City Holding Company Announces Record Quarterly Earnings

City Holding Company, “the Company” (NASDAQ:CHCO), a $3.4 billion bank holding company headquartered in Charleston, today announced third quarter net income per diluted share of $0.88 and net income of $14.0 million. Compared to the third quarter of 2012, earnings per share increased 23.6% while net income increased 31.8%. For the third quarter of 2013, the Company achieved a return on assets of 1.65%, a return on tangible equity of 18.5%, a net interest margin of 4.47%, and an efficiency ratio of 52.1%.

The Company’s earnings increased in the third quarter of 2013 primarily due to the acquisitions of Virginia Savings Bank in the second quarter of 2012 and the acquisition of Community Financial Corporation (”Community Bank”) in the first quarter of 2013. Net interest income increased $1.1 million from the second quarter of 2013 due to accelerated accretion income from acquired loans paying down and paying off more quickly than initially expected. Accretion income included $2.4 million related to certain credit impaired loans that paid off during the third quarter of 2013 unexpectedly. The Company’s net interest margin improved from 4.35% for the second quarter of 2013 to 4.47% for the third quarter of 2013 as a result of the additional accretion income.

City’s CEO Charles Hageboeck stated that “We continue to be very pleased with the results from our acquisitions of Virginia Savings Bank and Community Bank, especially with our success in resolving problem loans associated with these acquisitions. Primarily as a result of our efforts to effectively workout a number of these problem loans, our past due loans and other asset quality indicators continue to show improvement. While there is still work to be done in regards to credit-impaired loans, particularly those associated with Community Bank, we are pleased with our progress in resolving these acquired loans.”

“City’s net interest margin continues to be a source of strength, with a reported net interest margin of 4.47% for the third quarter of 2013. After adjustment for the positive benefits of accretion relating to our acquisitions, our net interest margin would have been 3.78% for the third quarter of 2013 compared to 3.80% for the third quarter of 2012. We are very pleased to report this increase in spite of the loss of over $50 million of high yielding trust preferred securities and the continuation of historic low interest rates. In addition, we anticipate solid commercial loan growth in the fourth quarter of 2013.”

“As a result of these successes and many others during the quarter, the Company’s quarterly earnings per diluted share of $0.88 represent a new record for City. In addition, our capital levels continue to increase with our tangible capital growing to 9.1% at September 30, 2013,” Hageboeck concluded.

Net Interest Income

The Company’s tax equivalent net interest income increased $1.1 million, or 3.4%, from $31.5 million during the second quarter of 2013 to $32.5 million during the third quarter of 2013. This increase is due to an increase in the accretion related to the acquisitions of Virginia Savings and Community Bank. The Company’s reported net interest margin increased from 4.35% for the second quarter of 2013 to 4.47% for the third quarter of 2013. Excluding the favorable impact of the accretion from the fair value adjustments ($5.0 million for the quarter ended September 30, 2013 and $3.5 million for the quarter ended June 30, 2013), the net interest margin would have been 3.78% for the quarter ended September 30, 2013 and 3.86% for the quarter ended June 30, 2013.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased from 1.33% at June 30, 2013 to 1.15% at September 30, 2013. Excluded from this ratio are purchased credit-impaired loans in which the Company estimated cash flows and estimated a credit mark. These loans are considered performing loans provided that the loan is performing in accordance with the estimated expectations. Such loans would be considered nonperforming loans if the loan’s performance deteriorates below the initial expectations. Total past due loans decreased from $22.6 million, or 0.89% of total loans outstanding, at June 30, 2013 to $18.4 million, or 0.72% of total loans outstanding, at September 30, 2013. Acquired past due loans represent approximately 61% of total past due loans and have declined $0.9 million, or 7.8%, since June 30, 2013. In accordance with regulatory guidance issued in the third quarter of 2012, the Company classifies loans in which the borrower has filed Chapter 7 bankruptcy with the debt discharged by the bankruptcy court and the loan not reaffirmed by the borrower to be troubled debt restructured loans (“TDR’s”). Since the time of this change, TDR’s have increased from $21.5 million at September 30, 2012 to $24.8 million at September 30, 2013. More than 90% of these loans are current with interest and principal payments.

As a result of the Company’s quarterly analysis of the adequacy of the Allowance for Loan Losses (“ALLL”), the Company recorded a provision for loan losses of $1.2 million in the third quarter of 2013, compared to $1.0 for the comparable period in 2012 and $2.0 million for the second quarter of 2013. During the third quarter of 2013, the Company recovered $0.5 million from loans that had previously been charged-off, which had a positive impact on the allowance for loan losses at September 30, 2013. Changes in the amount of the allowance for loan losses and the related provision 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

Excluding investment security transactions, non-interest income increased $0.9 million to $14.5 million in the third quarter of 2013 as compared to $13.6 million in the third quarter of 2012. Service charges increased $0.4 million, or 6.2%, to $7.2 million while bankcard revenues increased $0.4 million, or 11.5%, to $3.5 million. These increases were primarily due to the acquisition of Community Bank.

Non-interest Expenses

Non-interest expenses increased $2.8 million, from $21.8 million in the third quarter of 2012 to $24.7 million in the third quarter of 2013. This increase was primarily related to higher salaries and employee benefits ($1.6 million) and repossessed asset losses ($0.5 million). Salaries and employee benefits increased due to the acquisition of Community Bank ($1.0 million) and higher incentive compensation accruals ($0.2 million). Repossessed asset losses were based on updated appraisals. The Company continually re-evaluates the estimated fair value of properties that have been repossessed by obtaining updated appraisals on at least an annual basis. In addition, occupancy and equipment expense increased $0.3 million and depreciation increased $0.3 million. These increases were also primarily attributable to the acquisition of Community Bank. Overall expense increases associated with the acquisitions of Virginia Savings and Community Bank have continued to be in line with the Company’s expectations.

Balance Sheet Trends

Loans increased $31.1 million (1.2%) from June 30, 2013 to $2.56 billion at September 30, 2013. Residential real estate loans increased $18.7 million (1.6%), commercial and industrial (“C&I”) loans increased $12.9 million (9.3%) and home equity loans increased $2.5 million (1.8%). These increases were partially offset by a decrease in consumer loans ($3.5 million, or 6.4%). The Company strategically decided to reduce consumer loans due to the acquisition of a portfolio of indirect auto loans with unsatisfactory credit quality metrics associated with Community Bank.

Total average depository balances declined $16.6 million, or 0.6%, from the quarter ended June 30, 2013 to the quarter ended September 30, 2013. Time deposits decreased $10.0 million and interest-bearing deposits decreased $7.7 million.

Income Tax Expense

The Company’s effective income tax rate for the third quarter of 2013 was 33.6% compared to 34.3% for the year ended December 31, 2012, and 34.3% for the quarter ended September 30, 2012. The effective rate is based upon the Company’s expected tax rate for the year ending December 31, 2013.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 91.1% and the loan to asset ratio was 75.3% at September 30, 2013. The Company maintained investment securities totaling 10.2% of assets as of this date. The Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 50.3% of assets at September 30, 2013. Time deposits fund 32.3% of assets at September 30, 2013, 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 strongly capitalized. The Company’s tangible equity ratio was 9.1% at September 30, 2013 compared to 9.4% at December 31, 2012 despite the acquisition of Community Bank which lowered this ratio to 8.61% at March 31, 2013. At September 30, 2013, City National Bank’s Leverage Ratio is 9.09%, its Tier I Capital ratio is 12.21%, and its Total Risk-Based Capital ratio is 13.06%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On September 25, 2013, the Board approved a quarterly cash dividend of $0.37 cents per share payable October 31, 2013, to shareholders of record as of October 15, 2013.

City Holding Company is the parent company of City National Bank of West Virginia. City National operates 83 branches across West Virginia, Virginia, Kentucky 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. Such information involves risks and uncertainties that could result in the Company's actual results differing from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company could have adverse legal actions of a material nature; (4) the Company may face competitive loss of customers; (5) the Company may be unable to manage its expense levels; (6) the Company may have difficulty retaining key employees; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balances; (11) the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; (12) continued 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 resulting in either actual losses or other than temporary impairments on such investments; (13) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) recently adopted by the United States Congress and (14) the integration of the operations of City Holding and Community Financial may be more difficult than anticipated. Forward-looking statements made herein reflect management’s expectations as of the date such statements are made. 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 September 30, 2013 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary September 30, 2013 results and will adjust the amounts if necessary.