City Holding Company — FY2023 Form 10-K
Business and reporting period. This annual report covers the year ended December 31, 2023; it does not provide standalone fourth-quarter results. City Holding is a community banking holding company operating through City National Bank, with 98 branches in West Virginia, Kentucky, Virginia and southeastern Ohio. It acquired Citizens Commerce Bancshares on March 10, 2023.
Financial results and condition
- Profitability: Net income was $114.4 million, up 12.0% from $102.1 million in 2022. Diluted EPS was $7.61 versus $6.80. Return on average assets was 1.87% (1.71% in 2022); return on average equity was 18.0% (16.5%).
- Net interest income and margins: GAAP net interest income rose to $219.2 million from $180.0 million. Fully taxable-equivalent net interest income was $220.3 million, up 21.5%; net interest margin increased to 4.01% from 3.33%. Higher asset yields outweighed a substantial increase in funding costs.
- Other income and expenses: Noninterest income declined to $70.6 million from $72.1 million, including $4.9 million in realized securities losses. Noninterest expense rose to $143.5 million from $124.3 million, including $5.2 million of Citizens merger costs. The efficiency ratio was 47.8%, or 46.0% excluding merger costs.
- Credit: Provision for credit losses was $3.2 million, compared with $0.5 million in 2022. The allowance for credit losses increased to $22.7 million from $17.1 million, or 0.55% of loans. Net charge-offs were 0.01% of average loans; nonperforming assets were 0.21% of loans and other real estate owned.
- Balance sheet: Total assets were $6.17 billion. Gross loans grew 13.2% to $4.13 billion, including $254.7 million acquired with Citizens; excluding the acquisition, loans grew 6.2%. Deposits increased 1.3% to $4.93 billion, but declined 4.8% excluding acquired deposits.
- Liquidity and funding: Cash and equivalents were $156.3 million; investment securities totaled $1.37 billion. The company reported $334.9 million in short-term borrowings and $100 million in long-term FHLB advances. It reported $1.9 billion of available capacity on unused FHLB and Federal Reserve Discount Window lines. Operating cash flow was $137.6 million.
- Capital: Shareholders’ equity was $677.1 million, up from $577.9 million. City Holding’s CET1, total capital and Tier 1 leverage ratios were 15.7%, 16.2% and 10.2%; City National’s were 13.8%, 14.3% and 8.9%. Management considered both well capitalized.
Material changes and unusual items
- Citizens contributed acquired loans and deposits and increased goodwill and other intangible assets; goodwill and other intangibles totaled $162.6 million at year-end. The acquisition generated $5.2 million of merger-related expenses.
- In November 2023, the company sold mortgage-backed securities with a carrying value of $107.4 million, recognizing a pretax loss of approximately $5.0 million as part of an investment portfolio repositioning. Management said it did not intend to sell other impaired securities and did not expect to be required to sell them before recovery.
- Accumulated other comprehensive loss improved to $110.5 million from $131.5 million, largely reflecting a $20.9 million net-of-tax increase in other comprehensive income. Available-for-sale securities still had $144.3 million of gross unrealized losses at year-end.
- Share repurchases totaled approximately 666,575 shares for $60.1 million during 2023. A new authorization after year-end permits repurchases of up to 1 million shares.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management anticipated annualized 2024 common dividends of approximately $42.4 million, based on a $2.86-per-share rate, while noting dividends may be suspended. City National could pay up to $53.3 million to the parent without prior regulatory permission at year-end.
- Management described liquidity as strong and believed parent-company cash and expected bank dividends would meet funding needs over the next 12 months. Interest-rate sensitivity modeling estimated net income declines under each disclosed immediate parallel rate shock, ranging from 1.6% for a 100-basis-point increase to 13.9% for a 300-basis-point decrease; estimates depend on management assumptions.
- Key risks include regional economic weakness; real estate collateral and commercial real estate exposure; borrower credit deterioration; rising deposit costs or deposit outflows; interest-rate movements; investment valuation losses; competition; and operational, cybersecurity, fraud and third-party vendor risks. Residential real estate and home-equity loans were about 47% of the portfolio; commercial and industrial plus commercial real estate were about 51%. Loans to lessors of nonresidential buildings were 15% of total loans.
- The company reported ordinary-course legal actions and said outcomes could affect financial results; it did not quantify potential exposure. It reported no material effect from cybersecurity threats as of the report date. The independent auditor issued unqualified opinions on the financial statements and internal controls; the allowance’s qualitative credit-loss factors were identified as a critical audit matter.
Important facts for investors to verify
- How much of loan and deposit growth reflects Citizens versus underlying growth or attrition, and how integration is progressing.
- Trends in deposit balances, mix, pricing and borrowing reliance, especially given the 4.8% decline in deposits excluding the acquisition.
- Credit quality and reserve adequacy, particularly commercial real estate, hotel lending, criticized loans and the increase in the allowance.
- The earnings and capital implications of securities repositioning, unrealized securities losses and future interest-rate changes.
- Whether 2024 dividends and repurchases remain consistent with subsidiary-bank dividend capacity, capital needs and regulatory limits.