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 $0.51 and net income of $8.0 million. The results for the first quarter of 2013 include $5.5 million, or $0.23 diluted per share on an after tax basis, of acquisition and integration expenses related to the acquisition of Community Financial Corporation (”Community Bank”). For the first quarter of 2013, the Company achieved a return on assets of 0.96%, a return on tangible equity of 11.3%, a net interest margin of 4.18%, and an efficiency ratio of 66.5%. Excluding the acquisition and integration expenses, the Company would have reported net income of $11.7 million, a return on assets of 1.40%, a return on tangible equity of 16.4%, and an efficiency ratio of 53.9% for the first quarter of 2013.

City’s CEO Charles Hageboeck stated that, “During the first quarter of 2013, we continued to expand our footprint in Virginia by successfully completing our acquisition of Community Bank. This marked our second acquisition in Virginia in the last 12 months and the ten branches of Community Bank added approximately $381 million in deposits and $363 million in loans, net of the credit mark of $45 million. We are excited about our growth in Virginia and look forward to ongoing efforts to further develop our Virginia presence.”

“Our net interest income increased $4.0 million from the fourth quarter of 2012 due to the acquisition of Community Bank and correspondingly, our net interest margin increased from 3.99% in the fourth quarter of 2012 to 4.18% in the first quarter of 2013. Noninterest income increased $1.1 million from the first quarter of 2012 due to our acquisitions of Virginia Savings Bancorp, Inc. (“Virginia Savings”) and Community Bank and increased mortgage-related lending activity and trust and investment management fee income.”

“In March 2013, we announced a 6% increase in our quarterly dividend from 35 cents per share to 37 cents per share. This increase is based on the Company’s current strong liquidity position, our outstanding financial performance in 2012 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 increased $4.0 million, or 15.7%, from $25.7 million during the fourth quarter of 2012 to $29.7 million during the first quarter of 2013. This increase is due to the acquisition of Community Bank as of January 10, 2013 and an increase in the accretion related to the acquisitions of Virginia Savings and Community Bank. The Company’s reported net interest margin increased from 3.99% for the fourth quarter of 2012 to 4.18% for the first quarter of 2013. Excluding the favorable impact of the accretion from the fair value adjustments ($2.2 million for the quarter ended March 31, 2013 and $1.7 million for the quarter ended December 31, 2012), the net interest margin would have been 3.87% for the quarter ended March 31, 2013 and 3.73% for the quarter ended December 31, 2012.

Credit Quality

As a result of the Company’s quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of $1.7 million in the first quarter of 2013, compared to $1.95 for the comparable period in 2012 and $1.8 million for the fourth quarter of 2012. The provision for loan losses recorded in the first quarter of 2013 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

Excluding investment security transactions, non-interest income increased $1.1 million to $14.2 million in the first quarter of 2013 as compared to $13.1 million in the first quarter of 2012. Service charges increased $0.5 million, or 8.1%, to $6.5 million while bankcard revenues increased $0.2 million, or 5.2%, to $3.2 million. These increases were primarily due to the acquisitions of Virginia Savings and Community Bank. In addition, other income increased $0.3 million or 62.5%, to $0.9 million primarily as a result of increased mortgage related revenues. Trust and investment management fee income increased $0.2 million, or 22.7%, to $1.0 million due to core growth, as Virginia Savings and Community Bank did not offer these services.

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 increased $4.4 million, from $19.5 million in the first quarter of 2012 to $23.9 million in the first quarter of 2013. This increase was primarily related to higher salaries and employee benefits ($2.7 million) due to the acquisitions of Virginia Savings and Community Bank ($1.9 million), higher pension costs ($0.3 million), and higher health insurance ($0.2 million). In addition, other expenses increased $0.7 million, occupancy and equipment expense increased $0.5 million and depreciation increased $0.3 million. These increases were primarily attributable to the acquisitions of Virginia Savings and Community Bank.

Balance Sheet Trends

Loans have increased $350.7 million (16.3%) from December 31, 2012 to $2.50 billion at March 31, 2013, primarily due to the Company’s acquisition of Community Bank ($370.9 million). Excluding the Community Bank acquisition, loans have decreased $20.2 million (1.0%) from December 31, 2012 to $2.13 billion at March 31, 2013. Consumer loans declined $5.4 million (14.7%), commercial real estate loans decreased $5.1 million (0.6%), home equity loans declined $5.0 million (3.5%) and commercial and industrial (“C&I”) loans decreased $4.8 million (4.4%). The Company strategically decided to reduce consumer 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. In addition, the Company has opted to allow certain other high risk loans to exit the portfolio.

Total average depository balances increased $397.1 million, or 16.6%, from the quarter ended December 31, 2012 to the quarter ended March 31, 2013. This growth was primarily attributable to deposits acquired from Community Bank ($337.3 million). Exclusive of this contribution, noninterest-bearing deposits increased $24.5 million, interest-bearing deposits increased $21.0 million, and savings deposits increased $16.1 million.

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2013 was 37.4% compared to 34.3% for the year ended December 31, 2012, and 33.9% for the quarter ended March 31, 2012. As a result of the Company’s acquisition of Community Bank during the first quarter of 2013, the Company’s effective tax rate for 2013 is expected to decrease from 34.3% for the year ending December 31, 2012 to 33.7% for the year ending December 31, 2013. Due to this decline in the effective rate, the Company’s net deferred tax assets are expected to be realized at a lower effective rate, and as a result, the Company’s net deferred tax asset was reduced by $0.5 million in the first quarter ($0.03 diluted per share).

Capitalization and Liquidity

One of the Company’s strengths is that it is highly profitable while maintaining strong liquidity and capital. With respect to liquidity, the Company’s loan to deposit ratio was 86.6% and the loan to asset ratio was 72.9% at March 31, 2013. The Company maintained investment securities totaling 10.7% of assets as of this date. Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 51.3% of assets at March 31, 2013. Time deposits fund 32.9% of assets at March 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 continues to be strongly capitalized. The Company’s tangible equity ratio was 8.6% at March 31, 2013 compared to 9.4% at December 31, 2012. At March 31, 2013, City National Bank’s Leverage Ratio is 8.70%, its Tier I Capital ratio is 11.53%, and its Total Risk-Based Capital ratio is 12.34%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 28, 2013, the Board approved a quarterly cash dividend of $0.37 cents per share payable April 30, 2013, to shareholders of record as of April 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 March 31, 2013 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2013 results and will adjust the amounts if necessary.