City Holding Company Announces Third Quarter Results

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 $0.76 and net income of $11.9 million. For the third quarter of 2014, the Company achieved a return on assets of 1.40%, a return on tangible equity of 14.7%, a net interest margin of 3.95%, and an efficiency ratio of 54.7%. For the nine months ended September 30, 2014, the Company achieved a return on assets of 1.51%, a return on tangible equity of 15.9%, a net interest margin of 4.02%, and an efficiency ratio of 54.2%.

Balance Sheet Trends

Loans increased $53.0 million (2.1%) from June 30, 2014 to $2.63 billion at September 30, 2014. Residential real estate loans increased $31.0 million (2.5%), commercial real estate loans increased $23.2 million (2.3%), and home equity loans increased $1.5 million (1.0%). These increases were partially offset by decreases in consumer loans $1.8 million (4.2%) and commercial and industrial (“C&I”) loans $1.2 million (0.9%).

Total average depository balances decreased $16.7 million, or 0.6%, from the quarter ended June 30, 2014 to the quarter ended September 30, 2014. Decreases in time deposits ($15.4 million) and noninterest-bearing deposits ($5.6 million) were partially offset by an increase in interest-bearing deposits of $5.3 million.

Net Interest Income

The Company’s tax equivalent net interest income increased $0.6 million, or 2.1%, from $29.0 million during the second quarter of 2014 to $29.6 million during the third quarter of 2014. This is primarily due to an increase in interest income from residential real estate loans which increased outstanding balances by $31.0 million during the third quarter. The Company’s reported net interest margin remained at 3.95% for the both the second and third quarters of 2014. Excluding the favorable impact of the accretion from the fair value adjustments related to the acquisitions of Virginia Savings and Community Bank, the net interest margin would have been 3.71% for the quarter ended September 30, 2014 and 3.75% for the quarter ended June 30, 2014. This decrease was primarily due to loan yields compressing from 4.27% for the second quarter of 2014 to 4.22% for the third quarter of 2014.

Credit Quality - Asset Quality Continues to Improve

The Company’s ratio of nonperforming assets to total loans and other real estate owned improved from 1.10% at June 30, 2014 to 1.04% at September 30, 2014. Excluded from this ratio are purchased credit-impaired loans which continue to perform 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 modestly from $11.0 million at June 30, 2014 to $11.5 million, or 0.44% of total loans outstanding, at September 30, 2014. Acquired past due loans represent approximately 32% of total past due loans and have declined $12.7 million, or 77%, since March 31, 2013.

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 $1.9 million in the third quarter of 2014, compared to $1.2 for the comparable period in 2013 and $0.4 million for the second quarter of 2014. The provision for loan losses recorded in the third quarter of 2014 reflects the growth in the loan portfolio and changes in the quality of the portfolio. For the nine months ended September 30, 2014, the Company recorded provision for loan losses of $3.7 million and net charge offs for the same period were approximately $3.8 million. 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.

Non-interest Income

During the third quarter of 2014, the Company realized investment gains of $0.1 million from the sale of certain equity positions related to community banks and bank holding companies. Excluding investment security transactions, non-interest income was $14.5 million for both the third quarter of 2014 and the third quarter of 2013. Bankcard revenues increased $0.3 million, or 9.5%, to $3.8 million and trust and investment management fee income increased $0.2 million, or 17.5%, to $1.1 million. These increases were partially offset by lower service charges ($0.2 million or 3.3%) and other income ($0.2 million due to a decline in fixed rate mortgage lending activity).

Non-interest Expenses

Non-interest expenses decreased $0.3 million, from $24.6 million in the third quarter of 2013 to $24.3 million in the third quarter of 2014. This decrease was primarily due to a decrease in repossessed asset losses ($0.9 million) due to valuation adjustments on certain properties in the third quarter of 2013. This decrease was partially offset by an increase in salaries and employee benefits ($0.2 million) and bankcard expenses ($0.2 million).

Income Tax Expense

The Company’s effective income tax rate for the third quarter of 2014 was 33.6% compared to 34.4% for the year ended December 31, 2013, and 33.6% for the quarter ended September 30, 2013. The effective rate is based upon the Company’s expected tax rate for the year ending December 31, 2014.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 94.2% and the loan to asset ratio was 77.7% at September 30, 2014. The Company maintained investment securities totaling 10.6% 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 September 30, 2014. Time deposits fund 30.5% of assets at September 30, 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 continues to be strongly capitalized. The Company’s tangible equity ratio was 9.6% at September 30, 2014 compared to 9.5% at December 31, 2013. The Company was able to increase its tangible capital from December 31, 2013 despite the repurchase of approximately 457,000 shares of its common stock and increasing the quarterly cash dividend by over 8%. At September 30, 2014, City National Bank’s Leverage Ratio is 9.46%, its Tier I Capital ratio is 12.57%, and its Total Risk-Based Capital ratio is 13.40%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On September 24, 2014, the Board approved a quarterly cash dividend of $0.40 cents per share payable October 31, 2014, to shareholders of record as of October 15, 2014. During the quarter ended September 30, 2014, the Company repurchased 262,205 common shares at a weighted average price of $42.60. On September 24, 2014, the Company announced that the Board of Directors authorized the Company to buy back up to 1,000,000 shares of its common shares (approximately 7% 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 rescinded repurchases of additional shares under a repurchase program plan approved in July 2011. The Company had repurchased 980,076 shares under the July 2011 Stock Repurchase Plan.

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 September 30, 2014 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary September 30, 2014 results and will adjust the amounts if necessary.