For Immediate Release
January 26, 2015
For Further Information Contact:
Charles R. Hageboeck, Chief Executive Officer and President
(304) 769-1102
City Holding Company Announces Record Annual and Quarterly Earnings
Charleston, West Virginia – City Holding Company, “the Company” (NASDAQ:CHCO), a $3.5 billion bank holding company headquartered in Charleston, today announced record net income of $53.0 million, or $3.38 per diluted share, for the year ended December 31, 2014. City’s net income increased $4.8 million from 2013 due primarily to decreases in the provision for loan losses, other expenses, and income tax expense. For 2014, the Company achieved a return on assets of 1.56%, a return on tangible equity of 16.5%, a net interest margin of 3.98%, and an efficiency ratio of 53.7%.
For the fourth quarter of 2014 the Company reported net income of $14.5 million, or $0.95 per diluted share. The Company achieved a return on assets of 1.69%, a return on tangible equity of 18.3%, a net interest margin of 3.89%, and an efficiency ratio of 52.1% in the fourth quarter of 2014.
City’s CEO Charles Hageboeck stated, “I am pleased to report that 2014 was a record year for City with reported earnings of $3.38 per diluted share. Despite lower accretion income from two previous acquisitions in Virginia, City was again able to produce impressive financial results in 2014. Leading the way to our record earnings in 2014 was a decrease in our provision for loan losses. During 2014, our credit and lending teams continued their progress in resolving nonperforming loans, which declined $7.1 million, or 31%, from $22.8 million at December 31, 2013 to $15.7 million at December 31, 2014. In addition, our past due loans declined 45% to 0.40% of loans outstanding at December 31, 2014. This improvement in asset quality was consistent with recent trends, which reduced the required allowance for loan losses and enabled our provision in 2014 to decline $2.8 million from 2013.”
“Our net interest income declined $7.6 million from 2013 due to lower accretion income ($7.8 million) related to our acquisitions of Virginia Savings Bank and Community Financial Corporation (“Community Bank”). This decline was anticipated given our success in working out a significant number of larger problem loans during 2013. Excluding the impact of accretion income, our net interest margin decreased from 3.83% for the year ended December 31, 2013 to 3.75% for the year ended December 31, 2014. The compression in our net interest margin is due to the prolonged historically low interest rate environment the banking industry has experienced since 2008. While the interest rate environment remains a headwind for City, we are excited to report residential real estate loan growth of $90 million (7.5%) in 2014 and are encouraged to see our outstanding commercial loan balances rebound upward in the second half of 2014.”
“Our noninterest income grew modestly in 2014 on the strength of increased bankcard revenues and trust and investment management fee income. Noninterest expenses, excluding merger related charges in 2013, decreased $2.3 million from 2013 due largely to lower non-income based taxes. This decline, along with a decrease in the Company’s effective income tax rate, was caused by the recognition of a previously unrecognized tax position resulting from the expiration of the statute of limitations for previous years. The combined favorable impact of these discrete items for 2014 was $0.18 per diluted share (net of taxes).”
“During 2014 we increased our quarterly dividend by 8% to 40 cents per share and we repurchased 651,000 common shares. Our tangible capital of 9.4% at December 31, 2014 allows City to be poised for opportunities that may occur in the future.”
“Finally, we announced on January 12, 2015, that we sold our insurance operations, CityInsurance, to The Hilb Group effective January 1, 2015. While City has enjoyed significant success from CityInsurance in recent years, we made a strategic decision to focus on our core business of banking and to exit the rapidly consolidating insurance industry. We would like to thank the employees and leadership of CityInsurance for their service and contributions to City and wish them continued success operating as part of The Hilb Group. As a result of this sale, City will recognize a one-time after tax gain of $5.8 million from this transaction in the first quarter of 2015”, Hageboeck concluded.
Net Interest Income
The Company’s tax equivalent net interest income decreased $7.7 million, or 6.1%, from $125.9 million in 2013 to $118.2 million in 2014. This decrease is due primarily to expected decrease in accretion from the fair value adjustments related to the acquisitions of Virginia Savings Bank and Community Bank ($6.8 million for the year ended December 31, 2014 and $14.6 million for the year ended December 31, 2013). The Company’s reported net interest margin decreased from 4.33% for the year ended December 31, 2013 to 3.98% for the year ended December 31, 2014. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.75% for the year ended December 31, 2014 and 3.83% for the year ended December 31, 2013. The decrease was primarily caused by loan yields compressing from 4.48% for the year ended December 31, 2013 to 4.27% for the year ended December 31, 2014.
During the fourth quarter of 2014, the Company’s tax equivalent net interest income decreased $0.2 million, or 0.7%, from $29.6 million during the third quarter of 2014 to $29.4 million. The Company’s reported net interest margin decreased from 3.95% for the third quarter of 2014 to 3.89% for the fourth quarter of 2014. Excluding the favorable impact of the accretion from the fair value adjustments ($1.3 million for the quarter ended December 31, 2014 and $1.8 million for the quarter ended September 30, 2014), the net interest margin would have been 3.71% for both the quarter ended December 31, 2014 and the quarter ended September 30, 2014.
Credit Quality- Asset Quality Improves in 2014
The Company’s ratio of nonperforming assets to total loans and other real estate owned improved from 1.20% at December 31, 2013 to 0.90% at December 31, 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 decreased from $19.5 million, or 0.75% of total loans outstanding, at December 31, 2013 to $10.7 million, or 0.40% of total loans outstanding, at December 31, 2014. Acquired past due loans represent approximately 32% of total past due loans and have declined $13.0 million, or 79%, 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 fourth quarter of 2014 and $4.1 million for the year ended December 31, 2014 compared to $1.9 million and $6.8 million of the comparable periods in 2013. During the fourth quarter of 2014 the Company re-estimated the expected cash flows from its purchased credit impaired loans, which resulted in a $0.2 million addition to the ALLL. The provision for loan losses recorded in 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 2014. 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 2014, the Company realized investment gains of $1.2 million from the sale of certain equity positions related to community banks and bank holding companies. Exclusive of net investment securities gains, non-interest income increased $0.4 million to $57.6 million for the year ended December 31, 2014 as compared to $57.2 million for the year ended December 31, 2013. Bankcard revenues increased $1.5 million, or 11.4%, to $15.1 million and trust and investment management fee income increased $0.6 million, or 15.8%, to $4.6 million. These increases were partially offset by lower service charges on deposit accounts ($1.0 million or 3.7%) and other income ($0.7 million primarily due to lower demand for fixed rate mortgage products).
Exclusive of net investment securities gains, total non-interest income increased $0.2 million from $14.3 million for the fourth quarter of 2014 as compared to the fourth quarter of 2013. Increases in bankcard revenues ($0.3 million) and trust and investment management fee income ($0.2 million) were partially offset by decreases in service charges ($0.2 million) and bank owned life insurance revenues ($0.2 million).
Non-interest Expenses
During 2013, the Company recognized $5.5 million of acquisition and integration expenses associated with the completed acquisition of Community Bank. Excluding these expenses, noninterest expenses decreased $2.4 million from $97.4 million for the year ended December 31, 2013 to $95.0 million for the year ended December 31, 2014. This decrease was largely attributable to a decline in other expense of $2.4 million due to a decrease in non-income based taxes as a result of the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for previous tax years that was discrete to 2014. In addition, legal and professional fees also decreased $1.0 million from 2013 primarily due to lower legal settlements. Partially offsetting these decreases were increases in advertising expense ($0.6 million) and bankcard expense ($0.5 million).
For the fourth quarter of 2014, total non-interest expenses decreased $1.9 million, from $24.9 million for the fourth quarter of 2013 to $23.0 million. This decrease was attributable to a decline in other expense ($0.9 million), legal and professional fees ($0.9 million), and salaries and employee benefits ($0.4 million). Other expenses decreased due to a decrease in non-income based taxes as a result of the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for a previous tax year. As noted previously, this favorable difference was discrete to the fourth quarter of 2014. The decline in legal and professional fees from 2013 was primarily due to lower legal settlements. These decreases were partially offset by increased advertising expense of $0.3 million.
Balance Sheet Trends
Loans increased $45.9 million (1.8%) from December 31, 2013 to $2.65 billion at December 31, 2014 due to an increase in residential real estate loans of $90.1 million (7.5%) that were partially offset by decreases in commercial real estate loans($20.3 million), commercial and industrial (“C&I”) loans ($15.7 million), and consumer loans of ($6.7 million). During the first half of 2014, a variety of factors led to the decline in commercial real estate and C&I loans – a $14 million participation loan was repurchased by the lead bank (a large community bank); a $9 million loan from an acquisition that was classified as substandard was repaid in full; and a financially weak $9 million loan was refinanced by a smaller competitor that provided the borrower a cash out option. During the second half of 2014, the Company did experience an increase in commercial loan balances, particularly commercial real estate loans which increased $25.4 million from June 30, 2014 to December 31, 2014. In regards to consumer loans, the Company strategically decided to reduce the balances of an indirect portfolio of auto loans acquired with the Community Bank acquisition. These loans have higher loss percentages compared to the Company’s historical consumer portfolio and accounted for approximately $5.8 million of the decrease in 2014.
Total average depository balances increased $40.8 million, or 1.5%, from the quarter ended December 31, 2013 to the quarter ended December 31, 2014. Increases in noninterest-bearing demand deposits ($39.1 million), savings deposits ($35.4 million), and interest-bearing demand deposits ($22.5 million) were partially offset by a decrease in time deposits ($56.3 million).
Income Tax Expense
The Company’s effective income tax rate for the quarter and year ended December 31, 2014 was 29.1% and 31.4%, respectively, compared to 34.2% and 34.4% for the quarter and year ended December 31, 2013, respectively. During the quarter and the year ended December 31, 2014, the Company reduced income tax expense by $1.0 million and $1.8 million, respectively, due to the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for previous tax years. Exclusive of this discrete item recognized in the quarter and year ended December 31, 2014, the Company’s tax rate from operations was 33.8% for both periods.
Capitalization and Liquidity
The Company’s loan to deposit ratio was 92.3% and the loan to asset ratio was 76.6% at December 31, 2014. The Company maintained investment securities totaling 10.3% of assets as of this date. Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 53.4% of assets at December 31, 2014. Time deposits fund 29.7% of assets at December 31, 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 9.4% at December 31, 2014 compared to 9.5% at December 31, 2013. The Company was able to maintain approximately the same tangible capital from December 31, 2013 despite the repurchase of approximately 651,000 shares of its common stock and increasing the quarterly cash dividend by over 8%. At December 31, 2014, City National Bank’s Leverage Ratio is 8.82%, its Tier I Capital ratio is 11.93%, and its Total Risk-Based Capital ratio is 12.75%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory capital designation.
On December 17, 2014, the Board approved a quarterly cash dividend of $0.40 cents per share payable January 30, 2015, to shareholders of record as of January 15, 2015. During the year ended December 31, 2014, the Company repurchased 651,000 common shares at a weighted average price of $42.96. 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. At December 31, 2014, the Company could repurchase approximately 784,000 shares under the current 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; (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, 2013. 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 December 31, 2014 Form 10-K. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2014 results and will adjust the amounts if necessary.
