City Holding Company Announces Third Quarter Results

City Holding Company, “the Company” (NASDAQ:CHCO), a $3.5 billion bank holding company headquartered in Charleston, today announced third quarter net income per diluted share of $0.69 and net income of $10.6 million. For the third quarter of 2015, the Company achieved a return on assets of 1.21%, a return on tangible equity of 12.2%, a net interest margin of 3.62%, and an efficiency ratio of 57.3%. For the nine months ended September 30, 2015, the Company achieved net income of $40.6 million, a return on assets of 1.53%, a return on tangible equity of 15.9%, a net interest margin of 3.81%, and an efficiency ratio of 55.4%.

Net Interest Income

The Company’s tax equivalent net interest income declined $0.9 million, or 3.2%, from $28.9 million during the second quarter of 2015 to $28.0 million during the third quarter of 2015. This is primarily due to the decrease in accretion related to earlier acquisitions of Virginia Savings and Community Bank ($1.1 million for quarter ended September 30, 2015 compared to $1.6 million for the quarter ended June 30, 2015). The Company’s reported net interest margin decreased from 3.82% for the second quarter of 2015 to 3.62% for the third quarter of 2015. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.48% for the quarter ended September 30, 2015 and 3.60% for the quarter ended June 30, 2015. The Company continues to originate a significant portion of its commercial loans based on WSJ Prime or LIBOR and has elected to keep fixed rate investment security balances at approximately 10% of total assets and allow cash balances to increase. The Company believes that these measures position its balance sheet to benefit from a rising rate environment.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased from 0.84% at June 30, 2015 to 1.03% at September 30, 2015. 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. This increase was entirely related to a single commercial customer engaged in the mining and energy sectors (per the North American Industry Classification System (NAICS)) which filed for bankruptcy and for which the Company recorded a charge off in the second quarter of 2015. Total past due loans increased modestly from $9.6 million, or 0.36% of total loans outstanding, at June 30, 2015 to $10.6 million, or 0.39% of total loans outstanding, at September 30, 2015. Acquired past due loans represent approximately 34% of total past due loans at September 30, 2015 and have declined $12.8 million, or 78%, 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 $0.5 million in the third quarter of 2015, compared to $1.9 for the comparable period in 2014 and $2.8 million for the second quarter of 2015. The provision for loan losses recorded in the third quarter of 2015 reflects the modest growth in the loan portfolio, changes in the quality of the portfolio and general improvement in the Company’s historical loss rates used to compute the allowance not specifically allocated to individual credits. For the nine months ended September 30, 2015, the Company recorded provision for loan losses of $4.2 million and net charge offs for the same period were approximately $3.4 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

Non-interest income decreased $0.8 million to $13.7 million in the third quarter of 2015 as compared to $14.5 million in the third quarter of 2014. The primary reason for this decrease was the sale of CityInsurance effective January 1, 2015, which had insurance commission revenues of $1.4 million in the third quarter of 2014. This decrease was partially offset by an increase in other income of $0.3 million primarily related to mortgage banking activities and bank owned life insurance income of $0.2 million due to death benefit proceeds.

Non-interest Expenses

Non-interest expenses increased $1.1 million, from $24.3 million in the third quarter of 2014 to $25.4 million in the third quarter of 2015. This increase was primarily related to an increase in other expenses as the Company recognized a loss related to a partnership investment in Mountaineer Capital LP. In 2000, the Company’s former management team committed $2.8 million to an investment in Mountaineer Capital LP that to date has returned $0.6 million. The Company has taken various write-downs totaling $0.8 million related to this investment. Based upon recently obtained information from the partnership, the Company has concluded that it will not receive any significant additional value from its investment in Mountaineer Capital LP and has written down the remainder of its basis in this investment of $1.4 million. In addition, the Company realized losses of $0.5 million during the third quarter of 2015 on the sale of repossessed assets and $0.2 million in merger related expenses in connection with the Company’s forthcoming acquisition of three branches in Lexington, Kentucky from American Founders Bank, Inc., a wholly-owned subsidiary of Financial Holdings, Inc. These increases were partially offset by a decrease in salaries and employee benefits of $1.0 million as a result of the sale of CityInsurance.

Balance Sheet Trends

Loans increased $12.0 million (0.5%) from June 30, 2015 to $2.70 billion at September 30, 2015. Residential real estate loans increased $32.6 million (2.5%) and junior lien home equity loans increased $1.0 million (0.7%). These increases were partially offset by a decrease in commercial and industrial (“C&I”) loans of $17.6 million (12.4%) and commercial real estate loans of $3.2 million (0.3%). During the third quarter the decrease in C&I loans outstanding was largely due to a C&I loan customer that sold its business and repaid a $7.6 million loan.

Total average depository balances decreased $29.2 million, or 1.0%, from the quarter ended June 30, 2015 to the quarter ended September 30, 2015. Decreases in savings deposits ($17.4 million), time deposits ($17.2 million) and interest-bearing deposits ($3.6 million), were partially offset by an increase in noninterest-bearing deposits ($9.1 million).

Income Tax Expense

The Company’s effective income tax rate for the third quarter of 2015 was 32.6% compared to 31.4% for the year ended December 31, 2014, and 33.6% for the quarter ended September 30, 2014. The effective rate is based upon the Company’s expected tax rate for the year ending December 31, 2015.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 94.1% and the loan to asset ratio was 76.9% at September 30, 2015. The Company maintained investment securities totaling 11.2% of assets as of this date. Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 53.7% of assets at September 30, 2015. Time deposits fund 28.0% of assets at September 30, 2015, 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 10.1% at September 30, 2015 compared to 9.4% at December 31, 2014. At September 30, 2015, City National Bank’s Leverage Ratio is 9.65%, its Common Equity Tier I ratio is 12.64%, its Tier I Capital ratio is 13.62%, and its Total Risk-Based Capital ratio is 14.48%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On September 30, 2015, the Board approved a quarterly cash dividend of $0.42 cents per share payable October 30, 2015, to shareholders of record as of October 15, 2015.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 82 branches across West Virginia, Virginia, Kentucky and Ohio.

On June 1, 2015, the Company announced that City National Bank of West Virginia had executed an agreement to acquire three branches in Lexington, Kentucky, from American Founders Bank, Inc., a wholly-owned subsidiary of Financial Holdings, Inc. The proposed acquisition is expected to be completed in the fourth quarter of 2015, pending final regulatory approval and the completion of other closing conditions. This acquisition is expected to be immediately accretive to earnings per share.

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; (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; (14) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; and (15) other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those risk factors included in the disclosures under the heading “ITEM 1A Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. 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, 2015 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary September 30, 2015 results and will adjust the amounts if necessary.