City Holding Company Announces Quarterly Results | Q1 2019

CHARLESTON, W. Va.–(BUSINESS WIRE)–City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $4.9 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $21.6 million and diluted earnings of $1.30 per share for the quarter ended March 31, 2019. For the first quarter of 2019, the Company achieved a return on assets of 1.76% and a return on tangible equity of 17.7%. In addition, reported net interest income increased $7.4 million (22.7%) from the quarter ended March 31, 2018, while net interest income exclusive of accretion from fair value adjustments from acquisitions increased $7.2 million (22.2%) from the quarter ended March 31, 2018.

Net Interest Income

The Company’s net interest income increased from $36.4 million during the fourth quarter of 2018 to $40.1 million during the first quarter of 2019. During the first quarter of 2019, the Company’s tax equivalent net interest income increased $3.6 million, or 10.0%, from $36.6 million for the fourth quarter of 2018 to $40.3 million for the first quarter of 2019. The acquisitions of Poage and Farmers Deposit accounted for $3.0 million of this increase. In addition, higher loan yields (22 basis points) increased net interest income by $1.1 million while higher average loan balances ($59.1 million) increased net interest income by $0.6 million. These increases were partially offset by an increase in rates paid on deposits ($0.5 million) and decreased income from deposits in depository institutions ($0.4 million). The Company’s reported net interest margin increased from 3.55% for the fourth quarter of 2018 to 3.66% for the first quarter of 2019. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 3.61% for the quarter ended March 31, 2019 and 3.50% for the quarter ended December 31, 2018.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned improved from 0.54% at December 31, 2018 to 0.43% at March 31, 2019. Total nonperforming assets decreased from $19.4 million at December 31, 2018 to $15.4 million at March 31, 2019. 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 decreased from $13.1 million, or 0.37% of total loans outstanding, at December 31, 2018 to $11.0 million, or 0.31% of total loans outstanding, at March 31, 2019.

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 loss provision of $0.8 million in the first quarter of 2019, compared to a provision for loan loss provision of $0.2 million for the comparable period in 2018 and a recovery of loan loss provision of $0.4 million for the fourth quarter of 2018. The recovery of loan loss provision recorded in the first quarter of 2019 reflects a general improvement in the Company’s historical loss rates used to compute the allowance not specifically allocated to individual credits and a modest decline in loans outstanding from December 31, 2018. 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 $15.9 million for the first quarter of 2019 as compared to $14.5 million for the first quarter of 2018. During the first quarter of 2019, the Company realized a security gain of $0.1 million due to the call of a security and $0.1 million of unrealized fair value gains on the Company’s equity securities compared to $0.3 million of unrealized fair value gains on the Company’s equity securities in the first quarter of 2018. The Company’s portfolio of equity securities is comprised primarily of equity investments in community bank holding companies and perpetual preferred securities of national bank holding companies. As of April 17, 2019, the Company’s portfolio of community bank holding company equities consists primarily of the following: First National Corporation (FXNC) (4.0% ownership); Eagle Financial Services, Inc. (EFSI) (1.5% ownership); Summit Financial Corporation (SMMF) (<1% ownership); Potomac Bancshares, Inc. (PTBS) (<1% ownership). Exclusive of these gains, non-interest income increased from $14.2 million for the first quarter of 2018 to $15.8 million for the first quarter of 2019. This increase was largely attributable to an increase of $0.6 million, or 14.7%, in bankcard revenues and an increase of $0.5 million, or 6.7%, in service charges, with $0.4 million and $0.3 million, respectively, attributable to the acquisitions of Poage and Farmers Deposit. In addition, bank owned life insurance revenues increased $0.2 million due to death benefit proceeds received in the first quarter of 2019 and other income increased $0.2 million.

Non-interest Expenses

During the quarter ended March 31, 2019, the Company incurred an additional $0.3 million of acquisition and integration expenses associated with the acquisitions of Poage and Farmers Deposit. Excluding this expense, non-interest expenses increased $4.2 million (16.9% increase), from $24.9 million in the first quarter of 2018 to $29.2 million in the first quarter of 2019. This increase was primarily due to an increase in salaries and employee benefits of $2.0 million due primarily to the acquisitions of Poage and Farmers Deposit ($0.9 million) and annual salary adjustments ($0.7 million). In addition, other expenses increased $1.1 million, equipment and software related expenses increased $0.4 million and occupancy related expenses increased $0.3 million. These increases were primarily attributable to the acquisitions of Poage and Farmers Deposit.

Balance Sheet Trends

Loans decreased $28.3 million (0.8%) from December 31, 2018 to $3.56 billion at March 31, 2019. Commercial real estate loans decreased $18.8 million (1.3%), residential real estate loans decreased $9.7 million (0.6%), and home equity loans decreased $1.2 million (0.8%). These decreases were partially offset by an increase in commercial and industrial loans of $3.0 million (1.1%).

Total average depository balances increased $380.0 million, or 10.5%, from the quarter ended December 31, 2018 to the quarter ended March 31, 2019. This growth was primarily attributable to deposits acquired from Poage and Farmers Deposit ($472.0 million) that were outstanding for the entire quarter ended March 31, 2019, as compared to less than one month during the quarter ended December 31, 2018. Exclusive of this contribution, average time deposit balances increased $28.5 million, and average savings deposit balances increased $15.1 million. These increases were partially offset by lower noninterest-bearing demand deposit balances of $12.6 million.

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2019 was 21.2% compared to 20.5% for the year ended December 31, 2018, and 20.0% for the quarter ended March 31, 2018.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 88.0% and the loan to asset ratio was 72.4% at March 31, 2019. The Company maintained investment securities totaling 17.0% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 54.1% of assets at March 31, 2019. Time deposits fund 28.1% of assets at March 31, 2019, 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 10.0% at December 31, 2018 to 10.4% at March 31, 2019. At March 31, 2019, City National Bank’s Leverage Ratio was 9.45%, its Common Equity Tier I ratio was 13.89%, its Tier I Capital ratio was 13.89%, and its Total Risk-Based Capital ratio was 14.36%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 27, 2019, the Board of Directors of the Company approved a quarterly cash dividend of $0.53 per share payable April 30, 2019, to shareholders of record as of April 15, 2019. On February 27, 2019, the Company announced that the Board of Directors authorized the Company to buy back up to 1,000,000 shares of its common stock (approximately 6% of outstanding shares) in open market transactions at prices that are accretive to the earnings per share of continuing shareholders. No time limit was placed on the duration of the share repurchase program. As part of this authorization, the Company terminated its previous repurchase program that was approved in September 2014. The Company had repurchased 888,243 shares under the 2014 program. During the quarter ended March 31, 2019, the Company repurchased 55,000 common shares at a weighted average price of $74.69. As of March 31, 2019, the Company could repurchase approximately 945,000 additional shares under the current program.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 97 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; (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 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, 2019 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2019 results and will adjust the amounts if necessary.