CHARLESTON, W. Va.--(BUSINESS WIRE)--City Holding Company (NASDAQ:CHCO), a $5.5 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $20.1 million and diluted earnings of $1.25 per share for the quarter ended September 30, 2020. For the third quarter of 2020, the Company achieved a return on assets of 1.46% and a return on tangible equity of 13.8%.
Charles R. (“Skip”) Hageboeck, the President and Chief Executive Officer of City Holding Company, commented: “Like all of the world, City Holding Company and City National Bank have experienced repercussions from the economic slow-down that has accompanied COVID-19. As an essential business, our company has focused on continuing to provide our customers safe access to banking products and services consistent with our reputation for exceptional customer service. In 2020, City was recognized for the third consecutive year by the JD Power organization as the “Highest in Customer Satisfaction” in the North Central US. We have also been highly focused on protecting the health of our employees and customers. Branches were open by appointment only during the initial months of the pandemic, but by the end of the third quarter of 2020, all 94 of our locations were fully open to customers. We are pleased that while many businesses in our nation have had to implement layoffs, we have been fortunate not to have to consider such painful changes, and City’s family of dedicated employees have continued to demonstrate their exceptional commitment to each other, our customers, our communities, and to our company. I thank all of them for their brave and hard work during a very stressful time.”
“The COVID crisis caused the Federal Reserve to lower short-term interest rates to nearly zero during the second quarter of 2020. As a result, deposit rates are very low across all financial institutions. And yet, deposits at banks have ballooned this year. At City, deposits are up nearly $350 million since December 31, 2019 – or about 8%. While the economy continued to recover in the third quarter of 2020, the drop-off in the second quarter of 2020 was extraordinarily steep and thus loan demand outside of the Government sponsored Paycheck Protection Program ("PPP") remains very weak. Despite these lingering effects of COVID-19, City was again able to produce strong results during the third quarter of 2020. Net interest income for the third quarter of 2020 was about flat with the linked quarter. Provision expense was low. Fee income was solid and expenses continue to be well managed. These successes are attributable to the hard working team of City professionals, and I thank them for their dedication and effort.”
“Asset quality seems to be the top concern for analysts who follow banking organizations. In our opinion, City’s asset quality continues to remain solid. As compared to pre-COVID asset quality levels at December 31, 2019, nonperforming assets have improved; past-due loans have improved and troubled-debt restructured loans have improved! Further, the amount of loans in deferment status dropped dramatically during the quarter ended September 30, 2020. As of September 30, 2020, approximately $180 million of commercial loans have been granted deferrals as compared to approximately $430 million as of June 30, 2020. Nearly $160 million of the commercial loan deferments were for hotel and lodging related loans at September 30, 2020. While reduced business and personal travel have lowered occupancy rates for our hotel and lodging loan customers, occupancy rates continued to improve during the third quarter of 2020. As of September 30, 2020, approximately $15 million of mortgage loans have been granted deferrals as compared to approximately $125 million at June 30, 2020.”
Net Interest Income
The Company’s net interest income decreased slightly from $38.1 million during the second quarter of 2020 to $38.0 million during the third quarter of 2020. The Company’s tax equivalent net interest income remained level at $38.3 million for both the second and third quarters of 2020. Lower loan yields (21 basis points) decreased net interest income by $1.5 million and a decrease in accretion fair value adjustments lowered net interest income by $0.5 million. These decreases were essentially offset by an increase in investment income due to higher yields and an increase in balances and a decrease in rates paid on deposits (13 basis points) which increased net interest income by $0.9 million and $0.8 million, respectively. The Company’s reported net interest margin decreased from 3.13% for the second quarter of 2020 to 3.02% for the third quarter of 2020. Excluding the favorable impact of the accretion from fair value adjustments, the net interest margin would have been 2.97% for the quarter ended September 30, 2020 and 3.05% for the quarter ended June 30, 2020.
Credit Quality
The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased from 0.48% at June 30, 2020 to 0.43% at September 30, 2020. Total nonperforming assets decreased from $17.6 million at June 30, 2020 to $15.7 million at September 30, 2020. Total past due loans increased marginally from $7.1 million, or 0.19% of total loans outstanding, at June 30, 2020 to $7.4 million, or 0.20% of total loans outstanding, at September 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 $1.0 million in the third quarter of 2020, compared to a provision for loan losses of $0.3 million for the comparable period in 2019 and a provision for credit losses of $1.25 million for the second quarter of 2020. The provision for credit losses recognized in the third quarter of 2020 primarily relates to changes in outstanding balances in the Company’s loan portfolio and their associated loss rates and downgrades of certain hotel/motel credits during the quarter based on current market conditions which increased the Company’s ACL by $2.0 million and $1.2 million. 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.
Non-interest Income
Non-interest income was $17.0 million for the third quarter of 2020 as compared to $16.7 million for the third quarter of 2019. During the third quarter of 2020, the Company reported $0.5 million of unrealized fair value gains on the Company’s equity securities compared to $0.3 million of unrealized fair value losses on the Company’s equity securities in the third quarter of 2019. Exclusive of these gains, non-interest income decreased from $17.0 million for the third quarter of 2019 to $16.5 million for the third quarter of 2020. This decrease was largely attributable to a decrease of $1.9 million, or 23.1%, 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 ($0.6 million), other income due to fees from loan interest rate swap originations ($0.5 million), and bank owned life insurance revenues due to death benefit proceeds ($0.3 million).
Non-interest Expenses
Non-interest expenses increased $0.3 million (1.1%), from $28.4 million in the third quarter of 2019 to $28.7 million in the third quarter of 2020. This increase was primarily due to an increase in equipment and software related expenses of $0.4 million, FDIC insurance expense of $0.4 million, and other expenses of $0.2 million. These increases were partially offset by decreases in advertising expenses ($0.4 million) and occupancy related expenses ($0.3 million).
Balance Sheet Trends
Loans increased $47.9 million (1.3%) from December 31, 2019 to $3.66 billion at September 30, 2020. As a result of the Company’s participation in the PPP loans administered by the SBA, commercial and industrial loans increased $88.5 million. Excluding PPP loans, total loans decreased $40.6 million, (1.1%), from December 31, 2019 to $3.58 billion at September 30, 2020. Residential real estate loans decreased $19.1 million (1.2%), commercial and industrial loans decreased $12.5 million (4.1%) (excluding PPP loans), home equity loans decreased $8.8 million (5.9%) and consumer loans decreased $3.7 million (6.9%). These decreases were partially offset by an increase in commercial real estate loans of $5.0 million (0.3%). Decreases in loan outstandings are reflective of the low-interest rate environment driving residential mortgage originations toward fixed rate loans and a general lack of borrowing for commercial loans.
Total average depository balances increased $133.4 million, or 3.1%, from the quarter ended June 30, 2020 to the quarter ended September 30, 2020. Average noninterest-bearing demand deposit balances increased $70.8 million, average savings deposit balances increased $56.5 million, and average interest-bearing demand deposit balances increased $37.3 million. These increases were partially offset by a decrease in time deposit balances of $31.2 million. Since December 31, 2019, depository balances have increased $344.2 million (8.4%) due to the infusion of government transfer payments for unemployment insurance, PPP loans and stimulus checks. Additionally, due to very low interest rates across a wide array of investment alternatives, it appears that customers are stockpiling cash in banking institutions.
Income Tax Expense
The Company’s effective income tax rate for the third quarter of 2020 was 20.2% compared to 21.3% for the year ended December 31, 2019, and 21.7% for the quarter ended September 30, 2019.
Capitalization and Liquidity
The Company’s loan to deposit ratio was 82.9% and the loan to asset ratio was 66.5% at September 30, 2020. The Company maintained investment securities totaling 21.5% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 56.6% of assets at September 30, 2020. Time deposits fund 23.6% of assets at September 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 September 30, 2020. At September 30, 2020, City National Bank’s Leverage Ratio was 9.32%, its Common Equity Tier I ratio was 14.46%, its Tier I Capital ratio was 14.46%, and its Total Risk-Based Capital ratio was 15.04%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.
On September 30, 2020, the Board of Directors of the Company approved a quarterly cash dividend of $0.57 per share payable October 30, 2020, to shareholders of record as of October 15, 2020. During the quarter ended September 30, 2020, the Company repurchased 231,000 common shares at a weighted average price of $59.49 as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of September 30, 2020, the Company could repurchase approximately 247,000 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. The Company recently commenced construction of a new branch in Spring Mills, WV. Located in Berkeley County, the branch will serve one of West Virginia’s fastest growing markets in the second-most populous of West Virginia’s 55 counties.
