City Holding Company Announces 2009 Earnings

CHARLESTON, W.Va., Jan. 21 /PRNewswire-FirstCall/ -- City Holding Company, “the Company” (Nasdaq: CHCO), a $2.6 billion bank holding company headquartered in Charleston, today announced net income of $42.6 million for the year ended December 31, 2009 compared to $28.1 million during 2008.  Diluted earnings per share increased $0.94 per share, from $1.74 in 2008 to $2.68 in 2009 primarily due to a decrease in other-than-temporary impairment charges on investments and a lower provision for loan losses.  Return on assets for the full year was 1.63%, return on tangible equity was 18.0%, the net interest margin was 4.18%, and the efficiency ratio was 50.0%.

For the fourth quarter of 2009, the Company reported net income of $11.1 million, or $0.70 per diluted share compared to $4.2 million or $0.26 per diluted share in the fourth quarter of 2008.  For the quarter, the Company achieved a return on assets of 1.69%, a return on tangible equity of 17.7%, a net interest margin of 4.07%, and an efficiency ratio of 50.3%.  

Charles Hageboeck, Chief Executive Officer and President stated “While the U.S. economy continued to struggle in 2009, I am quite pleased with City’s results.  Our asset quality continues to improve with non-performing assets, net charge-offs, and past due loans all improving as compared to December 31, 2008.  We attribute this improvement to our disciplined lending approach and the relative stability of the markets in which we operate.  For example, the national unemployment rate was 10.0% for November 2009 compared to 8.4% for West Virginia.  Likewise, the national foreclosure rate for November 2009 was 0.24% compared to 0.01% for West Virginia.  Our primary asset quality problems continue to be non-owner occupied residential construction at The Greenbrier Resort in White Sulphur Springs, West Virginia and real estate in the Eastern Panhandle of West Virginia, a distant part of the Washington DC metropolitan area.  These properties accounted for approximately one half of City’s net charge-offs in 2009.  

“City’s total non-interest revenues increased in 2009 despite the recession and lower spending by consumers which dropped our branch service charge income 2% from 2008.  Increased insurance revenues of $1.4 million, or 32%, associated with our wholly owned insurance agency, City Insurance, helped offset the lower service fee income.  Despite increased FDIC insurance costs of $2.0 million, our expenses continue to be well maintained.  The increases in FDIC insurance premiums and a special assessment ($1.2 million) – costs created by losses and failures of other banks – essentially accounted for our increase in non-interest expenses.

“Due to the historically low interest rate environment and the duration of these low levels, City’s net interest income declined during 2009.  City also experienced some additional other-than-temporary impairment losses in 2009.  However, these losses were down significantly from 2008 and we believe that our methodology in reviewing our investment portfolio is appropriate given the current economic environment.  

“City continues to have strong capital, solid liquidity, and a stable core-deposit franchise, and our asset sensitive balance sheet is poised to benefit from future interest rate increases.  We are well positioned to compete against banks as they continue to work through asset quality and liquidity issues.  We are proud to have been able to maintain our strong quarterly dividend of 34 cents per share while many of our peers eliminated or greatly reduced dividends to shareholders. City remains one of the most profitable, most liquid, and best capitalized publicly traded banks in the U.S. and looks forward to continuing to help our shareholders and customers through this difficult economic environment,” Hageboeck concluded.

Net Interest Income

The Company’s tax equivalent net interest income decreased $6.3 million, or 6.1%, from $102.6 million in 2008 to $96.3 million in 2009, as interest income from loans and investments decreased more quickly than interest expense on deposits and other interest bearing liabilities. The Company’s reported net interest margin decreased to 4.18% for the year ended December 31, 2009 as compared to 4.64% for the year ended December 31, 2008.

During the third and fourth quarters of 2008, the Company sold $450 million of interest rate floors.  The $16.7 million gain from sales of these interest rate floors is being recognized over the remaining lives of the various hedged loans – primarily prime-based commercial and home equity loans.  During the year ended December 31, 2009, the Company recognized $9.7 million of interest income from the interest rate floors compared to $8.8 million of interest income recognized during the year ended December 31, 2008.  

The Company’s tax equivalent net interest income decreased $2.5 million, or 9.4%, from $26.3 million during the fourth quarter of 2008 to $23.8 million during the fourth quarter of 2009, as interest income from loans and investments decreased more quickly than interest expense on deposits and other interest bearing liabilities.  As previously discussed, the Company is recognizing the gain from the sale of its interest rate floors over the remaining lives of the various hedged loans.  $150 million of those loans matured during 2009, resulting in a decline in interest income recognized from these floors of $1.2 million from the fourth quarter of 2008 to the fourth quarter of 2009.  

Credit Quality

The Company’s ratio of non-performing assets to total loans and other real estate owned decreased from 1.59% at September 30, 2009 to 1.43% at December 31, 2009, and improved 21 basis points from December 31, 2008.  The Company’s ratio of non-performing assets to total loans and other real estate owned compares very favorably to peers. The Company’s non-performing asset ratio of 1.43% at December 31, 2009 is only 27% of the 5.23% non-performing asset ratio reported by the Company’s peer group (bank holding companies with total assets between $1 and $5 billion) as of the most recently reported quarter ended September 30, 2009.

Past due loans increased modestly from $7.2 million at September 30, 2009 to $8.5 million or 0.47% of total loans outstanding at December 31, 2009.  Past due commercial, financial, and agriculture loans were $0.6 million or 0.08% of loans outstanding at December 31, 2009; past due residential real estate loans were $3.8 million or 0.64% of loans outstanding at December 31, 2009; and past due home equity loans were $2.4 million or 0.60% of loans outstanding at December 31, 2009.

The Company recognized net charge-offs of $2.5 million for the fourth quarter of 2009. Net charge-offs on commercial and residential loans were $1.7 million and $0.4 million, respectively, for the fourth quarter.  Charge-offs for commercial loans were primarily related to a specific Greenbrier Resort-related credit relationship that had been appropriately considered in establishing the allowance for loans losses in prior periods.  Net charge-offs for depository accounts were $0.3 million for the fourth quarter of 2009.  While charge-offs on depository accounts are appropriately taken against the Allowance for Loan Losses (“ALLL”), the revenue associated with depository accounts is reflected in service charges.

At December 31, 2009, the ALLL was $18.7 million or 1.04% of total loans outstanding and 133% of non-performing loans compared to $22.3 million or 1.23% of loans outstanding and 86% of non-performing loans at December 31, 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 $1.6 million in the fourth quarter of 2009 and $7.1 million for the year ended December 31, 2009 compared to $5.3 million and $10.4 million for the comparable periods in 2008.  The provision for loan losses recorded during 2009 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.  Despite the additional credit issues that occurred in 2009, the overall credit quality of the Company’s loan portfolio has improved over 2008, which resulted in a lower allowance for loan losses and provision for loan loss expense. 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.

Impairment Losses

During 2009, the Company recorded $5.3 million of investment impairment losses, including $0.9 million in the fourth quarter.  The charges deemed to be other than temporary were related to pooled bank trust preferreds ($0.3 million impairment in the fourth quarter and a $3.8 million impairment for the full year) with remaining book value of $7.1 million at December 31, 2009 and community bank and bank holding company equity positions ($0.6 million impairment in the fourth quarter and $1.5 million for the full year) with remaining book value of $5.1 million at December 31, 2009.  The impairment charges related to the pooled bank trust preferred securities 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 $3.8 million on the pooled bank trust preferred securities were appropriate for the year ended December 31, 2009.  The impairment charges of $1.5 million related to community bank and bank holding company equity positions were due to poor financial performance of the community banks and bank holding companies and the length of time and extent to which the market values have been below the Company’s cost basis in these positions.

Non-interest Income

Exclusive of other than temporary investment impairment losses, investment losses, and the gain from the VISA initial public offering in 2008, total non-interest income increased $1.2 million to $58.1 million for the year ended December 31, 2009 as compared to $56.9 million for the year ended December 31, 2008.  Insurance commission revenues increased $1.4 million, or 32.4%, from $4.2 million during the year ended December 31, 2008 to $5.6 million during the year ended December 31, 2009 due to contingency payments and new business.  In addition, other income increased $0.4 million and bank owned life insurance revenues increased $0.3 million as the result of proceeds from a death benefit.  Partially offsetting these increases was a decrease of $1.0 million, or 2.1%, in service charges from depository accounts.  This decrease is attributable to a general nationwide decline in consumer spending.

Exclusive of other than temporary investment impairment losses and investment losses, total non-interest income increased $0.4 million to $14.4 million for the fourth quarter of 2009 as compared to the fourth quarter of 2008.  Service charges from depository accounts increased $0.2 million and insurance commission revenues increased $0.1 million from the fourth quarter of 2008.

Non-interest Expenses

Excluding the loss on the early redemption of the trust preferred securities in 2008, total non-interest expense increased $2.7 million from $74.5 million for the year ended December 31, 2008 to $77.2 million for the year ended December 31, 2009.  Insurance and regulatory expense increased $2.0 million, or 143.4%, from the year ended December 31, 2008 primarily due to a special assessment levied by the Federal Deposit Insurance Corporation (“FDIC”) to rebuild the Deposit Insurance Fund and to help maintain public confidence in the banking system.  The special assessment of $1.2 million was principally based on the asset size of the Company’s federally insured depository institution.  Additionally, as a result of the Company fully utilizing its FDIC credits and increases in the assessment rates during 2009, FDIC related insurance expense increased $0.8 million from the year ended December 31, 2008.  Occupancy and equipment expense increased $0.8 million, or 11.9%, from the year ended December 31, 2008 due to an upgrade of the Company’s core processing system and increased occupancy expenses.  In addition, advertising expense rose $0.6 million from the year ended December 31, 2008.  Partially offsetting these increases was a decline in other expenses of $1.0 million.  The decrease in other expenses was predominately attributable to a decrease of $1.1 million of amortization expense associated with interest rate floors that were sold in the third and fourth quarters of 2008.

Total non-interest expenses increased $1.4 million from $17.8 million in the fourth quarter of 2008 to $19.2 million in the fourth quarter of 2009.    Other expenses increased $1.1 million due primarily to amortization associated with low income housing tax credits while insurance and regulatory expenses were $0.7 million higher as the Company fully utilized its FDIC credits and the assessment rates increased in 2009.  In addition, occupancy and equipment expenses increased $0.2 million and repossessed asset losses (net of expenses) increased $0.2 million from the fourth quarter of 2008.  These increases were partially offset by decreased salaries and employee benefit expenses of $0.3 million.

Balance Sheet Trends

As compared to December 31, 2008, loans have decreased $20.0 million (1.1%) at December 31, 2009 due to decreases in residential real estate loans of $16.3 million (2.7%) and commercial loans of $16.2 million (2.1%).  These decreases were partially offset by an increase in home equity loans of $14.4 million (3.8%).

Total average depository balances increased $113.9 million, or 5.6%, from the quarter ended December 31, 2008 to the quarter ended December 31, 2009.  This growth was due to increases in time deposits ($52.6 million), interest bearing demand deposits ($33.4 million), and savings deposits ($24.1 million).

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2009 was 29.5% and 32.5% compared to 31.0% and 25.2% for the quarter and year ended December 31, 2008, respectively.  The increase in the effective tax rate is attributable to higher pre-tax income in 2009 as a result of higher other than temporary impairment losses on investments and loan loss provision recorded during 2008.

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 82.8% and the loan to asset ratio was 68.3% at December 31, 2009.  The Company maintained investment securities totaling 19.6% of assets as of this date.  Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 44.4% of assets at December 31, 2009.  Time deposits fund 38.0% of assets at December 31, 2009, but very few of these deposits are in accounts that have balances of more than $150,000, reflecting the core retail orientation of the Company.

The Company is also strongly capitalized. The Company’s tangible equity ratio was 9.8% at December 31, 2009 compared with a tangible equity ratio of 8.8% at December 31, 2008.  At December 31, 2009, City National Bank’s Leverage Ratio is 8.25%, its Tier I Capital ratio is 11.06%, and its Total Risk-Based Capital ratio is 12.05%.  These preliminary regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.  Further, the Company has not achieved strong bank capital through the excessive issuance of trust preferred debt by the bank holding company or by participation in the Troubled Asset Relief Program (“TARP”).

On December 31, 2009, the Board approved a quarterly cash dividend to 34 cents per share payable January 31, 2010, to shareholders of record as of January 15, 2010.  During the quarter ended December 31, 2009, the Company repurchased 27,600 common shares at a weighted average price of $30.48.  On October 28, 2009, 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 6% 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 the previous share repurchase program plan approved in August 2007.  The Company had repurchased 900,258 shares under the August 2007 Stock Repurchase Plan.

City Holding Company is the parent company of City National Bank of West Virginia.  City National operates 67 branches across West Virginia, Eastern Kentucky and Southern Ohio.

The Company is required under generally accepted accounting principles to evaluate subsequent events through the filing of its December 31, 2009 consolidated financial statements on Form 10-K. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of December 31, 2009 and will adjust amounts preliminarily reported, if necessary.

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.

SOURCE City Holding Company