City Holding Company Announces 2010 Earnings

CHARLESTON, W.Va., Jan. 24, 2011 /PRNewswire/ -- City Holding Company, “the Company” (Nasdaq: CHCO), a $2.6 billion bank holding company headquartered in Charleston, today reported financial results for the year ended December 31, 2010.  The Company’s earnings remained strong while loans and deposits continued to grow as evidenced by a $72.6 million (4.1%) increase in the Company’s loan portfolio and a $23.5 million (1.1 %) increase in its average depository base from the quarter ended December 31, 2009.  This growth, bolstered by a continuation of solid credit quality trends, helped partially offset the impact of lower service fee income and decreased interest income from interest rate floors.

The Company reported net income per diluted share for 2010 of $2.47 compared to $2.68 for 2009.  Net income for 2010 was $39.0 million compared to $42.6 million for 2009. For 2010, the Company achieved a return on assets of 1.47%, a return on tangible equity of 15.0%, a net interest margin of 4.06%, and an efficiency ratio of 52.9%.

For the fourth quarter of 2010, the Company reported net income of $9.9 million, or $0.64 per diluted share compared to $11.1 million or $0.70 per diluted share in the fourth quarter of 2009. For the fourth quarter of 2010, the Company achieved a return on assets of 1.49%, a return on tangible equity of 15.0%, a net interest margin of 3.92%, and an efficiency ratio of 50.7%.  

Charles Hageboeck, President and Chief Executive Officer stated, “While our financial results are down slightly from 2009, our results compare favorably to our peers considering the many headwinds and challenges our industry encountered again this year.  Although the economy is still in a state of flux, City’s asset quality remains strong with stable and relatively low levels of past due loans.  Our nonperforming assets declined $4.8 million, or 19%, from December 31, 2009 and net charge-offs for the year were $3.2 million lower than 2009.”    

"During 2010, City maintained net interest income at nearly the same level as 2009 despite a substantial decrease in interest income from interest rate floors and a sustained and abnormally low interest rate environment.  City offset these challenges by growing its loan portfolio 4.1% during 2010 and judiciously pricing interest bearing deposits.  I am particularly pleased with our loan growth in commercial, home equity, and residential real estate portfolios at a time when many banks are experiencing declining or stable balances.”

“While City was able to successfully meet these headwinds, changes mandated in the Electronic Funds Transfer Act (“Regulation E”) and a general decline in consumer spending adversely impacted our service fee revenues.  While our customers responded to 'Regulation E' as we had anticipated (the majority of customers who utilized these services elected to “opt in” and the majority of those who had not used these services did not), the regulatory change and new processes we implemented to support it, combined with less consumer spending, reduced our service fee income by 11% compared to 2009.  City also experienced additional credit-related net impairment losses during 2010, primarily in our portfolio of community bank equity positions.”  

“In spite of these many challenges, City’s consistent history of solid earnings have enabled the Company to continue our strong quarterly dividend of 34 cents per share while many of our peers eliminated or significantly reduced shareholders dividends. City’s strong capital, liquidity, and stable core-deposits provide us with the ability to consider acquisition opportunities to grow the Company.  City remains one of the most profitable and well capitalized publicly traded banks in the U.S. and we look forward to continuing to provide our shareholders the value they have come to expect and our customers the services they need,” Hageboeck concluded.

Net Interest Income

The Company’s tax equivalent net interest income decreased $1.0 million, or 1.1%, from $96.3 million in 2009 to $95.3 million in 2010.  This decline is due to a decrease in interest income associated with the gain from the sale of interest rate floors.  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 2010, the Company recognized $4.5 million of interest income compared to $9.7 million of interest income recognized in 2009 from the interest rate floors.  This decline was partially offset by the decrease in interest expense exceeding the decline in interest income from 2009 resulting in an increase in tax equivalent net interest income of approximately $3.1 million.  In addition, the Company recognized $1.1 million of additional interest income related to three of the six pools of previously securitized loans that had a negative carrying value due to actual recoveries that exceeded estimates and discount accretion previously recognized. As a result, the carrying value for these three pools is $0 and future cash receipts related to these three pools will be recognized as interest income as received.  The Company’s reported net interest margin decreased from 4.18% for the year ended December 31, 2009 to 4.06% for the year ended December 31, 2010.

The Company’s tax equivalent net interest income decreased $0.6 million, or 2.6%, from $23.8 million during the fourth quarter of 2009 to $23.2 million during the fourth quarter of 2010.  This decline is due to a decrease in interest income associated with the gain from the sale of interest rate floors. During the fourth quarter of 2010, the Company recognized $0.8 million of interest income compared to $1.9 million of interest income recognized in the fourth quarter of 2009 from the interest rate floors. This decline was partially offset by the decrease in interest expense exceeding the decline in interest income from the fourth quarter of 2009 resulting in an increase in tax equivalent net interest income of approximately $0.5 million. The Company’s reported net interest margin decreased from 4.07% for the quarter ended December 31, 2009 to 3.92% for the quarter ended December 31, 2010.

Credit Quality

The Company’s ratio of non-performing assets to total loans and other real estate owned decreased from 1.31% at September 30, 2010 to 1.12% at December 31, 2010 and improved 31 basis points from December 31, 2009.  Past due loans increased modestly from $7.9 million at September 30, 2010 to $8.7 million or 0.47% of total loans outstanding at December 31, 2010 and increased $0.2 million from December 31, 2009.  Past due commercial, financial, and agriculture loans were $0.8 million or 0.10% of loans outstanding at December 31, 2010; past due residential real estate loans were $4.8 million or 0.78% of loans outstanding at December 31, 2010; and past due home equity loans were $2.3 million or 0.55% of loans outstanding at December 31, 2010.  

The Company recognized net charge-offs of $2.5 million for the fourth quarter of 2010. Net charge-offs on depository accounts and residential loans were $1.5 million and $0.8 million, respectively, for the fourth quarter.  Depository account charge-offs increased in the fourth quarter of 2010 due to a specific, nonrecurring depository overdraft loss during the quarter and was appropriately considered in the Company's normal process for estimating the allowance for loan losses and recognizing charge-offs.  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, 2010, the ALLL was $18.2 million or 0.98% of total loans outstanding and 156% of non-performing loans compared to $18.5 million or 1.03% of loans outstanding and 132% of non-performing loans at December 31, 2009.  

As a result of the Company’s quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of $2.3 million in the fourth quarter of 2010 and $7.1 million for the year ended December 31, 2010 compared to $1.5 million and $7.0 million for the comparable periods in 2009.  The provision for loan losses recorded during 2010 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. 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 2010, the Company recorded $6.1 million of credit-related net investment impairment losses, including $1.2 million in the fourth quarter.  The charges deemed to be other than temporary were related to pooled bank trust preferreds ($0.1 million credit-related net impairment losses in the fourth quarter and a $1.8 million credit-related net impairment losses for the full year) with remaining book value of $7.8 million at December 31, 2010; single issuer bank trust preferreds ($0.7 million credit-related net impairment losses for the full year) with remaining book value of $1.2 at December 31, 2010; and community bank and bank holding company equity positions ($1.1 million credit-related net impairment losses in the fourth quarter and $3.6 million for the full year) with remaining book value of $3.6 million at December 31, 2010.  The credit-related net impairment charges related to the pooled bank trust preferred securities and single issuer bank trust preferred securities (Cascade Capital Trust I issued by Cascade Financial of Everett, Washington) 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 credit-related impairment charges of $1.8 million and $0.7 million on the pooled bank trust preferred securities and single issuer bank trust preferred securities, respectively, were appropriate for the year ended December 31, 2010.  During the year ended December 31, 2010, the Company recognized $3.6 million of credit-related impairment charges on the Company’s equity positions due to trends of poor financial performance over the last several quarters and the length of time and the extent to which the market values of these securities have been below the Company’s cost basis in these positions.  As a result of these factors, the Company does not expect the market value of these securities to recover in the near future.  These losses were partially offset by realized investment gains of $1.4 million as the Company sold certain single issuer trust preferred securities with a remaining book value of $75.3 million during the year ended December 31, 2010.

Non-interest Income

Exclusive of net other-than-temporary investment impairment losses and realized investment security gains/(losses), non-interest income decreased $4.5 million to $53.6 million for the year ended December 31, 2010 as compared to $58.1 million for the year ended December 31, 2009.  Service charges from depository accounts decreased $5.0 million, or 11.1%, to $40.0 million for the year ended December 31, 2010.  This decline is primarily attributable to the Company’s compliance with new federal rules under the Electronic Funds Transfer Act, also known as Regulation E.  The changes to this regulation affect how banks can provide certain overdraft services, and were effective July 1, 2010 for new customers and August 15, 2010 for existing accounts.  This decrease was partially offset by an increase of $0.4 million, or 18.1%, in trust and investment management fee income from $2.4 million for the year ended December 31, 2009 compared to $2.8 million for the year ended December 31, 2010.

Exclusive of other than temporary investment impairment losses and investment losses, total non-interest income decreased $1.2 million to $13.1 million for the fourth quarter of 2010 as compared to the fourth quarter of 2009.  Service charges from depository accounts decreased $2.0 million due to the changes from complying with Regulation E and a general decline in consumer spending.  This decrease was partially offset by increases in insurance commission revenues of $0.4 million, trust and investment management fee income of $0.2 million, and other income of $0.2 million from the fourth quarter of 2009.

Non-interest Expenses

Non-interest expenses increased $1.5 million from $77.2 million for the year ended December 31, 2009 to $78.7 million for the year ended December 31, 2010.  Insurance and regulatory expense increased $1.5 million, or 44.1%, from the year ended December 31, 2009 primarily as a result of the Company fully utilizing the balance of its FDIC credits during 2009 and increases in the general assessment rates during 2010, which increased the Company’s FDIC insurance expense from $2.2 for the year ended December 31, 2009 to $3.7 million for the year ended December 31, 2010.  In addition, repossessed asset losses increased $0.8 million and salaries and employee benefits increased $0.7 million, or 1.9%, from the year ended December 31, 2009.  The repossessed asset losses were primarily due to the write down of a foreclosed property located in the eastern panhandle of West Virginia reflecting continued weakness in property values in this market.  As a result of this write down, this foreclosed property is now valued at approximately one-half of its original cost.  Partially offsetting these increases were decreases in other expenses of $0.7 million, or 7.9%, and bankcard expenses of $0.6 million, or 24.9%.  Other expenses decreased primarily due to a decrease of $0.6 million of amortization expenses associated with low income housing tax credits.  

Total non-interest expenses decreased $0.9 million from $19.3 million in the fourth quarter of 2009 to $18.4 million in the fourth quarter of 2010.  Other expenses decreased $1.1 million due primarily to amortization associated with low income housing tax credits while insurance and advertising expenses were $0.2 million lower.  These increases were partially offset by increased salaries and employee benefit expenses of $0.4 million.

Income Tax Expense

The Company’s effective income tax rate for the quarter and year ended December 31, 2010 was 29.8% and 32.1% compared to 29.5% and 32.5% for the quarter and year ended December 31, 2009, respectively.

Balance Sheet Trends

As compared to December 31, 2009, loans have increased $72.6 million (4.1%) at December 31, 2010 due to increases in commercial loans of $44.3 million (5.9%), home equity loans of $17.4 million (4.4%), and residential real estate loans of $14.7 million (2.5%).  

Total average depository balances decreased $15.0 million, or 0.7%, from the quarter ended September 30, 2010 to the quarter ended December 31, 2010.  This decline was primarily due to a decrease in time deposits of $23.6 million that was partially offset by increases in interest bearing demand deposits and noninterest bearing demand deposits of $4.8 million and $3.1 million, respectively.  As compared to the quarter ended December 31, 2009, total average depository balances have increased $23.5 million, or 1.1%, for the quarter ended December 31, 2010.  This increase was due to increased interest bearing deposits ($31.6 million), noninterest bearing deposits ($28.6 million), and savings deposits ($13.7 million) that were partially offset by a decrease in time deposits ($50.4 million).

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 85.9% and the loan to asset ratio was 70.7% at December 31, 2010.  The Company maintained investment securities totaling 17.2% of assets as of this date.  Further, the Company’s deposit mix is weighted heavily toward checking and saving accounts that fund 46.3% of assets at December 31, 2010.  Time deposits fund 36.0% of assets at December 31, 2010, 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 10.0% at December 31, 2010 compared with a tangible equity ratio of 9.8% at December 31, 2009.  At December 31, 2010, City National Bank’s Leverage Ratio is 9.62%, its Tier I Capital ratio is 12.67%, and its Total Risk-Based Capital ratio is 13.61%.  These preliminary regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On December 31, 2010, the Board approved a quarterly cash dividend to 34 cents per share payable January 31, 2011, to shareholders of record as of January 14, 2011.  During the year ended December 31, 2010, the Company repurchased 408,151 common shares at a weighted average price of $31.61 as part of a one million share repurchase plan authorized by the Board of Directors in October 2009.

City Holding Company is the parent company of City National Bank of West Virginia.  City National operates 68 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; (15) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) recently adopted by the United States Congress. 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.

SOURCE City Holding Company