City Holding Company Announces Second Quarter Results

City Holding Company, “the Company” (NASDAQ:CHCO), a $3.4 billion bank holding company headquartered in Charleston, today announced second quarter net income per diluted share of $0.80 and net income of $12.8 million. For the second quarter of 2014, the Company achieved a return on assets of 1.50%, a return on tangible equity of 15.8%, a net interest margin of 3.95%, and an efficiency ratio of 55.7%. For the six months ended June 30, 2014, the Company achieved a return on assets of 1.57%, a return on tangible equity of 16.5%, a net interest margin of 4.05%, and an efficiency ratio of 54.0%. In addition, the Company has increased its tangible equity ratio from 9.5% at December 31, 2013 to 9.8% at June 30, 2014.

City’s CEO Charles Hageboeck stated that “Our results for the second quarter of 2014 continue years of strong performance placing City among the top performing banks in the U.S. During 2014, asset quality has continued to improve, capital has increased, and dividends have increased. Like most banks, however, we recognize that the economy remains stalled in a low-growth trajectory with many customers too uncertain about the future to buy homes or invest in growing their businesses."

Net Interest Income

The Company’s tax equivalent net interest income declined $1.2 million, or 3.9%, from $30.2 million during the first quarter of 2014 to $29.0 million during the second quarter of 2014. This is primarily due to the expected decrease in accretion related to the acquisitions of Virginia Savings and Community Bank ($1.5 million for quarter ended June 30, 2014 compared to $2.2 million for the quarter ended March 31, 2014). The Company’s reported net interest margin decreased from 4.15% for the first quarter of 2014 to 3.95% for the second quarter of 2014. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.75% for the quarter ended June 30, 2014 and 3.85% for the quarter ended March 31, 2014. This decrease was primarily due to loan yields compressing from 4.39% for the first quarter of 2014 to 4.27% for the second quarter of 2014 and resulted in net interest income declining $0.4 million.

Credit Quality - Asset Quality Continues to Improve

The Company’s ratio of nonperforming assets to total loans and other real estate owned improved from 1.19% at March 31, 2014 to 1.10% at June 30, 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 remained at $11.0 million, or 0.43% of total loans outstanding, at both March 31, 2014 and at June 30, 2014. Acquired past due loans represent approximately 31% of total past due loans and have declined $13.0 million, or 79.2%, 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 $0.4 million in the second quarter of 2014, compared to $2.0 for the comparable period in 2013 and $1.4 million for the first quarter of 2014. The provision for loan losses recorded in the second quarter of 2014 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. Additionally, the improvement in nonperforming assets also contributed to a lower provision for loan losses during the second quarter of 2014. For the six months ended June 30, 2014, the Company recorded provision for loan losses of $1.8 million and net charge offs for the same period were approximately $1.8 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 second quarter of 2014, the Company realized investment gains of $0.8 million from the sale of certain equity positions related to community banks and bank holding companies. Excluding investment security transactions, non-interest income increased $0.1 million to $14.3 million in the second quarter of 2014 as compared to $14.2 million in the second quarter of 2013. Bankcard revenues increased $0.4 million, or 11.2%, to $3.8 million and trust and investment management fee income increased $0.15 million, or 15.1%, to $1.1 million. These increases were partially offset by lower other income ($0.2 million due to a decline in fixed rate mortgage lending activity) and service charges ($0.2 million or 2.3%). The decline in service charges is attributed to a sluggish economy.

Non-interest Expenses

Non-interest expenses increased $0.3 million, from $24.0 million in the second quarter of 2013 to $24.3 million in the second quarter of 2014. This increase was primarily related to higher salaries and employee benefits ($0.3 million), repossessed asset losses ($0.2 million), and advertising ($0.1 million). These expenses were partially offset by a decrease in other expenses ($0.3 million).

Balance Sheet Trends

Loans increased $20.7 million (0.8%) from March 31, 2014 to $2.58 billion at June 30, 2014. Residential real estate loans increased $30.6 million (2.5%), commercial and industrial (“C&I”) loans increased $5.3 million (3.7%) and home equity loans increased $1.1 million (0.8%). These increases were partially offset by a decrease in commercial real estate loans ($16.3 million or 1.6%) that was attributable to a more competitive lending environment.

Total average depository balances increased $7.2 million, or 0.3%, from the quarter ended March 31, 2014 to the quarter ended June 30, 2014. Increases in savings deposits ($16.3 million) and noninterest-bearing deposits ($10.5 million), were partially offset by a decrease in time deposits of $18.3 million.

Income Tax Expense

The Company’s effective income tax rate for the second quarter of 2014 was 33.7% compared to 34.4% for the year ended December 31, 2013, and 33.6% for the quarter ended June 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 92.5% and the loan to asset ratio was 76.6% at June 30, 2014. The Company maintained investment securities totaling 11.0% of assets as of this date. Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 51.9% of assets at June 30, 2014. Time deposits fund 30.9% of assets at June 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 9.8% at June 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 195,000 shares of its common stock and increasing the quarterly cash dividend by over 8%. At June 30, 2014, City National Bank’s Leverage Ratio is 9.53%, its Tier I Capital ratio is 12.89%, and its Total Risk-Based Capital ratio is 13.73%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On June 25, 2014, the Board approved a quarterly cash dividend of $0.40 cents per share payable July 31, 2014, to shareholders of record as of July 15, 2014. During the quarter ended June 30, 2014, the Company repurchased 126,500 common shares at a weighted average price of $42.90 as part of a one million share repurchase plan authorized by the Board of Directors in July 2011. At June 30, 2014, the Company could repurchase approximately 260,000 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. In addition to the Bank, City National offers a full range of insurance products and services through CityInsurance Professionals, which completed an agency acquisition in June 2014.

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