1,500 PPP loans totaling over $85 million, with an average balance of approximately $60,000 per PPP loan. As a result of these loans, City recognized approximately $0.3 million of loan fees in the quarter ended June 30, 2020 and expects to recognize approximately $3.0 million, net of associated expenses, over the life of these PPP loans.”

“As of June 30, 2020, approximately $430 million of commercial loans have been granted deferrals as compared to approximately $380 million as of April 24, 2020, while approximately $125 million of mortgage loans have been granted deferrals as June 30, 2020, as compared to approximately $80 million at April 24, 2020. At June 30, 2020, approximately $260 million of the commercial loan deferments were for hotel and lodging related loans. We know that our hotel and lodging loan customers continue to suffer low demand as a result of reduced business and personal travel. However, we are encouraged by reports from certain hotel and lodging loan customers that, although still depressed compared to pre-pandemic periods, occupancy rates have improved during the past 30-45 days.”

Net Interest Income

The Company’s net interest income decreased from $40.4 million during the first quarter of 2020 to $38.1 million during the second quarter of 2020. During the second quarter of 2020, the Company’s tax equivalent net interest income decreased $2.3 million, or 5.7%, from $40.6 million for the first quarter of 2020 to $38.3 million for the second quarter of 2020. Lower loan yields (42 basis points) and lower investment yields (34 basis points) decreased net interest income by $3.8 million and $0.9 million, respectively. City has approximately $715 million of commercial loans tied to LIBOR rates, and the average 3 month Libor rate fell from 1.40% in for the quarter ended March 31, 2020 to 0.35% for the quarter ended June 30, 2020. The yield on investment securities decreased predominantly as a result of additional securities purchased in the quarter ended June 30, 2020 due to increased liquidity. Approximately $100 million of new securities were purchased that are tied to one month LIBOR rates and approximately $80 million of additional securities were purchased at lower yields than our overall portfolio yield. These decreases were partially offset by a decrease in rates paid on deposits (20 basis points) and an increase in average loan balances ($51.3 million) which increased net interest income by $1.5 million and $0.6 million, respectively. The Company’s reported net interest margin decreased from 3.54% for the first quarter of 2020 to 3.13% for the second quarter of 2020. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 3.05% for the quarter ended June 30, 2020 and 3.40% for the quarter ended March 31, 2020.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased slightly from 0.44% at March 31, 2020 to 0.48% at June 30, 2020. Total nonperforming assets increased from $16.0 million at March 31, 2020 to $17.6 million at June 30, 2020. Total past due loans decreased from $10.0 million, or 0.28% of total loans outstanding, at March 31, 2020 to $7.1 million, or 0.19% of total loans outstanding, at June 30, 2020.

As a result of the Company’s quarterly analysis of the adequacy of the allowance for credit losses (“ACL”), the Company recorded a provision for credit losses of $1.25 million in the second quarter of 2020, compared to a recovery of loan loss provision of $0.6 million for the comparable period in 2019 and a provision for credit losses of $8.0 million for the first quarter of 2020. The provision for credit losses is largely dependent on expected unemployment ranges. The expected unemployment ranges utilized at June 30, 2020, have not changed significantly from those utilized at March 31, 2020 which reflected the expected economic impact of the COVID-19 pandemic. Additionally, adjustments in qualitative and other factors have not been revised significantly from March 31, 2020, to June 30, 2020. The provision for credit losses recognized in the second quarter of 2020 primarily relates to updated valuations for two specific credits during the quarter based on current market conditions which increased the Company’s ACL by $1.7 million. Partially offsetting these increases in the ACL was a decrease in the ACL due to lower amounts of DDA overdrafted balances which released $0.5 million of ACL reserves. Due to the guarantee from the SBA for the PPP loans that were issued during the quarter ended June 30, 2020, no reserve for credit losses was deemed necessary for these loans.

Non-interest Income

Non-interest income was $14.6 million for the second quarter of 2020 as compared to $17.8 million for the second quarter of 2019. During the second quarter of 2020, the Company reported $0.2 million of unrealized fair value gains on the Company’s equity securities compared to $0.1 million of unrealized fair value gains on the Company’s equity securities in the second quarter of 2019. Exclusive of these gains, non-interest income decreased from $17.7 million for the second quarter of 2019 to $14.4 million for the second quarter of 2020. This decrease was largely attributable to a decrease of $2.8 million, or 36.4%, in service charges as average deposit balances have increased during the COVID-19 pandemic. In addition, other income decreased $0.8 million due to recognition of a $0.7 million gain from the sale of our Virginia Beach, VA, branch in June 2019. These decreases were partially offset by increases in our bankcard revenues ($0.4 million) and trust and investment management fee income ($0.2 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 Bankshare, Inc. and Farmers Deposit Bankcorp, Inc. Excluding this expense, non-interest expenses decreased $1.8 million (5.8%), from $30.2 million in the second quarter of 2019 to $28.5 million in the second quarter of 2020. This decrease was primarily due to a decrease in salaries and employee benefits of $0.9 million due primarily to lower health insurance and incentive expenses. Additionally, other expenses decreased $0.5 million, occupancy related expenses decreased $0.2 million, FDIC expense decreased $0.2 million and repossessed asset losses decreased $0.2 million. These decreases were partially offset by an increase in equipment and software related expenses of $0.3 million.

Balance Sheet Trends

Loans increased $49.5 million (1.4%) from December 31, 2019 to $3.67 billion at June 30, 2020. As a result of the Company’s participation in the PPP loans administered by the SBA, commercial and industrial loans increased $88.4 million. Excluding PPP loans, total loans decreased $39.0 million, (1.1%), from December 31, 2019 to $3.58 billion at June 30, 2020. Commercial and industrial loans decreased $27.4 million (8.9%) (excluding PPP loans), residential real estate loans decreased $9.3 million (0.6%), home equity loans decreased $6.3 million (4.2%) and DDA overdrafts decreased $2.1 million (43.3%). These decreases were partially offset by an increase in commercial real estate loans of $7.9 million (0.5%).

Total average depository balances increased $235.4 million, or 5.8%, from the quarter ended March 31, 2020 to the quarter ended June 30, 2020. Average noninterest-bearing demand deposit balances increased $191.6 million, average savings deposit balances increased $31.6 million, and average interest-bearing demand deposit balances increased $23.9 million. We believe that these increases were largely attributable to stimulus checks received by our customers from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (approximately $90 million) and proceeds from PPP loans (approximately $90 million). These increases were partially offset by a decrease in time deposit balances of $11.6 million.

Income Tax Expense

The Company’s effective income tax rate for the second quarter of 2020 was 20.6% compared to 21.3% for the year ended December 31, 2019, and 20.4% for the quarter ended June 30, 2019.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 83.1% and the loan to asset ratio was 66.3% at June 30, 2020. The Company maintained investment securities totaling 19.6% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 55.5% of assets at June 30, 2020. Time deposits fund 24.3% of assets at June 30, 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 continues to be strongly capitalized. The Company’s tangible equity ratio decreased from 11.0% at December 31, 2019 to 10.6% at June 30, 2020. At June 30, 2020, City National Bank’s Leverage Ratio was 9.29%, its Common Equity Tier I ratio was 14.55%, its Tier I Capital ratio was 14.55%, and its Total Risk-Based Capital ratio was 15.15%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On June 24, 2020, the Board of Directors of the Company approved a quarterly cash dividend of $0.57 per share payable July 31, 2020, to shareholders of record as of July 15, 2020. During the quarter ended June 30, 2020, the Company repurchased 79,000 common shares at a weighted average price of $61.75 as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of June 30, 2020, the Company could repurchase approximately 478,000 additional shares under the plan.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 94 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 June 30, 2020 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary June 30, 2020 results and will adjust the amounts if necessary.