City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $6.1 billion bank holding company headquartered in Charleston, West Virginia, today announced record quarterly net income of $32.7 million and diluted earnings of $2.16 per share for the quarter ended June 30, 2023. For the second quarter of 2023, the Company achieved a return on assets of 2.12% and a return on tangible equity of 27.4%.

Net Interest Income

The Company’s net interest income increased approximately $2.0 million, or 3.8%, from $53.5 million during the first quarter of 2023 to $55.5 million during the second quarter of 2023. The Company’s tax equivalent net interest income increased $2.0 million, or 3.7%, from $53.8 million for the first quarter of 2023 to $55.8 million for the second quarter of 2023. The acquisition of Citizens Commerce Bancshares, Inc., and its subsidiary, Citizens Commerce Bank, (“Citizens”), during the first quarter of 2023 added $2.9 million of net interest income during the quarter ended June 30, 2023. Due to recent increases in the Federal Funds rate, net interest income increased by $1.7 million due to an increase in loan yields (net of loan fees and accretion) of 13 basis points and by $0.4 million due to an increase in the yield on deposits in depository institutions of 60 basis points. In addition, net interest income increased $0.6 million due to an increase in balances of deposits in depository institutions from the quarter ended March 31, 2023. These increases were partially offset by an increase in the cost of interest bearing liabilities (40 basis points) which decreased net interest income by $3.8 million. The Company’s reported net interest margin decreased from 4.05% for the first quarter of 2023 to 4.00% for the second quarter of 2023.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned remained stable at 0.17%, or $6.5 million, at both March 31, 2023 and June 30, 2023. Total past due loans increased from $5.9 million, or 0.15% of total loans outstanding, at March 31, 2023, to $7.4 million, or 0.19% of total loans outstanding at June 30, 2023.

As a result of the Company’s quarterly analysis of the adequacy of the allowance for credit losses, the Company recorded a provision for credit losses of $0.4 million in the second quarter of 2023, compared to no provision for credit losses for the comparable period in 2022, and a provision for credit losses of $2.9 million for the first quarter of 2023. The provision for credit losses in the second quarter was primarily the result of net charge-offs.

Non-interest Income

Non-interest income was $20.3 million during the quarter ended June 30, 2023, as compared to $17.9 million during the quarter ended June 30, 2022. During the second quarter of 2023, the Company reported $0.3 million of unrealized fair value losses on the Company’s equity securities as compared to $0.6 million of unrealized fair value losses on the Company’s equity securities during the second quarter of 2022.

Exclusive of these items, non-interest income increased $2.1 million, or 11.6%, from $18.5 million for the second quarter of 2022 to $20.6 million for the second quarter of 2023. This increase was largely attributable to an increase of $2.2 million in bank owned life insurance due to higher death benefit proceeds and an increase of $0.2 million, or 11.4%, in trust and investment management fee income. These increases were partially offset by a decrease in other income of $0.3 million and a decrease in service fees of $0.2 million, or 2.3%. Citizens’ contribution to non-interest income for the quarter ended June 30, 2023 was less than $0.1 million.

Non-interest Expenses

Non-interest expenses increased $4.1 million, or 13.3%, from $30.7 million in the second quarter of 2022 to $34.8 million in the second quarter of 2023. This increase was largely due to an increase in salaries and employee benefits of $2.0 million due to the acquisition of Citizens ($0.6 million), salary adjustments, and increased health insurance cost. In addition, other expenses increased $1.2 million, and FDIC insurance expenses increased $0.3 million.

Balance Sheet Trends

Loans increased $27.5 million (0.7%) from March 31, 2023 to $3.92 billion at June 30, 2023. Commercial and industrial loans increased $27.0 million (6.9%) and residential real estate loans increased $9.0 million (0.5%) during the quarter ended June 30, 2023. These increases were partially offset by a decrease in commercial real estate loans of $7.8 million.

Period-end deposit balances decreased $121.7 million from March 31, 2023, to June 30, 2023. Total average depository balances increased $141.9 million, or 2.9%, from the quarter ended March 31, 2023 to the quarter ended June 30, 2023. This growth was primarily attributable to deposits acquired from Citizens ($226.5 million). Exclusive of these contributions, average depository balances declined $84.6 million, or 1.7%, from the quarter ended March 31, 2023. Average savings deposit balances decreased $64.0 million and average non-interest bearing demand deposit balances decreased $44.8 million. These decreases were partially offset by increases in average interest bearing demand deposit balances of $15.4 million and average time balances of $12.4 million.

Income Tax Expense

The Company’s effective income tax rate for the second quarter of 2023 was 19.4% compared to 19.8% for the year ended December 31, 2022, and 20.3%, for the quarter ended June 30, 2022.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 78.2% and its loan to asset ratio was 63.8% at June 30, 2023. The Company maintained investment securities totaling 23.6% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 66.0% of assets at June 30, 2023. Time deposits fund 15.6% of assets at June 30, 2023, with only 11.4% of time deposits having balances of more than $250,000, reflecting the core retail orientation of the Company.

City Holding Company is the parent company of City National Bank of West Virginia (“City National”). City National has borrowing facilities with the Federal Reserve Bank and the Federal Home Loan Bank that can be accessed as necessary to fund operations and to provide contingency funding. As of June 30, 2023, City National had the capacity to borrow an additional $2.0 billion from these existing borrowing facilities. In addition, $826.3 million of City National’s investment securities were unpledged at June 30, 2023.

The Company continues to be strongly capitalized with tangible equity of $473 million at June 30, 2023. The Company’s tangible equity ratio decreased slightly from 8.0% at December 31, 2022 to 7.9% at June 30, 2023. At June 30, 2023, City National’s Leverage Ratio was 9.36%, its Common Equity Tier I ratio was 14.82%, its Tier I Capital ratio was 14.82%, and its Total Risk-Based Capital ratio was 15.36%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On May 31, 2023, the Board of Directors of the Company approved a quarterly cash dividend of $0.65 per share payable July 31, 2023, to shareholders of record as of July 14, 2023. During the quarter ended June 30, 2023, the Company repurchased 269,000 common shares at a weighted average price of $88.93 per share as part of a one million share repurchase plan authorized by the Board of Directors in May 2022. As of June 30, 2023, the Company could repurchase 329,000 additional shares under the current program.

City National operates 99 branches across West Virginia, Kentucky, Virginia, 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. Forward-looking statements express only management’s beliefs regarding future results or events and are subject to inherent uncertainty, risks, and changes in circumstances, many of which are outside of management’s control. Uncertainty, risks, changes in circumstances and other factors could cause the Company’s actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 under “ITEM 1A Risk Factors” and the following: (1) general economic conditions, especially in the communities and markets in which we conduct our business; (2) ongoing uncertainties on the Company’s business, results of operations and financial condition caused by the scope of the recovery of the COVID-19 pandemic; (3) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for credit losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations in our loan portfolio; (4) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (5) changes in the interest rate environment; (6) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (7) changes in technology and increased competition, including competition from non-bank financial institutions; (8) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers’ performance and creditworthiness; (9) difficulty growing loan and deposit balances; (10) our ability to effectively execute our business plan, including with respect to future acquisitions; (11) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (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; (13) regulatory enforcement actions and adverse legal actions; (14) difficulty attracting and retaining key employees; and (15) other economic, competitive, technological, operational, governmental, regulatory, and market factors affecting our operations. 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, 2023 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary June 30, 2023 results and will adjust the amounts if necessary.