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 $22.7 million and diluted earnings of $1.51 per share for the quarter ended June 30, 2022. For the second quarter of 2022, the Company achieved a return on assets of 1.51% and a return on tangible equity of 18.1%.

Net Interest Income

The Company’s net interest income increased from $37.9 million during the first quarter of 2022 to $41.3 million during the second quarter of 2022. During the second quarter of 2022, the Company’s tax equivalent net interest income increased $3.4 million, or 8.8%, from $38.2 million for the first quarter of 2022 to $41.6 million for the second quarter of 2022. Higher yields from both loans (14 basis points) and investments (26 basis points) increased net interest income by $1.5 million and $1.1 million, respectively. In addition, the yield on deposits in depository institutions also increased by 53 basis points which increased net interest income by $0.6 million. The Company’s reported net interest margin increased from 2.82% for the first quarter of 2022 to 3.04% for the second quarter of 2022.

Credit Quality

The Company’s ratio of nonperforming assets to total loans and other real estate owned increased modestly from 0.18%, or $6.3 million, at March 31, 2022 to 0.19%, or $6.8 million, at June 30, 2022. Total past due loans decreased from $6.7 million, or 0.19% of total loans outstanding, at March 31, 2022 to $6.2 million, or 0.17% of total loans outstanding, at June 30, 2022.

As a result of the Company’s quarterly analysis of the adequacy of the allowance for credit losses (“ACL”), the Company did not record a provision for credit losses in the second quarter of 2022, compared to a recovery of credit losses of $2.0 million for the comparable period in 2021 and a recovery of credit losses of $0.8 million for the first quarter of 2022. The Company did not record a provision for credit losses in the second quarter of 2022 primarily because net charge-offs and revisions to qualitative factors were essentially offset by improved loss factors and loan upgrades.

Non-interest Income

Non-interest income was $17.9 million for the second quarter of 2022 as compared to $17.4 million for the second quarter of 2021. During the second quarter of 2022, the Company reported $0.6 million of unrealized fair value losses on the Company’s equity securities as compared to $0.4 million of unrealized fair value gains on the Company’s equity securities in the second quarter of 2021. As of June 30, 2022, the fair value of these equity securities was approximately $7.9 million. Exclusive of these gains and losses, non-interest income increased from $17.0 million for the second quarter of 2021 to $18.5 million for the second quarter of 2022. This increase was primarily due to increases in service charges ($1.2 million, or 19.9%) and other revenue ($0.3 million, or 32.1%).

Non-interest Expenses

Non-interest expenses increased $1.1 million (3.8%), from $29.6 million in the second quarter of 2021 to $30.7 million in the second quarter of 2022. This increase was largely due to increased salary and employee benefits of $0.9 million. As anticipated, salary increases (4.7%) from the quarter ended June 30, 2021, were higher than the Company has typically experienced.

Balance Sheet Trends

Loans increased $6.9 million from March 31, 2022 to June 30, 2022, to $3.57 billion. PPP loans decreased $0.5 million from March 31, 2022 to $0.1 million at June 30, 2022. Excluding outstanding PPP loans (included in the commercial and industrial loan category), total loans increased $7.3 million, or 0.2%, from March 31, 2022 to $3.57 billion at June 30, 2022. Residential real estate loans increased $62.1 million (3.9%); commercial and industrial loans, excluding PPP loans, increased $23.5 million (7.0%); consumer loans increased $4.8 million (12.1%); and home equity loans increased $4.3 million (3.5%). These increases were partially offset by a decrease in commercial real estate loans of $88.0 million (6.0%). Despite solid originations during the second quarter of 2022, loan payoffs were unusually high due to the sale of one of City’s largest customers. The Company has a robust pipeline of new commercial loans that have been approved and scheduled to close in the next several months, and although we anticipate normal payoffs as well, we expect that aggregate commercial loan balances will grow in the third quarter.

Total average depository balances increased $52.3 million, or 1.1%, from the quarter ended March 31, 2022 to the quarter ended June 30, 2022. Average savings deposit balances increased $45.7 million, average noninterest-bearing demand deposit balances increased $36.6 million, and average interest-bearing demand deposit balances increased $13.9 million. These increases were partially offset by a decrease in time deposit balances of $43.8 million. While average deposits increased modestly during the quarter ended June 30, 2022, point-to-point noninterest bearing deposits and customer repurchase agreements both increased significantly from March 31, 2022. At the end of June 2022, the Company received a large, short-term inflow of funds from a customer. These funds exited the Company’s balance sheet in early July. Exclusive of this deposit, total deposits and customer repurchase agreements (combined) would have decreased approximately $85 million from March 31, 2022.

Income Tax Expense

The Company’s effective income tax rate for the second quarter of 2022 was 20.3% compared to 20.8% for the year ended December 31, 2021, and 20.3% for the quarter ended June 30, 2021.

Capitalization and Liquidity

The Company’s loan to deposit ratio was 69.4% and the loan to asset ratio was 57.1% at June 30, 2022. The Company maintained investment securities totaling 24.4% of assets as of the same date. The Company’s deposit mix is weighted heavily toward checking and saving accounts, which fund 66.6% of assets at June 30, 2022. Time deposits fund 15.8% of assets at June 30, 2022, but very few of these deposits are in accounts that have balances of more than $250,000, reflecting the core retail orientation of the Company.

The Company continues to be strongly capitalized with tangible equity of $476 million at June 30, 2022. Due primarily to unrealized security losses during the six months ended June 30, 2022, the Company’s tangible equity ratio decreased from 9.6% at December 31, 2021 to 7.8% at June 30, 2022. However, unrealized security losses are not incorporated into measures of regulatory capital. As a result, at June 30, 2022, City National Bank’s Leverage Ratio was 8.81%, its Common Equity Tier I ratio was 14.80%, its Tier I Capital ratio was 14.80%, and its Total Risk-Based Capital ratio was 15.21%. These regulatory capital ratios are significantly above levels required to be considered “well capitalized,” which is the highest possible regulatory designation.

On May 25, 2022, the Board of Directors of the Company approved a quarterly cash dividend of $0.60 per share payable July 29, 2022, to shareholders of record as of July 15, 2022. On May 25, 2022, the Company announced that the Board of Directors authorized the Company to buy back up to 1,000,000 shares of its common stock (approximately 7% 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 terminated its previous repurchase program that was approved in March 2021. The Company had repurchased 826,330 shares under the 2021 program. During the quarter ended June 30, 2022, the Company repurchased 208,000 common shares at a weighted average price of $78.33 per share. As of June 30, 2022, the Company could repurchase 895,000 additional shares under the current program.

City Holding Company is the parent company of City National Bank of West Virginia. City National Bank operates 94 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, 2021 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) the uncertainties on the Company’s business, results of operations and financial condition, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its continued influence on financial markets, the effectiveness of the Company’s work from home arrangements and staffing levels in operational facilities, the impact of market participants on which the Company relies and actions taken by governmental authorities and other third parties in response to the pandemic; (3) credit risk, including risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for loan 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; (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, 2022 Form 10-Q. The Company will continue to evaluate the impact of any subsequent events on the preliminary June 30, 2022 results and will adjust the amounts if necessary.