-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, JM2vw2WZ1cDcWmf3+hsv+X+JRa947CVUwSItcTOu9jo6SUJNa0T63Q9uFFjrdufU exBeLPRO84VurxkqZYIG/Q== 0000916641-95-000161.txt : 19950517 0000916641-95-000161.hdr.sgml : 19950516 ACCESSION NUMBER: 0000916641-95-000161 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY HOLDING CO CENTRAL INDEX KEY: 0000726854 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 550619957 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11733 FILM NUMBER: 95537404 BUSINESS ADDRESS: STREET 1: 3601 MACCORKLE AVE SE CITY: CHARLESTON STATE: WV ZIP: 25304 BUSINESS PHONE: 3049256611 MAIL ADDRESS: STREET 1: 3601 MACCORKLE AVE SE CITY: CHARLESTON STATE: WV ZIP: 25301 10-Q 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number March 31, 1995 0-11733 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3601 MacCorkle Avenue, Southeast Charleston, West Virginia 25304 (Address of principal offices) Registrant's telephone number, including area code: (304) 925-6611 Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes xx No The number of shares outstanding of the issuer's common stock as of May 5, 1995: Common Stock, $2.50 Par Value -- 3,777,933 shares THIS REPORT CONTAINS 26 PAGES. EXHIBIT INDEX IS LOCATED ON PAGE 25 . Index City Holding Company and Subsidiaries PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated balance sheets -- March 31, 1995 (unaudited) and December 31, 1994 Consolidated Statements of Income (unaudited) -- Three months ended March 31, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity (unaudited) -- Three months ended March 31, 1995 and 1994 Consolidated Statements of Cash Flows (unaudited) --Three months ended March 31, 1995 and 1994 Notes to Consolidated Financial Statements (unaudited) -- March 31, 1995 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES Item I. MARCH 31 DECEMBER 31 1995 1994 (unaudited) ASSETS Cash and due from banks $ 21,036,000 $ 27,591,000 Securities available for sale, at fair value 68,134,000 67,920,000 Investment securities (approximate market values: March 31, 1995--$120,552,000; December 31, 1994--$123,995,000) 122,579,000 128,457,000 Loans Gross loans 537,147,000 504,956,000 Unearned income (9,076,000) (9,544,000) Allowance for possible loan losses (6,040,000) (6,017,000) NET LOANS 522,031,000 489,395,000 Loans held for sale 44,833,000 30,227,000 Bank premises and equipment 18,432,000 17,678,000 Accrued interest receivable 5,643,000 5,922,000 Other assets 12,949,000 13,336,000 TOTAL ASSETS $ 815,637,000 $ 780,526,000 LIABILITIES Deposits: Noninterest-bearing $ 81,424,000 $ 80,694,000 Interest-bearing 574,542,000 570,570,000 TOTAL DEPOSITS 655,966,000 651,264,000 Short-term borrowings 88,796,000 57,483,000 Long-term debt 4,825,000 6,875,000 Other liabilities 7,069,000 8,035,000 TOTAL LIABILITIES 756,656,000 723,657,000 STOCKHOLDERS' EQUITY Preferred stock, par value $25 a share: Authorized-500,000 shares; none issued Common stock, par value $2.50 a share: authorized 20,000,000 shares; issued and outstanding 3,779,818 shares as of March 31, 1995 and December 31, 1994, including 1,885 shares in treasury at March 31, 1995. 9,451,000 9,451,000 Capital Surplus 18,887,000 18,887,000 Retained Earnings 31,750,000 30,605,000 Cost of common stock in treasury (53,000) NONE Net unrealized loss on securities available for sale, net of deferred income taxes (1,054,000) (2,074,000) TOTAL STOCKHOLDERS' EQUITY 58,981,000 56,869,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 815,637,000 $ 780,526,000
See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES THREE MONTH PERIOD ENDED March 31 1995 1994 INTEREST INCOME Interest and fees on loans $ 11,726,000 $ 8,985,000 Interest and dividends on securities: Taxable 2,639,000 3,135,000 Tax-exempt 420,000 447,000 Other interest income 0 98,000 TOTAL INTEREST INCOME 14,785,000 12,665,000 INTEREST EXPENSE Interest on deposits 5,369,000 4,889,000 Interest on short-term borrowings 799,000 109,000 Interest on long-term debt 130,000 97,000 TOTAL INTEREST EXPENSE 6,298,000 5,095,000 NET INTEREST INCOME 8,487,000 7,570,000 PROVISION FOR POSSIBLE LOAN LOSSES 183,000 201,000 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 8,304,000 7,369,000 OTHER INCOME Securities gains(losses) 3,000 69,000 Service charges 620,000 498,000 Other 472,000 318,000 TOTAL OTHER INCOME 1,095,000 885,000 OTHER EXPENSES Salaries and employee benefits 3,565,000 3,024,000 Net occupancy expense 1,093,000 969,000 Other 2,184,000 1,837,000 TOTAL OTHER EXPENSES 6,842,000 5,830,000 INCOME BEFORE INCOME TAXES 2,557,000 2,424,000 INCOME TAXES 813,000 766,000 NET INCOME $ 1,744,000 $ 1,658,000 Net income per common share $ .46 $ .44 Average common shares outstanding 3,778,965 3,772,006 See notes to consolidated financial statements STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES Three months Ended March 31, 1995
NET UNREALIZED GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY Balances at December 31, 1994 $9,451,000 $18,887,000 $30,605,000 ($2,074,000) 0 $56,869,000 Net income 1,744,000 1,744,000 Cash dividends declared ($.16/share) (599,000) (599,000) Change in unrealized gain/(loss) net of income taxes of $719,000 1,020,000 1,020,000 Cost of 2,313 shares of common stock acquired for treasury (65,000) (65,000) Issuance of 428 shares of treasury stock 12,000 12,000 Balances at March 31, 1995 $9,451,000 $18,887,000 $31,750,000 $(1,054,000) ($53,000) $58,981,000 Three months Ended March 31, 1994 NET UNREALIZED GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY Balances at December 31, 1993 $8,846,000 $13,999,000 $35,222,000 ($23,000) ($2,210,000) $55,834,000 Net income 1,658,000 1,658,000 Cash dividends declared ($.15/share) (476,000) (476,000) Adjustment to beginning balance of unrealized gain on securities for change in accounting method, net of income taxes of $704,000 1,055,000 1,055,000 Changes in net unrealized gain/(loss), net of income taxes of $597,000 (905,000) (905,000) Issuance of 1,053 shares of treasury stock 5,000 25,000 30,000 Balances at March 31, 1994 $8,846,000 $14,004,000 $36,404,000 $ 127,000 ($2,185,000) $57,196,000
See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTH PERIOD ENDED MARCH 31 1995 1994 OPERATING ACTIVITIES Net Income $1,744,000 $1,658,000 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization 236,000 237,000 Provision for depreciation 534,000 389,000 Provision for loan losses 183,000 201,000 Realized securities gains (3,000) (69,000) Loan originated for sale (9,114,000) (2,418,000) Purchases of loans held for sale (43,448,000) (15,861,000) Proceeds from loans sold 37,998,000 0 Realized gains on loans sold (42,000) 0 Minority interest in income of subsidiary 0 17,000 Decrease (increase) in accrued interest receivable 279,000 (85,000) Increase in other assets (444,000) (1,233,000) Decrease (increase) in other liabilities (966,000) 425,000 NET CASH USED IN OPERATING ACTIVITIES (13,043,000) (16,739,000) INVESTING ACTIVITIES Proceeds from sales of securities available for sale 10,533,000 3,305,000 Proceeds from maturities of securities available for sale 2,325,000 10,656,000 Purchases of securities available for sale (11,273,000) (9,074,000) Proceeds from sales of securities 3,000,000 0 Proceeds from maturities of securities 3,697,000 56,722,000 Purchases of securities (1,000,000) (48,330,000) Net increase in loans (32,819,000) (4,953,000) Purchases of premises and equipment (1,288,000) (541,000) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (26,825,000) 7,785,000 FINANCING ACTIVITIES Net increase in noninterest bearing deposits 730,000 2,027,000 Net increase in interest-bearing deposits 3,972,000 13,519,000 Net increase (decrease) in short-term borrowings 31,313,000 (5,089,000) Proceeds from long-term-debt 2,150,000 0 Repayment of long-term debt (4,200,000) 0 Purchases of treasury stock (65,000) 0 Proceeds from sales of treasury stock 12,000 30,000 Cash dividends paid (599,000) (476,000) NET CASH PROVIDED BY FINANCING ACTIVITIES 33,313,000 10,011,000 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,555,000) 1,057,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,591,000 27,436,000 CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,036,000 $28,493,000
See notes to consolidated financial statement NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 1995 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements, which are unaudited, include all the accounts of City Holding Company (the Parent Company) and its wholly owned subsidiaries (collectively, the Company). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 1995, are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 1995. The Company's accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. For further information, refer to the consolidated financial statements and footnotes thereto included in the City Holding Company annual report on Form 10-K for the year ended December 31, 1994. NOTE B - INCOME TAXES The consolidated provision for income taxes is based upon financial statement earnings. The effective tax rate for the three months ended March 31, 1995, of 31.80% varied from the statutory federal income tax rate primarily due to state income taxes and the tax effects of nontaxable interest income and the amortization of goodwill. NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, that are not included in the consolidated financial statements. These commitments approximate $49,248,000 at March 31, 1995. These arrangements, consisting principally of unused lines of credit issued in the normal course of business, have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Standby letters of credit, which total $3,662,000, have historically expired unfunded. NOTE D - STOCKHOLDERS' EQUITY In April 1994, the Company announced the implementation of an Open Market Stock Purchase Plan (the Plan). The Board of Directors allocated $5 million to be used over the next two years to purchase shares of the Company's common stock. The Plan was authorized to commence May 1, 1994. The Plan as of March 31, 1995 has not reacquired a material number of shares. NOTE E - ACCOUNTING PRONOUNCEMENT WITH DELAYED EFFECTIVE DATE On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that impaired loans be identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate on the fair value of the collateral if the loan is collateral dependent. FAS No. 114 did not have a material impact on the Company's financial position or results of operations. NOTE F - PENDING MERGER In March 1995, the Company signed a definitive agreement to acquire First Merchants Bancorp, Montgomery, West Virginia (Merchants). At March 31, 1995, Merchants reported total assets of approximately $108 million. Under the definitive agreement signed by the parties, Merchants shareholders will receive 1.60 shares of the Company's common stock for each share of Merchants' 576,000 outstanding shares. It is anticipated that the transaction will be accounted for under the pooling of interests method of accounting. It is expected that the merger will be consummated in the third quarter of 1995. The following condensed unaudited proforma financial information presents selected balance sheet amounts and operating results of the Company and Merchants as though they had been combined during all periods indicated below. (In thousands, except per share data) December 31 March 31 March 31 1994 1995 1994 AT PERIOD END Net loans $547,809 $573,225 $469,860 Total deposits 746,805 751,005 728,676 Total assets 895,817 923,783 830,187 SUMMARY OF OPERATIONS Year Ended Three months December 31 March 31 1994 1995 1994 Net interest income $ 37,594 $ 9,707 $ 8,685 Net income 8,142 2,040 1,906 Net income per common share 1.74 .43 .41 NOTE G - LONG-TERM BORROWINGS Long-term debt consists of a $10,000,000 revolving line of credit of the Parent Company with a variable rate based on the lesser of the adjusted LIBOR rate plus 1.875% per annum or the lender's base rate less .25% per annum (8.00% at March 31, 1995) due on June 30, 1995. The lender has the option to extend the maturity date for an additional twelve months. As of March 31, 1995, the outstanding balance was equal to $4,825,000. Interest on this obligation is payable quarterly, and the Parent Company has pledged the common stock of The City National Bank of Charleston and the Peoples Bank of Point Pleasant as security for the loan. Management intends to refinance this loan according to the provisions provided in the agreement. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENT On March 14, 1995, the Company agreed to acquire First Merchants Bancorp ("Merchants"), the parent company of First Merchants National Bank ("First Merchants"). At March 31, 1995, Merchants operated five branches in West Virginia and had total assets of approximately $108 million, total deposits of $95 million and stockholders' equity of approximately $10 million. For additional information with respect to the acquisition, including summary pro forma financial information, see Note F, Pending Merger, to the Company's financial statements included herein. With the acquisition of Merchants and First Merchants, the Company continues to implement its strategy of building shareholder value by combining with healthy institutions in attractive markets. HIGHLIGHTS FINANCIAL POSITION Total assets increased $35.1 million or approximately 4.5% during the first three months of 1995. Net loans increased $32.6 million or 6.7%. Loans held for sale, consisting primarily of loans received through the Company's participation in a short-term whole loan bulk purchasing program, increased $14.6 million or 48%. As of March 31, 1995, program loans owned by the Company had an outstanding principal balance of approximately $34.6 million. See LOAN PORTFOLIO. The Company earned interest income of approximately $394,000 on program loans during the first quarter of 1995. See NET INTEREST INCOME. The increases in net loans and loans held for sale were funded by an increase in short-term borrowings of $31.3 million Net stockholders' equity increased $2.1 million during the first three months of 1995 representing the Company's retained net profits, plus the $1 million change in the net unrealized loss on securities available for sale. QUARTER ENDED MARCH 31, 1995, COMPARED TO QUARTER ENDED MARCH 31, 1994. The Company reported net income of $1,744,000 for the three months ended March 31, 1995 compared to net income of $1,658,000 for the quarter ended March 31, 1994. This increase of $86,000, or 5.19%, was primarily due to an increase of $916,000 in the Company's net interest income during the first quarter of 1995 as compared to the same period of 1994. However, the increase in net interest income did not translate into a corresponding increase in net income because of the level of non-interest expense associated with Company expansion, which increased $1,012,000 or 17% during the first quarter of 1995 as compared to the same period of 1994. See NET INTEREST INCOME for further discussion. Earnings per share were $.46 and $.44 for the first quarter of 1995 and 1994, respectively. Total other income, excluding securities transactions, increased $276,000 or 34% primarily due to fees generated from increased loan volume and return item fees on deposits collected through the ordinary course of business. SELECTED RATIOS The return on average assets (ROA) for the first quarter of 1995 was .89% compared to .93% in the first quarter of 1994. The return on average shareholder's equity (ROE) for the first quarter of 1995 was 12.33% compared to 11.59% ROE for the first quarter of 1994. The dividend payout ratio of 34.78% for the quarter ended March 31, 1995 represents a slight increase of 2.02% from the quarter ended March 31, 1994. Since 1988, the Company has paid dividends on a quarterly basis, and expects to continue to do so in the future. LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: LOAN PORTFOLIO BY TYPE (Dollars in Thousands) March 31 December 31 1995 1994 Commercial, financial and agricultural $160,587 $137,425 Real Estate-Mortgage 230,545 223,113 Real Estate-Construction 17,123 15,118 Installment and other 128,892 129,300 Unearned Income (9,076) (9,544) TOTAL $528,071 $495,412 Loans Held for Sale Program loans $ 34,554 $ 22,379 Loans Originated for Sale 10,279 7,848 TOTAL $ 44,833 $ 30,227 The Company grants loans to customers generally within the market areas of its subsidiaries. Loans have been trending up significantly over the past two years primarily due to the Company's more active solicitation of commercial business, introduction of new loan products, and continued expansion. There have been no significant changes in the Company's loan policy or credit standards. The Company continues to shift its marketing efforts more towards direct loan business. There are no significant concentrations of credit and speculative or highly leveraged transactions are insignificant. Also, in order to increase the repricing frequency of the loan portfolio, the Company has significantly increased its portfolio of variable rate commercial and residential mortgage loans. ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the Company's risk elements for the periods ending March 31, 1995 and December 31, 1994. The Company's coverage ratio of nonperforming assets and potential problem loans continues to be strong, at 135% as of March 31, 1995. Management is of the opinion that the allowance for loan losses is adequate to provide for probable future losses inherent in the portfolio. RISK ELEMENTS (in thousands) Three months Ended Year Ended March 31 December 31 1995 1994 ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $6,017 $ 5,764 Charge-offs (272) (1,093) Recoveries 112 393 Net charge-offs (160) (700) Provision for loan possible losses 183 953 Balance at end of period $6,040 $6,017 AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs 0.03% 0.16% Provision for possible loan losses 0.04% 0.21% Allowance for loan losses 1.19% 1.34% March 31 December 31 1995 1994 NON -PERFORMING ASSETS Other real estate owned $867 $679 Non-accrual loans 1,811 2,600 Accruing loans past due 90 days or more 1,028 1,218 Restructured loans 260 472 Total Non-performing Assets $3,966 $4,969 POTENTIAL PROBLEM LOANS $521 $529 AS A PERCENT OF NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS Allowance for loan losses 134.61% 109.44% ACCRUING LOANS PAST DUE 90 DAYS OR MORE AS A PERCENT OF AVERAGE TOTAL LOANS 0.20% 0.27% LIQUIDITY AND INTEREST RATE SENSITIVITY The Company's cash and cash equivalents, represented by cash and due from banks and overnight federal funds sold, is a product of its operating, investing and financing activities. These activities are set forth in the City Holding Company Consolidated Statements of Cash Flows included elsewhere herein. Cash was used in operating activities in each period presented, primarily from loans originated for sale and purchase of loans held for sale. Net cash was used in investing activities during the first quarter of 1995 funding the Company's loan growth. Net cash was provided by investing activities during the first quarter of 1994 due to maturing investment securities. The net cash provided by financing activities in the respective periods is a result of an increase in interest- bearing deposits and short-term borrowings. The Company seeks to maintain a strong liquidity position to reduce interest rate risk, which is the susceptibility of assets and liabilities to decline in value as a result of changes in general market interest rates. The Company minimizes this risk through asset and liability management, where the goal is to optimize earnings while managing interest rate risk. The Company measures this interest rate risk through interest sensitivity gap analysis as illustrated in the following table. At March 31, 1995, the one year period shows a negative gap (liability sensitive) of $318 million. This analysis is a "static gap" presentation and movements in deposit rates offered by the Company's subsidiary banks lag behind movements in the prime rate. Such time lags affect the repricing frequency of many items on the Company's balance sheet. Accordingly, the sensitivity of deposits to changes in market rates may differ significantly from the related contractual terms. The table is first presented without adjustment for expected repricing behavior. Then, as presented in the "management adjustment" line, these balances have been notionally distributed over the first three periods to reflect those portions of such accounts that are expected to reprice fully with market rates over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of such allocations by each of the affiliate banks, and is based upon historical experience with their individual markets and customers. Management expects to continue the same pricing methodology in response to future market rate changes; however, management adjustments may change as customer preferences, competitive market conditions, liquidity, and loan growth change. Also presented in the management adjustment line are loan prepayment assumptions which may differ from the related contractual term of the loans. These balances have been distributed over the four periods to reflect those loans that are expected to be repaid in full prior to their maturity date over the respected periods. After management adjustments, the table shows a negative gap in the one year period of $134 million. A negative gap position is advantageous when interest rates are falling because interest-bearing liabilities are being repriced at lower rates and in greater volume, which has a positive effect on net interest income. Consequently, the Company has experienced a decline in its net interest margin during the past year and is somewhat vulnerable to a rapid rise in interest rates during 1995. These declines in net interest margin did not translate into declines in net interest income because of increases in the volume of interest-earning assets. In any event, the Company is working to increase the repricing frequency of interest-earning assets, particularly through variable-rate loan products, to achieve a less volatile gap position. There are no known trends, demands, commitments or uncertainties that have resulted or are reasonably likely to result in material changes in liquidity. INTEREST RATE SENSITIVITY GAPS (in thousands) 1 to 3 3 to 12 1 to 5 Over 5 Months Months Years Years Total ASSETS Gross loans $127,426 $59,731 $262,274 $85,905 $535,336 Loans held for sale 44,833 0 0 0 44,833 Securities 17,739 17,328 100,945 54,701 190,713 Total Interest earning assets 189,998 77,059 363,219 140,606 770,882 LIABILITIES Savings and NOW Accounts 294,495 0 0 0 294,495 All other interest bearing deposits 72,460 124,058 81,817 1,712 280,047 Short term and other borrowings 88,796 0 0 0 88,796 Long term borrowings 4,825 0 0 0 4,825 Total interest bearing liabilities $460,576 $124,058 $ 81,817 $ 1,712 $668,163 Interest sensitivity gap ($270,578) ($46,999) $281,402 $138,894 $102,719 Cumulative sensitivity gap ($270,578) ($317,577) ($36,175) $102,719 Management adjustments $254,114 ($70,831) ($173,330) ($9,953) Cumulative management adjusted gap ($ 16,464) ($134,294) ($26,222) $102,719
The table above includes various assumptions and estimates by management as to maturity and repricing patterns. Future interest margins will be impacted by balances and rates which are subject to change periodically throughout the year. CAPITAL RESOURCES As a bank holding company, City Holding Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In January 1989, the Federal Reserve published risk-based capital guidelines in final form which are applicable to bank holding companies. Such guidelines define items in the calculation of risk-weighted assets. At March 31, 1995, the regulatory minimum ratio of qualified total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8 percent. At least half of the total capital is to be comprised of "Tier 1 capital", or the Company's common stockholders' equity, and minority interest in consolidated subsidiary, net of intangibles. The remainder ("Tier 2 capital") may consist of certain other prescribed instruments and a limited amount of loan loss reserves. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 capital to quarterly average tangible assets) guidelines for bank holding companies. These guidelines provide for a minimum ratio of 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies will be required to maintain a leverage ratio of 3 percent plus an additional cushion of a least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The following table presents comparative capital ratios and related dollar amounts of capital for the Company: Dollars in Thousands March 31 December 31 1995 1994 Capital Components Tier 1 risk-based capital $53,753 $52,408 Total risk-based capital 59,793 58,425 Capital Ratios Tier 1 risk-based 10.16% 10.65% Total risk-based 11.30 11.88 Leverage 6.94 6.65 Regulatory Minimum Tier 1 risk-based (dollar/ratio) $21,161/4.00% $19,677/4.00% Total risk-based (dollar/ratio) 42,323/8.00 39,354/8.00 Leverage (dollar/ratio) 23,222/3.00 23,628/3.00 The capital position of the Company is indicative of management's emphasis on asset quality and a history of retaining between 60% and 70% of annual net income. The ratios enable the Company to continually pursue acquisitions and other growth opportunities. Improvements in operating results and a consistent dividend program, coupled with an effective management of credit risk, have been, and will be, the key elements in maintaining the Company's present capital position. The Company does not anticipate any material capital expenditures in 1995. Earnings from subsidiary bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, subsidiary banks have the capability to upstream sufficient dividends to meet the cash requirements of the Company. NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, improved from the first quarter of 1994 to the first quarter of 1995 by approximately $902,000 due to an increase in net earning assets. Net yield on earning assets increased between periods from 4.69% to 4.79%, as earning asset yields increased 49 basis points (100 basis points equal one percent) to 8.25%, and the cost of interest-bearing liabilities increased 45 basis points to 3.97%. The $170,000 increase in net interest income due to rate, as shown in the following table, was coupled with a $732,000 increase in net interest income due to volume. The major component of this favorable volume change was increased average loans. A significant part of the increase in net earning assets for the first quarter of 1995 is attributable to the Company's participation in a short-term, whole-loan bulk purchasing program. Under the program, the Company purchases from a third party whole loans secured by residential mortgages and insured by an agency of the United States government. The loans typically have balances of less than $25,000 and are not concentrated geographically. Additionally, the program permits the Company to require the seller to repurchase or replace certain non-performing loans. The loans are generally repurchased from the Company within 30 to 90 days. Although the loans usually are located outside the Company's primary market areas, management believes that these loans pose no greater risk than similar inmarket loans because of the Company's review of the loans, the credit support associated with the loans, the short duration of the Company's investment and the other terms of the program. The loans are serviced by third parties and the Company earns a fixed rate of return on the loans. The Company earned approximately $394,000 in interest income on program loans for the quarter ended March 31, 1995. These loans are being funded through short-term borrowings which consist primarily of securities sold under agreement to repurchase. EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Quarter Ended March 31 1995 1994 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate EARNING ASSETS: Loans (1) Commercial and industrial $ 150,422 $3,360 8.93% $ 126,838 $2,541 8.01% Real estate 240,651 4,945 8.22 187,675 3,870 8.25 Consumer obligations 117,484 2,848 9.70 101,446 2,518 9.93 Total loans 508,557 11,153 8.77 415,959 8,929 8.59 Loans held for sale 25,894 573 8.85 3,455 56 6.48 Securities Taxable 162,414 2,639 6.50 202,634 3,135 6.19 Tax-exempt (2) 30,205 637 8.44 30,652 679 8.86 Total securities 192,619 3,276 6.80 233,286 3,814 6.54 Federal funds sold 12,146 98 3.23 Total earning assets 727,070 15,002 8.25 664,846 12,897 7.76 Cash and due from banks 21,494 21,271 Bank premises and equipment 18,220 15,354 Other assets 19,229 14,584 Less: allowance for possible loan losses (5,955) (5,851) Total assets $780,058 $710,204 INTEREST BEARING LIABILITIES Demand deposits $ 91,618 $ 686 3.00% $ 89,732$ 603 2.69% Savings deposits 207,657 1,563 3.01 218,228 1,702 3.12 Time deposits 270,943 3,120 4.61 247,415 2,584 4.18 Short-term borrowings 57,707 799 5.54 17,313 109 2.52 Long-term debt 7,201 130 7.22 5,875 97 6.60 Total interest-bearing liabilities 635,126 6,298 3.97 578,563 5,095 3.52 Demand deposits 80,728 67,747 Other liabilities 7,613 6,574 Stockholders' equity 56,591 57,320 Total liabilities and stockholders' equity $780,058 $710,204 Net interest income $8,704 $7,802 Net yield on earning assets 4.79% 4.69%
(1) For purposes of this table, nonaccruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of 34% in all years. RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) Quarter Ended March 31 1995 VS. 1994 Increase (Decrease) Due to Change In: INTEREST INCOME FROM: Volume Rate Net Loans Commercial and industrial $ 506 $ 313 $ 819 Real estate 1,169 (94) 1,075 Consumer obligations 697 (367) 330 Total loans 2,372 (148) 2,224 Loans held for sale 489 28 517 Securities Taxable (1,401) 905 (496) Tax-exempt (1) (10) (32) (42) Total Securities (1,411) 873 (538) Federal funds sold (49) (49) (98) Total interest-earning assets $ 1,401 $ 704 $ 2,105 INTEREST EXPENSE ON: Demand deposits 13 70 83 Savings deposits (81) (58) (139) Time deposits 258 278 536 Short-term borrowings 456 234 690 Long-term debt 23 10 33 Total interest-bearing liabilities $669 $ 534 $ 1,203 NET INTEREST INCOME $ 732 $ 170 $ 902 (1) Fully federal taxable equivalent using a tax rate of 34% in all years. PART II OTHER INFORMATION Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities - Not Applicable Item 3. Defaults Upon Seller Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on 8-K - (a) Exhibits 10.1 Agreement and Plan of Reorganization, dated as of March 14, 1995, among City Holding Company, First Merchants Bancorp, Inc. and Merchants National Bank (attached as Annex I to the Proxy Statement/Prospectus filed by the Company with the Commission on April 14, 1995, in connection with the Company's Registration Statement on Form S-4 (file no. 33-58647) and incorporated by reference herein). 27 Financial Data Schedule for the quarter ending March 31, 1995. (b) Reports on Form 8-K filed during the three months ended March 31, 1995. 1. The Company filed Form 8-Ka on February 21, 1995, reporting Pro Forma Consolidated Financial Information relating to the Hinton Acquisition. S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY May 12, 1995 By /s/Dawn Woolsey Dawn Woolsey, Chief Accounting Officer (Principal Accounting Officer) EXHIBIT INDEX Exhibit Index 27 Financial Data Schedule for the quarter ending March 31, 1995 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1995 MAR-31-1995 21,036 0 0 0 68,134 122,579 120,552 528,071 6,040 815,637 655,966 88,796 7,069 4,825 9,451 0 0 49,530 815,637 11,726 3,059 0 14,785 5,369 6,298 8,487 183 3 6,842 2,557 1,744 0 0 1,744 .46 .46 4.79 1,811 1,028 260 521 6,017 272 112 6,040 0 0 0
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