City Holding Company Announces Record Annual Earnings

City Holding Company, “the Company” (NASDAQ:CHCO), a $3.4 billion bank holding company headquartered in Charleston, today announced net income of $48.7 million, or $3.06 per diluted share, for the year ended December 31, 2013. City’s net income increased $9.7 million from 2012 due primarily to the acquisitions of Virginia Savings Bank in the second quarter of 2012 and Community Financial Corporation (“Community Bank”) in the first quarter of 2013. For 2013, the Company achieved a return on assets of 1.44%, a return on tangible equity of 16.4%, a net interest margin of 4.33%, and an efficiency ratio of 55.5%. Despite $5.5 million of merger-related expenses, 2013’s financial performance outpaced 2012’s results.

For the fourth quarter of 2013 the Company reported net income of $13.7 million, or $0.86 per diluted share. The Company achieved a return on assets of 1.61%, a return on tangible equity of 17.7%, a net interest margin of 4.33%, and an efficiency ratio of 51.7% in the fourth quarter of 2013.

City’s CEO Charles Hageboeck stated that, “2013 was a record year for City with reported earnings of $3.06 per diluted share despite merger-related expenses of $5.5 million ($0.23 per diluted share on an after tax basis). While the results from our acquisitions of Virginia Savings Bancorp and Community Bank have been in line with our expectations, the results of resolving problem loans associated with these acquisitions have exceeded our expectations. This has largely been due our credit and lending teams’ ability to effectively workout a number of problem loans. As a result of these efforts, our nonperforming loans, past due loans, and other asset quality measures continue to show improvement. Although our work is not yet complete in regards to acquired problem assets, particularly those related to Community Bank, we expect to have less efforts concentrated in these endeavors during 2014.”

“During 2013, our reported net interest margin increased from 3.96% in 2012 to 4.33% for 2013. Excluding the positive impact of accretion relating to our acquisitions, our net interest margin only dropped from 3.85% for 2012 to 3.83% for 2013 despite the loss of over $50 million of high yielding trust preferred securities and continued historically low interest rates. Excluding the acquisition of Community Bank, our loans grew $87.7 million, or 4.1%, from December 31, 2012. This growth was fueled by an increase of $59.4 million (5.8%) in residential real estate loans and $42.9 million in commercial loans (4.6%).”

“I am also excited that in less than one year, the Company’s tangible capital rebounded after dropping to 8.6% following the Community Bank acquisition to 9.5% at December 31, 2013. At City, we are excited about our future and are poised to take advantage of the opportunities ahead.”

Net Interest Income

The Company’s tax equivalent net interest income increased $27.4 million, or 27.8%, from $98.5 million in 2012 to $125.9 million in 2013. This increase is due primarily to loan growth from the acquisition of Community Bank as of January 9, 2013 and accretion of the fair value adjustments related to the acquisitions of Virginia Savings Bank and Community Bank. The Company’s reported net interest margin increased from 3.96% for the year ended December 31, 2012 to 4.33% for the year ended December 31, 2013. Excluding the favorable impact of the accretion from the fair value adjustments ($14.6 million for the year ended December 31, 2013 and $2.6 million for the year ended December 31, 2012), the net interest margin would have been 3.83% for the year ended December 31, 2013 and 3.85% for the year ended December 31, 2012.

During the fourth quarter of 2013, the Company’s tax equivalent net interest income decreased $0.3 million, or 1.1%, from $32.5 million during the third quarter of 2013 to $32.2 million. The Company’s reported net interest margin decreased from 4.47% for the third quarter of 2013 to 4.33% for the fourth quarter of 2013. Excluding the favorable impact of the accretion from the fair value adjustments ($3.9 million for the quarter ended December 31, 2013 and $5.0 million for the quarter ended September 30, 2013), the net interest margin would have been 3.81% for the quarter ended December 31, 2013 and 3.78% for the quarter ended September 30, 2013.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased slightly from 1.28% at December 31, 2012 to 1.20% at December 31, 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 increased from $13.0 million, or 0.60% of total loans outstanding, at December 31, 2012 to $19.5 million, or 0.75% of total loans outstanding, at December 31, 2013. Acquired past due loans represent approximately 64% of total past due loans and have declined $4.0 million, or 24.2%, since March 31, 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 $25.1 million at December 31, 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 ALLL, the Company recorded a provision for loan losses of $1.9 million in the fourth quarter of 2013 and $6.8 million for the year ended December 31, 2013 compared to $1.8 million and $6.4 million of the comparable periods in 2012. During the fourth quarter of 2013 the Company re-estimated the expected cash flows from its purchased credit impaired loans, which resulted in a $0.5 million addition to the ALLL. The provision for loan losses recorded during 2013 reflects difficulties encountered by certain commercial borrowers of the Company during the year, the downgrade of their related credits and management’s assessment of the impact of these difficulties on the ultimate collectability of the loans. 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.

Investment Securities Gains/(Losses)

During 2013, the Company realized investment gains of $0.7 million associated with the calls of trust preferred securities. In addition, the Company also recognized gains of $0.1 million from the sale of certain equity positions related to community banks and bank holding companies.

Non-interest Income

Exclusive of net investment securities gains, non-interest income increased $2.9 million to $57.2 million for the year ended December 31, 2013 as compared to $54.3 million for the year ended December 31, 2012. Service charges increased $1.2 million, or 4.5%, to $27.6 million and bankcard revenues increased $1.1 million, or 9.0%, to $13.5 million for the year ended December 31, 2013. These increases were primarily due to the acquisition of Community Bank.

Exclusive of net investment securities gains, total non-interest income was flat for the fourth quarter of 2013 as compared to the fourth quarter of 2012. A decrease of $0.4 million in other income was essentially offset by an increase of $0.3 million in bankcard revenue during the fourth quarter of 2013.

Non-interest Expenses

During 2013, the Company recognized $5.5 million of acquisition and integration expenses associated with the completed acquisition of Community Bank. In comparison, during 2012, the Company recorded $4.7 million of acquisition and integration expenses associated with the completed acquisition of Virginia Savings Bancorp and the impending acquisition of Community Bank. Excluding these expenses, noninterest expenses increased $14.0 million from $82.7 million for the year ended December 31, 2012 to $96.7 million for the year ended December 31, 2013. Salaries and employee benefits increased $7.9 million due primarily to additional employees associated with the acquisition of Community Bank. Normal annual salary increases, increased pension costs, and increased incentive compensation accruals also contributed to the increase in salaries and employee benefits. In addition, other expenses increased $2.0 million, occupancy and equipment expenses increased $1.7 million, and depreciation expense increased $1.1 million. These increases were primarily attributable to the acquisition of Community Bank and were in line with the Company’s expectations. These increases were partially offset by a decrease in repossessed asset losses as a result of losses recognized in 2012.

For the fourth quarter of 2013, total non-interest expenses increased $2.9 million, from $21.3 million for the fourth quarter of 2012 to $24.2 million. Salaries and employee benefit expenses increased $1.6 million, primarily associated with the acquisition of Community Bank and increased pension costs. In addition, other expenses increased $0.7 million, occupancy and equipment expenses increased $0.4 million, legal and professional expenses increased $0.3 million, and depreciation expense increased $0.2 million from the fourth quarter of 2012. These increases were partially offset by decreases in merger related expenses ($0.3 million), repossessed asset losses ($0.2 million), and advertising expenses ($0.2 million).

Balance Sheet Trends

Loans increased $458.4 million (21.4%) from December 31, 2012 to $2.60 billion at December 31, 2013, primarily due to the Company’s acquisition of Community Bank ($370.8 million). Excluding the Community Bank acquisition, loans increased $87.7 million (4.1%) from December 31, 2012 to $2.23 billion at December 31, 2013. Increases in residential real estate loans of $59.4 million (5.8%), commercial real estate loans of $32.9 million (4.0%), and commercial and industrial (“C&I”) loans of $10.0 million (9.2%) were partially offset by a decrease in consumer loans ($14.1 million). The majority of this decrease is attributable to the Company’s decision to strategically reduce the portfolio of indirect auto loans with unsatisfactory credit quality metrics associated with the Community Bank acquisition.

Total average depository balances increased $413.5 million, or 17.3%, from the quarter ended December 31, 2012 to the quarter ended December 31, 2013. This growth was primarily attributable to deposits acquired from Community Bank ($337.3 million). Exclusive of this contribution, the Company experienced increases in noninterest-bearing demand deposits ($43.9 million), savings deposits ($39.6 million), and interest-bearing demand deposits ($14.9 million) that were partially offset by a decrease in time deposits ($22.5 million).

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2013 was 34.2% and 34.4%, respectively, compared to 34.9% and 34.3% for the quarter and year ended December 31, 2012, respectively.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 93.5% and the loan to asset ratio was 77.3% at December 31, 2013. The Company maintained investment securities totaling 11.0% of assets as of this date. The Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 50.7% of assets at December 31, 2013. Time deposits fund 32.0% of assets at December 31, 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 also strongly capitalized. Although the Company’s acquisition of Community Bank lowered its tangible equity ratio from 9.4% at December 31, 2012 to 8.6% at March 31, 2013, our tangible equity ratio has returned to 9.5% at December 31, 2013. At December 31, 2013, City National Bank’s leverage ratio is 8.54%, its tier I capital ratio is 11.35%, and its total risk-based capital ratio is 12.18%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On December 18, 2013, the Board approved a quarterly cash dividend of 37 cents per share payable January 31, 2014, to shareholders of record as of January 15, 2014.

City Holding Company is the parent company of City National Bank of West Virginia. City National operates 82 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; and (13) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) recently adopted by the United States Congress. 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 December 31, 2013 Form 10-K. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2013 results and will adjust the amounts if necessary.