City Holding Company — Q1 2023 Form 10-Q
Business and period. City Holding is a community banking holding company operating through City National Bank, with branches across West Virginia, Kentucky, Virginia and southeastern Ohio. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are to December 31, 2022. The company acquired Citizens Commerce Bancshares on March 10, 2023, so its results include only a partial-quarter contribution from the acquisition.
Financial performance and position
- Earnings: Net income available to common shareholders was $24.3 million, up 14.0% from $21.3 million. Diluted EPS was $1.63 versus $1.41. Return on average assets was 1.63%; return on average equity was 15.8%.
- Revenue and margins: Interest income was $61.5 million versus $39.6 million. Net interest income rose 41% to $53.5 million; tax-equivalent net interest margin increased to 4.05% from 2.82%. Total noninterest income was $18.7 million versus $17.4 million, including $0.8 million of net securities gains and $0.4 million of unrealized equity-security gains.
- Expenses and credit costs: Noninterest expense rose 31% to $38.6 million, including $5.6 million of merger-related costs. Provision for credit losses was $2.9 million, compared with a $0.8 million recovery in Q1 2022. The reported efficiency ratio was 53.6%; excluding merger expenses, it was 45.7%.
- Loans and credit: Gross loans were $3.895 billion, up 6.8% from year-end, primarily reflecting $251.4 million of acquired loans. The allowance for credit losses was $22.7 million, up from $17.1 million; management attributed the increase to acquired loans and a $0.9 million provision primarily related to two commercial-loan downgrades. Nonaccrual loans were $5.7 million; none were over 90 days past due and still accruing.
- Deposits, liquidity and borrowings: Deposits were $5.137 billion, up 5.5%, including $299.2 million acquired. Cash and cash equivalents were $302.8 million. Customer repurchase agreements, reported as short-term debt, were $293.3 million; the bank had no borrowings from its Federal Reserve or FHLB facilities and reported $1.6 billion of available capacity. Management estimated 13% of deposits were uninsured.
- Cash flow and capital: Operating cash flow was $39.9 million; investing activities provided $129.4 million and financing activities used $66.4 million. Shareholders’ equity was $651.1 million. City Holding’s CET1 and total capital ratios were 15.6% and 16.2%; City National’s were 14.1% and 14.6%, respectively. Management said both were well capitalized.
Material changes and unusual items
- The Citizens acquisition was completed for approximately $62.1 million, primarily in newly issued shares. The preliminary allocation recorded $40.5 million of goodwill and an $8.3 million core deposit intangible; purchase accounting remains subject to finalization.
- Acquisition-related costs of $5.6 million included professional fees, severance and data-processing costs. The acquired portfolio also drove credit-loss expense and securities-sale gains.
- Available-for-sale securities had $149.5 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $113.0 million. Management said it did not intend, and was not more likely than not required, to sell impaired securities before recovery, and considered the losses temporary.
- The company repurchased 218,249 shares for $20.1 million during the quarter and declared dividends of $0.65 per share.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said Q1 results are not necessarily indicative of full-year results and believed available cash and expected bank dividends would meet the holding company’s needs for the next 12 months.
- Interest-rate risk is a key exposure. The company’s model estimated that an immediate, sustained 300-basis-point rate decrease would reduce net income over 12 months by 25.3%; a 300-basis-point increase was estimated to reduce it by 0.1%. Management cautioned these estimates depend on assumptions and may differ from actual results.
- Risks include deposit competition or outflows, higher funding costs, unrealized securities losses, credit deterioration, real-estate-market changes, interest-rate movements, and potential further disruption or regulatory changes following bank failures in 2023. Management also cited cybersecurity, operational, competitive, economic and acquisition-integration risks.
- Commitments to extend credit and letters of credit were outstanding; management did not anticipate material losses. The company is involved in ordinary-course legal actions, whose financial effects cannot be assured to be immaterial.
Important facts for investors to verify
- How Citizens integration, final purchase accounting and full-period results affect earnings, costs, goodwill and intangible amortization.
- Whether deposit retention and pricing trends, including uninsured-deposit levels, alter funding costs or liquidity.
- Loan growth and credit quality, especially commercial real estate exposures, downgraded loans, and the adequacy of the allowance for credit losses.
- Changes in interest-rate sensitivity and the value or liquidity implications of the securities portfolio’s unrealized losses.
- Capital and liquidity metrics, including the use of available borrowing facilities, alongside ongoing share repurchases and dividends.