City Holding Company Announces Record Annual Earnings

City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $5.8 billion bank holding company headquartered in Charleston, West Virginia, today announced record net income of $89.6 million and diluted earnings of $5.55 per share for the year ended December 31, 2020.

City’s CEO Charles Hageboeck stated that, “2020 was a year unlike any before for City Holding Company, City National Bank, the financial industry, and the world. COVID-19 has impacted all facets of our lives from personal to professional. As a result of disruptions to our communities and the economy, City’s staff was presented with many unusual and unforeseen challenges during 2020. While the task at hand for our Company and employees was more difficult, our employees rose to the occasion and not only persevered, but excelled at providing outstanding service to our customers. For the third year in a row, City was recognized by the JD Power organization as the “Highest in Customer Satisfaction” in the North Central US. I applaud our employees for this achievement, particularly in the midst of a world-wide pandemic.”

“The COVID-19 crisis also created pressure on financial results. As a result of the pandemic, the Federal Reserve slashed interest rates to nearly zero in mid-March. Consequently, both loan and deposit rates fell and net interest margins for financial institutions contracted significantly in 2020. City’s net interest margin declined by 43 basis points and our reported net interest income decreased $6.8 million. While deposit rates dropped precipitously, deposit balances at banks increased dramatically, with total deposits at City increasing $576 million, or 14.1%, from December 31, 2019 to December 31, 2020. As the economy flattened during 2020, commercial loan demand for the majority of 2020 was weak, except for Government-sponsored Paycheck Protection Program (“PPP”) loans administered by the Small Business Administration (“SBA”). During the fourth quarter however, City had commercial loan growth of $32 million, or approximately 7.3%, on an annualized basis, exclusive of PPP loan repayments.”

“Asset quality remains in the forefront for those in the investment community focused on financial institutions. City’s asset quality remains stellar at December 31, 2020. Nonperforming assets, past due loans, and troubled debt restructurings at December 31, 2020, are all below the levels reported at December 31,2019. City has also continued to see a decline in deferred loans as of the quarter ended December 31, 2020. Commercial loan deferrals have dropped from $180 million at September 30, 2020 to $99 million at December 31, 2020. Of that, $88 million of the commercial deferrals at December 31, 2020 were for hotel and lodging related loans. While occupancy levels for our loan customers in this industry are still below pre-pandemic levels, our loan customers are continuing to see occupancy levels continue to slowly increase. Residential mortgage deferrals at December 31, 2020 were approximately $9 million.”

“In summary, 2020 presented a myriad of obstacles for all of us to overcome and I am pleased with how City and our employees managed these obstacles and are moving into 2021 from a position of strength.”

Net Interest Income

The Company’s net interest income decreased from $161.4 million for the year ended December 31, 2019 to $154.6 million for the year ended December 31, 2020. The Company’s tax equivalent net interest income decreased $6.5 million, or 4.0%, from $162.2 million for the year ended December 31, 2019 to $155.7 million for the year ended December 31, 2020. Lower loan yields (68 basis points) and investment yields (48 basis points) decreased net interest income by $24.5 million and $5.4 million, respectively. These decreases were partially offset by lower rates paid on interest bearing liabilities (40 basis points), higher investment balances ($195.9 million), and higher commercial loan balances ($99.3 million, driven largely by PPP loans) which increased net interest income by $13.1 million, $6.5 million, and $4.7 million, respectively. In addition, the Company recognized $1.6 million of loan fees associated with PPP loans during 2020. The Company’s reported net interest margin declined from 3.59% for the year ended December 31, 2019 to 3.16% for the year ended December 31, 2020. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.08% for the year ended December 31, 2020 and 3.51% for the year ended December 31, 2019.

The Company’s net interest income increased from $38.0 million during the third quarter of 2020 to $38.2 million during the fourth quarter of 2020. During the fourth quarter of 2020, the Company’s tax equivalent net interest income increased $0.2 million, or 0.6%, to $38.5 million from $38.3 million during the third quarter of 2020. Higher investment balances ($133.3 million) and lower rates on interest bearing deposits (12 basis points) increased net interest income by $0.9 million and $0.8 million, respectively. In addition, loan fees increased $0.8 million due to an increase in PPP loan fees recognized as $33.1 million of PPP loans were fully repaid by the SBA during the quarter ended December 31, 2020. These increases were partially offset by lower investment yields (51 basis points) and lower loan yields (7 basis points) which decreased net interest income by $1.6 million and $0.7 million, respectively. The Company’s reported net interest margin declined from 3.02% for the third quarter of 2020 to 2.99% for the fourth quarter of 2020. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 2.94% for the quarter ended December 31, 2020 and 2.97% for the quarter ended September 30, 2020.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased from 0.45% at December 31, 2019 to 0.38% at December 31, 2020. Total nonperforming assets decreased from $16.4 million at December 31, 2019 to $13.9 million at December 31, 2020. 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 $11.4 million, or 0.32% of total loans outstanding, at December 31, 2019 to $8.9 million, or 0.25% of total loans outstanding, at December 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 $0.5 million in the fourth quarter of 2020 and $10.7 million for the year ended December 31, 2020, compared to a recovery of credit losses of $0.1 million and $1.3 million for the comparable periods in 2019. The provision for credit losses recorded during 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 their associated loss rates, exclusive of COVID-19, the Company’s ACL increased by $3.1 million during 2020, while downgrades of certain credit relationships resulted in an increase in the ACL of $2.9 million during 2020. Partially offsetting these increases in the ACL, was a decrease in the ACL due to the upgrade of a specific credit that was downgraded in 2017, but has since seen improved financial performance. This upgrade released $2.2 million of ACL reserves during 2020.

Non-interest Income

Non-interest income was $82.7 million for 2020 as compared to $68.5 million for 2019. During 2020, the Company sold the entirety of its Visa Inc. Class B common shares (86,605 shares) 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 $0.9 million of unrealized fair value losses on the Company’s equity securities compared to $0.9 million of unrealized fair value gains on the Company’s equity securities during 2019. Exclusive of these items, non-interest income decreased from $67.5 million for the year ended December 31, 2019 to $65.6 million for the year ended December 31, 2020. This decrease was largely attributable to a decrease of $5.8 million, or 18.3%, in service charges as average deposit balances have increased during the COVID-19 pandemic. This decrease was partially offset by an increase of $2.0 million, or 9.3%, in bankcard revenues, an increase of $0.7 million, or 17.3%, in other income (largely due to fees from loan interest rate swap originations), an increase of $0.7 million in bank owned life insurance due to higher death benefit proceeds received during 2020 compared to 2019, and an increase of $0.6 million in trust and investment management fee income.

Non-interest income was $17.7 million during the quarter ended December 31, 2020 as compared to $18.0 million during the quarter ended December 31, 2019. During the fourth quarter of 2020, the Company reported $0.8 million of unrealized fair value gains on the Company’s equity securities compared to $0.9 million of unrealized fair value gains on the Company’s equity securities during the fourth quarter of 2019. Exclusive of these unrealized fair value gains, non-interest income decreased from $17.1 million for the fourth quarter of 2019 to $16.9 million for the fourth quarter of 2020. This decrease was largely attributable to a decrease of $1.5 million, or 17.8%, in service charges as average deposit balances have increased during the COVID-19 pandemic. This decrease was partially offset by increases in our bankcard revenues ($0.8 million) and other income due primarily to fees from loan interest rate swap originations ($0.3 million).

Non-interest Expenses

During 2019, the Company recognized $0.8 million of acquisition and integration expenses associated with the completed acquisitions of Poage Bankshares, Inc. (“Poage”) and Farmers Deposit Bancorp, Inc. (“Farmers”). Excluding these expenses, non-interest expenses decreased from $116.8 million for 2019 to $115.3 million for 2020. This decrease was primarily due to a decrease in occupancy related expense of $0.8 million, other expenses of $0.8 million (largely on the strength of a gain from the sale of a branch bank location acquired in connection with the acquisition of Farmers), advertising of $0.6 million, repossessed asset losses of $0.4 million, and telecommunication expense of $0.3 million. These decreases were partially offset by an increase in equipment and software related expenses ($1.2 million), bankcard expenses ($0.3 million), and FDIC insurance expense ($0.2 million).

Non-interest expenses decreased $0.4 million from $29.0 million in the quarter ended December 31, 2019 to $28.6 million in the quarter ended December 31, 2020. This decrease was primarily due to a decrease in other expenses of $0.5 million, repossessed asset losses of $0.3 million, and legal and professional fees of $0.3 million. These decreases were partially offset by increases in FDIC insurance expense ($0.4 million) and equipment and software related expense ($0.4 million).

Balance Sheet Trends

Loans increased $6.0 million (0.2%) from December 31, 2019 to $3.62 billion at December 31, 2020. Largely as a result of the Company’s participation in the PPP loans administered by the SBA, commercial and industrial loans increased $65.0 million. The Company originated $88.5 million of PPP loans, with $33.1 million of these loans being repaid by the SBA as of December 31, 2020. Excluding outstanding PPP loans, total loans decreased $49.4 million, (1.4%), from December 31, 2019 to $3.57 billion at December 31, 2020. Residential real estate loans decreased $52.7 million (3.2%), home equity loans decreased $12.5 million (8.4%) and consumer loans decreased $6.6 million (12.1%). These decreases were partially offset by an increase in commercial real estate loans of $15.0 million (1.0%) and commercial and industrial loans of $9.5 million (3.1%) (excluding PPP loans). Decreases in loan outstandings are reflective of the low-interest rate environment driving residential mortgage originations toward fixed rate loans.

Total average depository balances for the year ended December 31, 2020 increased $306.7 million, or 7.6%, as compared to the year ended December 31, 2019. Average noninterest bearing demand deposits increased $217.6 million, average savings deposits increased $94.4 million, and average interest bearing demand deposits increased $33.6 million. These increases were partially offset by a decrease in average time deposits of $38.9 million. These increases were likely associated with the infusion of government transfer payments for unemployment insurance, PPP loans and stimulus checks issued early in the second quarter of 2020 and again in December 2020.

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2020 was 17.0% and 19.5%, respectively, compared to 21.8% and 21.3% for the comparable periods in 2019. The Company’s effective tax rate declined for the year ended December 31, 2020 due to higher tax exempt loan interest income, an increase in bank owned life insurance death benefit proceeds, an increase in low income housing tax credits due to growth in such investments, and the ability to utilize a net operating loss obtained from an acquisition via the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Capitalization and Liquidity

The Company’s loan to deposit ratio was 77.9% and the loan to asset ratio was 62.9% at December 31, 2020. The Company maintained investment securities totaling 20.9% of assets as of the same date. The Company’s deposit mix is weighted toward checking and saving accounts that fund 58.9% of assets at December 31, 2020. Time deposits fund 21.9% of assets at December 31, 2020, but very few of these deposits are in accounts that have balances of more than $250,000.

The Company continues to be strongly capitalized with tangible equity growing from $538 million at December 31, 2019 to $583 million at December 31, 2020. Due to the influx of deposits during 2020, the Company’s tangible equity ratio decreased from 11.0% at December 31, 2019 to 10.3% at December 31, 2020. At December 31, 2020, City National Bank’s Leverage Ratio was 8.97%, its Common Equity Tier I ratio was 14.10%, its Tier I Capital ratio was 14.10%, and its Total Risk-Based Capital ratio was 14.68%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On December 16, 2020, the Board approved a quarterly cash dividend of $0.58 cents per share payable January 29, 2021, to shareholders of record as of January 15, 2021. This dividend increase represents a 1.75% increase from the $0.57 per share paid on October 30, 2020. During the year ended December 31, 2020, the Company repurchased 573,000 common shares at a weighted average price of $63.68 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of December 31, 2020, the Company could repurchase approximately 166,000 shares under the current 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) the uncertainties 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 December 31, 2020 Form 10-K. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2020 results and will adjust the amounts if necessary .