For Immediate Release
January 27, 2009
For Further Information Contact:
Charles R. Hageboeck, Chief Executive Officer and President
(304) 769-1102
City Holding Company Announces 2008 Earnings
Charleston, West Virginia – City Holding Company, “the Company” (NASDAQ:CHCO), a $2.5 billion bank holding company headquartered in Charleston, today announced net income of $4.2 million or $0.26 per diluted share for the fourth quarter of 2008 and $28.1 million or $1.74 per diluted share for the full year. Charles Hageboeck, Chief Executive Officer and President stated “Against the backdrop of one of the most significant economic downturns in decades, City’s underlying fundamentals are solid. Excluding short-term loans to other banks, loans grew 6.2% during the year ended December 31, 2008. Average checking and saving deposits for the year were up 1.9% in 2008 as compared to 2007. The net interest margin for 2008 averaged 4.64%, up from 4.34% for 2007, and was 4.73% during the fourth quarter of 2008. Branch Service Charges increased 3.6%, trust and investment management fees increased 9.7%, and insurance revenues increased 3.0% in 2008. City’s non-interest expenses increased 3.6% after considering the impact of the expenses associated with the early redemption of our 9.15% trust preferred securities and a special program to establish funds in City’s name in community foundations in many of City’s primary markets. City’s tangible common equity ratio is 8.8% which is strong compared to other banks of City’s size. The strength of our capital position provided us the option not to participate in the government assistance made available to banks in the fourth quarter of 2008 (the “Trouble Asset Relief Program”). With strong core earnings, strong capital, and with a low ratio of loans to deposits in comparison to our peer group (bank holding companies with total assets between $1 and $5 billion), City expects to be able to continue to lend within its communities and to continue to grow its franchise.
“Despite the challenges that are facing City, our industry, and indeed our entire nation, City remains strong, operating in some of the most stable markets in the U.S. For example, West Virginia’s unemployment rate in November 2008 was 4.6% as compared to the U.S. unemployment rate of 6.8% for the same period. The rate of foreclosures on residential mortgages in West Virginia has been reported to be one of the lowest in the U.S. and home prices are generally believed to have remained relatively stable through the last 18 months as prices in many markets have fallen precipitously.
“The economic recession being experienced throughout the U.S. and the world has also been felt at City Holding Company and City National Bank. During the third quarter of 2008, we experienced a significant loss on investments in Fannie Mae and Freddie Mac, two of our nation’s largest Companies, which were placed into conservatorship by our government. As the recession has deepened during the fourth quarter of 2008, City’s investments in pools of debt issued by banks throughout the U.S. also deteriorated in value on fears that some of the banks that have issued debt into these pools will not survive. As a result, we took charges of $10.8 million in the fourth quarter and $38.3 million during the year for other than temporary impairments of investments, including our investment in preferred stock in Fannie Mae and Freddie Mac. We have experienced some increase in losses on loans, although not to the extent experienced in most other markets throughout the U.S. As a result, our provision for loan losses was $5.3 million for the fourth quarter of 2008 and $10.4 million for the year. Despite these setbacks, City still achieved a return on assets of 1.12% for the full year of 2008 – better than most in our peer group (bank holding companies with total assets between $1 and $5 billion).
“As the economic recession, and the political response to it continues to unfold, it is possible that City, as well as our entire industry, will continue to experience higher than normal losses within our loan portfolio. We may also experience further deterioration of investments made by City in debt or preferred stock of some of our competitors. Regulatory changes that may accompany a new regime in Washington may have adverse consequences for all banks. However, we believe that City’s strong earnings, capital and liquidity will allow City to outperform our industry. Many of our peers are reducing, or in some cases eliminating, their dividends. City’s dividend has increased by approximately 10% or more each of the last five years. We are proud of the results that we have achieved for our shareholders. Our Board will determine in March 2009 whether to increase our dividend above the current $0.34 rate based upon our estimates of both the U.S. economy, and our own financial condition, at that time.”
Net Interest Income
The Company’s tax equivalent net interest income increased $4.6 million, or 4.7%, from $97.9 million in 2007 to $102.6 million in 2008, as interest expense on deposits and other interest bearing liabilities decreased more quickly than interest income from loans and investments. The Company’s reported net interest margin expanded to 4.64% for the year ended December 31, 2008 as compared to 4.34% for the year ended December 31, 2007.
The Company benefited from a portfolio of interest rate floors with a total notional value of $500 million which minimized the impact of falling rates on the Company’s interest income from variable rate loans during 2008. During the fourth quarter of 2008, an interest rate floor with a notional value of $50 million matured and the Company sold the remaining interest rate floors with notional amounts totaling $350 million. The gain of $12.5 million from the sale of these interest rate floors will be recognized over the remaining lives of the various hedged loans. Partially offsetting the reduction in interest expense from falling market rates was a decrease of $1.6 million in interest income from Previously Securitized Loans from the year ended December 31, 2007 as the average balances of these loans have decreased 50.6%. The decrease in average balances of Previously Securitized Loans was partially mitigated by an increase in the yield on these loans from 69.1% for the year ended December 31, 2007 to 108.1% for the year ended December 31, 2008.
The Company’s tax equivalent net interest income increased $2.0 million, or 8.3%, from $24.3 million during the fourth quarter of 2007 to $26.3 million during the fourth quarter of 2008, as interest expense on deposits and other interest bearing liabilities decreased more quickly than interest income from loans and investments. As previously discussed, the Company’s interest rate floors diminished the impact of falling rates on the Company’s interest income from variable rate loans.
Credit Quality
At December 31, 2008, the Allowance for Loan Losses (“ALLL”) was $22.3 million or 1.23% of total loans outstanding and 86% of non-performing loans compared to $17.6 million or 1.00% of loans outstanding and 103% of non-performing loans at December 31, 2007, and $18.9 million or 1.06% of loans outstanding and 136% of non-performing loans at September 30, 2008.
As a result of the Company’s quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of $5.3 million in the fourth quarter of 2008 and $10.4 million for the year ended December 31, 2008 compared to $1.7 million and $5.4 million for the comparable periods in 2007. The provision for loan losses recorded during 2008 reflects difficulties encountered by certain commercial borrowers of the Company during the year, the downgrade of their related credits and management’s assessment of the impact of these difficulties on the ultimate collectability of the loans. Additionally, the provision reflects changes in the economic conditions in the Company’s geographic market and the United States in general and an increase in the balance of commercial loans during the year. 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.
The Company’s ratio of non-performing assets to total loans and other real estate owned increased from 1.20% at December 31, 2007 to 1.64% at December 31, 2008. This increase is attributable primarily to the difficulties encountered by certain commercial customers during 2008 and their related borrowings have been classified as substandard.
Approximately 48% of the Company’s nonperforming loans at December 31, 2008, or approximately $12 million, were associated with a $17 million portfolio of loans to builders of speculative homes at the Greenbrier Resort in White Sulphur Springs, West Virginia. Through December 31, 2008, the Company has specifically reserved $3.6 million of the allowance for loan losses (ALLL) associated with this portfolio of speculative properties. The Greenbrier Resort has a long history and tradition as a top resort destination and is owned by CSX Corporation. However, the current economic scenario has been challenging for the Greenbrier, which lost $35 million in 2008 according to CSX Corporation. Additionally, the CSX Corporation has reported hiring Goldman Sachs to apprise them of their strategic options regarding the Greenbrier. The Company has considered the uncertainty of the situation at the
Greenbrier arising in the fourth quarter, and has increased the provision for loan losses relative to this portfolio of speculative builders by $1.15 million. Based on our analysis, the Company believes that the allowance allocated to the nonperforming and substandard loans, after considering the value of the collateral securing such loans, is adequate to cover losses that may result from these loans at December 31, 2008. While the Company’s non-performing assets have increased, our ratio of non-performing assets to total loans and other real estate owned is 136 basis points lower than that of our peer group (bank holding companies with total assets between $1 and $5 billion), which reported average non-performing assets as a percentage of loans and other real estate owned of 3.00% for the most recently reported quarter ended September 30, 2008. The Company’s non-performing assets are disproportionately tied to two sub-sectors within the loan portfolio.
In addition to the 48% of the Company’s non-performing loans associated with speculative builders at the Greenbrier, slightly more than 25% of the Company’s non-performing assets are associated with real estate in what is known as the “Eastern Panhandle” of West Virginia – the counties of Jefferson, Berkeley, and Morgan. These three counties are all considered distant suburbs of the Washington D.C. MSA and have experienced explosive growth in the last 10 years. While this is a relatively small part of the Company’s entire franchise, the downturn that has gripped the nation’s mortgage and construction industry has had disproportionately more impact upon the Company’s asset quality and provision in this region than in the remainder of the Company. Exclusive of loans to speculative builders at the Greenbrier or loans in the Eastern Panhandle, other loans throughout the Company account for only 27% of the Company’s non-performing loans.
The Company had net charge-offs of $2.0 million in the fourth quarter of 2008. Net charge-offs on commercial and residential loans were $1.1 million and $0.5 million, respectively, for the fourth quarter, while installment loans experienced no net charge-offs during the quarter. The increase in charge-offs on commercial loans was primarily related to one credit that had been appropriately considered in establishing the allowance for loan losses in prior periods. In addition, net charge-offs for depository accounts were $0.4 million for the fourth quarter of 2008 and $1.4 million for the year ended December 31, 2008. While charge-offs on depository accounts are appropriately taken against the ALLL, the revenue associated with depository accounts is reflected in service charges. Charge-offs for the full year 2008 totaled $5.75 million. Of these, $1.2 million are associated with speculative loans at the Greenbrier and $1.2 million are associated with loans in the Eastern Panhandle of West Virginia.
Impairment Losses
During 2008, the Company recorded $38.3 million of investment impairment losses, including $10.8 million in the fourth quarter. The charges deemed to be other than temporary were related to agency preferreds ($21.1 million impairment taken in the third quarter) with remaining book value of $1.6 million at December 31, 2008; pooled bank trust preferreds (a $9.9 million impairment in the fourth quarter and a $14.2 million impairment for the full year) with remaining book value of $10.9 million at December 31, 2008; income notes (a $0.9 million impairment in the fourth quarter and $2.0 million for the full year) with no remaining book value at December 31, 2008; and corporate debt securities (a $1.0 million impairment taken
in the third quarter) with remaining book value of $24.6 million at December 31, 2008. The impairment charges for the agency preferred securities were due to the actions of the federal government to place Freddie Mac and Fannie Mae into conservatorship and the suspension of dividends on such preferred securities. The impairment charges related to the pooled bank trust preferred securities and income notes were based on the Company’s quarterly reviews of its investment securities for indications of losses considered to be other than temporary. Based on management’s assessment of the securities the Company owns, the seniority position of the securities within the pools, the level of defaults and deferred payments within the pools, and a review of the financial strength of the banks within the respective pools, management concluded that impairment charges of $15.5 million and $2.0 million on the pooled bank trust preferred securities and the income notes, respectively, were necessary for the year ended December 31, 2008. The $1.0 million impairment charge for corporate debt securities was due to Lehman Brothers Holdings bankruptcy filing. The Company had acquired this security as the result of an acquisition of a bank in 2005.
Visa Gain
In addition, the Company recognized a $3.3 million gain in connection with Visa’s successful initial public offering (“IPO”) completed in March 2008. The Company received approximately $2.3 million on the partial redemption of its equity interest in Visa. The Company’s remaining Class B shares will be converted to Class A shares on the third anniversary of Visa’s IPO or upon Visa’s settlement of certain litigation matters, whichever is later. The unconverted Class B shares are not reflected in the Company’s balance sheet at December 31, 2008 as the Company has no historical basis in these shares. Visa also escrowed a portion of the proceeds from the IPO to satisfy approximately $1.0 million of liabilities that represented the Company’s proportionate share of legal judgments and settlements related to Visa litigation with American Express and Discover Financial Services.
Non-interest Expenses
During 2008, the Company fully redeemed $16.0 million of 9.15% trust preferred securities that had been issued in 1998. As a result of this redemption, the Company incurred charges of $1.2 million to fully amortize issuance costs incurred in 1998 and for the early redemption premium. Excluding the loss on the early redemption of the trust preferred securities, non-interest expenses increased $3.5 million from $71.0 million in 2007 to $74.5 million in 2008. Salaries and employee benefits increased $1.2 million, or 3.3%, from $36.0 million in 2007 to $37.2 million in 2008 due in part to additional staffing for new retail locations. Other expenses also include increased charitable contributions of $0.75 million during 2008.
Non-interest expenses decreased $0.1 million from $17.9 million in the fourth quarter of 2007 to $17.8 million in the fourth quarter of 2008. Other expenses decreased $1.1 million from 2007 as a charge related to the Company’s proportionate share of certain losses incurred by Visa U.S.A. Inc. (see Visa U.S.A. Inc.) was recorded in the fourth quarter of 2007. This decrease was partially offset by increases in advertising of $0.2 million, occupancy and equipment of $0.2 million, and repossessed asset losses of $0.2 million.
Income Tax Expense
The Company’s effective income tax rate for the quarter and year ended December 31, 2008 was 31.0% and 25.2% compared to 32.2% and 33.6% for the year ended December 31, 2007, respectively. The lower effective tax rate is largely attributable to the reduction in pre-tax income from the higher loan loss provision and other than temporary impairment losses on investments without a corresponding decrease in income from tax-exempt sources.
City Holding Company is the parent company of City National Bank of West Virginia. City National operates 69 branches across West Virginia, Eastern Kentucky and Southern 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 may experience increases in the default rates on previously securitized loans that would result in impairment losses or lower the yield on such loans; (4) the Company may not continue to benefit from strong recovery efforts on previously securitized loans resulting in improved yields on these assets; (5) the Company could have adverse legal actions of a material nature; (6) the Company may face competitive loss of customers; (7) the Company may be unable to manage its expense levels; (8) the Company may have difficulty retaining key employees; (9) 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; (10) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (11) 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; (12) the Company may experience difficulties growing loan and deposit balances; (13) the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; (14) 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; and (15) the United States government’s plan to purchase large amounts of illiquid, mortgage-backed and other securities from financial institutions may not be effective and/or it may not be available to us. 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.
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| Financial Highlights | | | | | | | | | |
| (Unaudited) | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended December 31, | | | Percent | |
| | | 2008 | | | 2007 | | | Change | |
| | | | | | | | | | |
| Earnings ($000s, except per share data): | | | | | | | | | |
| Net Interest Income (FTE) | | $ | 26,280 | | | $ | 24,264 | | | | 8.31 | % |
| Net Income | | | 4,249 | | | | 12,758 | | | | (66.70 | )% |
| Earnings per Basic Share | | | 0.26 | | | | 0.78 | | | | (66.67 | )% |
| Earnings per Diluted Share | | | 0.26 | | | | 0.78 | | | | (66.67 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Key Ratios (percent): | | | | | | | | | | | | |
| Return on Average Assets | | | 0.68 | % | | | 2.05 | % | | | (66.98 | )% |
| Return on Average Tangible Equity | | | 7.32 | % | | | 21.56 | % | | | (66.06 | )% |
| Net Interest Margin | | | 4.73 | % | | | 4.32 | % | | | 9.68 | % |
| Efficiency Ratio | | | 44.04 | % | | | 46.15 | % | | | (4.56 | )% |
| Average Shareholders' Equity to Average Assets | | | 11.53 | % | | | 11.84 | % | | | (2.62 | )% |
| | | | | | | | | | | | | |
| Consolidated Risk Based Capital Ratios (a): | | | | | | | | | | | | |
| Tier I | | | 11.85 | % | | | 14.12 | % | | | (16.08 | )% |
| Total | | | 13.04 | % | | | 15.11 | % | | | (13.70 | )% |
| | | | | | | | | | | | | |
| Tangible Equity to Tangible Assets | | | 8.83 | % | | | 9.72 | % | | | (9.19 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Common Stock Data: | | | | | | | | | | | | |
| Cash Dividends Declared per Share | | $ | 0.34 | | | $ | 0.31 | | | | 9.68 | % |
| Book Value per Share | | | 17.58 | | | | 18.14 | | | | (3.08 | )% |
| Tangible Book Value per Share | | | 13.98 | | | | 14.55 | | | | (3.91 | )% |
| Market Value per Share: | | | | | | | | | | | | |
| High | | | 42.88 | | | | 39.15 | | | | 9.53 | % |
| Low | | | 29.08 | | | | 33.41 | | | | (12.96 | )% |
| End of Period | | | 36.42 | | | | 33.84 | | | | 7.62 | % |
| | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, | | | Percent | |
| | | 2008 | | | 2007 | | | Change | |
| | | | | | | | | | | | | |
| Earnings ($000s, except per share data): | | | | | | | | | | | | |
| Net Interest Income (FTE) | | $ | 102,575 | | | $ | 97,949 | | | | 4.72 | % |
| Net Income | | | 28,109 | | | | 51,026 | | | | (44.91 | )% |
| Earnings per Basic Share | | | 1.74 | | | | 3.02 | | | | (42.38 | )% |
| Earnings per Diluted Share | | | 1.74 | | | | 3.01 | | | | (42.19 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Key Ratios (percent): | | | | | | | | | | | | |
| Return on Average Assets | | | 1.12 | % | | | 2.03 | % | | | (44.70 | )% |
| Return on Average Tangible Equity | | | 11.44 | % | | | 20.99 | % | | | (45.48 | )% |
| Net Interest Margin | | | 4.64 | % | | | 4.34 | % | | | 6.96 | % |
| Efficiency Ratio | | | 46.33 | % | | | 45.91 | % | | | 0.91 | % |
| Average Shareholders' Equity to Average Assets | | | 12.12 | % | | | 12.01 | % | | | 0.90 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Common Stock Data: | | | | | | | | | | | | |
| Cash Dividends Declared per Share | | $ | 1.36 | | | $ | 1.24 | | | | 9.68 | % |
| Market Value per Share: | | | | | | | | | | | | |
| High | | | 47.28 | | | | 41.54 | | | | 13.82 | % |
| Low | | | 29.08 | | | | 31.16 | | | | (6.68 | )% |
| | | | | | | | | | | | | |
| Price/Earnings Ratio (b) | | | 20.93 | | | | 11.21 | | | | 86.80 | % |
| | | | | | | | | | | | | |
| (a) December 31, 2008 risk-based capital ratios are estimated | | | | | | | | | |
| (b) December 31, 2008 price/earnings ratio computed based on 2008 earnings | | | | | | | | | |
a - 2007 and 2008 amounts are based on actual results. 2009, 2010, and 2011 amounts are based on estimated amounts.
Note: The amounts reflected in the table above require management to make significant assumptions based on estimated future default, prepayment, and discount rates. Actual performance could be significantly different from that assumed, which could result in the actual results being materially different from the amounts estimated above.
