City Holding Company (“Company” or “City”) (NASDAQ:CHCO), a $6.2 billion bank holding company headquartered in Charleston, West Virginia, today announced record net income of $114.4 million and record diluted earnings of $7.61 per share for the year ended December 31, 2023. For the year ended December 31, 2023, the Company achieved a return on assets of 1.87% and a return on tangible equity of 23.8%.

“2023 was a challenging year for the banking industry, but a great year for City”, said City’s President and CEO Charles Hageboeck. “City’s strong performance during the year highlights the value of the Company’s deep customer base and conservative operating principles. During 2023, City completed the acquisition of Citizens Commerce Bancshares, Inc., and its subsidiary, Citizens Commerce Bank (“Citizens”) of Versailles, Kentucky, that enhanced our market position in central Kentucky.

“Net of loans acquired from Citizens, City grew loans over 6% during 2023, and asset quality remained strong with City only needing to take a relatively small provision for the year (excluding the provision established as part of the acquisition of Citizens). The number of checking accounts grew approximately 2% in 2023, and City saw checking accounts increase in many slow growth regions where City already has a dominant market position. We believe this growth resulted from a combination of excellent service, strong products and technology, coupled with less competition than may be present in more urban markets.

“After adjusting for security gains and losses and one-time merger costs, City’s earnings per share remained essentially flat on a quarterly basis throughout 2023 – at approximately $2.00 per share. During the year, the cost of City’s deposits rose by 60 basis points, while interest earning asset yields rose by 145 basis points. City’s average deposits in the fourth quarter of 2023 declined 5.5% from average deposits in the fourth quarter of 2022 (net of deposits acquired from Citizens), but declined only 0.5% from the third quarter of 2023 that reflects an attractive customer mix which is dependent on many, small retail deposit customers.

“City issued 667,000 shares in its acquisition of Citizens in the first quarter of 2023, but was able to repurchase essentially all of those shares during the year. As a result, the number of City’s shares outstanding at the end of 2023 only grew marginally from the end of 2022 (due to shares issued for employee and director compensation) – and City’s tangible common equity ratio increased from 8.0% at December 31, 2022, to over 8.6% at December 31, 2023 despite the large number of shares purchased.

“As a result, City begins 2024 exceptionally positioned with an extremely strong customer franchise, an exceptional team, an enviable cost of funds, strong asset quality, and competitors who seem focused on making their customers banking experiences more difficult.”

Net Interest Income

The Company’s net interest income increased from $180.0 million for the year ended December 31, 2022 to $219.2 million for the year ended December 31, 2023. The Company’s tax equivalent net interest income increased $39.0 million, or 21.5%, from $181.3 million for the year ended December 31, 2022 to $220.3 million for the year ended December 31, 2023. The acquisition of Citizens during the first quarter of 2023 added $10.6 million of net interest income during the year ended December 31, 2023. Due to increases in market rates, net interest income increased by $47.2 million due to an increase in loan yields (net of loan fees and accretion) of 127 basis points, by $14.2 million due to an increase in the yield on investment securities of 97 basis points, and by $4.9 million due to a 342 basis point increase on deposits in depository institutions. In addition, net interest income increased $4.4 million due to an increase in balances of loans of $110.2 million and by $2.0 million due to additional accretion from the year ended December 31, 2022.

These increases were partially offset by an increase in the cost of interest bearing liabilities (110 basis points) which decreased net interest income by $41.6 million, lower balances of deposits in depository institutions ($214.9 million) that lowered net interest income by $2.3 million, and lower investment balances ($57.8 million) that lowered net interest income by $1.6 million. The Company’s reported net interest margin increased from 3.33% for the year ended December 31, 2022 to 4.01% for the year ended December 31, 2023.

During the fourth quarter of 2023, the Company’s net interest income decreased from $55.6 million during the third quarter of 2023 to $54.7 million. During the fourth quarter of 2023, the Company’s tax equivalent net interest income decreased $1.0 million, or 1.7%, to $54.9 million from $55.9 million during the third quarter of 2023. Due to an increase in the cost of interest bearing liabilities (22 basis points), net interest income decreased $1.8 million. Additionally, lower investment balances ($100.4 million) decreased net interest income by $0.9 million and an increase in balances of interest bearing liabilities ($40.2 million) decreased net interest income by $0.6 million. These decreases were partially offset by an increase in loan balances of $89.0 million which increased net interest income by $1.3 million, an increase of 18 basis points on investment security yields which increased net interest income by $0.7 million, and an increase of one basis point on loans yields which increased net interest income by $0.6 million. The Company’s reported net interest margin decreased from 4.03% for the third quarter of 2023 to 3.98% for the fourth quarter of 2023.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased from 0.17%, or $6.3 million, at December 31, 2022 to 0.21%, or $8.6 million at December 31, 2023 primarily as a result of the acquisition of Citizens. Total past due loans increased from $9.2 million, or 0.25% of total loans outstanding, at December 31, 2022 to $10.9 million, or 0.27% of total loans outstanding, at December 31, 2023.

As a result of the Company’s quarterly analysis of the adequacy of the Allowance for Credit Losses, the Company recorded a recovery of credit losses of $0.3 million in the fourth quarter of 2023 and a provision for credit losses of $3.2 million for the year ended December 31, 2023, compared to a $0.5 million provision for credit losses for the fourth quarter and for the year ended December 31, 2022. In connection with the completion of our acquisition of Citizens during 2023, the Company recorded $2.0 million of credit loss expense associated with loans acquired from Citizens in its total provision for credit losses. Additionally, the provision for the year ended December 31, 2023 was a result of loan growth and credit downgrades that were partially offset by lower historical loss rates in the loan portfolio.

Non-interest Income

Non-interest income was $70.6 million for the year ended December 31, 2023, as compared to $72.1 million for the year ended December 31, 2022. In 2023, the Company reported $4.9 million of realized security losses and $0.4 million of unrealized security gains on the Company’s equity securities as compared to $1.6 million of unrealized security losses on the Company’s equity securities in 2022. The realized security losses during 2023, which lowered diluted earnings per share by $0.25, were executed to reposition a portion of our investment securities.

Exclusive of these realized and unrealized gains and losses, non-interest income increased $1.4 million, or 2.0%, from $73.7 million for 2022 to $75.1 million for 2023. This increase was largely attributable to an increase of $0.8 million, or 8.7%, in trust and investment management fee income and a $0.6 million, or 2.2%, increase in bankcard revenue. In addition, death benefits from bank owned life insurance increased $0.5 million from the year ended December 31, 2022. These increases were partially offset by a decrease of $0.6 million in service charges.

During the quarter ended December 31, 2023, non-interest income was $14.2 million as compared to $18.5 million during the quarter ended December 31, 2022. During the fourth quarter of 2023, the Company reported $5.0 million of realized security losses and $0.4 million of unrealized fair value gains on the Company’s equity securities as compared to $0.3 million of unrealized fair value losses on the Company’s equity securities during the fourth quarter of 2022.

Exclusive of these realized and unrealized gains and losses, non-interest income remained consistent at $18.8 million for both the fourth quarter of 2022 and for the fourth quarter of 2023. Lower death benefits from bank owned life insurance of $0.6 million was essentially offset by higher bankcard revenue, $0.3 million or 4.7%, and trust and investment management fee income, $0.2 million or 9.4%.

Non-interest Expenses

Non-interest expenses increased $19.2 million, or 15.5%, from $124.3 million for 2022 to $143.5 million for 2023. This increase was primarily due to an increase in other expenses ($9.8 million, due primarily to higher acquisition and integration expenses associated with the completed acquisition of Citizens ($5.2 million)) and salaries and employee benefit expenses ($6.6 million due to salary adjustments, Citizens personnel ($1.9 million), and increased health insurance). In addition, bankcard expense increased $1.4 million, FDIC expense increased $1.2 million and occupancy related expenses increased $0.6 million.

In the fourth quarter of 2023, non-interest expenses increased $2.5 million (7.7%) from $32.6 million in the fourth quarter of 2022 to $35.1 million. This increase was largely due to an increase in salaries and employee benefits of $1.6 million (salary adjustments, Citizens personnel ($0.6 million), and increased health insurance) and bankcard expenses of $0.7 million. In addition, other expenses increased $0.5 million and FDIC expense increased $0.5 million. These increases were partially offset by lower equipment and software related expense ($0.5 million).

Balance Sheet Trends

Loans increased $479.7 million (13.2%) from December 31, 2022 to $4.13 billion at December 31, 2023. The Company’s acquisition of Citizens increased total loans by $254.7 million. Excluding the acquisition, total loans increased $225.0 million (6.2%) from December 31, 2022. Commercial real estate loans increased $101.4 million (7.3%); residential real estate loans increased $51.3 million (3.0%); commercial and industrial loans increased $38.4 million (10.3%); home equity loans increased $19.1 million (14.3%); and consumer loans increased $13.4 million (27.4%).

Average depository balances for the year ended December 31, 2023 approximated those for the year ended December 31, 2022 at $4.98 billion. The acquisition of Citizens increased average deposits by $243.0 million during 2023. Excluding the acquisition of Citizens, average deposits declined $237.9 million. Average savings deposits decreased $139.7 million, average noninterest bearing demand deposits decreased $87.3 million, and average time deposits decreased $68.3 million. These decreases were partially offset by an increase in average interest bearing demand deposits of $57.3 million.

Income Tax Expense

The Company’s effective income tax rates for the quarter and year ended December 31, 2023 were 19.5% and 20.1%, respectively, compared to 18.2% and 19.8% for the comparable periods in 2022.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 83.6% and the loan to asset ratio was 66.9% at December 31, 2023. The Company maintained investment securities totaling 22.2% of assets as of the same date. The Company’s deposit mix is weighted toward checking and saving accounts that fund 63.1% of assets at December 31, 2023. Time deposits fund 16.9% of assets at December 31, 2023, with only 12.6% 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. These borrowing facilities are collateralized by various loans held on City National’s balance sheet. As of December 31, 2023, City National had the capacity to borrow an additional $2.0 billion from these existing borrowing facilities. In addition, approximately $690 million of City’s investment securities were pledged to collateralize customer repurchase agreements and various deposit accounts, leaving approximately $680 million of City’s investment securities unpledged at December 31, 2023.

The Company continues to be strongly capitalized with tangible equity of $514 million at December 31, 2023. The Company’s tangible equity ratio increased from 8.0% at December 31, 2022 to 8.6% at December 30, 2023. This increase was attributable to the Company’s net income for 2023 less dividends and a decrease in unrealized losses on securities available for sale due to the impact of lower interest rates at the end of 2023.

At December 31, 2023, City National’s Leverage Ratio was 8.9%, its Common Equity Tier I ratio was 13.8%, its Tier I Capital ratio was 13.8%, and its Total Risk-Based Capital ratio was 14.3%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On November 15, 2023, the Company’s Board of Directors approved a quarterly cash dividend of $0.715 cents per share payable January 31, 2024, to shareholders of record as of January 15, 2024. During the year ended December 31, 2023, the Company repurchased 667,000 common shares at a weighted average price of $90.21 per share as part of a one million share repurchase plan authorized by the Board of Directors in May 2022. As of December 31, 2023, the Company could repurchase an additional approximately 150,000 shares under the current plan.

City National Bank operates 98 branches across West Virginia, Kentucky, Virginia, and Ohio. City National will be closing its Nichols Park branch located in Lexington, Kentucky on February 9, 2024, due to its proximity to three existing City National branches.

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) 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; (3) changes in the real estate market, including the value of collateral securing portions of our loan portfolio; (4) changes in the interest rate environment; (5) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (6) changes in technology and increased competition, including competition from non-bank financial institutions; (7) changes in consumer preferences, spending and borrowing habits, demand for our products and services, and customers’ performance and creditworthiness; (8) difficulty growing loan and deposit balances; (9) our ability to effectively execute our business plan, including with respect to future acquisitions; (10) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries, including changes in deposit insurance premiums; (11) 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; (12) regulatory enforcement actions and adverse legal actions; (13) difficulty attracting and retaining key employees; and (14) 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 December 31, 2023 Form 10-K. The Company will continue to evaluate the impact of any subsequent events on the preliminary December 31, 2023 results and will adjust the amounts if necessary.