City Holding Company — 2023 Third-Quarter Form 10-Q
Business context and reporting period. City Holding is a community banking holding company operating City National Bank across West Virginia, Kentucky, Virginia and southeastern Ohio. This unaudited filing covers the quarter and nine months ended September 30, 2023. The March 10 acquisition of Citizens Commerce Bancshares expanded the company’s presence in the Lexington, Kentucky area.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net income available to common shareholders | $29.8 million | $27.4 million | $86.9 million | $71.4 million |
| Diluted EPS | $1.98 | $1.83 | $5.77 | $4.75 |
| Net interest income | $55.6 million | $48.8 million | $164.6 million | $128.0 million |
| Provision for credit losses | $0.2 million | $0.7 million | $3.5 million | Recovery of $0.03 million |
| Non-interest income | $17.4 million | $18.2 million | $56.4 million | $53.5 million |
| Non-interest expense | $35.0 million | $31.5 million | $108.4 million | $91.7 million |
- Margins and returns: Reported net interest margin was 4.03% in Q3 versus 3.57% a year earlier, and 4.02% for the nine months versus 3.14%. Q3 return on assets was 1.94% and return on equity was 18.1%; nine-month results were 1.91% and 18.2%, respectively.
- Balance sheet at September 30: Total assets were $6.08 billion; gross loans were $4.01 billion and net loans $3.98 billion; deposits were $4.95 billion; shareholders’ equity was $610.1 million.
- Funding and debt: Cash and cash equivalents were $110.7 million, down from $200.0 million at year-end 2022. The company had $100 million of FHLB advances, borrowed in Q2 at a weighted average rate of 4.01% and maturing in 2027. Customer repurchase agreements were $278.7 million.
- Cash flow, nine months: Operating activities provided $104.0 million and investing activities provided $32.8 million; financing activities used $226.2 million. Cash declined $89.3 million over the period.
- Capital: City Holding’s CET1, Tier 1 and total capital ratios were 15.4%, 15.4% and 15.9%; City National’s were 14.7%, 14.7% and 15.3%. Management reported both as well capitalized.
Material changes versus comparable periods
- Q3 net income rose approximately 9% year over year; nine-month net income increased approximately 22%. Higher net interest income was the primary contributor, supported by higher loan and investment yields and the Citizens acquisition.
- Interest expense rose materially as deposit, repurchase-agreement and borrowing costs increased. Nine-month interest expense was $34.8 million versus $5.1 million a year earlier; reported net interest income nevertheless increased $36.6 million.
- Citizens added approximately $254.7 million of loans and $298.7 million of deposits at acquisition. Excluding acquired loans, loans grew $106.5 million, or 2.9%, from year-end. Excluding acquired deposits, deposits declined $223.5 million, or 4.6%.
- Non-interest expense increased, including $5.6 million of nine-month merger costs. Excluding merger costs, nine-month non-interest expense rose $11.1 million, or 12.1%, year over year.
- Available-for-sale securities had fair value of $1.36 billion against amortized cost of $1.57 billion, an unrealized loss of $214.5 million before tax. Accumulated other comprehensive loss was $166.6 million, primarily reflecting securities valuation losses.
- Allowance for credit losses rose to $23.1 million from $17.1 million at year-end. The increase included reserves related to acquired Citizens loans and provision associated with the acquisition and downgrades of two commercial loans.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management said it believes liquidity is strong and sufficient for needs over the next 12 months; it reported $1.8 billion of additional borrowing capacity and approximately $0.8 billion of unpledged securities at City National.
- Management estimated uninsured deposits at 13% of total deposits, down from 14% at year-end. It cautioned that higher rates could prompt deposit declines or shifts toward higher-cost products.
- Interest-rate sensitivity modeling estimated net income changes over 12 months of -3.2% for an immediate +300-basis-point shock and -17.3% for a -300-basis-point shock. Management emphasized that results depend on assumptions and are not forecasts.
- Key risks include credit deterioration and commercial real estate concentrations, interest-rate and securities-value exposure, deposit competition and liquidity, economic conditions, cybersecurity and operational events, regulatory changes, and banking-sector disruption. Management said securities losses were primarily rate- and market-related, did not intend to sell impaired securities, and did not consider sale before recovery more likely than not.
- Commitments to extend credit and letters of credit are off-balance-sheet exposures; management did not anticipate material losses. The company is involved in ordinary-course legal actions, whose ultimate financial effects are uncertain.
- The Citizens purchase-price allocation remained preliminary, including tax-return finalization; recorded goodwill was $41.2 million and was not expected to be tax deductible. The acquisition also generated $5.6 million of merger costs and a $0.7 million Q3 realized securities loss.
Important facts for investors to verify
- Whether deposit declines excluding Citizens continued, and how deposit pricing and mix affect funding costs and net interest margin.
- Credit trends in commercial real estate and the two downgraded commercial credits, and whether the $23.1 million allowance remains adequate as conditions change.
- The sensitivity of the $214.5 million pretax unrealized securities loss to rates, liquidity needs and any potential securities sales.
- Citizens integration, final purchase accounting and the earnings contribution relative to merger and intangible-amortization costs.
- Capital and liquidity resilience under adverse rate, deposit-runoff and economic scenarios, including the assumptions behind management’s sensitivity estimates.