City Holding Company — Q2 2023 Form 10-Q
Business and period: Community banking company operating through City National Bank, with 99 offices across West Virginia, Kentucky, Virginia and southeastern Ohio. This unaudited report covers the quarter and six months ended June 30, 2023; year-over-year comparisons are to the corresponding 2022 periods. On March 10, 2023, City Holding acquired Citizens Commerce Bancshares and its Kentucky bank subsidiary.
Financial performance and position
Dollar amounts are in millions unless stated otherwise.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $55.5 | $41.3 | $109.0 | $79.2 |
| Provision for (recovery of) credit losses | $0.4 | $0.0 | $3.3 | $(0.8) |
| Non-interest income | $20.3 | $17.8 | $39.0 | $35.3 |
| Non-interest expense | $34.8 | $30.7 | $73.4 | $60.2 |
| Net income | $32.7 | $22.7 | $57.1 | $44.0 |
| Diluted EPS | $2.16 | $1.51 | $3.79 | $2.92 |
| Net interest margin | 4.00% | 3.04% | 4.02% | 2.93% |
| Efficiency ratio | 44.6% | 50.5% | 49.0% | 51.1% |
Quarterly net income increased about 44% year over year, with higher net interest income the main driver. Higher loan and investment yields amid rate increases more than offset increased funding costs. The quarterly return on assets was 2.12% versus 1.51%; return on equity was 20.4% versus 14.7%. For the six-month period, reported return on assets was 1.89% versus 1.47%, and return on tangible common equity was 23.7% versus 16.6% (26.2% excluding merger-related expense and provision, a non-GAAP measure).
- Balance sheet at June 30: Assets were $6.15 billion; gross loans $3.92 billion; deposits $5.02 billion; cash and cash equivalents $231.3 million; investment securities $1.45 billion; and shareholders’ equity $636.2 million. Gross loans rose 7.6% from year-end, largely reflecting the acquisition. Excluding acquired balances, loans grew 0.6%.
- Deposits and borrowings: Deposits increased 3.0% from year-end including Citizens; excluding the acquisition, they declined $153.5 million, or 3.2%. The company had $100 million in new FHLB long-term advances, borrowed in Q2 at a 4.01% weighted-average rate, and $271.7 million in customer repurchase agreements.
- Credit: Allowance for credit losses was $22.8 million, up from $17.1 million at year-end. The filing attributes the increase principally to acquired loan reserves and provisions, including $2.8 million for acquired purchased-credit-deteriorated loans, $2.0 million of provision associated with acquired loans, and $0.9 million primarily related to downgrades of two commercial loans. Non-accrual loans without an allowance totaled $5.4 million; loans over 90 days past due and still accruing totaled $0.2 million.
- Cash flow for six months: Operating activities provided $67.3 million; investing activities provided $107.7 million; financing activities used $143.7 million. Cash increased $31.3 million to $231.3 million. Financing outflows included deposit declines and $44.1 million of treasury-stock purchases, partly offset by the $100 million FHLB borrowing.
- Capital and liquidity: City Holding’s CET1, Tier 1, total capital and leverage ratios were 15.5%, 15.5%, 16.0% and 9.8%; City National’s were 14.8%, 14.8%, 15.4% and 9.4%. Management reported both as well capitalized. City National had $2.4 billion of additional capacity under existing borrowing facilities and approximately $0.8 billion of unpledged securities. Management estimated 12% of deposits were uninsured.
Material changes and unusual items
- Citizens acquisition: City Holding issued approximately 0.7 million shares, with total consideration of $62.1 million. Acquired assets included $251.4 million of loans and $299.3 million of deposits. Preliminary purchase accounting recorded $40.5 million of goodwill and an $8.3 million core deposit intangible; allocation remained subject to finalization.
- Six-month merger-related expense was $5.6 million, primarily professional fees, severance and data-processing costs. The company reported $0.8 million of net securities gains for the half-year, primarily from selling Citizens’ approximately $41 million investment portfolio after acquisition.
- Available-for-sale securities had $167.3 million of gross unrealized losses at June 30; the related accumulated other comprehensive loss was $127.0 million. Management attributed losses mainly to interest rates and market factors, said it did not intend to sell impaired securities and did not expect to be required to sell before recovery; no securities credit-loss allowance was recorded.
- Shareholders’ equity included $130.4 million of accumulated other comprehensive loss. During the first half, the company repurchased 487,587 shares for $44.1 million and declared $1.30 per share in dividends.
Outlook, commentary and risks
The filing provides no formal earnings or financial guidance. Management said it considered the allowance for credit losses adequate and described liquidity as strong; it also cautioned that interim results are not necessarily indicative of full-year results. The company expects annualized common dividends of approximately $39 million over the next 12 months based on June 30 shares outstanding, while noting dividends could be suspended if necessary.
Interest-rate sensitivity modeling estimated that an immediate, sustained 300-basis-point increase would reduce net income over 12 months by 2.5%, while a 300-basis-point decrease would reduce it by 18.2%. These estimates depend on assumptions about deposit repricing, customer behavior, prepayments and new business and are not forecasts. Principal disclosed risks include credit deterioration and commercial real estate exposures, interest-rate and securities valuation changes, deposit competition or outflows, recession and broader banking-sector confidence, regulatory changes and assessments, cybersecurity and operational events, and acquisition execution. The company specifically warned that recent bank failures could weaken confidence, affect funding and liquidity, increase FDIC costs or prompt regulatory changes.
Important facts for investors to verify
- How Citizens integration, final purchase accounting and realized cost savings affect earnings, goodwill and capital.
- Whether deposit outflows excluding Citizens continue, and how deposit pricing and the $100 million FHLB borrowing affect net interest margin.
- Loan-quality trends, particularly commercial real estate and hotel exposures, the allowance’s adequacy, and any further commercial-loan downgrades.
- Whether unrealized securities losses, uninsured deposits and changing market confidence create liquidity, capital or earnings pressure.
- Whether actual rate movements and deposit behavior align with the filing’s interest-rate sensitivity assumptions.