City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $5.9 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $19.8 million and diluted earnings of $1.25 per share for the quarter ended March 31, 2021.

Charles R. (“Skip”) Hageboeck, the President and Chief Executive Officer of City Holding Company, commented: “Our country and the communities that we serve are emerging from the COVID-19 pandemic and it is encouraging to see economic activity returning to more “normal” conditions. However, the impacts of this crisis continued to impact our financial performance during the first quarter of 2021. Our reported net interest income dipped $0.7 million from the linked quarter ended December 31, 2020 and our net interest margin dropped 8 basis points to 2.91%. Deposit balances continue to grow primarily as a result of the third round of stimulus payments with average deposit balances increasing over $150 million from the quarter ended December 31, 2020. City continues to participate in the government-sponsored Paycheck Protection Program (“PPP”) loans administered by the Small Business Administration (“SBA”). Thus far, City has assisted customers in obtaining almost $40 million in new PPP loans during the second round.

“A hallmark for City over the last several years has been our asset quality. Our asset quality remains very strong at March 31, 2021. Nonperforming assets, past due loans, and troubled debt restructurings remain at or below the levels reported at December 31, 2020. Deferred commercial loans remained relatively low at approximately 6% of total commercial balances at March 31, 2021. Hotel and lodging related loans comprise $105 million of the $115 million of these deferrals at March 31, 2021, and our hotel and lodging loan customers are experiencing increasing occupancy rates. Residential mortgage deferrals have dropped to approximately $3 million at March 31, 2021.

“Loan growth has been a particular challenge with interest rates at historic lows. Although our residential mortgage origination levels hit record highs in 2020, balances have decreased as some mortgages were refinanced into fixed rate loans not predominately offered by City. Those trends continued in the first quarter of 2021, but we believe that as mortgage rates and fees charged by agencies increase, our mortgage balances will increase. The decline in commercial loans primarily reflects a seasonal customer, as well as pricing pressure from some competitors. As the economy continues to improve, our view is that commercial loans will regain positive momentum.”

Net Interest Income

The Company’s net interest income decreased from $38.2 million during the fourth quarter of 2020 to $37.5 million during the first quarter of 2021. The Company’s tax equivalent net interest income decreased $0.6 million, or 1.7%, from $38.5 million for the fourth quarter of 2020 to $37.9 million for the first quarter of 2021. Lower loan yields (2 basis points) and lower average loan balances ($50 million) decreased interest income by $0.7 million and $0.5 million, respectively, as compared to the quarter ended December 31, 2020. In addition, lower average investment balances ($30 million) decreased interest income by $0.2 million from the quarter ended December 31, 2020. These decreases were partially offset by lower rates paid on interest-bearing liabilities (primarily time deposits) that lowered interest expense by $0.9 million during the quarter ended March 31, 2021. The Company’s reported net interest margin decreased from 2.99% for the fourth quarter of 2020 to 2.91% for the first quarter of 2021.

Balance Sheet Trends

Loans decreased $75.4 million from December 31, 2020 to March 31, 2021, to $3.55 billion. Net of forgiveness received from the SBA of approximately $32 million of PPP loans from the first round, PPP loans increased $7.4 million as a result of the Company’s participation in the second round of the PPP lending. Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans decreased $82.8 million, (2.3%), from December 31, 2020 to $3.48 billion at March 31, 2021. Residential real estate loans decreased $54.8 million (3.5%); commercial real estate loans decreased $12.1 million (0.8%); commercial and industrial loans decreased $9.2 million (2.9%) (excluding PPP loans); and home equity loans decreased $6.5 million (4.7%).

Total average depository balances increased $152.5 million, or 3.4%, from the quarter ended December 31, 2020 to the quarter ended March 31, 2021. Average noninterest-bearing demand deposit balances increased $67.8 million, average savings deposit balances increased $72.5 million, and average interest-bearing demand deposit balances increased $54.7 million. These balances increased despite low average interest rates paid by the Company – 5 basis points for interest-bearing deposits and 6 basis points for savings deposits. We believe that these increases were largely attributable to the third round of Economic Impact Payments as part of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (approximately $180 million). These increases were partially offset by lower average time deposit balances of $42.5 million.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased modestly from 0.38% at December 31, 2020 to 0.39% at March 31, 2021. Total nonperforming assets increased slightly from $13.9 million at December 31, 2020 to $14.0 million at March 31, 2021. Total past due loans decreased from $8.9 million, or 0.25% of total loans outstanding, at December 31, 2020 to $6.6 million, or 0.19% of total loans outstanding, at March 31, 2021.

As a result of the Company’s quarterly analysis of the adequacy of the allowance for credit losses (“ACL”), the Company recorded a recovery of credit losses of $0.4 million in the first quarter of 2021, compared to a provision for credit losses of $8.0 million for the comparable period in 2020 and a provision for credit losses of $0.5 million for the fourth quarter of 2020. The recovery of credit losses recorded in the first quarter of 2021 largely reflects the decline in loan balances ($83 million) from the quarter ended December 31, 2020 which resulted in the release of $0.5 million from the allowance for credit losses during the first quarter of 2021. As a result of an improvement in economic conditions in the Company’s footprint, net charge-offs for the quarter ended March 31, 2021 were negligible.

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 $0.1 million of unrealized fair value losses on the Company’s equity securities during the first quarter of 2021 compared to $2.4 million of unrealized fair value losses on the Company’s equity securities during the first quarter of 2020. The Company’s portfolio of equity securities consists primarily of holdings in First National Corporation (“FXNC”) (a commercial banking company headquartered in Strasburg, VA) and Eagle Financial Services (a commercial banking company headquartered in Berryville, VA). In the first quarter of 2021, the Company sold shares of FXNC and realized a gain of $0.3 million. Exclusive of these items, non-interest income decreased from $17.9 million for the first quarter of 2020 to $16.4 million for the first quarter of 2021. This decrease was largely attributable to a decrease of $1.8 million, or 23.9%, in service charges. In addition, other income, primarily due to lower fees from loan interest rate swap originations, decreased $0.7 million. These decreases were partially offset by higher bankcard revenues ($1.1 million, or 21.5%) compared to the quarter ended March 31, 2020. Bankcard revenue of $6.2 million in the quarter ended March 31, 2021, represents the highest quarterly total in the Company’s history as spending by our customers increased significantly in the month of March.

Non-interest Expenses

Non-interest expenses increased $0.3 million, or 1.2%, from $29.5 million in the first quarter of 2020 to $29.8 million in the first quarter of 2021. FDIC insurance expense increased $0.4 million from the quarter ended March 31, 2020 due to credits utilized in the first quarter of 2020.

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2021 was 20.1% compared to 19.5% for the year ended December 31, 2020, and 20.2% for the quarter ended March 31, 2020.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 73.9% and the loan to asset ratio was 60.2% at March 31, 2021. The Company maintained investment securities totaling 20.6% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 60.9% of assets at March 31, 2021. Time deposits fund 20.5% of assets at March 31, 2021, 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 with tangible equity of $573 million at March 31, 2021. Due primarily to the influx of deposits and unrealized security losses during the quarter ended March 31, 2021, the Company’s tangible equity ratio decreased modestly from 10.3% at December 31, 2020 to 9.9% at March 31, 2021. At March 31, 2021, City National Bank’s Leverage Ratio was 8.91%, its Common Equity Tier I ratio was 14.75%, its Tier I Capital ratio was 14.75%, and its Total Risk-Based Capital ratio was 15.33%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 31, 2021, the Board of Directors of the Company approved a quarterly cash dividend of $0.58 per share payable April 30, 2021, to shareholders of record as of April 15, 2021. On March 31, 2021, 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 February 2019. The Company had repurchased 908,701 shares under the 2019 program. During the quarter ended March 31, 2021, the Company repurchased 75,000 common shares at a weighted average price of $76.71 per share as part of a one million share repurchase plan authorized by the Board of Directors in February 2019. As of March 31, 2021, the Company could repurchase 1,000,000 additional shares under the current program.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 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, 2020 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 March 31, 2021 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2021 results and will adjust the amounts if necessary.