City Holding Company Announces First Quarter Results

City Holding Company, “the Company” (NASDAQ:CHCO), a $3.4 billion bank holding company headquartered in Charleston, today announced first quarter net income per diluted share of $0.86 and net income of $13.8 million. For the first quarter of 2014, the Company achieved a return on assets of 1.63%, a return on tangible equity of 17.3%, a net interest margin of 4.15%, and an efficiency ratio of 52.3%.

City’s CEO Charles Hageboeck stated that, “Despite the challenges of lower accretion income, a water crisis in Charleston, West Virginia and surrounding areas, and an extremely harsh winter, City was able to deliver another quarter of impressive earnings. Our net income of $13.8 million and diluted earnings per share of $0.86 were above both the first quarter of 2013 (net income of $8.0 million and diluted earnings per share of $0.51) and the fourth quarter of 2013 (net income of $13.2 million and diluted earnings per share of $0.83).”

“Our net interest income declined $2.0 million from the fourth quarter of 2013 due to lower accretion from fair value adjustments related to our acquisitions of Virginia Savings Bancorp, Inc. (“Virginia Savings Bank”) and Community Financial Corporation (“Community Bank”). This decline is largely due to our credit and lending teams’ ability to favorably work out a significant number of larger problem loans during 2013. Excluding the impact of accretion income, our net interest margin increased from 3.81% for the fourth quarter of 2013 to 3.85% for the first quarter of 2014.”

“During the first quarter of 2014, City’s credit metrics continued to strengthen. The ratio of nonperforming loans to loans and other real estate owned declined to 1.19% and past due loans as a percentage of loans dropped to 0.43%. The drop in past due loans was primarily attributable to a decline in past due loans from acquisitions, which reflects the successes of our credit and lending teams in working out acquired problem loans.”

“City’s noninterest income was relatively flat compared to the first quarter of 2013. Our service charges were negatively impacted due to the harsh winter and a water crisis in Charleston, West Virginia that restricted business activity and consumer spending for an extended time period. Noninterest expenses, exclusive of merger related charges in the first quarter of 2013, were down due to lower non-income based taxes. In addition, our income tax rate for the first quarter of 2014 also declined. These declines are due to the recognition of a previously unrecognized tax position resulting from the expiration of the statute of limitations for a previous year. The combined favorable impact of these discrete items for the first quarter of 2014 was $0.10 per diluted share (net of taxes), and we expect that the Company’s effective tax rate for the year ending December 31, 2014 will be 31.2% (33.6% excluding the recognition of unrecognized discrete tax positions).”

“In March 2014, we announced an 8% increase in our quarterly dividend from 37 cents per share to 40 cents per share. This increase is based on the Company’s commitment of returning value to our shareholders, our current strong financial position, and our confidence in the Company being able to sustain this performance,” Hageboeck concluded.

Net Interest Income

The Company’s tax equivalent net interest income decreased $2.0 million, or 6.1%, from $32.2 million during the fourth quarter of 2013 to $30.2 million during the first quarter of 2014. This decrease is due to a decline in the accretion from fair value adjustments related to the acquisitions of Virginia Savings Bank and Community Bank ($2.2 million for the quarter ended March 31, 2014 compared to $3.9 million for the quarter ended December 31, 2013). The Company’s reported net interest margin decreased from 4.33% for the fourth quarter of 2013 to 4.15% for the first quarter of 2014. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.85% for the quarter ended March 31, 2014 and 3.81% for the quarter ended December 31, 2013.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned decreased slightly from 1.20% at December 31, 2013 to 1.19% at March 31, 2014. 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 $19.5 million, or 0.75% of total loans outstanding, at December 31, 2013 to $11.0 million, or 0.43% of total loans outstanding, at March 31, 2014. Acquired past due loans represent approximately 47% of total past due loans and have declined $11.3 million, or 68.7%, since March 31, 2013. The company’s TDR’s have decreased from $25.1 million at December 31, 2013 to $23.7 million at March 31, 2014, and 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 $1.4 million in the first quarter of 2014, compared to $1.7 for the comparable period in 2013 and $1.9 million for the fourth quarter of 2013. The provision for loan losses recorded in the first quarter of 2014 reflects difficulties of certain commercial borrowers of the Company during the quarter, 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.

Non-interest Income

Non-interest income was steady at $14.3 million for both the first quarter of 2014 and the first quarter of 2013. Bankcard revenues increased $0.5 million, or 15.2%, due to increased usage by our customers from the first quarter of 2013, while insurance commissions were up $0.2 million, or 10.1%, on the strength of increased contingency payments. These increases were essentially offset by decreases in service charges of $0.4 million and other income of $0.3 million from the first quarter of 2013. We believe that service charges were down primarily as a result of a much harsher winter in the first quarter of 2014 and the water crisis experienced in Charleston, West Virginia and surrounding areas during January 2014. Other income declined during the first quarter of 2014 due largely to a decline in fixed rate mortgages lending activity.

Non-interest Expenses

During the first quarter of 2013, the Company completed its acquisition of Community Bank and recognized $5.5 million of acquisition and integration expenses. Excluding these expenses, non-interest expenses decreased $0.5 million, from $23.9 million in the first quarter of 2013 to $23.4 million in the first quarter of 2014. This decrease was largely attributable to a decline in other expenses of $1.3 million due to a decrease in non-income based taxes as a result of the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for a previous tax year. As noted previously, this favorable difference was discrete to the first quarter of 2014. This decrease was partially offset by an increase in repossessed asset losses ($0.5 million) and salaries and employee benefits ($0.2 million).

Balance Sheet Trends

Loans have decreased $49.2 million (1.9%) from December 31, 2013 to $2.56 billion at March 31, 2014. Commercial real estate loans decreased $31.0 million (3.0%), commercial and industrial (“C&I”) loans decreased $20.4 million (12.4%), and consumer loans declined $4.1 million (8.8%). During the quarter ended March 31, 2014, a variety of factors led to the decline in commercial real estate and C&I loans – a $14 million participation loan was repurchased by the lead bank (a large community bank); a $9 million loan from an acquisition that was classified as substandard was repaid in full; a financially weak $9 million loan was refinanced by a smaller competitor that provided the borrower a cash out option; and various lines of credit experienced balance reductions. In regards to consumer loans, the Company strategically decided to reduce these loans due to the acquisition of an indirect portfolio of auto loans associated with Community Bank. These loans have higher loss percentages compared to the Company’s historical consumer portfolio.

Total average depository balances increased $8.6 million, or 0.3%, from the quarter ended December 31, 2013 to the quarter ended March 31, 2014. Increases in interest-bearing deposits ($14.6 million) and savings deposits ($10.9 million) were partially offset by a decrease in time deposits ($16.2 million).

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2014 was 29.6% compared to 34.4% for the year ended December 31, 2013, and 37.4% for the quarter ended March 31, 2013. During the first quarter of 2014, the Company reduced income tax expense by $0.8 million due to the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for a previous tax year. Exclusive of this discrete item recognized in the first quarter of 2014, the Company’s tax rate from operations was 33.6%.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 90.4% and the loan to asset ratio was 75.3% at March 31, 2014. The Company maintained investment securities totaling 11.1% of assets as of this date. Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 52.0% of assets at March 31, 2014. Time deposits fund 31.3% of assets at March 31, 2014, 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 was 9.6% at March 31, 2014 compared to 9.5% at December 31, 2013. At March 31, 2014, City National Bank’s Leverage Ratio is 9.09%, its Tier I Capital ratio is 12.28%, and its Total Risk-Based Capital ratio is 13.15%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 26, 2014, the Board approved a quarterly cash dividend of $0.40 cents per share payable April 30, 2014, to shareholders of record as of April 15, 2014. During the quarter ended March 31, 2014, the Company repurchased 68,000 common shares at a weighted average price of $43.08 as part of a one million share repurchase plan authorized by the Board of Directors in July 2011. At March 31, 2014, the Company could repurchase approximately 386,000 shares under the July 2011 authorization.

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 materially 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) 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”) and the regulations promulgated and to be promulgated thereunder, which may subject the Company and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses. 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, 2014 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2014 results and will adjust the amounts if necessary.