City Holding Company Announces Quarterly Results

City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $6.2 billion bank holding company headquartered in Charleston, West Virginia, today announced quarterly net income of $24.3 million and diluted earnings of $1.63 per share for the quarter ended March 31, 2023. During the first quarter of 2023, the Company completed its acquisition of Citizens Commerce Bancshares, Inc. (“Citizens”) and its principal banking subsidiary, Citizens Commerce Bank of Versailles, Kentucky, on March 10, 2023. The results for the quarter ended March 31, 2023, include $2.0 million of credit loss expense associated with loans acquired from Citizens in its total provision for credit losses and $5.6 million of acquisition and integration expenses related to the acquisition. These expenses reduced diluted earnings per share on an after-tax-basis by $0.40.

Net Interest Income

The Company’s net interest income increased approximately $1.4 million, or 2.7%, from $52.0 million during the fourth quarter of 2022 to $53.5 million during the first quarter of 2023. The Company’s tax equivalent net interest income increased $1.4 million, or 2.6%, from $52.4 million for the fourth quarter of 2022 to $53.8 million for the first quarter of 2023. The acquisition of Citizens added $0.5 million of net interest income during the quarter ended March 31, 2023. Due to recent increases in the Federal Funds rate, net interest income increased by $3.0 million due to an increase in loan yields (net of loan fees and accretion) of 43 basis points and by $0.5 million due to an increase in investment yields of 21 basis points. In addition, loan fees increased $0.6 million and an increase of 99 basis points in the yield on deposits in depository institutions increased net interest income by $0.4 million from the quarter ended December 31, 2022. These increases were partially offset by an increase in the cost of interest bearing liabilities (38 basis points) which decreased net interest income by $3.5 million. The Company’s reported net interest margin increased from 3.89% for the fourth quarter of 2022 to 4.05% for the first 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 $6.3 million, at December 31, 2022 and 0.17%, or $6.5 million, at March 31, 2023. Total past due loans decreased from $9.2 million, or 0.25% of total loans outstanding, at December 31, 2022, to $5.9 million, or 0.15% of total loans outstanding at March 31, 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 $2.9 million in the first quarter of 2023, compared to a recovery of credit losses of $0.8 million for the comparable period in 2022, and a provision for credit losses of $0.5 million for the fourth quarter of 2022. In connection with the completion of our acquisition of Citizens during the quarter ended March 31, 2023, the Company recorded $2.0 million of credit loss expense associated with loans acquired from Citizens in its total provision for credit losses. In addition, the provision for credit losses included $0.9 million that was primarily related to the downgrade of two commercial loans.

Non-interest Income

Non-interest income was $18.7 million during the quarter ended March 31, 2023, as compared to $17.5 million during the quarter ended March 31, 2022. During the first quarter of 2023, the Company reported $0.8 million of realized gains from the sale of investment securities and $0.4 million of unrealized fair value gains on the Company’s equity securities compared to $0.7 million of unrealized fair value losses on the Company’s equity securities during the first quarter of 2022. The gain from the sale of securities in the first quarter of 2023 was primarily due to the sale of Citizens investment portfolio of approximately $41 million shortly after the acquisition date. These securities were marked to market in accordance with purchase accounting rules and due to a change in market conditions and an opportunity to increase the yield on the portfolio, the Company elected to liquidate those securities. The proceeds also enabled the Company an opportunity to enhance its liquidity position.

Exclusive of these items, non-interest income decreased $0.6 million, or 3.4%, from $18.2 million for the first quarter of 2022 to $17.5 million for the first quarter of 2023. This decrease was largely attributable to a decrease of $1.2 million in bank owned life insurance due to a decrease in death benefit proceeds and a decrease of $0.2 million, or 2.4%, in service charges. These decreases were partially offset by an increase in other income of $0.5 million. Citizens’ contribution to noninterest income for the quarter ended March 31, 2023, was less than $0.1 million.

Non-interest Expenses

Non-interest expenses increased $9.1 million, or 30.8%, from $29.5 million in the first quarter of 2022 to $38.6 million in the first quarter of 2023. During the quarter ended March 31, 2023, the Company recognized $5.6 million of acquisition and integration expenses associated with the completed acquisition of Citizens. Excluding these expenses, non-interest expenses increased $3.5 million from $29.5 million in the quarter ended March 31, 2022 to $33.0 million in the quarter ended March 31, 2023. This increase was largely due to an increase in salaries and employee benefits of $2.1 million due to higher salary adjustments, increased incentive compensation, and increased health insurance cost. In addition, other expenses increased $1.3 million and equipment and software-related expenses increased $0.3 million. The acquisition of Citizens increased noninterest expenses by approximately $0.2 million during the quarter ended March 31, 2023.

Balance Sheet Trends

Loans increased $248.4 million (6.8%) from December 31, 2022 to $3.89 billion at March 31, 2023, primarily due to the Company’s acquisition of Citizens ($254.7 million). Excluding the acquisition, total loans decreased $6.3 million (0.2%), from December 31, 2022 to $3.64 billion at March 31, 2023. Commercial real estate loans decreased $27.6 million during the quarter ended March 31, 2023. This decrease was partially offset by increases in consumer loans of $15.1 million (31.0%), home equity loans of $3.3 million (2.4%), and commercial and industrial loans of $2.3 million (0.6%).

Period-end deposit balances increased $266.9 million from December 31, 2022, to March 31, 2023, due to the Company’s acquisition of Citizens ($298.7 million). Total average depository balances increased $27.1 million, or 0.6%, from the quarter ended December 31, 2022 to the quarter ended March 31, 2023. This growth was primarily attributable to deposits acquired from Citizens ($73.0 million). Exclusive of these contributions, average depository balances declined $45.9 million, or 0.9%, from the quarter ended December 31, 2022. Average savings deposit balances decreased $53.2 million, average time deposit balances decreased $30.7 million, and average noninterest-bearing demand deposit balances decreased $21.5 million. These decreases were partially offset by an increase in average interest-bearing demand deposit balances of $59.5 million.

Income Tax Expense

The Company’s effective income tax rate for the first quarter of 2023 was 20.5% compared to 19.8% for the year ended December 31, 2022, and 19.7%, for the quarter ended March 31, 2022.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 75.8% and the loan to asset ratio was 62.7% at March 31, 2023. The Company maintained investment securities totaling 23.8% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 67.2% of assets at March 31, 2023. Time deposits fund 15.5% of assets at March 31, 2023, with only 10.9% 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 Board and the Federal Home Loan Bank that can be accessed as necessary to fund operations and to provide contingency funding. As of March 31, 2023, City National had the capacity to borrow an additional $1.6 billion from these existing borrowing facilities. In addition, $803.2 million of City National’s investment securities were unpledged at March 31, 2023.

The Company continues to be strongly capitalized with tangible equity of $487 million at March 31, 2023. The Company’s tangible equity ratio increased slightly from 8.0% at December 31, 2022 to 8.1% at March 31, 2023. At March 31, 2023, City National’s Leverage Ratio was 9.18%, its Common Equity Tier I ratio was 14.08%, its Tier I Capital ratio was 14.08%, and its Total Risk-Based Capital ratio was 14.63%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On March 29, 2023, the Board of Directors of the Company approved a quarterly cash dividend of $0.65 per share payable April 28, 2023, to shareholders of record as of April 14, 2023. During the quarter ended March 31, 2023, the Company repurchased 218,000 common shares at a weighted average price of $92.10 per share as part of a one million share repurchase plan authorized by the Board of Directors in May 2022. As of March 31, 2023, the Company could repurchase 599,000 additional shares under the current program. In connection with the acquisition of Citizens, the Company issued 667,000 shares of common stock on March 10, 2023.

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 March 31, 2023 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary March 31, 2023 results and will adjust the amounts if necessary.