-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JurWU2EPNH2/XRLwHihYx4NkQdqUlKL6RGFzW1lt6okokpSN74f+x0QMJD78+xaZ WoJkYKbPHI102d8/6aLPIA== 0000916641-97-000382.txt : 19970417 0000916641-97-000382.hdr.sgml : 19970417 ACCESSION NUMBER: 0000916641-97-000382 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970416 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY HOLDING CO CENTRAL INDEX KEY: 0000726854 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 550619957 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-11733 FILM NUMBER: 97582247 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-K405/A 1 AMENDMENT NO.1 TO 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number December 31, 1996 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2.50 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by nonaffiliates of the registrant based on the closing price as of March 26, 1997 (Registrant has assumed that all of its executive officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose): Aggregate Market Value -- $204,811,470 The number of shares outstanding of the issuer's common stock as of March 26, 1997: Common Stock, $2.50 Par Value -- 6,068,488 shares The total number of pages are 17 . Exhibit Index is located on page 5 . ----- ----- Page 1 of 17 PART III Items 10 - 13 are amended as follows: Item 10 Directors and Executive Officers of Registrant The information required by Item 10 of FORM 10-K appears in the Company's 1997 Proxy Statement under the captions "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS", which is included in this report as Exhibit 99(a) and incorporated herein by reference. Item 11 Executive Compensation The information required by Item 11 of FORM 10-K appears in the Company's 1997 Proxy Statement under the caption "EXECUTIVE COMPENSATION", which is included in this report as Exhibit 99(a) and incorporated herein by reference. Item 12 Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 of FORM 10-K appears in the Company's 1997 Proxy Statement under the caption "OWNERSHIP OF EQUITY SECURITIES", which is included in this report as Exhibit 99(a) and incorporated herein by reference. Item 13 Certain Relationships and Related Transactions The information required by Item 13 of FORM 10-K appears in the Company's 1997 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" included in this report as Exhibit 99(a) and in NOTE FOURTEEN of Notes to Consolidated Financial Statements appearing at page 28 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, included in this report as Exhibit 13, and incorporated herein by reference. 2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) /s/ Steven J. Day ------------------------------ Steven J. Day, President/Director (Principal Executive Officer) /s/ Robert A. Henson ------------------------------ Robert A. Henson, Chief Financial Officer (Principal Financial Officer) 3 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K (c) Exhibits Item 14(c) is amended to include the following exhibit: 99(a) Excerpts from the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders. 4 EXHIBIT INDEX The following exhibits are filed herewith or are incorporated herein by reference. Prior Filing Exhibit Reference or Page Number Description Number Herein - ------ ----------- ------------- 99(a) Excerpts from the Company's 6-17 Proxy Statement for the 1997 Annual Meeting of Shareholders. 5 EX-13 2 ANNUAL REPORT SELECTED FINANCIAL DATA TABLE ONE FINANCIAL SUMMARY (in thousands, except per share data)
FIVE YEAR SUMMARY 1996 1995 1994 1993 1992 -------- ----------- ---------- ---------- ---------- SUMMARY OF OPERATIONS Total interest income $ 86,069 $ 75,125 $ 62,762 $ 55,301 $ 50,880 Total interest expense 39,064 33,580 25,168 22,425 22,184 Net interest income 47,005 41,545 37,594 32,876 28,696 Provision for loan losses 1,678 1,104 1,040 1,434 2,325 Total other income 11,123 6,346 5,249 3,862 2,328 Total other expenses 40,982 33,887 30,116 24,292 18,889 Income before income taxes 15,468 12,900 11,687 11,012 9,810 Net income 10,130 8,718 8,141 7,645 6,972 PER SHARE DATA (1) Net income $ 1.81 $ 1.55 $ 1.44 $ 1.35 $ 1.23 Cash dividends declared (2) .63 .56 .49 .46 .41 Book value per share 14.21 13.09 11.66 11.56 10.73 AVERAGE BALANCE SHEET SUMMARY Total loans $ 665,641 $ 608,551 $ 504,795 $ 413,645 $ 322,464 Securities 166,667 221,743 264,976 262,742 232,930 Deposits 812,655 771,303 736,115 639,480 523,488 Long-term debt 24,666 8,204 6,252 4,387 508 Stockholders' equity 76,130 69,463 67,652 63,511 58,606 Total assets 1,079,540 957,048 864,690 739,804 610,707 AT YEAR END Net loans $ 690,701 $ 650,195 $ 547,809 $ 462,424 $ 376,206 Securities 163,922 194,368 239,882 283,833 248,740 Deposits 828,670 797,415 746,805 709,958 605,398 Long-term debt 34,250 20,000 6,875 5,875 4,000 Stockholders' equity 79,373 73,139 66,299 65,605 60,858 Total assets 1,048,810 1,040,969 895,785 816,225 701,862 SELECTED RATIOS Return on average assets .94% .91% .94% 1.03% 1.14% Return on average equity 13.31 12.55 12.03 12.04 11.90 Average equity to average assets 7.05 7.26 7.82 8.58 9.60 Dividend payout ratio (2) 34.81 36.47 33.91 34.36 33.11
(1) All per share data have been restated to reflect 10% stock dividends effective November, 1996, January and November, 1995 and August, 1992. (2) Cash dividends and the related payout ratio are based on historical results of the Company and do not include cash dividends of acquired subsidiaries prior to the dates of consummation. The Company acquired 100% of the Common Stock of The Buffalo Bank of Eleanor (Buffalo) in December 1992 for cash. In 1993, certain other purchase acquisitions were consummated by the Company. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the results of operations of the purchased subsidiaries are included in the information presented above from the date of acquisition forward, and prior year balance sheets have not been restated for such transactions. The acquisitions of Home Bancorp, Inc. (1992), Hinton Financial Corporation and subsidiary (1994) and First Merchants Bancorp, Inc. and subsidiary (1995) were accounted for as poolings of interests and, accordingly, the financial data of these subsidiaries are included in all five years presented above, as if the acquisitions had occurred as of the beginning of the earliest period presented. 1 TWO YEAR SUMMARY OF COMMON STOCK PRICES AND DIVIDENDS MARKET PRICE RANGE* -------------------------- Cash Dividends Per Share* Low High ------------------------------------- 1996 Fourth Quarter $ .170 $ 21.00 $ 26.25 Third Quarter .155 19.77 22.95 Second Quarter .155 20.00 23.41 First Quarter .155 20.91 24.09 1995 Fourth Quarter $ .155 $ 20.45 $ 22.73 Third Quarter .141 20.66 23.14 Second Quarter .132 21.49 23.96 First Quarter .132 21.49 24.79 *All per share data have been restated to reflect 10% stock dividends effective November, 1996 and January and November, 1995. Cash dividends represent amounts declared by the Company and do not include cash dividends of acquired subsidiaries prior to the dates of acquisition. The Company's Common Stock is included on The Nasdaq National Market under the symbol CHCO. The table sets forth the cash dividends paid per share and information regarding the market prices per share of the Company's Common Stock for the period indicated. The price ranges are based on transactions as reported on The Nasdaq National Market. At December 31, 1996, there were 2,035 stockholders of record. See NOTE ELEVEN of the audited Consolidated Financial Statements for a discussion of restrictions on subsidiary dividends. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CITY HOLDING COMPANY City Holding Company (the Company), a West Virginia corporation headquartered in Charleston, commenced operations in November 1983. The Company currently has nine banking subsidiaries, and three non-banking subsidiaries. All of the subsidiaries are wholly-owned. At December 31, 1996, the Company had total assets of $1.049 billion, total deposits of $829 million and total stockholders' equity of $79 million. The banking subsidiaries include The City National Bank of Charleston (City National, principal subsidiary bank), The Peoples Bank of Point Pleasant (Peoples Bank), First State Bank & Trust (First State), The Bank of Ripley, Home National Bank of Sutton (Home National), Blue Ridge Bank, Peoples State Bank, The First National Bank of Hinton (Hinton) and Merchants National Bank (Merchants), which currently operate 37 banking offices in the state of West Virginia. In addition to the Company's periodic filings with the SEC, each of its subsidiary banks are subject to certain regulatory guidelines at the applicable federal and state level. As such, the banks are routinely examined by these regulatory bodies and certain information is required to be submitted to them each quarter. The Company operates retail and consumer-oriented community banks that emphasize personal service. During 1996, the Company created City Mortgage Services, a mortgage loan servicing division. Headquarted in Charleston, West Virginia, this division was formed to facilitate the Company's growth of its mortgage servicing portfolio. On December 31, 1996, the Company acquired certain assets and assumed certain liabilities of Prime Financial Corporation, a mortgage loan servicing company located in Costa Mesa, California, which increased the Company's mortgage loan servicing portfolio by approximately $600 million. This West Coast operation was absorbed into the mortgage loan servicing division headquartered in Charleston, West Virginia. During 1993, the Company formed two non-banking subsidiaries. City Mortgage Corporation, a full service mortgage banking company headquartered in a suburb of Pittsburgh, Pennsylvania, originates, services and sells long-term fixed-rate mortgage and other loan products. City Financial Corporation, a full service securities brokerage and investment advisory company, is headquartered in Charleston, West Virginia with its office located in City National's main location. Both of these companies were formed pursuant to a strategy to generate fee income, lessen the Company's reliance on net interest margin and enable the Company to offer a full array of financial services to its customers. Hinton Financial Corporation, the Company's third non-banking subsidiary, owns all of the capital stock of Hinton and does not conduct any other business activities. The Company continually seeks strategic aquisition opportunities for small to medium-sized banks. The Company's latest bank acquisitions include Hinton Financial Corporation and subsidiary, acquired in late 1994, followed by First Merchants Bancorp, Inc. and subsidiary in mid 1995. The Company's acquisition policy has permitted subsidiary banks to operate as separate entities with their historical names and boards of directors. The Company believes that this policy maintains community loyalty to the subsidiary banks and improves operating performance while providing the services and efficiencies of a larger holding company. 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS AND SUMMARY Return on average assets (ROA), a measure of the effectiveness of asset utilization, was .94% in 1996. Return on average equity (ROE), which measures the return on stockholders' investment, was 13.31% in 1996. The Company's ROA and ROE were .91% and 12.55%, respectively, in 1995. Earnings per share for 1996 were $1.81, an increase of approximately 16.8% from the $1.55 per share in 1995. The main reason for the increase in earnings per share is increased net interest income and other income. Increases in net interest income are primarily attributable to increased participation in the Title I loan program as discused below. An expansion of the Company's mortgage servicing division produced an additional $2.3 million in non-interest income. The Company reported total assets of $1.049 billion at December 31, 1996 and achieved $10.1 million in net income for the year then ended. Total assets increased .8% over the 1995 total of $1.041 billion. Net income was up significantly over the $8.7 million and $8.1 million reported for 1995 and 1994, respectively. INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES Average interest-earning assets increased $110.0 million from 1995 to 1996 and $87.5 million from 1994 to 1995. These increases are attributable to the loan volume generated by the Company's subsidiary banks, which was accompanied by a comparable increase in deposits and short-term borrowings. A significant part of the increase in net earning assets for 1996 and 1995 is attributable to the Company's participation in a whole loan purchasing program. Under the program, the Company generally purchases HUD Title I home improvement loans secured by second lien mortgages and partially insured by the Federal Housing Administration. The loans typically have balances of less than $25,000 and are generally sold within 30 to 90 days. Although loans are originated nationwide, the two states which experienced the most volume of originations during 1996 were California and Texas. Although the loans usually are located outside the Company's primary market areas, management believes that these loans pose no greater risk than similar "in-market" 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 generally serviced by the Company's mortgage servicing division. Effective November 1996, the Company restructured its participation in the program so that it would receive the full coupon rate on loans purchased. Previously, the Company had received a fixed rate of 9% on outstanding balances. At December 31, 1996, the loans had a weighted average coupon of 13.46% and a weighted average maturity of approximately 173 months. The Company earned approximately $12.6 and $4.6 million during 1996 and 1995, on average balances of program loans of approximately $136.4 and $49.1 million, respectively. These loans are being funded through short-term borrowings which consist primarily of advances from the Federal Home Loan Bank of Pittsburgh. The Company's participation in the Title I loan program, through purchasing Title I loans, holding the loans until they are securitized, and providing servicing of the loans subsequent to securitization is expected to continue to have a positive impact on the Company's operating results. However, this return is not achieved without a degree of risk of loss to the Company. Such risks include credit risk, related to the quality of the underlying loan and the borrower's financial capability to repay the loan, market risk related to the continued attractiveness of the Title I loan product to both borrowers and end-investors, and interest rate risk related to potential changes in interest rates and the resulting repricing of both financial assets and liabilities. The Company manages this risk by continuously improving policies and procedures designed to reduce the risk of loss to a level commensurate with the return being earned on the Company's investment in this program. Average short-term borrowings increased $55.8 million from 1995 to 1996 and $52.2 million from 1994 to 1995. The average rate paid by the Company for short-term borrowings decreased 47 basis points in 1996 due to general decreases in market interest rates, which were led by the Federal funds rate. The average rate paid for short-term borrowings increased 179 basis points in 1995 due to general increases in market interest rates. Most of the internal growth in deposits has been in response to the Company's service-oriented philosophy and its active involvement in the local communities it serves. The Company also continues to establish additional commercial relationships, with an emphasis on "in-market" lending to businesses owned and operated by established customers. The Company believes its decentralized management style appeals to retail consumers and small businesses. These lending arrangements are in furtherance of the Company's mission of being a high quality service provider retaining strong ties to the local communities in which its subsidiary banks operate. In 1996, the Company's subsidiaries had an aggregate increase in loans of approximately $39.9 million or 6%. In response to the significant growth in loans and loans held for sale, average investment securities decreased $55.1 million from $222 million in 1995 to $167 million in 1996. The overall yield on investments has decreased from 1995 as a result of reinvestment of matured securities at slightly lower rates. Average investment securities decreased $43.2 million from $265 million in 1994 to $222 million in 1995. Long-term debt includes $24.3 million in obligations of the Parent Company and $10 million in FHLB obligations of City National. For further details with respect to long-term debt see NOTE TEN of the audited Consolidated Financial Statements. 3 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE TWO EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
1996 1995 1994 -------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------- EARNING ASSETS: Loans (1) Commercial and industrial $ 213,687 $19,631 9.19% $ 188,122 $18,014 9.58% $ 153,952 $12,829 8.33% Real estate 317,204 27,455 8.66 283,752 24,149 8.51 231,755 19,178 8.28 Consumer obligations 134,750 13,408 9.95 136,677 13,270 9.71 119,088 11,685 9.81 - ------------------------------------------------------------------------------------------------------------------- Total loans 665,641 60,494 9.09 608,551 55,433 9.11 504,795 43,692 8.66 Loans held for sale 171,308 15,394 8.99 62,408 5,691 9.12 27,655 2,375 8.59 Securities Taxable 130,600 8,139 6.23 181,140 11,612 6.41 222,304 13,897 6.25 Tax-exempt (2) 36,067 3,048 8.45 40,603 3,485 8.58 42,672 3,753 8.79 - ------------------------------------------------------------------------------------------------------------------- Total securities 166,667 11,187 6.71 221,743 15,097 6.81 264,976 17,650 6.66 Federal funds sold 564 30 5.32 1,473 89 6.04 9,253 321 3.47 - ------------------------------------------------------------------------------------------------------------------- Total earning assets 1,004,180 87,105 8.67 894,175 76,310 8.53 806,679 64,038 7.94 Cash and due from banks 31,057 25,392 25,063 Bank premises and equipment 27,357 22,178 19,807 Other assets 23,675 21,761 19,514 Less: allowance for possible loan losses (6,729) (6,458) (6,373) - ------------------------------------------------------------------------------------------------------------------- Total assets $1,079,540 $957,048 $864,690 - ------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Demand deposits $ 101,013 $ 3,028 3.00% $106,590 $ 3,059 2.87% $ 96,870 $ 3,006 3.10% Savings deposits 228,286 7,017 3.07 227,217 6,990 3.08 255,634 7,890 3.09 Time deposits 366,650 19,193 5.23 335,011 17,100 5.10 284,807 11,981 4.21 Short-term borrowings 154,759 8,138 5.26 98,973 5,675 5.73 46,822 1,846 3.94 Long-term debt 24,666 1,688 6.84 8,204 756 9.22 6,252 445 7.12 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 875,374 39,064 4.46 775,995 33,580 4.33 690,385 25,168 3.65 Demand deposits 116,706 102,485 98,804 Other liabilities 11,330 9,105 7,849 Stockholders' equity 76,130 69,463 67,652 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,079,540 $957,048 $864,690 - ------------------------------------------------------------------------------------------------------------------- Net interest income $48,041 $ 42,730 $38,870 - ------------------------------------------------------------------------------------------------------------------- Net yield on earning assets 4.78% 4.78% 4.82% - -------------------------------------------------------------------------------------------------------------------
(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 approximately 34% in all years. 4 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, increased $5.3 million during 1996. The average yield on earning assets increased from 8.53% in 1995 to 8.67% in 1996, and the average cost of interest-bearing liabilities increased from 4.33% to 4.46% over this same period. This had no effect on the net yield on earning assets of 4.78% in both 1995 and 1996. The $301,000 decrease in net interest income due to rate, as shown in Table Three which follows, was coupled with a $5.6 million increase in net interest income due to volume. The major components of this favorable volume change were increased average loans and loans held for sale as more fully discussed in the Interest-Earning Assets and Interest-Bearing Liabilities section. Net interest income, on a fully federal tax-equivalent basis, increased $3.9 million in 1995. The $4.6 million increase caused by changes in volume was offset by a $724,000 decrease in net interest income due to rate. TABLE THREE RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)
1996 VS. 1995 1995 VS. 1994 Increase (Decrease) Increase (Decrease) Due to Change In: Due to Change In: - ------------------------------------------------------------------------------------------------------------------- Volume Rate Net Volume Rate Net INTEREST INCOME FROM: Loans Commercial and industrial $ 2,371 $ (754) $ 1,617 $ 3,101 $ 2,084 $ 5,185 Real estate 2,889 417 3,306 4,411 560 4,971 Consumer obligations (189) 327 138 1,709 (124) 1,585 - ------------------------------------------------------------------------------------------------------------------- Total 5,071 (10) 5,061 9,221 2,520 11,741 Loans held for sale 9,787 (84) 9,703 3,160 156 3,316 Investment securities Taxable (3,158) (315) (3,473) (2,631) 346 (2,285) Tax-exempt (1) (384) (53) (437) (179) (89) (268) - ------------------------------------------------------------------------------------------------------------------- Total (3,542) (368) (3,910) (2,810) 257 (2,553) Federal funds sold (49) (10) (59) (376) 144 (232) - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 11,267 $ (472) $ 10,795 $ 9,195 $ 3,077 $12,272 - ------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE ON: Demand deposits $ (164) $ 133 $ (31) $ 289 $ (236) $ 53 Savings deposits 33 (6) 27 (874) (26) (900) Time deposits 1,647 446 2,093 2,316 2,803 5,119 Short-term borrowings 2,968 (505) 2,463 2,720 1,109 3,829 Long-term debt 1,171 (239) 932 160 151 311 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 5,655 $ (171) $ 5,484 $ 4,611 $ 3,801 $ 8,412 - ------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $ 5,612 $ (301) $ 5,311 $ 4,584 $ (724) $ 3,860 - -------------------------------------------------------------------------------------------------------------------
(1) Fully federal taxable equivalent using a tax rate of approximately 34% in all years. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 5 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND INTEREST RATE SENSITIVITY The Company is satisfied with its liquidity position and 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: The Company manages its liquidity position to reduce interest rate risk, which is the susceptibility of assets and liabilities to declines in value as a result of changes in general market interest rates. The Company seeks to reduce this risk through asset and liability management, where the goal is to optimize the balance between earnings and interest rate risk. The Company measures this interest rate risk through interest sensitivity gap analysis as illustrated in Table Four. At December 31, 1996, the one year period shows a negative gap (liability sensitive) of $332 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. Table Four 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 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 terms 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. After management adjustments, Table Four shows a negative gap in the one year period of $124 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. However, when interest rates are rising, this position produces the converse effect. Consequently, the Company has experienced a slight decline in its net interest margin during the past two years and is somewhat vulnerable to a rapid rise in interest rates in 1997. 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. Liquidity: The Company also seeks to maintain adequate liquidity in order to generate sufficient cash flows to fund operations on a timely basis. The Company manages its liquidity position to provide for asset growth and to ensure that the funding needs of depositors and borrowers can be met promptly. The Company does not have a high concentration of volatile funds, and all such funds are invested in assets of comparable maturity to mitigate liquidity concerns. At December 31, 1996, the Parent Company had $24,250,000 in long-term debt outstanding against a $28,000,000 revolving loan agreement. These funds were used to provide subsidiaries with additional capital, to fund certain acquisitions in 1993 and 1994 and to provide funding for expansion of the Company's data processing operations and mortgage servicing divisions. Total debt service for the Parent Company in 1997 will approximate $1.8 million at current interest rates. Other than long-term debt, the cash needs of the Parent Company consist of routine payroll and benefit expenses of Parent Company personnel, expenses for certain professional services, debt service on affiliate advances and dividends to shareholders. The Parent Company has approximately $15.9 million available for transfer from its subsidiary banks as of January 1, 1997. Subsidiary bank earnings in 1997 through the date of dividend declaration are also available for transfer upstream. Such subsidiary bank dividends are the Parent Company's primary source of cash. Management anticipates that the cash flow requirements of the Parent Company will be adequately met in the normal course of business. For more specific information regarding restrictions on subsidiary dividends, see NOTE ELEVEN to the audited Consolidated Financial Statements. The Company's cash and cash equivalents, represented by cash, due from banks and federal funds sold, are a product of its operating, investing and financing activities. These activities are set forth in the Company's Consolidated Statements of Cash Flows included elsewhere herein. Cash was generated from operating activities in 1996 due to proceeds from loans sold. Net cash was used in operating activities during 1995 and 1994 due to the purchases of loans held for sale. Net cash was used in investing activities for each year presented which is indicative of the Company's net increases in loan volume. Cash was used in financing activities during 1996, which is attributable to decreases in short-term borrowings. Net cash was provided by financing activities, principally in the form of increased short-term borrowings and deposit growth, during 1995 and 1994. 6 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE FOUR INTEREST RATE SENSITIVITY GAPS (in thousands)
1 TO 3 MO. 3 TO 12 MO. 1 TO 5 YRS. OVER 5 YRS. TOTAL - ------------------------------------------------------------------------------------------------------------------- ASSETS Gross loans $ 154,700 $ 106,222 $ 349,100 $ 93,019 $703,041 Loans held for sale 92,472 0 0 0 92,472 Securities 25,399 17,568 90,182 30,773 163,922 Federal funds sold 413 0 0 0 413 - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 272,984 123,790 439,282 123,792 959,848 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES Savings and NOW accounts 331,451 0 0 0 331,451 All other interest-bearing deposits 104,055 168,323 105,495 370 378,243 Short-term borrowings 90,298 0 0 0 90,298 Long-term borrowings 34,250 0 0 0 34,250 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 560,054 168,323 105,495 370 834,242 - ------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $(287,070) $ (44,533) $ 333,787 $123,422 $125,606 - ------------------------------------------------------------------------------------------------------------------- Cumulative sensitivity gap $(287,070) $(331,603) $ 2,184 $125,606 - ------------------------------------------------------------------------------------------------------------------- Management adjustments $ 285,426 $ (77,732) $(196,523) $(11,171) - ------------------------------------------------------------------------------------------------------------------- Cumulative management adjusted gap $ (1,644) $(123,909) $ 13,355 $125,606 - -------------------------------------------------------------------------------------------------------------------
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. TABLE FIVE INVESTMENT PORTFOLIO (dollars in thousands)
BOOK VALUES AS OF December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government corporations and agencies $ 106,875 $ 132,007 $ 179,061 States and political subdivisions 36,290 40,635 45,041 Other 20,757 21,726 15,780 - ------------------------------------------------------------------------------------------------------------------- Total $163,922 $ 194,368 $ 239,882 - -------------------------------------------------------------------------------------------------------------------
At December 31, 1996, there were no securities of any issuers whose aggregate carrying or market value exceeded 10% of stockholders' equity.
MATURING - ------------------------------------------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years - ------------------------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government corporations and agencies $ 22,464 6.06% $ 71,568 6.12% $ 11,121 7.24% $ 1,722 6.27% State and political subdivisions 3,472 8.93 16,370 8.19 14,555 8.45 1,893 9.01 Other 17,031 6.27 2,244 8.24 1,482 8.01 0 0.00 - ------------------------------------------------------------------------------------------------------------------- Total $ 42,967 6.37% $ 90,182 6.55% $ 27,158 7.93% $ 3,615 7.70% - -------------------------------------------------------------------------------------------------------------------
Weighted average yields on tax-exempt obligations of states and political subdivisions have been computed on a fully federal tax-equivalent basis using a tax rate of approximately 34%. The Company had $7.3 million in structured notes as of December 31, 1996. All structured notes are federal agency securities that are classified as available-for-sale. They have a weighted average coupon of 4.31% and a weighted average maturity of approximately two years. Approximately 67% of these securities were obtained through the Company's acquisitions and management has no plans to purchase any additional structured notes in the future. The impact of holding these securities on the results of operations was immaterial for the period ending December 31, 1996. 7 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE SIX LOAN PORTFOLIO (in thousands)
DECEMBER 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 224,267 $ 214,304 $164,366 $ 149,112 $ 108,127 Real estate-mortgage 338,385 304,848 258,910 205,745 157,562 Installment loans to individuals 142,123 145,734 140,695 124,490 129,017 - ------------------------------------------------------------------------------------------------------------------- Total loans $ 704,775 $ 664,886 $563,971 $ 479,347 $ 394,706 - -------------------------------------------------------------------------------------------------------------------
The Company had $26.0 million and $27.2 million outstanding in real estate construction loans at December 31, 1996 and 1995, respectively, the majority of which related to one-to-four-family residential properties. Real estate construction loans were not material in all other periods presented. The following table shows the maturity of loans outstanding as of December 31, 1996.
MATURING - ------------------------------------------------------------------------------------------------------------------- After One Within But Within After One Year Five Years Five Years Total - ------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 68,852 $ 92,170 $ 63,245 $ 224,267 Real estate-mortgage 66,437 79,939 192,009 338,385 Installment loans to individuals 24,389 103,906 13,828 142,123 - ------------------------------------------------------------------------------------------------------------------- Total loans $ 159,678 $276,015 $ 269,082 $ 704,775 - ------------------------------------------------------------------------------------------------------------------- Loans maturing after one year with: Fixed interest rates $ 323,502 Variable interest rates 221,595 - ------------------------------------------------------------------------------------------------------------------- Total $ 545,097 - -------------------------------------------------------------------------------------------------------------------
TABLE SEVEN MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSITS IN AMOUNTS OF $100,000 OR MORE (in thousands) Maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 1996, are summarized as follows:
Amounts Percentage - ------------------------------------------------------------------------------------------------------------------- Three months or less $ 17,537 28% Over three months through six months 10,965 18 Over six months through twelve months 15,037 24 Over twelve months 18,970 30 - ------------------------------------------------------------------------------------------------------------------- Total $ 62,509 100% - -------------------------------------------------------------------------------------------------------------------
8 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LOAN LOSS ANALYSIS During 1996, the Company charged-off $1,375,000 of loans that were doubtful as to collection and had recoveries of $412,000. The resulting net charge-offs of $963,000 represent a decrease of $52,000 or 5% from that reported in 1995. Net charge-offs increased approximately 31%, or $243,000 in 1995 versus 1994. Net charge-offs as a percent of average total loans decreased 17.6% or 3 basis points when comparing 1996 to 1995. The Company's asset quality continues to compare favorably with that of peer banks. The provision for possible loan losses charged to operations each year is dependent upon many factors, including loan growth, historical charge-off experience, size and composition of the loan portfolio, delinquencies and general economic trends. The provision of $1,678,000 in 1996 represents .25% of average loans as compared to a $1,104,000, or .18%, provision in 1995. As discussed in NOTE FIVE to the audited Consolidated Financial Statements, during 1996, the Company restructured its participation in a loan purchasing program such that the Company currently buys, directly from loan originators, home-improvement loans that are subsequently sold by the Company to an independent third party institution for securitization. The modification of the Company's participation in this program resulted in an increased return on the Company's investment in these loans and an increase in the risk of loss to the Company due to delinquencies or uncollectibility. As a result, management increased, compared to 1995, its 1996 provision for possible loan losses to provide for potentially uncollectible loans inherent in the pools of loans acquired in this program. As further discussed below, management believes that the consolidated allowance for loan losses is adequate to provide for any potential losses on loans currently reported in the consolidated balance sheets. Loan volume has continued to increase in recent years as a result of the Company's more active solicitation of commercial loan business as well as general volume increases applicable to the traditional borrowing segment from which the Company has generated loans in the past. The Company has successfully attracted more commercial customers, while continuing to obtain noncommercial, lower risk collateral such as residential properties. The Company's collateral position with respect to real estate loans has typically been less volatile than its peers, particularly banks located outside of its region where dramatic escalations in real estate values took place in certain prior years. Loans held for sale volume has increased due primarily to the expansion and growth of the mortgage banking area. The allowance for loan losses was $7,281,000 or 1.05% of net loans, as of December 31, 1996, compared to $6,566,000 or 1.01% of net loans in 1995. As detailed in Table Ten, as of December 31, 1996, the allowance for loan losses is allocated 27% to commercial, financial and agricultural loans, 54% to real estate-mortgage loans and 19% to installment loans to individuals. These amounts reflect management's assessment of the risk in each specific portfolio in relation to the total. These percentages compare to 31%, 48% and 21%, respectively, as of December 31, 1995. The portion of the allowance related to commercial credits is based primarily upon specific credit review with minor weighting being given to past charge-off history. Conversely, due to the homogenous nature of the portfolios and consistency in underwriting standards, the portions of the allowance allocated to the real estate-mortgages and installment loans to individuals are based primarily upon prior charge-off history with minor weighting being given to specific credit reviews. Management has, however, increased the portion of the allowance allocated to real estate-mortgages above the trend in net charge-off history for that portfolio. This increase is primarily due to management's concern that rapid increases in real estate lending within the Company over the past several years have led to a portfolio that may not be seasoned enough for past net charge-offs to represent current risk. In addition, the Company's adjustable rate mortgages have grown from $93.9 million at December 31, 1994 to $139.4 million at December 31, 1996, an increase of 48% in three years. In management's opinion, the consolidated allowance for loan losses is adequate to provide for any potential losses on existing loans. See NOTE FIVE to the audited Consolidated Financial Statements for a discussion of concentrations of credit risks. Nonperforming loans, consisting of nonaccrual, past-due and restructured credits, increased approximately $556,000 in 1996. While the general economy remains soft in certain of the subsidiary banks' market areas, management does not anticipate material loan losses since loan to collateral ratios remain favorable. At December 31, 1996, loans aggregating $235,000 are considered by management to represent possible future credit problems. These loans are generally contractually current, but information is available to management which indicates that serious doubt may exist as to the ability of such borrowers to comply with the present loan repayment terms. The ratio of the allowance for loan losses to nonperforming loans, including potential problem loans, was 149% at December 31, 1996, as compared to 151% and 134% at December 31, 1995 and 1994. Tables Eight, Nine and Ten detail loan performance and analyze the allowance for loan losses. 9 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE EIGHT ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (in thousands)
DECEMBER 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 6,566 $ 6,477 $ 6,209 $ 5,730 $ 2,761 Charge-offs: Commercial, financial and agricultural (193) (174) (327) (693) (255) Real estate-mortgage (262) (278) (160) (258) (325) Installment loans to individuals (920) (879) (693) (664) (711) - ------------------------------------------------------------------------------------------------------------------- Totals (1,375) (1,331) (1,180) (1,615) (1,291) - ------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial and agricultural 19 56 111 58 22 Real estate-mortgage 166 22 11 220 65 Installment loans to individuals 227 238 286 217 168 - ------------------------------------------------------------------------------------------------------------------- Totals 412 316 408 495 255 - ------------------------------------------------------------------------------------------------------------------- Net charge-offs (963) (1,015) (772) (1,120) (1,036) Provision for possible loan losses 1,678 1,104 1,040 1,434 2,325 Balance of acquired subsidiary 165 1,680 - ------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 7,281 $ 6,566 $ 6,477 $ 6,209 $ 5,730 - ------------------------------------------------------------------------------------------------------------------- AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs .14% .17% .15% .27% .32% Provision for possible loan losses .25 .18 .21 .35 .72 AS A PERCENT OF NONPERFORMING AND POTENTIAL PROBLEM LOANS Allowance for loan losses 149.26% 150.84% 134.24% 129.68% 102.71%
TABLE NINE NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS (in thousands)
DECEMBER 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 1,734 $ 2,525 $ 2,614 $ 1,559 $ 1,517 Accruing loans past due 90 days or more 2,674 1,421 1,420 708 1,487 Restructured loans 235 141 262 1,078 1,559 - ------------------------------------------------------------------------------------------------------------------- $ 4,643 $ 4,087 $ 4,296 $ 3,345 $ 4,563 - -------------------------------------------------------------------------------------------------------------------
During 1996, the Company recognized approximately $219,000 of interest income received in cash on nonaccrual and restructured loans. Approximately $332,000 of interest income would have been recognized during the year if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on nonaccrual, restructured, or other potential problem loans at December 31, 1996. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest unless the loan is well collateralized and in the process of collection. When interest accruals are discontinued, interest credited to income in the current year that is unpaid and deemed uncollectible is charged to operations. Prior year interest accruals that are unpaid and deemed uncollectible are charged to the allowance for loan losses, provided that such amounts were specifically reserved. 10 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE TEN ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (in thousands)
DECEMBER 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent Of Loans Of Loans Of Loans Of Loans Of Loans In Each In Each In Each In Each In Each Category Category Category Category Category To Total To Total To Total To Total To Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - ------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $1,939 32% $2,053 32% $1,919 29% $ 2,100 31% $2,107 27% Real estate-mortgage 3,964 48 3,125 46 2,848 46 2,325 43 1,804 40 Installment loans to individuals 1,378 20 1,388 22 1,710 25 1,784 26 1,819 33 - ------------------------------------------------------------------------------------------------------------------- $7,281 100% $6,566 100% $6,477 100% $ 6,209 100% $5,730 100% - -------------------------------------------------------------------------------------------------------------------
The portion of the allowance for loan losses that is not specifically allocated to individual credits has been apportioned among the separate loan portfolios based on the risk of each portfolio. OTHER INCOME AND EXPENSES During 1996, the Company continued its pursuit of new products and services that generate additional fee-based income, reducing the Company's reliance on interest-based revenues. Over the past three years, the Company has begun offering new products to its existing customers and attracting new customers by expanding its focus from traditional banking operations to include trust, brokerage, mortgage banking and other related services. During 1996, the Company made a significant investment in loan servicing operations by assuming the responsibility to service pools of FHA Title I home improvement loans. At December 31, 1996, the Company serviced approximately $939 million of these and similar loans, generating $2.2 million of additional income during the year (compared to a $168 million portfolio serviced at December 31, 1995, which generated $350,000 of income in 1995). Additionally, the Company increased its volume of secondary-market mortgage loan originations, which resulted in an increase in fee income from $922,000 in 1995 to $1,462,000 in 1996. These activities resulted in other income of $4,019,000 in 1996 compared to $1,272,000 and $317,000 in 1995 and 1994, respectively. Also during 1996, the Company realized a one-time gain approximating $437,000 on the termination of the defined benefit plan of First Merchants Bancorp, Inc., which was acquired by the Company in 1995. Revenues generated by the Company's loan servicing operation are dependent on a variety of factors, including the continued market for Title I loans and an interest rate environment conducive to the general terms of these types of loans. Although management believes that the servicing operation will continue to have a positive impact on the Company, fee income could be reduced if a substantial number of serviced loans are prepaid by the borrowers more quickly than expected or if substantially more loans default than currently anticipated. Total other expenses increased $7.1 million, or 20.9%, during 1996 due primarily to $1.6 million in expenses incurred by City Mortgage Services, which includes $967,000 in personnel costs and $72,000 in expenses related to equipment. No expenses for this new division were included in the 1995 results. In addition, the Parent Company had an increase of approximately $3.7 million in non-interest expenses associated with growth, consisting of a $2.2 million increase in personnel costs and a $970,000 increase in expenses related to equipment. The additional increase of $2.6 million is attributable to higher personnel costs throughout the organization due to the Company's overall growth during 1996. Total other expenses increased $3.8 million, or 12.5%, during 1995 due primarily to the Company's overall growth during that year, which produced higher personnel costs throughout the organization. Salaries and employee benefits increased $2.9 million between 1995 and 1994. 11 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. At December 31, 1996, the Federal Reserve Board's minimum ratio of qualified total capital to risk-weighted assets is 8 percent. At least half of the total capital is required to be comprised of Tier 1 capital, or the Company's common stockholders' equity less 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 4 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies are required to maintain a leverage ratio of 4 percent plus an additional cushion of at 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 1996 1995 - ------------------------------------------------------------------------------------------------------------------- CAPITAL COMPONENTS Tier 1 risk-based capital $ 72,157 $ 66,260 Total risk-based capital 79,439 72,826 CAPITAL RATIOS Tier 1 risk-based 10.20% 8.87% Total risk-based 11.23 9.75 Leverage 6.58 6.45 REGULATORY MINIMUM Tier 1 risk-based (dollar/ratio) $ 28,290/4.00% $ 29,888/4.00% Total risk-based (dollar/ratio) 56,579/8.00 59,776/8.00 Leverage (dollar/ratio) 43,872/4.00 41,068/4.00
The strong capital position of the Company is indicative of management's emphasis on asset quality and a history of retained 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 1997. 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 Parent Company. INFLATION Since the assets and liabilities of the subsidiary banks are primarily monetary in nature (payable in fixed, determinable amounts), the performance of banks is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. While the effect of inflation on banks is normally not as significant as its influence on those businesses which have large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above-average growth in assets, loans and deposits. Also, general increases in the price of goods and services will result in increased operating expenses. 12 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME TAXES Income tax expense was $5,338,000 in 1996, resulting in an effective tax rate of 34.51% for the year. Such rates were 32.42% and 30.34% in 1995 and 1994, respectively. The effective tax rate from 1995 to 1996 and the effective tax rate from 1994 to 1995 both increased due primarily to a decrease in tax-exempt interest income. At December 31, 1996, gross deferred tax assets total approximately $4.2 million. Such assets are primarily attributable to the allowance for loan losses ($2.8 million), acquired net operating loss (NOL) carryforwards ($741,000) and certain nonqualified deferred compensation arrangements sponsored by subsidiary banks ($391,000). Pursuant to management's evaluation for the quarter ended December 31, 1996, no valuation allowance has been allocated to the deferred tax assets. The quarterly evaluation process employed by management is based upon the expected reversal period of the assets, in consideration of taxes paid by the Company in the carryback years, expected reversals of existing taxable temporary differences, and historical trends in taxable income. Those assets for which realization is expected to be dependent on future events are subjected to further evaluation. Management's analysis has shown that realization of certain deferred tax assets, principally the acquired NOL, will be dependent on future events. After considering such factors as the magnitude of the asset relative to historical levels of financial reporting income and taxable income, the period over which future taxable income would have to be earned to realize the asset, and budgeted future results of operations, management has concluded that it is more likely than not that all deferred tax assets existing at December 31, 1996, will be realized. At present, management does not expect that implementation of tax planning strategies will be necessary to ensure realization. The need for a valuation allowance will continue to be addressed by management each quarter and any changes in the valuation allowance will be reported contemporaneously therewith in the Company's quarterly results of operations. 13 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders City Holding Company We have audited the accompanying consolidated balance sheets of City Holding Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1994 consolidated financial statements of Hinton Financial Corporation and subsidiary which statements reflect total revenues constituting 7% of the 1994 consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Hinton Financial Corporation and subsidiary, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of City Holding Company and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Charleston, West Virginia January 27, 1997 14 CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES
December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 47,764,000 $ 28,460,000 Securities available for sale, at fair value 122,944,000 143,649,000 Investment securities (approximate market values: 1996-$41,826,000; 1995-$52,183,000) 40,978,000 50,719,000 Loans: Gross loans 704,775,000 664,886,000 Unearned income (6,793,000) (8,125,000) Allowance for possible loan losses (7,281,000) (6,566,000) - ------------------------------------------------------------------------------------------------------------------ NET LOANS 690,701,000 650,195,000 Loans held for sale 92,472,000 122,222,000 Bank premises and equipment 30,025,000 23,651,000 Accrued interest receivable 7,510,000 8,031,000 Other assets 16,416,000 14,042,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,048,810,000 $1,040,969,000 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Noninterest-bearing $ 118,976,000 $ 116,992,000 Interest-bearing 709,694,000 680,423,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 828,670,000 797,415,000 Short-term borrowings 90,298,000 141,309,000 Long-term debt 34,250,000 20,000,000 Other liabilities 16,219,000 9,106,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 969,437,000 967,830,000 STOCKHOLDERS' EQUITY Preferred stock, par value $25 per share: authorized - 500,000 shares; none issued Common stock, par value $2.50 per share: authorized - 20,000,000 shares; issued and outstanding: 1996 - 5,598,912 shares; 1995 - 5,092,046 shares including 11,341 and 13,640 shares in treasury at December 31, 1996 and 1995 13,998,000 12,730,000 Capital surplus 35,426,000 25,942,000 Retained earnings 30,246,000 34,432,000 Net unrealized gain on securities available for sale, net of deferred income taxes 3,000 395,000 - ------------------------------------------------------------------------------------------------------------------ 79,673,000 73,499,000 Cost of common stock in treasury (300,000) (360,000) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 79,373,000 73,139,000 COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,048,810,000 $1,040,969,000 - ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 75,888,000 $ 61,124,000 $ 46,067,000 Interest on investment securities: Taxable 8,139,000 11,612,000 13,897,000 Tax-exempt 2,012,000 2,300,000 2,477,000 Other interest income 30,000 89,000 321,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 86,069,000 75,125,000 62,762,000 INTEREST EXPENSE Interest on deposits 29,238,000 27,149,000 22,877,000 Interest on short-term borrowings 8,138,000 5,675,000 1,846,000 Interest on long-term debt 1,688,000 756,000 445,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 39,064,000 33,580,000 25,168,000 - ------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 47,005,000 41,545,000 37,594,000 PROVISION FOR POSSIBLE LOAN LOSSES 1,678,000 1,104,000 1,040,000 - ------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 45,327,000 40,441,000 36,554,000 OTHER INCOME Investment securities gains (losses) 87,000 2,000 (729,000) Service charges 3,700,000 3,347,000 2,723,000 Other income 7,336,000 2,997,000 3,255,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME 11,123,000 6,346,000 5,249,000 OTHER EXPENSES Salaries and employee benefits 21,593,000 17,815,000 14,874,000 Occupancy, excluding depreciation 2,736,000 2,555,000 2,838,000 Depreciation 3,466,000 2,534,000 2,033,000 Other expenses 13,187,000 10,983,000 10,371,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSES 40,982,000 33,887,000 30,116,000 - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 15,468,000 12,900,000 11,687,000 INCOME TAXES 5,338,000 4,182,000 3,546,000 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 10,130,000 $ 8,718,000 $ 8,141,000 - ------------------------------------------------------------------------------------------------------------------- Net income per common share $ 1.81 $ 1.55 $ 1.44 - ------------------------------------------------------------------------------------------------------------------- Average common shares outstanding 5,586,006 5,642,186 5,676,116 - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES
Unrealized Gain/(Loss) Common on Securities Total Stock Capital Retained Available Treasury Stockholders' (Par Value) Surplus Earnings for Sale Stock Equity - ---------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1994 $ 11,148,000 $ 13,478,000 $ 42,907,000 $ 282,000 $(2,242,000) $ 65,573,000 Net income 8,141,000 8,141,000 Cash dividends declared--$.49 a share (1,930,000) (1,930,000) Cash dividends of acquired subsidiary (763,000) (763,000) Adjustments to beginning balance for change in accounting method, net of income taxes of $704,000 1,055,000 1,055,000 Change in unrealized gain/(loss) net of income taxes of ($2,790,000) (4,200,000) (4,200,000) Redemption of fractional and dissenter shares (1,843,000) (1,843,000) Cost of 7,002 shares of common stock acquired for treasury (193,000) (193,000) Sale of 14,898 shares of treasury stock 131,000 328,000 459,000 Retirement of 101,865 shares of common stock held in treasury (255,000) (1,820,000) 2,075,000 Issuance of 10% stock dividend 860,000 8,420,000 (9,280,000) - ------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 11,753,000 18,366,000 39,075,000 (2,863,000) (32,000) 66,299,000 Net income 8,718,000 8,718,000 Cash dividends declared--$.56 a share (2,852,000) (2,852,000) Cash dividends of acquired subsidiary (150,000) (150,000) Change in unrealized gain/(loss) net of income taxes of $2,154,000 3,258,000 3,258,000 Cost of 86,665 shares of common stock acquired for treasury (2,286,000) (2,286,000) Sale of 6,486 shares of treasury stock (20,000) 172,000 152,000 Retirement of 69,739 shares of common stock held in treasury (174,000) (1,612,000) 1,786,000 Issuance of 10% stock dividend 1,151,000 9,208,000 (10,359,000) - ------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1995 12,730,000 25,942,000 34,432,000 395,000 (360,000) 73,139,000 Net income 10,130,000 10,130,000 Cash dividends declared-- $.63 a share (3,540,000) (3,540,000) Change in unrealized gain/(loss) net of income taxes of ($261,000) (392,000) (392,000) Sale of 2,299 shares of treasury stock (2,000) 60,000 58,000 Redemption of fractional shares (22,000) (22,000) Issuance of 10% stock dividend 1,268,000 9,508,000 (10,776,000) - ------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1996 $ 13,998,000 $35,426,000 $ 30,246,000 $ 3,000 $ (300,000) $79,373,000 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 10,130,000 $ 8,718,000 $ 8,141,000 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization 943,000 1,003,000 951,000 Provision for depreciation 3,466,000 2,534,000 2,033,000 Provision for possible loan losses 1,678,000 1,104,000 1,040,000 Deferred income tax benefit (582,000) (439,000) (309,000) Loans originated for sale (118,287,000) (74,242,000) (24,729,000) Purchases of loans held for sale (1,029,098,000) (639,331,000) (189,719,000) Proceeds from loans sold 1,177,135,000 621,578,000 184,221,000 Realized investment securities (gains) losses (87,000) (2,000) 729,000 Decrease (increase) in accrued interest receivable 521,000 (1,128,000) (630,000) Increase in other assets (2,356,000) (1,027,000) (2,800,000) Increase (decrease) in other liabilities 7,113,000 (73,000) 2,110,000 - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 50,576,000 (81,305,000) (18,962,000) INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities 134,539,000 40,084,000 79,281,000 Purchases of investment securities (124,979,000) (3,238,000) (64,346,000) Proceeds from sales of securities available for sale 33,865,000 55,185,000 40,307,000 Proceeds from maturities and calls of securities available for sale 47,275,000 11,331,000 13,093,000 Purchases of securities available for sale (60,938,000) (52,617,000) (30,747,000) Net increase in loans (42,184,000) (103,490,000) (86,499,000) Net cash paid in acquisitions (504,000) Purchases of premises and equipment (9,840,000) (5,055,000) (4,129,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (22,262,000) (57,800,000) (53,544,000) FINANCING ACTIVITIES Net increase in noninterest-bearing deposits 1,984,000 22,624,000 15,853,000 Net increase in interest-bearing deposits 29,271,000 27,986,000 20,994,000 Net (decrease) increase in short-term borrowings (51,011,000) 74,682,000 39,415,000 Proceeds from long-term debt 14,250,000 17,525,000 6,875,000 Repayment of long-term debt (4,400,000) (5,875,000) Purchases of treasury stock (2,286,000) (193,000) Proceeds from sales of treasury stock 58,000 152,000 459,000 Redemption of dissenter and fractional shares (22,000) (1,843,000) Cash dividends paid (3,540,000) (3,002,000) (2,693,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,010,000) 133,281,000 72,992,000 - ------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,304,000 (5,824,000) 486,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,460,000 34,284,000 33,798,000 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 47,764,000 $ 28,460,000 $34,284,000 - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES DECEMBER 31, 1996 NOTE ONE SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Summary of Significant Accounting and Reporting Policies: The accounting and reporting policies of City Holding Company and its subsidiaries (the Company) conform with generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. Actual results could differ from management's estimates. The following is a summary of the more significant policies. Principles of Consolidation: The consolidated financial statements include the accounts of City Holding Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Description of Principal Markets and Services: The Company is a multi-bank holding company headquartered in Charleston, West Virginia. The Company's banking subsidiaries are comprised of retail and consumer oriented community banks with offices throughout West Virginia. The non-banking subsidiaries are comprised of a full service mortgage banking company located in Pittsburgh, Pennsylvania, and a full service securities brokerage and investment advisory company located in Charleston. During 1996, the Parent Company created a mortgage loan servicing division to facilitate the Company's continued expansion into the mortgage banking industry. With the acquisition discussed in Note Three, the mortgage servicing division has loan servicing facilities located in West Virginia and California. Cash and Due from Banks: The Company considers cash and due from banks and federal funds sold as cash and cash equivalents. The carrying amounts reported in the December 31, 1996 and 1995, consolidated balance sheets for cash and cash equivalents approximate those assets' fair values. Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities to maturity, they are classified as investment securities and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale along with the Company's investment in equity securities. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. Securities classified as available for sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. The specific identification method is used to determine the cost basis of securities sold. Loans: Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods which generally result in level rates of return. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in process of collection. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE ONE SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued) Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Loans Held for Sale: Loans held for sale represent mortgage loans the Company has either purchased or originated with the intent to sell on the secondary market and are carried at the lower of aggregate cost or estimated fair value. Loan Servicing: On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights". Statement No. 122 requires the cost of mortgage servicing rights, regardless of how obtained, be capitalized and amortized in proportion to and over the period of estimated net servicing revenues. The adoption of Statement No. 122 did not have a material impact on the Company's operating results. Statement No. 122 has been superseded by Statement No. 125, discussed below. Allowance for Loan Losses: The provision for possible loan losses included in the consolidated statements of income is based upon management's evaluation of individual credits in the loan portfolio, historical loan loss experience, current and expected future economic conditions, and other relevant factors. These provisions, less net charge-offs, comprise the allowance for loan losses. In management's judgment, the allowance for loan losses is maintained at a level adequate to provide for probable losses on existing loans. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Generally, estimated useful lives of bank premises and furniture, fixtures, and equipment do not exceed 30 and 7 years, respectively. Intangibles: Intangible assets, other than rights to service mortgage loans, are comprised of goodwill and core deposits and are included in other assets in the consolidated balance sheets. Goodwill is being amortized on a straight-line basis over a 15 year period and core deposits are being amortized using accelerated methods over 10 year estimated useful lives. The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows. Income Taxes: The consolidated provision for income taxes is based upon reported income and expense. Deferred income taxes (included in other assets) are provided for temporary differences between financial reporting and tax bases of assets and liabilities. The Company files a consolidated income tax return. The respective subsidiaries generally provide for income taxes on a separate return basis and remit amounts determined to be currently payable to the Parent Company. Net Income Per Common Share: Net income per common share is based on the weighted average common shares outstanding during each year. On October 21, 1996, a 10% stock dividend was declared by the Board of Directors for shareholders of record on November 1, 1996. The stock dividend was paid on November 30, 1996, and all stock related data in the consolidated financial statements reflects the stock dividend. Similar 10% stock dividends were paid on November 30, 1995, and on January 15, 1995. For each declaration, an amount equal to the fair value of the additional shares issued was transferred from retained earnings to the common stock and capital surplus accounts. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE ONE SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued) New Accounting Pronouncement: The Financial Accounting Standards Board (FASB) issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which will require the Company to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The Company will apply the new rules prospectively to transactions beginning in the first quarter of 1997. Based on current circumstances, management believes the application of the new rules will not have a material impact on the Company's financial statements. Statements of Cash Flows: Cash paid for interest, including long-term debt, was $39,008,000, $32,755,000 and $24,886,000 in 1996, 1995, and 1994, respectively. Cash paid for income taxes was $5,399,000, $4,055,000 and $3,567,000 in 1996, 1995, and 1994, respectively. NOTE TWO RESTRICTIONS ON CASH AND DUE FROM BANKS Certain of the subsidiary banks are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1996, was approximately $9,241,000. Included in cash and due from banks at December 31, 1996, is $2.7 million of cash restricted for mortgage banking activities. NOTE THREE ACQUISITIONS On December 31, 1996, the Company acquired certain assets and assumed certain liabilities of Prime Financial Corporation, a mortgage loan servicing company located in Costa Mesa, California. This transaction, accounted for under the purchase method of accounting, increased the Company's mortgage loan servicing portfolio by approximately $600 million. As a result of a servicing arrangement entered into by the Company, the loan servicing income and expenses of the acquiree have been included in the Company's financial statements since November, 1996. In August, 1995, the Company acquired 100% of the common stock of First Merchants Bancorp, Inc. and subsidiary (Merchants) in exchange for 921,600 shares of the Company's common stock. In December, 1994, the Company acquired 100% of the common stock of Hinton Financial Corporation and subsidiary (Hinton) in exchange for 460,047 shares of the Company's common stock. Both of these transactions were accounted for as a pooling of interests. Accordingly, the consolidated financial statements for all periods presented were restated to reflect the accounts of Merchants and Hinton. In June 1994, the Company acquired the remaining 33% interest in the common stock of First National Bank-Beckley, West Virginia (FNB) for which consideration included $530,000. As a result, FNB became a wholly-owned subsidiary of the Company. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations attributable to the acquisition have been included in the consolidated totals from the date of acquisition. Intangible assets arising from purchase business combinations consist primarily of goodwill and core deposits which have an aggregate unamortized balance at December 31, 1996 and 1995, of $5,781,000 and $5,154,000, respectively. Amortization of goodwill and core deposits approximated $619,000, $623,000, and $562,000 during the years ended December 31, 1996, 1995, and 1994, respectively. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE FOUR INVESTMENTS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. The adoption of SFAS No. 115 resulted in an increase in stockholders' equity of $1,055,000 in 1994 and a transfer of approximately $15 million from investment securities to securities available for sale. In November, 1995, the Financial Accounting Standards Board (FASB) staff issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". In accordance with provisions in that Special Report, the Company chose to reclassify securities from held to maturity to available for sale. At the date of transfer, the amortized cost of those securities was $69,389,000 and the unrealized gain on those securities was $242,000, which was included in stockholders' equity. Included in the Company's investment portfolio are structured notes with an estimated fair value of $7.3 million and $11.8 million at December 31, 1996 and 1995, respectively. Such investments are used by management to enhance yields, diversify the investment portfolio, and manage the Company's exposure to interest rate fluctuations. These securities consist of federal agency securities with an average maturity of less than two years. Management, periodically, performs sensitivity analyses to determine the Company's exposure to fluctuation in interest rates of 3% and has determined that the structured notes meet regulatory price sensitivity guidelines. The aggregate carrying and approximate market values of securities follow. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Available-for-Sale Securities Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- December 31, 1996 U.S. Treasury securities and obligations of U.S. government corporations and agencies $79,311,000 $ 198,000 $ 588,000 $ 78,921,000 Obligations of states and political subdivisions 11,033,000 246,000 4,000 11,275,000 Mortgage-backed securities 12,347,000 282,000 92,000 12,537,000 Other debt securities 3,332,000 130,000 3,462,000 - ------------------------------------------------------------------------------------------------------------------- Total debt securities 106,023,000 856,000 684,000 106,195,000 Equity securities 16,918,000 244,000 413,000 16,749,000 - ------------------------------------------------------------------------------------------------------------------- $ 122,941,000 $ 1,100,000 $ 1,097,000 $122,944,000 - -------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- December 31, 1996 U.S. Treasury securities and obligations of U.S. government corporations and agencies $14,974,000 $ 54,000 $ 133,000 $ 14,895,000 Obligations of states and political subdivisions 25,015,000 973,000 31,000 25,957,000 Mortgage-backed securities 443,000 15,000 428,000 Other debt securities 546,000 546,000 - ----------------------------------------------------------------------------------------------------------------- $40,978,000 $ 1,027,000 $ 179,000 $ 41,826,000 - -----------------------------------------------------------------------------------------------------------------
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE FOUR INVESTMENTS (continued)
Available-for-Sale Securities Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- December 31, 1995 U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 92,793,000 $ 469,000 $ 562,000 $ 92,700,000 Obligations of states and political subdivisions 12,885,000 474,000 10,000 13,349,000 Mortgage-backed securities 15,486,000 455,000 67,000 15,874,000 Other debt securities 4,347,000 63,000 19,000 4,391,000 - ------------------------------------------------------------------------------------------------------------------- Total debt securities 125,511,000 1,461,000 658,000 126,314,000 Equity securities 17,479,000 162,000 306,000 17,335,000 - ------------------------------------------------------------------------------------------------------------------- $ 142,990,000 $1,623,000 $ 964,000 $143,649,000 - ------------------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- December 31, 1995 U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 22,971,000 $ 167,000 $ 64,000 $23,074,000 Obligations of states and political subdivisions 27,286,000 1,419,000 46,000 28,659,000 Mortgage-backed securities 462,000 12,000 450,000 - ------------------------------------------------------------------------------------------------------------------- $ 50,719,000 $1,586,000 $ 122,000 $52,183,000 - -------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Estimated Cost Fair Value - ------------------------------------------------------------------------------------------------------------------- Available-for-sale Due in one year or less $ 20,347,000 $ 20,366,000 Due after one year through five years 62,125,000 61,934,000 Due after five years through ten years 9,961,000 10,056,000 Due after ten years 1,243,000 1,302,000 - ------------------------------------------------------------------------------------------------------------------- 93,676,000 93,658,000 Mortgage-backed securities 12,347,000 12,537,000 - ------------------------------------------------------------------------------------------------------------------- $ 106,023,000 $ 106,195,000 - ------------------------------------------------------------------------------------------------------------------- Held-to-maturity Due in one year or less $ 3,510,000 $ 3,544,000 Due after one year through five years 21,267,000 21,478,000 Due after five years through ten years 15,168,000 15,742,000 Due after ten years 590,000 634,000 - ------------------------------------------------------------------------------------------------------------------- 40,535,000 41,398,000 Mortgage-backed securities 443,000 428,000 - ------------------------------------------------------------------------------------------------------------------- $ 40,978,000 $ 41,826,000 - -------------------------------------------------------------------------------------------------------------------
Gross gains of $89,000, $103,000, and $234,000, and gross losses of $2,000, $101,000, and $999,000, were realized on sales and calls of securities during 1996, 1995, and 1994, respectively. The book value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $112,849,000 and $104,289,000 at December 31, 1996 and 1995, respectively. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE FIVE LOANS The loan portfolio is summarized as follows:
December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 224,267,000 $214,304,000 Residential real estate 338,385,000 304,848,000 Installment loans to individuals 142,123,000 145,734,000 - ------------------------------------------------------------------------------------------------------------------- $ 704,775,000 $664,886,000 - -------------------------------------------------------------------------------------------------------------------
The Company grants loans to customers generally within the market areas of its subsidiary banks. There is no significant concentration of credit risk by industry or by related borrowers. There are no foreign loans outstanding and highly leveraged loan transactions are insignificant. The Company originates and sells fixed rate mortgage loans on a servicing released basis. At December 31, 1996, the Company originated loans held for sale of approximately $18 million. In 1994, the Company began participation in a whole loan purchasing program whereby the Company purchased FHA Title I home improvement loans, secured by second lien mortgages, from an independent third party. In November 1996, the Company restructured this program and began purchasing the loans directly from loan originators. As a result of this restructuring, the Company currently earns the stated note rate of the loans during the period the loans are held by the Company. Prior to restructuring, the Company received interest income on the loans pursuant to established loan purchasing agreements with rate sharing provisions. As a result, the interest income earned on the loans increased from 9% in 1995 to 9.23% in 1996, on an annualized basis. The weighted average coupon rate of loans held at December 31, 1996 was 13.46%. Aggregate income earned from the loans approximated $12.6 million, $4.6 million, and $1.9 million during 1996, 1995, and 1994. The average aggregate balance of the loans approximated $136.4 million, $49.1 million, and $21.2 million during 1996, 1995, and 1994. The loans are generally held by the Company for approximately 90 days before being sold to an independent third party for securitization. Due to the short-term holding period of the loans, the recorded balance approximates the fair value of the loans. A summary of changes in the allowance for possible loan losses follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 6,566,000 $ 6,477,000 $ 6,209,000 Provision for possible loan losses 1,678,000 1,104,000 1,040,000 Charge-offs (1,375,000) (1,331,000) (1,180,000) Recoveries 412,000 316,000 408,000 - ------------------------------------------------------------------------------------------------------------------- BALANCE AT END OF YEAR $ 7,281,000 $ 6,566,000 $ 6,477,000 - -------------------------------------------------------------------------------------------------------------------
Beginning in 1995, the Company adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan". Under the new standard, the 1996 and 1995 allowance for loan losses related to loans that are identified for evaluation in accordance with Statement 114 are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The 1994 allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The recorded investment in loans that were considered impaired was $4,643,000 and $4,087,000 at December 31, 1996 and 1995, respectively. Included in these amounts are $1,891,000 and $1,630,000, respectively, of impaired loans for which the related allowance for loan losses is $408,000 and $404,000, respectively. . The average recorded investments in impaired loans during the years ended December 31, 1996 and 1995, were approximately $4,528,000 and $3,423,000. During the years ended December 31, 1996 and 1995, $332,000 and $328,000, respectively, was recognized as interest income on impaired loans and $219,000 and $258,000, respectively, was recognized as interest income using a cash basis method of accounting. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE SIX LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $911,775,000 and $168,241,000 at December 31, 1996 and 1995, respectively. The unpaid principal balances of intercompany mortgage loans serviced was $28,290,000 at December 31, 1996. Mortgage loan servicing rights of $1,019,000 and $1,023,000 at December 31, 1996 and 1995, respectively, are included in other assets in the accompanying balance sheets. Amortization of mortgage loan servicing rights approximated $225,000, $128,000, and $49,000 during the years ended December 31, 1996, 1995, and 1994, respectively. NOTE SEVEN BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment follows:
December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Bank premises $ 28,141,000 $ 24,477,000 Furniture, fixtures, and equipment 19,856,000 15,470,000 - ------------------------------------------------------------------------------------------------------------------- 47,997,000 39,947,000 Less allowance for depreciation 17,972,000 16,296,000 - ------------------------------------------------------------------------------------------------------------------- $ 30,025,000 $ 23,651,000 - -------------------------------------------------------------------------------------------------------------------
NOTE EIGHT SHORT-TERM BORROWINGS Short-term borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh (the FHLB) and securities sold under agreement to repurchase. The underlying securities included in repurchase agreements remain under the Company's control during the effective period of the agreements. A summary of the Company's short-term borrowings is set forth below: 1996: Average amount outstanding during the year $ 154,301,000 Maximum amount outstanding at any month end 207,790,000 Weighted average interest rate: During the year 5.27% End of the year 5.01% 1995: Average amount outstanding during the year $ 97,357,000 Maximum amount outstanding at any month end 190,862,000 Weighted average interest rate: During the year 5.23% End of the year 5.51% 1994: Average amount outstanding during the year $ 46,484,000 Maximum amount outstanding at any month end 86,897,000 Weighted average interest rate: During the year 3.95% End of the year 5.43%
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE NINE SCHEDULED MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE (in thousands) Scheduled maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 1996, are summarized as follows: Within one year $ 43,539 Over one through two years 8,311 Over two through three years 4,372 Over three through four years 3,277 Over four through five years 3,010 Over five years 0 - ------------------------------------------------------------------------ Total $ 62,509 - ------------------------------------------------------------------------ NOTE TEN LONG-TERM DEBT AND UNUSED LINES OF CREDIT Long-term debt includes an obligation of the Parent Company consisting of a $28,000,000 revolving credit loan facility with an unrelated party. At December 31, 1996, $24,250,000 was outstanding. The loan has a variable rate (7.4375% at December 31, 1996) with interest payments due quarterly and principal due at maturity in July 1997. Management intends to refinance the loan according to provisions provided in the agreement. The loan agreement contains certain restrictive provisions applicable to the Parent Company including limitations on additional long-term debt. The Parent Company has pledged the common stock of each of its wholly-owned banking subsidiaries as collateral for the revolving credit loan. City National Bank, a wholly-owned subsidiary, has obtained long-term financing from the Federal Home Loan Bank (FHLB) in the form of Long-Term LIBOR Floaters as follows:
DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------------------- Amount Amount Available Outstanding Interest Rate Maturity Date - ------------------------------------------------------------------------------------------------------------------- $5,000,000 $5,000,000 5.64% December 1998 $5,000,000 5,000,000 4.97% December 2001
The Company has purchased, through its subsidiaries, 101,000 shares of FHLB stock at par value. Such purchases entitle the Company to dividends declared by the FHLB and provide an additional source of short-term and long-term funding, in the form of collateralized advances. Additionally, at December 31, 1996, the subsidiaries have been issued one year flexline commitments of $18,165,000, at prevailing interest rates, from the FHLB with maturities ranging from January to May 1997. Such commitments are subject to satisfying the Capital Stock Requirement provisions, as defined, in the agreement with the FHLB. As of December 31, 1996, there were no amounts outstanding pursuant to the agreements. Financing obtained from the FHLB, including the LIBOR Floaters, is based in part on the amount of qualifying collateral available, specifically U.S. Treasury and agency securities, mortgage-backed securities and residential real estate loans. At December 31, 1996, collateral pledged to the FHLB included approximately $10.1 million in FHLB capital stock. NOTE ELEVEN RESTRICTIONS ON SUBSIDIARY DIVIDENDS Certain restrictions exist regarding the ability of the subsidiary banks to transfer funds to the Parent Company in the form of cash dividends. The approval of the bank's applicable primary regulator is required prior to the payment of dividends by a subsidiary bank in excess of its earnings retained in the current year plus retained net profits for the preceding two years. During 1997, the subsidiary banks can without prior regulatory approval, declare dividends of approximately $15,858,000 to the Parent Company, plus retained net profits for the interim period through the date of such dividend declaration. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE TWELVE INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 2,827,000 $ 2,397,000 Acquired net operating loss carryforward 741,000 748,000 Deferred compensation payable 391,000 411,000 Other 279,000 346,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSETS 4,238,000 3,902,000 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Federal income tax allowance for loan losses 148,000 546,000 Premises and equipment 886,000 785,000 Core deposit intangible 458,000 461,000 Investments 92,000 128,000 Loans 159,000 233,000 Securities available for sale 2,000 264,000 Other 314,000 150,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED TAX LIABILITIES 2,059,000 2,567,000 - ------------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $ 2,179,000 $ 1,335,000 - -------------------------------------------------------------------------------------------------------------------
Significant components of the provision for income taxes are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Federal: Current $ 5,046,000 $ 3,930,000 $ 3,152,000 Deferred (582,000) (439,000) (309,000) - ------------------------------------------------------------------------------------------------------------------- 4,464,000 3,491,000 2,843,000 State 874,000 691,000 703,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL $ 5,338,000 $ 4,182,000 $ 3,546,000 - -------------------------------------------------------------------------------------------------------------------
Current income tax expense (benefit) attributable to investment securities transactions approximated $ 35,000, $1,000, and $(292,000) in 1996, 1995, and 1994, respectively. As of December 31, 1996, the Company has approximately $1.6 million and $1.9 million, respectively, of federal and state net operating loss carryforwards which expire in 2006. A reconciliation between income taxes as reported and the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Computed federal taxes and statutory rate $ 5,414,000 $ 4,515,000 $ 4,019,000 State income taxes, net of federal tax benefit 502,000 335,000 394,000 Tax effects of: Nontaxable interest income (685,000) (805,000) (850,000) Other items, net 107,000 137,000 (17,000) - ------------------------------------------------------------------------------------------------------------------- $ 5,338,000 $ 4,182,000 $ 3,546,000 - -------------------------------------------------------------------------------------------------------------------
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE THIRTEEN EMPLOYEE BENEFIT PLANS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", (APB 25) and related Interpretations in accounting for its employee stock options as permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation". Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company's 1993 Stock Incentive Plan has authorized the grant of options to key employees for up to 300,000 shares of the Company's common stock adjusted for changes in the capital structure of the Company since the adoptions of the plan. On December 19, 1996, the Board of Directors granted 36,000 stock options which have 5 year terms and vest and become fully exercisable immediately. The effect of applying Statement No. 123's fair value method to the Company's stock based awards results in net income and earnings per share that are not materially different from amounts reported. The City Holding Company Profit Sharing and 401(k) Plan (the Plan) is a deferred compensation plan under section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Participants may contribute from 1% to 15% of pre-tax earnings to their respective accounts. These contributions may be invested in any of five investment options selected by the employee, one of which is City Holding Company common stock. The Company matches 50% of the first 6% of compensation deferred by the participant with City Holding Company common stock. Although the profit sharing features of this plan remain intact, future profit contributions, if any, are expected to be made to the employee stock ownership plan discussed below. The City Holding Company Employees' Stock Ownership Plan (ESOP), covering all employees who have completed one year of service and have attained the age of 21, was created January 1, 1996 and includes both Money Purchase and Stock Bonus plan features. Annually, the Company will contribute to the Money Purchase account an amount equal to 9% of eligible compensation. Contributions to the Stock Bonus account are discretionary, as determined by the Company's Board of Directors. The Company's total expense associated with the Plan and the ESOP (collectively, the benefit plans) approximated $2,126,000, $1,400,000, and $854,000 in 1996, 1995, and 1994, respectively. The total number of shares of the Company's common stock held by the benefit plans is 214,856. Other than the benefit plans, the Company offers no postretirement benefits. NOTE FOURTEEN TRANSACTIONS WITH DIRECTORS AND OFFICERS Subsidiaries of the Company have granted loans to the officers and directors of the Company and its subsidiaries, and to their associates. The loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The aggregate amount of loans outstanding as of December 31, 1996 and 1995, atrributable directly and indirectly to these parties, was approximately $34,167,000 and $27,950,000, respectively. During 1996, $17,626,000 of new loans were made and repayments totaled $11,409,000. NOTE FIFTEEN INCOME The following items of other income exceeded one percent of total revenue for the respective years:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Mortgage loan servicing fee income $ 2,557,000 $ 350,000 $ 91,000 Secondary market mortgage loan origination fees 1,462,000 922,000 226,000 Insurance recovery 0 0 1,400,000
NOTE SIXTEEN EXPENSES The following items of other expenses exceeded one percent of total revenue for the respective years: 1996 1995 1994 - ------------------------------------------------------------------------------ Insurance, including FDIC premiums $ 700,000 $ 1,139,000 $ 1,817,000 Advertising 914,000 889,000 964,000 Bank supplies 1,618,000 1,236,000 1,016,000 Legal and accounting fees 771,000 571,000 1,032,000 Telecommunications 1,082,000 740,000 519,000 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE SEVENTEEN COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, certain financial products are offered by the Company to accommodate the financial needs of its customers. Loan commitments (lines of credit) represent the principal off-balance-sheet financial product offered by the Company. At December 31, 1996 and 1995, commitments outstanding to extend credit totaled approximately $64,379,000 and $67,357,000, respectively. To a much lesser extent, the Company offers standby letters of credit which require payments to be made on behalf of customers when certain specified future events occur. Amounts outstanding pursuant to such standby letters of credit were $2,937,000 and $3,313,000 as of December 31, 1996 and 1995, respectively. Historically, substantially all standby letters of credit have expired unfunded. Both of the above arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Collateral is obtained based on management's credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments. NOTE EIGHTEEN PREFERRED STOCK AND SHAREHOLDER RIGHTS PLAN The Company's Board of Directors has the authority to issue preferred stock, and to fix the designation, preferences, rights, dividends and all other attributes of such preferred stock, without any vote or action by the shareholders. As of December 31, 1996, there are no such shares outstanding, nor are any expected to be issued, except as might occur pursuant to the Stock Rights Plan discussed below. The Company's Stock Rights Plan provides that each share of common stock carries with it one right. The rights would be exercisable only if a person or group, as defined, acquired 10% or more of the Company's common stock, or announces a tender offer for such stock. Under conditions described in the Stock Rights Plan, holders of rights could acquire shares of preferred stock or additional shares of the Company's common stock, or in the event of a 50% or more change-in-control, shares of common stock of the acquiror. The value of shares acquired under the plan would equal twice the exercise price. NOTE NINETEEN REGULATORY MATTERS The Company, including its banking subsidiaries, is subject to various regulatory capital requirements administered by the various banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary action by regulators, that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The Company's and each of its banking subsidiary's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Qualitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1996, that the Company and each of its banking subsidiaries met all capital adequacy requirements to which they were subject. As of December 31, 1996, the most recent notifications from banking regulatory agencies categorized the Company and each of its banking subsidiaries as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Company and each of its banking subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since notifications that management believes have changed the institutions' categories. The Company's and its significant banking subsidiaries' (as defined) actual capital amounts and ratios are presented in the following table. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE NINETEEN REGULATORY MATTERS (continued)
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- As of December 31, 1996: Total Capital (to Risk Weighted Assets): Consolidated $ 79,439 11.23% $ 56,579 8.00% $ 70,724 10.00% City National 34,753 11.34 24,524 8.00 30,655 10.00 Peoples Bank 10,755 12.23 7,038 8.00 8,798 10.00 Merchants National 10,558 12.94 6,527 8.00 8,159 10.00 Tier I Capital (to Risk Weighted Assets): Consolidated 72,157 10.20 28,290 4.00 42,434 6.00 City National 31,721 10.35 12,262 4.00 18,393 6.00 Peoples Bank 9,833 11.18 3,519 4.00 5,279 6.00 Merchants National 10,035 12.30 3,264 4.00 4,896 6.00 Tier I Capital (to Average Assets): Consolidated 72,157 6.58 43,872 4.00 54,840 5.00 City National 31,721 7.23 17,540 4.00 21,925 5.00 Peoples Bank 9,833 7.74 5,084 4.00 6,355 5.00 Merchants National 10,035 8.82 4,553 4.00 5,691 5.00
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------- As of December 31, 1995: Total Capital (to Risk Weighted Assets): Consolidated $72,826 9.75% $59,776 8.00% $74,720 10.00% City National 31,384 10.28 24,415 8.00 30,519 10.00 Peoples Bank 9,423 11.34 6,645 8.00 8,306 10.00 Merchants National 8,420 10.93 6,165 8.00 7,706 10.00 Tier I Capital (to Risk Weighted Assets): Consolidated 66,260 8.87 29,888 4.00 44,832 6.00 City National 28,378 9.30 12,207 4.00 18,311 6.00 Peoples Bank 8,510 10.25 3,322 4.00 4,984 6.00 Merchants National 7,960 10.33 3,082 4.00 4,624 6.00 Tier I Capital (to Average Assets): Consolidated 66,260 6.45 41,068 4.00 51,336 5.00 City National 28,378 6.74 16,844 4.00 21,055 5.00 Peoples Bank 8,510 7.41 4,597 4.00 5,746 5.00 Merchants National 7,960 7.43 4,287 4.00 5,358 5.00
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE TWENTY FAIR VALUES OF FINANCIAL INSTRUMENTS FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following table represents the estimates of fair value of financial instruments:
FAIR VALUE OF FINANCIAL INSTRUMENTS 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 47,764,000 $ 47,764,000 $ 28,460,000 $ 28,460,000 Loans held for sale 92,472,000 92,472,000 122,222,000 122,222,000 Securities 163,922,000 164,770,000 194,368,000 195,832,000 Net loans 690,701,000 693,832,000 650,195,000 660,208,000 Liabilities Demand deposits 440,917,000 440,917,000 425,050,000 425,050,000 Time deposits 387,753,000 387,808,000 372,365,000 371,439,000 Short-term borrowings 90,298,000 90,298,000 141,309,000 141,309,000 Long-term debt 34,250,000 34,245,000 20,000,000 19,593,000
The following methods and assumptions were used in estimating fair value amounts for financial instruments: The fair values for the loan portfolio are estimated using discounted cash flow analyses at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying values of accrued interest approximate fair value. The fair values of demand deposits (i.e. interest and noninterest-bearing checking, regular savings, and other types of money market demand accounts) are, by definition, equal to their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits. Securities sold under agreements to repurchase represent borrowings with original maturities of less than 90 days. The carrying amount of advances from the FHLB and borrowings under repurchase agreements approximate their fair values. The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair values approximated the carrying values of these commitments and letters of credit as of December 31, 1996 and 1995. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE TWENTY ONE CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 4,243,000 $ 1,226,000 Securities available for sale 1,392,000 1,237,000 Investment in subsidiaries 93,041,000 83,380,000 Fixed assets 6,584,000 3,006,000 Other assets 5,079,000 2,192,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $110,339,000 $91,041,000 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES Long-term debt $ 24,250,000 $ 15,000,000 Advances from affiliates 934,000 934,000 Other liabilities 5,782,000 1,968,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 30,966,000 17,902,000 STOCKHOLDERS' EQUITY 79,373,000 73,139,000 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $110,339,000 $91,041,000 - -------------------------------------------------------------------------------------------------------------------
Advances from affiliates, which eliminate for purposes of the Company's consolidated financial statements, represent amounts borrowed from banking subsidiaries to fund the purchase of certain bank premises and to meet other cash needs of the Parent. Such debt is collateralized by the securities and fixed assets of the Parent Company. Interest is due quarterly at prime with principal due at maturity in 1997. CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- INCOME Dividends from bank subsidiaries $ 4,180,000 $13,465,000 $5,626,000 Mortgage loan servicing fees 1,147,000 Administrative fees 2,828,000 Other income 1,017,000 640,000 1,715,000 - ------------------------------------------------------------------------------------------------------------------- 9,172,000 14,105,000 7,341,000 EXPENSES Interest expense 1,477,000 1,144,000 735,000 Other expenses 9,302,000 4,206,000 3,159,000 - ------------------------------------------------------------------------------------------------------------------- 10,779,000 5,350,000 3,894,000 - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED NET INCOME (EXCESS DIVIDENDS) OF SUBSIDIARIES (1,607,000) 8,755,000 3,447,000 Income tax benefit (2,261,000) (2,127,000) (1,344,000) - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME 654,000 10,882,000 4,791,000 (EXCESS DIVIDENDS) OF SUBSIDIARIES EQUITY IN UNDISTRIBUTED NET INCOME (EXCESS DIVIDENDS) OF SUBSIDIARIES 9,476,000 (2,164,000) 3,350,000 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $10,130,000 $ 8,718,000 $8,141,000 - -------------------------------------------------------------------------------------------------------------------
31 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE TWENTY ONE CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION (continued) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $10,130,000 $ 8,718,000 $8,141,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation 1,077,000 272,000 149,000 (Increase) decrease in other assets (2,842,000) (882,000) 44,000 Increase (decrease) in other liabilities 3,807,000 (300,000) 1,532,000 (Equity in undistributed net income) excess dividends of subsidiaries (9,476,000) 2,164,000 (3,350,000) Other (10,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,686,000 9,972,000 6,516,000 INVESTING ACTIVITIES Proceeds from maturities of investment securities 836,000 Proceeds from sales of securities 43,000 Purchases of investment securities (107,000) (160,000) (148,000) Purchases of mortgage loans (71,000) (808,000) Cash paid for acquired subsidiary (532,000) Cash invested in subsidiaries (625,000) (6,082,000) (5,318,000) Purchases of premises and equipment (4,655,000) (1,533,000) (126,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (5,415,000) (6,939,000) (6,932,000) FINANCING ACTIVITIES Proceeds from long-term debt 9,250,000 12,525,000 6,875,000 Principal repayments on long-term debt (4,400,000) (5,875,000) Repayments to bank subsidiaries, net (4,873,000) 3,573,000 Cash dividends paid (3,540,000) (3,002,000) (2,693,000) Purchases of treasury stock (2,286,000) (193,000) Proceeds from sales of treasury stock 58,000 152,000 461,000 Redemption of dissenter and fractional shares (22,000) (1,843,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,746,000 (1,884,000) 305,000 - ------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,017,000 1,149,000 (111,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,226,000 77,000 188,000 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,243,000 $ 1,226,000 $ 77,000 - -------------------------------------------------------------------------------------------------------------------
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES NOTE TWENTY TWO SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly financial information for 1996 and 1995 follows:
First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- 1996 Interest income $ 21,093,000 $ 21,503,000 $ 21,485,000 $ 21,988,000 Interest expense 9,683,000 9,435,000 9,923,000 10,023,000 Net interest income 11,410,000 12,068,000 11,562,000 11,965,000 Provision for possible loan losses 271,000 290,000 382,000 735,000 Investment securities gains 61,000 2,000 5,000 19,000 Net income 2,461,000 2,566,000 2,543,000 2,560,000 Net income per common share 0.44 0.46 0.45 0.46 1995 Interest income $ 16,787,000 $ 18,227,000 $ 19,256,000 $ 20,855,000 Interest expense 7,080,000 8,166,000 8,842,000 9,492,000 Net interest income 9,707,000 10,061,000 10,414,000 11,363,000 Provision for possible loan losses 201,000 208,000 302,000 393,000 Investment securities gains/(losses) 3,000 (1,000) 7,000 (7,000) Net income 2,040,000 2,125,000 2,143,000 2,410,000 Net income per common share 0.36 0.37 0.38 0.44
NOTE TWENTY THREE SUBSEQUENT EVENT On January 24, 1997, the Company consummated its acquisition of The Old National Bank of Huntington in Huntington, West Virginia (Old National). The merger, which will be accounted for under the pooling of interests method of acounting, involved the exchange of approximately 481,000 shares of the Company's common stock for all of the outstanding shares of Old National. The acquisition of Old National will increase total assets of the Company by approximately $49 million or 4.7% of total assets of the Company as of December 31, 1996. Accordingly, condensed proforma information has not been included for the information provided herein. On January 8, 1997, City National Bank signed a Letter of Intent to acquire RMI, Ltd., an insurance agency designed to market insurance products and services to select corporate and individual clients. It is anticipated that the transaction will be accounted for under the purchase method of accounting. The acquisition, subject to the negotiation of a defined acquisition agreement, would have less than a 1% impact on total assets and net income reported in the Company's 1996 financial statements. As a result, proforma information has not been included for the information provided herein. A director of one of the Company's subsidiaries is the President and current owner of RMI, Ltd. 33 AFFILIATE BANKS THE CITY NATIONAL BANK OF CHARLESTON 3601 MacCorkle Avenue, S.E. Charleston, West Virginia 25304 304/925-6611 Affiliated March 1984 Samuel M. Bowling, Chairman of the Board Steven J. Day, President & CEO Net Loans $343,700,000 Deposits 320,589,000 Total Assets 433,381,000 BANK OF RIPLEY 108 North Church Street Ripley, West Virginia 25271 304/372-2281 Affiliated October 1988 James J. Robinson, Chairman of the Board William E. Casto, President & CEO Net Loans $43,797,000 Deposits 59,356,000 Total Assets 65,289,000 PEOPLES STATE BANK 300 West Main Street Clarksburg, West Virginia 26301 304/624-0181 Affiliated December 1992 David E. Brock, Chairman of the Board, President & CEO Net Loans $18,960,000 Deposits 10,291,000 Total Assets 20,780,000 THE OLD NATIONAL BANK OF HUNTINGTON 999 Fourth Avenue Huntington, West Virginia 25701 304/525-7500 Affiliated January 1997 William M. Frazier, Chairman of the Board, President & CEO Net Loans $26,214,000 Deposits 44,715,000 Total Assets 49,087,000 THE PEOPLES BANK OF POINT PLEASANT 2212 Jackson Avenue Point Pleasant, West Virginia 25550 304/675-1121 Affiliated December 1986 Jack E. Fruth, Chairman of the Board Joe L. Ellison, President & CEO Net Loans $93,838,000 Deposits 106,286,000 Total Assets 121,901,000 THE HOME NATIONAL BANK OF SUTTON 101 Second Street Sutton, West Virginia 26601 304/765-7333 Affiliated May 1992 M. Scott Gibson, Chairman of the Board Van R. Thorn, Chief Executive Officer Net Loans $ 44,001,000 Deposits 56,480,000 Total Assets 63,732,000 THE FIRST NATIONAL BANK OF HINTON 321 Temple Street Hinton, West Virginia 25951 304/466-2311 Affiliated December 1994 C. Scott Briers, President of the Board Bob F. Richmond, Executive Vice President & Cashier Net Loans $41,645,000 Deposits 56,149,000 Total Assets 64,912,000 FIRST STATE BANK & TRUST 1218 Main Street Rainelle, West Virginia 25962 304/438-6144 Affiliated September 1988 Dr. D. K. Cales, Chairman of the Board Carlin K. Harmon, President & CEO Net Loans $62,852,000 Deposits 74,174,000 Total Assets 81,466,000 BLUE RIDGE BANK 420 South Raleigh Street Martinsburg, West Virginia 25401 304/264-4500 Affiliated August 1992 Jack C. Allen, Chairman of the Board M. Rebecca Linton, President Net Loans $57,329,000 Deposits 67,201,000 Total Assets 84,830,000 MERCHANTS NATIONAL BANK 4th Avenue & Washington Street Montgomery, West Virginia 25136 304/442-2475 Affiliated August 1995 George F. Davis, Chairman of the Board, President & CEO Net Loans $75,736,000 Deposits 85,323,000 Total Assets 114,075,000 34 BANK DIRECTORS CITY HOLDING COMPANY Samuel M. Bowling Chairman of the Board, City Holding Company President, Dougherty Co., Inc. C. Scott Briers President, Briers, Inc. Dr. D. K. Cales Dentist Hugh R. Clonch President, Clonch Industries George F. Davis Chairman of the Board, President and Chief Executive Officer, Merchants National Bank Steven J. Day President and Chief Executive Officer, City Holding Company Robert D. Fisher Partner, Adams, Fisher & Evans William M. Frazier Chairman of the Board, President and Chief Executive Officer, The Old National Bank of Huntington Jack E. Fruth Principal Owner, Fruth Pharmacies Jay Goldman President, Goldman Associates Carlin K. Harmon President and Chief Executive Officer, First State Bank & Trust C. Dallas Kayser Attorney Dale Nibert Dairy Farmer Otis L. O'Connor Partner, Steptoe & Johnson Leon K. Oxley Secretary, The Old National Bank of Huntington Bob F. Richmond Executive Vice President and Cashier, The First National Bank of Hinton Mark H. Schaul President, Charmar Realty Company Van R. Thorn, II Chief Executive Officer, The Home National Bank of Sutton DIRECTORS EMERITUS Vitus Hartley, Jr. James J. Robinson IN MEMORY OF J. Richard McCormick for his 32 years of service and dedication. THE CITY NATIONAL BANK OF CHARLESTON Samuel M. Bowling Chairman of the Board, The City National Bank of Charleston President, Dougherty Co., Inc. Charles "Laddie" Burdette Vice President, Fruth Pharmacies, Inc. Willie H. Childress Optometrist Oshel Craigo President, Better Foods, Inc. George J. Davis Public Accountant Steven J. Day President and Chief Executive Officer, The City National Bank of Charleston Jerry L. Goldberg President, Dunbar Building Products, Inc. Jay Goldman President, Goldman Associates Dickinson M. Gould, Jr. President, Buzz Products, Inc. and Haddy's Prime Beef William T. Hackworth President, Dunbar Printing Company David E. Haden President, RMI Ltd. J. C. Jefferds, III Vice President and Treasurer, Jefferds Corporation Barry W. Kemerer President, Precision Pump & Valve Otis L. O'Connor Partner, Steptoe & Johnson Harold R. Payne Vice President, Payne & Donahoe Insurance Agency, Inc. Mark H. Schaul President, Charmar Realty Company Frank Schirtzinger Owner, Charleston West 76 Truck Stop Charles R. Sigman Public Accountant Jon W. Watkins President, Natures Furniture, Inc. Harlan Wilson, Jr. President, Wilson Funeral Home, Inc. DIRECTORS EMERITUS W. S. Endres Roger D. Griffith Richard J. Hoylman Robert L. Peden THE PEOPLES BANK OF POINT PLEASANT Young I. Choi, M.D. Physician Joe L. Ellison President and Chief Executive Officer, The Peoples Bank of Point Pleasant Cynthia S. Epling Secretary/Treasurer, Smith Buick, Inc. John Felker, II Owner, Point Distributing Company Jack E. Fruth Chairman of the Board, The Peoples Bank of Point Pleasant Principal Owner, Fruth Pharmacies Vance Johnson President, Johnson's Supermarket, Inc. C. Dallas Kayser Attorney Michael R. Lieving Executive Vice President, The Peoples Bank of Point Pleasant Samuel P. McNeill, M.D. Physician George E. Miller Assistant Superintendent & Personnel, Mason County School System Dale Nibert Dairy Farmer Michael G. Sellards Executive Director and Chief Executive Officer, Pleasant Valley Hospital Mark E. Sheets Partner, Halliday, Sheets & Saunders Cecil Williams President, Flair Furniture Company Robert Wingett Publisher, Point Pleasant Register, Gallipolis Tribune and Daily Sentinel DIRECTORS EMERITUS Vitus Hartley, Jr. James Lewis Vaught Smith FIRST STATE BANK & TRUST Dan Akers President, Appalachian Heating K. O. Boley Retired Businessman John Buckland Executive Vice President, First State Bank & Trust Dr. D. K. Cales Chairman of the Board, First State Bank & Trust Dentist J. H. Crookshanks Owner, Crookshanks Builders Supply L. A. Gates President & CEO, L. A. Gates Company Philip J. Gwinn President, P. J. Gwinn Construction Co., Inc. Carlin K. Harmon President and Chief Executive Officer, First State Bank & Trust Alan Larrick Attorney at Law, Larrick Law Offices Curtis E. McCall President, Showcase Cinemas F. Eugene Nelson Independent Insurance Agent Max Priddy President, Priddy's Lumber Pat Reed Broker/Owner, Reed-Patton Assoc., Inc. Better Homes and Gardens Robert C. Ripley, Sr. Retired Sales Manager, Dodson-Hager Ford Ralph D. Williams Former State Senator and Area Representative, State Farm Insurance DIRECTOR EMERITUS Ryan Thompson 35 BANK DIRECTORS BANK OF RIPLEY William E. Casto President and Chief Executive Officer, Bank of Ripley R. Fred Clark Executive Vice President, Bank of Ripley Robert D. Fisher Partner, Adams, Fisher & Evans Robert C. Lester Retired Pharmacist Harry H. Parsons Retired Merchant Gary W. Roark Owner, G. W. Roark & Associates James J. Robinson Chairman of the Board, Bank of Ripley G. Lee Wilson Owner, Ponderosa and Char House Restaurants THE HOME NATIONAL BANK OF SUTTON Roy W. Cutlip President, The Home National Bank of Sutton M. Scott Gibson Chairman of the Board, The Home National Bank of Sutton Director, Stockert-Gibson Funeral Home Loran Kniceley Owner, Kniceley Insurance Agency Sue Nuzum President, Braxton Motor, Inc. Van R. Thorn, II Chief Executive Officer, The Home National Bank of Sutton IN MEMORY OF Ralph J. Pletcher for his 20 years of service and dedication. BLUE RIDGE BANK Jack C. Allen Chairman of the Board, Blue Ridge Bank State Farm Insurance Agent (Retired) Lewis O. Braithwaite Director, Rosedale Funeral Home Carol F. Kable Realtor George Karos President and Owner, Patterson's Drug Store M. Rebecca Linton President, Blue Ridge Bank Peter L. Mulford Administrator, City Hospital PEOPLES STATE BANK John P. Aman Vice President, Peoples State Bank David E. Brock Chairman of the Board, President and Chief Executive Officer, Peoples State Bank Timothy J. Manchin Partner, Manchin, Aloi & Carrick Mark F. Oliverio Vice President, Oliverio Italian Style Peppers, Inc. Mark B. Owen President, Tmaro Corporation Robert W. Riggs President, Robard, Inc. Frank E. Simmerman, Jr. Partner, Johnson, Simmerman & Broughton, L.C. THE FIRST NATIONAL BANK OF HINTON C. Scott Briers President of the Board, The First National Bank of Hinton President, Briers, Inc. James S. Kerr Realtor William G. Meador Retired Insurance Agent David L. Parmer Attorney at Law Bob F. Richmond Executive Vice President and Cashier, The First National Bank of Hinton Dr. J. D. Woodrum Physician Paul L. Wykle Retired Former Owner, Twin State Barber and Beauty Supply IN MEMORY OF James V. Coste for his 35 years of service and dedication. MERCHANTS NATIONAL BANK Linda G. Aguilar Vice President, Merchants National Bank Thomas L. Carson President (Retired), College Drug Store, Inc. Hugh Clonch President, Clonch Industries, Inc. Ghassan Dagher, M.D. Eye Physician & Surgeon George F. Davis Chairman of the Board, President and Chief Executive Officer, Merchants National Bank Robert C. Gillespie Regents Professor, West Virginia Institute of Technology Carl L. Harris Attorney at Law Thomas A. Jacobs Tax Consultant Carl L. Kennedy, D.D.S. Kennedy Dental Office Giles E. Musick President, Brown Chevrolet, Inc. James F. Neil Plant Manager (Retired), Elkem Metals, Inc. THE OLD NATIONAL BANK OF HUNTINGTON W. B. Andrews President, Dewco, Inc. Lucian R. Carter President, Carter & Company Robert M. Davidson Certified Public Accountant, Carter & Company William M. Frazier Chairman of the Board, President and Chief Executive Officer, The Old National Bank of Huntington W. Michael Frazier Attorney, Frazier & Oxley Frank Gaddy President, Gaddy Engineering W. Kenneth Grant President, Gino's Pizza John J. Klim, Jr. President, D & E Industries Ezra Midkiff President, Wilson Welding Leon K. Oxley Secretary, The Old National Bank of Huntington 36 ADDITIONAL INFORMATION STOCK INFORMATION The Company's Common Stock is included on The Nasdaq National Market under the symbol "CHCO". Nasdaq market makers in City Holding Company include: Advest, Inc. Ferris Baker Watts, Inc. Herzog, Heine, Geduld, Inc. Legg, Mason, Wood, Walker, Inc. Robinson Humphrey Co., Inc. Wheat, First Securities, Inc. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN City Holding Company offers to holders of its Common Stock the opportunity to purchase, through reinvestment of dividends or by additional cash payments, additional shares of its Common Stock. Please address inquiries regarding the plan to: City Holding Company Dividend Reinvestment and Stock Purchase Plan Post Office Box 4168 Charleston, WV 25364-4168 Attn: Stock Transfer Agen ABOUT FORM 10-K A copy of the Company's annual report on Form 10-K, as filed with the Securities and Exchange Commission, will be forwarded without charge to any stockholder upon written request to: City Holding Company Attention: Robert A. Henson, Chief Financial Officer Post Office Box 4168 Charleston, West Virginia 25364-4168 37 EX-99.A 3 EXCERPTS FROM THE 1997 PROXY STATEMENT ELECTION OF THE COMPANY'S DIRECTORS The Company's Board of Directors presently comprises eighteen members. The Board of Directors is classified into three classes, with one class to be elected each year to a three-year term. Proxies will be voted for the election of the following nominees as Class II directors to serve until the Company's 2000 Annual Meeting. Each nominee is currently a director of the Company. The Board of Directors has no reason to believe that any of the nominees will be unavailable to serve if elected, but in such event, proxies will be voted for such substitutes as the Board may designate. The Proxies may cumulate votes at their discretion.
Principal Occupation Director Name (Age) and Business Experience Since - ---------- ----------------------- ----- Class II Nominees (to serve until the 2000 Annual Meeting) Carlin K. Harmon (60) President & Chief Executive Officer, 9/88 First State Bank & Trust, Rainelle, WV, since 1972; Executive Vice President of the Company since 1990. Dale Nibert (69) Dairy Farmer, 4/88 Point Pleasant, WV Mark Schaul (66) President, Charmar Realty Company, 3/76 Charleston, WV Van R. Thorn (48) Chief Executive Officer, The Home 5/92 National Bank of Sutton, Sutton, WV, since 1992; Cashier from 1979 to 1992. C. Scott Briers (61) President of the Board, First National 1/95 Bank of Hinton since 1994; Owner, Briers Furniture since 1977 Hugh R. Clonch (57) President of Clonch 9/95 Industries, Inc. (timber) in Dixie, WV, since 1975 6 Principal Occupation Director Name (Age) and Business Experience Since - ---------- ----------------------- ----- Class III Directors (to serve until the 1998 Annual Meeting) Dr. D. K. Cales (67) Dentist, Rainelle, WV 7/90 Jay Goldman (53) President, Goldman Associates (real 8/88 estate) Charleston, WV C. Dallas Kayser (45) C. Dallas Kayser, L.C. (attorney) 1/95 Point Pleasant, WV Robert D. Fisher (44) Partner, Adams Fisher & Evans 8/94 (attorney) Ripley, WV George F. Davis (69) President and Chief Executive Officer 9/95 of Merchants National Bank, Montgomery, WV, since 1979 William M. Frazier (68) Attorney, Frazier & Oxley, LC; 2/97 President and Chief Executive Officer of The Old National Bank of Huntington, Huntington, WV, since 1984 Class I Directors (to serve until the 1999 Annual Meeting) Samuel M. Bowling (59) President, Dougherty Company, Inc. 3/83 (mechanical contractor) since 1977, Chairman of the Company since 1990. Steven J. Day (43) President and Chief Executive Officer of 11/88 the Company since 1990; Treasurer and Chief Financial Officer from 1983 to 1990. Jack E. Fruth (68) Principal Owner, Fruth Pharmacies 4/87 Point Pleasant, WV. 7 Otis L. O'Connor (61) Partner, Steptoe & Johnson (attorneys) 1/76 Charleston, WV. Bob F. Richmond (56) Chief Executive Officer, First National 1/95 Bank of Hinton since 1981; Vice President from 1972 to 1981 Leon K. Oxley (48) Attorney, Frazier & Oxley, LC; 2/97 Secretary of the Old National Bank of Huntington, Huntington, WV, since 1981
8 Committees of the Board of Directors The entire Board of Directors functions as a nominating committee by considering nominees for election as Directors of the Company. The Board will consider nominees recommended by shareholders if such recommendations are submitted in writing and delivered or sent by first class registered or certified mail to the President of the Company not less than 14 no more than 50 days prior to the date of the 1998 Annual Meeting. Such recommendations should include the name, address, occupation and ownership of shares of Common Stock of the nominee, and the name, address and ownership of shares of Common Stock of the nominating shareholder. City Holding has a standing Audit Committee consisting of three members, Dr. D. K. Cales, Jack E. Fruth, and Mark Schaul. The Audit Committee has the responsibility of meeting with and reviewing the scope of work performed by internal and external auditors. Significant matters are discussed with the full Board of Directors. This committee meets on a quarterly basis as needed and met four times during 1996. The Company has a Compensation Committee consisting of Dr. D. K. Cales, Jack E. Fruth, and Jay Goldman, none of whom is an employee of City Holding. The Compensation Committee makes recommendations to the Board with respect to the compensation of executive officers and certain junior officers who participate in the Company's Stock Incentive Plan. This committee meets once a year. Attendance The Company's Board of Directors held 12 meetings during the fiscal year ended December 31, 1996. No director attended fewer than 75% of the meetings of the Company's Board, all members of the Audit Committee attended all of the Audit Committee meetings, and all members of the Compensation Committee attended the Compensation Committee meeting. Compensation of Directors The Company's Directors are paid a fee of $500 for each meeting of the full board, regardless of attendance. Directors who are also officers of the Company and its subsidiaries receive no fee. EXECUTIVE OFFICERS The executive officers of City Holding are as follows: Steven J. Day, President and Chief Executive Officer. George F. Davis, Executive Vice President. Carlin K. Harmon, Executive Vice President. 9 Matthew B. Call, 39, has been Senior Vice President of City Holding Company since August 1994. Prior to joining City Holding Company, he was Senior Vice President and Cashier for Bank One, West Virginia. Robert A. Henson, CPA, 35, has been Chief Financial Officer of City Holding since May 1990. He was Chief Accounting Officer from 1988 to 1990 and has been employed by the Company since 1987. Prior to joining the Company, he was an Audit Manager with Ernst & Young, LLP in Charleston, West Virginia. F. Eric Nelson, Jr., 35, has been Treasurer and Investment Portfolio Manager of the Company since October 1994. He was Chief Operations Officer and Investment Portfolio Manager from 1992 to 1994 and Vice President and Investment Portfolio Manager from 1990 to 1992. Prior to joining the Company, he was a Director with the Corporate Finance Department of Crestar Bank in Richmond, Virginia. 10 EXECUTIVE COMPENSATION The following table presents information relating to compensation of executive officers of the Company whose compensation exceeded $100,000 during the fiscal year ended December 31, 1996. Summary Compensation Table Annual Compensation
Name and All Other Principal Position Year Salary ($) Bonus ($) (1) Compensation(2) ------------------ ---- ---------- ------------- --------------- Steven J. Day President and Chief 1996 $194,057 $90,444 $23,597 Executive Officer 1995 187,043 80,718 22,127 1994 179,763 72,952 22,045 Carlin K. Harmon Executive Vice 1996 154,726 69,574 23,613 President 1995 149,133 57,764 22,408 1994 143,328 40,132 21,410 George F. Davis Executive Vice 1996 132,480 37,094 20,857 President 1995 123,500 19,000 (3) 9,203 Robert A. Henson 1996 97,481 46,302 22,168 Chief Financial Officer 1995 93,957 40,602 20,572 1994 90,300 35,080 18,259 F. Eric Nelson, Jr. Treasurer and Investment Portfolio 1996 89,975 42,904 22,187 Manager 1995 86,723 37,560 19,127 1994 83,347 32,570 16,963
(1) Includes bonus awards under the Company's Incentive Plan. (2) Includes Company matching and profit-sharing contributions under the Company's Profit-Sharing and 401(k) Plan, which was implemented January 1, 1991, and the Company's ESOP, which was implemented January 1, 1996. (3) During 1995, Mr. Davis' compensation was calculated based on the recommendations of the Senior Personnel Committee of Merchants National Bank. Beginning in January 1996, Mr. Davis' compensation is calculated in accordance with City Holding's Incentive Plan. 11 Stock Options Granted The following table sets forth certain information concerning stock options granted during 1996 to the named executives:
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term Individual Grants - --------------------------------------------------------------------------------------------------------------------------------- Name Number of Securities % of Total Stock Options Exercise Underlying Stock Granted to Employees Price Expiration Options Granted During the Year per Share Date 5% 10% - --------------------------------------------------------------------------------------------------------------------------------- Steven J. Day 15,000 39% 24.50 12/19/2001 101,550 224,400 Carlin K. Harmon 2,000 5% 24.50 12/19/2001 13,540 29,920 Matthew B. Call 5,000 10% 24.50 12/19/2001 33,850 74,800 Robert A. Henson 7,000 18% 24.50 12/19/2001 47,390 104,720 F. Eric Nelson 5,000 10% 24.50 12/19/2001 33,850 74,800
Option values reflect Black Scholes model output for options. The assumptions used in the model were expected volatility of .237, risk-free rate of return of 6.04%, dividend yield of 2.75%, and time to exercise of five years. Prior to 1996, no stock options had been awarded. No stock options were exercised through December 31, 1996. The stock options vest and become fully exercisable immediately. 12 Option Values The following table sets forth certain information concerning option values at December 31, 1996: Number of Securities Value of Unexercised Underlying Unexercised Options In-The-Money Options At Fiscal Year-End At Fiscal Year-End - ------------------------------------------------------------------------------- Steven J. Day 15,000 $13,125 Carlin K. Harmon 2,000 1,750 Matthew B. Call 5,000 4,375 Robert A. Henson 7,000 6,125 F. Eric Nelson 5,000 4,375 Based on closing sales price of $25.375 on December 31, 1996. 13 Stock Incentive Plan The Committee administers the Company's 1993 Stock Incentive Plan (the "Stock Incentive Plan"). The Committee may delegate its authority to administer the Stock Incentive Plan to an officer of the Company. Key employees of the Company and its related entities and individuals who provide services to the Company and its related entities are eligible to participate in the Stock Incentive Plan. The class of eligible personnel is selected by the Committee and includes approximately 25 people, including Messrs. Day, Harmon, Davis, Henson, Nelson and Call. The Committee may, from time to time, grant stock options, stock appreciation rights ("SARs"), or stock awards to Stock Incentive Plan Participants. Options granted under the Stock Incentive Plan may be incentive stock options ("ISOs") or nonqualified stock options. The option price will be fixed by the Committee at the time the option is granted, but in the case of an ISO, the price cannot be less than the shares' fair market value on the date of grant. The option price may be paid in cash, or, with the Committee's consent, with shares of Common Stock, a combination of cash and Common Stock or in installments. SARs entitle the participant to receive the excess of the fair market value of a share of Common Stock on the date of exercise over the initial value of the SAR. The initial value of the SAR is the fair market value of a share of Common Stock on the date of grant. SARs may be granted in relation to option grants ("Corresponding SARs") or independently of option grants. The difference between these two types of SARs is that to exercise a Corresponding SAR, the participant must surrender unexercised that portion of the stock option to which the Corresponding SAR relates. Participants may also be awarded shares of Common Stock pursuant to a stock award. The Committee may prescribe that a participant's right in a stock award shall be nontransferable or forfeitable or both unless certain conditions are satisfied. These conditions may include, for example, a requirement that the participant continue employment with the Company for a specified period or that the Company or the participant achieve stated objectives. The Stock Incentive Plan provides that outstanding options and SARs will become exercisable and outstanding stock awards will be earned in full and nonforfeitable upon a change in control. A maximum of 300,000 shares of Common Stock may be issued upon the exercise of options and SARs and stock awards. This limitation will be adjusted, as the Committee determines is appropriate, in the event of a change in the number of outstanding shares of Common Stock by reason of a stock dividend, stock split, combination, reclassification, recapitalization or other similar events. The terms of outstanding awards also may be adjusted by the Committee to reflect such changes. 14 No option, SAR or stock award may be granted under the Stock Incentive Plan after March 8, 2003. The Company's Board of Directors may, without further action by shareholders, terminate or suspend the Stock Incentive Plan in whole or in part. The Board of Directors may also amend the Stock Incentive Plan except that no amendment that increases the number of shares of Common Stock that may be issued under the Stock Incentive Plan or changes the class of individuals who may be selected to participate in the Plan will become effective until it is approved by shareholders. Employee Benefit Plans Under the Company's Profit Sharing & 401(k) Plan (the "Plan"), a deferred compensation plan under the Internal Revenue code, eligible participants, including Messrs. Day, Harmon, Davis, Henson, Nelson and Call, may contribute from 1% to 15% of pre-tax earnings to their Plan accounts. Contributions may be invested in any of five investment options as selected by the participant, including Company Common Stock. The Company matches, in its Common Stock, 50% of the first 6% of earnings contributed by each participant. Although the profit sharing features of this Plan remain intact, future profit sharing contributions, if any, are expected to be made to the Employee Stock Ownership Plan. City Holding Company's Employees' Stock Ownership Plan ("ESOP"), covers all eligible employees, including Messrs. Day, Harmon, Davis, Henson, Nelson and Call, who have completed one year of service and have attained the age of 21. The ESOP plan was created January 1, 1996, and includes both a Money Purchase and a Stock Bonus feature. Annually, the Company will contribute to the Money Purchase account an amount equal to 9% of eligible compensation. The Stock Bonus account contributions are discretionary and are determined annually by the Company's Board of Directors. For the year ended December 31, 1996, ESOP contributions for Messrs. Call and Davis equaled 13% of their gross salary, while contributions for Messrs. Day, Harmon, Henson and Nelson equaled 13% of the 1996 maximum contribution limit as set forth by the Internal Revenue Service. Contributions to all executive officers of the Company aggregated $109,543, and included contributions of $19,500 each to Messrs. Day, Harmon, Henson, and Nelson and $13,833 and $17,710 to Messrs. Call and Davis, respectively. 15 EMPLOYMENT AGREEMENTS The Company has an executive severance agreement with Mr. Day providing that if his employment is terminated (either voluntarily or involuntarily other than as a normal consequence of death, disability or retirement at a normal retirement age) at any time within a period of two years from a change in control of the Company, he will receive as compensation for services a lump sum payment (subject to any applicable payroll and other taxes) generally equal to 2.99 times his annual compensation. A "change of control" shall be deemed to have taken place if (i) a third person acquires shares of Common Stock that, aggregated with shares of Common Stock previously held by such person, have 30% or more of the total number of votes that may be cast for the election of directors of the Company; or (ii) as the result of any cash tender or exchange offer, merger or other business combination or sale of assets, shares of Common Stock are converted into cash or securities of another corporation. The Company also has an agreement with Mr. Davis providing that he will serve as Executive Vice President of the Company at annual compensation and benefits not less than his last compensation package with Merchants National Bank prior to their acquisition. Additionally, the agreement provides that when Mr. Davis retires on his seventieth birthday, the Company will retain him in a consulting capacity for three years and will pay him an annual fee equal to fifty percent of his last annual salary. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 1996, the Company and its subsidiaries had, and expect to have in the future, banking transactions with officers and directors of the Company, their immediate families and entities in which they are principal owners (more than 10% interest). The transactions are in the ordinary course of business and on substantially the same terms, including interest rates and security, as those prevailing at the same time for comparable transactions with others and do not involve more than the normal risk of collectibility or present other unfavorable factors. Otis L. O'Connor, Secretary and Director of the Company, is a partner in Steptoe & Johnson, Charleston, West Virginia, which performed legal services for the Company in 1996 and is expected to continue to perform similar services in the future. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company's executive officers, directors and 10% shareholders are required under the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership with the Securities Exchange Commission. Copies of these reports must also be furnished to City Holding. Based solely on review of the copies of such reports furnished to the Company through the date hereof, or written representations that no reports were required, the Company believes that during 1996, all filing requirements applicable to its officers, directors and 10% shareholders were met. 16 OWNERSHIP OF EQUITY SECURITIES The Company's only authorized voting equity security is its Common Stock, par value $2.50 per share (the "Common Stock"). As discussed on the preceding page, the Company's Common Stock has one vote per share on all matters except the election of Directors. On April 15, 1997, the date for determining shareholders entitled to vote at the Annual Meeting (the "Record Date"), there were outstanding and entitled to vote 6,068,488 shares of Common Stock. The table below presents certain information as of the Record Date regarding beneficial ownership of shares of Common Stock by Directors, nominees for Director, and all Directors and officers as a group. The Company knows of no person that owns more than 5% of the outstanding Common Stock.
Aggregate Sole Voting and Percentage Name Investment Power Other (1) Owned - ---- ---------------- --------- ----- Samuel M. Bowling 24,191 55,141 1.31% C. Scott Briers 6,808 2,487 0.15% Dr. D. K. Cales 88,152 0 1.45% Hugh R. Clonch 18,647 87,167 1.74% George F. Davis 7,417 933 0.14% Steven J. Day 30,044 15,990 0.76% Robert D. Fisher 6,440 0 0.11% William M. Frazier 32,976 51,251 1.39% Jack E. Fruth 33,970 0 0.56% Jay Goldman 9,972 304 0.17% Carlin K. Harmon 29,280 6,736 0.59% C. Dallas Kayser 33,028 438 0.55% Dale Nibert 42,790 0 0.71% Otis L. O'Connor 3,559 14 0.06% Leon K. Oxley 27,474 43,482 1.17% Bob F. Richmond 10,478 564 0.18% Mark Schaul 28,988 1,609 0.50% Van R. Thorn, II 1,756 1,738 0.06% Directors and Officers as a group (21 persons) 448,431 279,138 11.99% - --------------
(1) Includes shares (a) owned by or with certain relatives; (b) held in various fiduciary capacities; (c) held by certain corporations; or (d) held in trust by the Company's 401(k) and Profit Sharing Plan; or (e) held in trust by the Company's Employee Stock Ownership Plan (ESOP). 17 -----END PRIVACY-ENHANCED MESSAGE-----