-----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, BVDloZYkuX43/2c/srDQxUivV0Z9BwihsDMi1HyUTcPmIRJDbQ3BjR1r48dmYRsy UnZI09SBFfmoofm6GeEJbg== 0000916641-97-000841.txt : 19970815 0000916641-97-000841.hdr.sgml : 19970815 ACCESSION NUMBER: 0000916641-97-000841 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11733 FILM NUMBER: 97661586 BUSINESS ADDRESS: STREET 1: 3601 MACCORKLE AVE SE CITY: CHARLESTON STATE: WV ZIP: 25304 BUSINESS PHONE: 3049256611 MAIL ADDRESS: STREET 1: 3601 MACCORKLE AVE SE CITY: CHARLESTON STATE: WV ZIP: 25301 10-Q 1 CITY HOLDING COMPANY 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number June 30, 1997 0-11733 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3601 MacCorkle Avenue, Southeast Charleston, West Virginia 25304 (Address of principal offices) Registrant's telephone number, including area code: (304) 925-6611 Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes xx No ------ ------ The number of shares outstanding of the issuer's common stock as of August 11, 1997: Common Stock, $2.50 Par Value -- 6,071,327 shares THIS REPORT CONTAINS 34 PAGES. EXHIBIT INDEX IS LOCATED ON PAGE 32 . Index City Holding Company and Subsidiaries PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets -- June 30, 1997 (unaudited) and December 31, 1996 Consolidated Statements of Income (unaudited) -- Six months ended June 30, 1997 and 1996 and the three months ended June 30, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity (unaudited) -- Six months ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows (unaudited) -- Six months ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements (unaudited) -- June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures PAGE 2 OF 34 PART I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES
Item I. JUNE 30 DECEMBER 31 1997 1996 ------------ ------------ ASSETS (unaudited) Cash and due from banks $ 45,011,000 $ 47,351,000 Federal funds sold 532,000 413,000 Securities available for sale, at fair value 182,393,000 122,944,000 Investment securities (approximate market values: December 31, 1996 -- $41,826,000) 0 40,978,000 Loans: Gross loans 768,553,000 704,775,000 Unearned income (8,150,000) (6,793,000) Allowance for possible loan losses (7,864,000) (7,281,000) ---------- ----------- NET LOANS 752,539,000 690,701,000 Loans held for sale 110,342,000 92,472,000 Bank premises and equipment 30,848,000 30,025,000 Accrued interest receivable 8,317,000 7,510,000 Other assets 17,702,000 16,416,000 ------------ ----------- TOTAL ASSETS $ 1,147,684,000 $ 1,048,810,000 ============= ============= LIABILITIES Deposits: Noninterest-bearing $ 138,037,000 $ 118,976,000 Interest-bearing 763,050,000 709,694,000 ----------- ----------- TOTAL DEPOSITS 901,087,000 828,670,000 Short-term borrowings 101,832,000 90,298,000 Long-term debt 39,400,000 34,250,000 Other liabilities 17,882,000 16,219,000 ------------- ----------- TOTAL LIABILITIES 1,060,201,000 969,437,000 STOCKHOLDERS' EQUITY Preferred stock, par value $25 a share: Authorized-500,000 shares; none issued Common stock, par value $2.50 a share: authorized 20,000,000 shares; issued 6,082,456 and 5,598,912 shares as of June 30, 1997 and December 31, 1996, respectively, including 11,130 and 11,341 shares in treasury at June 30, 1997 and December 31, 1996, respectively. 15,207,000 13,998,000 Capital surplus 35,795,000 35,426,000 Retained earnings 36,214,000 30,246,000 Cost of common stock in treasury (310,000) (300,000) Net unrealized gain on securities available for sale, net of deferred income taxes 577,000 3,000 -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 87,483,000 79,373,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,147,684,000 $ 1,048,810,000 ============== ==============
See notes to consolidated financial statements PAGE 3 OF 34 CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED June 30 1997 1996 ---------- ---------- INTEREST INCOME Interest and fees on loans $ 40,563,000 $ 37,318,000 Interest and dividends on securities: Taxable 4,456,000 4,227,000 Tax-exempt 974,000 1,032,000 Other interest income 59,000 19,000 --------------- ----------- TOTAL INTEREST INCOME 46,052,000 42,596,000 INTEREST EXPENSE Interest on deposits 15,851,000 14,587,000 Interest on short-term borrowings 3,479,000 3,749,000 Interest on long-term debt 1,252,000 782,000 ------------ ------------ TOTAL INTEREST EXPENSE 20,582,000 19,118,000 NET INTEREST INCOME 25,470,000 23,478,000 PROVISION FOR POSSIBLE LOAN LOSSES 938,000 561,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 24,532,000 22,917,000 OTHER INCOME Net securities gains 11,000 63,000 Service charges 2,086,000 1,784,000 Mortgage loan servicing fees 5,352,000 520,000 Other 2,560,000 1,654,000 ------------- ------------ TOTAL OTHER INCOME 10,009,000 4,021,000 OTHER EXPENSES Salaries and employee benefits 13,991,000 10,456,000 Net occupancy expense 4,006,000 2,876,000 Other 7,195,000 6,053,000 ---------- ---------- TOTAL OTHER EXPENSES 25,192,000 19,385,000 INCOME BEFORE INCOME TAXES 9,349,000 7,553,000 INCOME TAXES 3,345,000 2,526,000 ---------- ---------- NET INCOME $ 6,004,000 $ 5,027,000 ========== ========== Net income per common share $ .99 $ .90 ========== ========== Average common shares outstanding 6,069,192 5,586,170 ========== ==========
See notes to consolidated financial statements PAGE 4 OF 34 CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTH PERIOD ENDED June 30 1997 1996 ---------- ---------- INTEREST INCOME Interest and fees on loans $ 21,907,000 $ 19,015,000 Interest and dividends on securities: Taxable 2,289,000 1,974,000 Tax-exempt 488,000 500,000 Other interest income 3,000 14,000 --------------- ----------- TOTAL INTEREST INCOME 24,687,000 21,503,000 INTEREST EXPENSE Interest on deposits 8,147,000 7,354,000 Interest on short-term borrowings 2,217,000 1,670,000 Interest on long-term debt 660,000 411,000 ------------ ------------ TOTAL INTEREST EXPENSE 11,024,000 9,435,000 NET INTEREST INCOME 13,663,000 12,068,000 PROVISION FOR POSSIBLE LOAN LOSSES 550,000 290,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 13,113,000 11,778,000 OTHER INCOME Net securities (losses) gains (17,000) 2,000 Service charges 1,138,000 945,000 Mortgage loan servicing fees 2,570,000 293,000 Other 1,161,000 868,000 ------------- ------------ TOTAL OTHER INCOME 4,852,000 2,108,000 OTHER EXPENSES Salaries and employee benefits 7,324,000 5,202,000 Net occupancy expense 2,038,000 1,506,000 Other 3,717,000 3,164,000 ---------- ---------- TOTAL OTHER EXPENSES 13,079,000 9,872,000 INCOME BEFORE INCOME TAXES 4,886,000 4,014,000 INCOME TAXES 1,711,000 1,448,000 ----------- ---------- NET INCOME $ 3,175,000 $ 2,566,000 ========== ========== Net income per common share $ .52 $ .46 ========== ========== Average common shares outstanding 6,069,161 5,586,093 ========== ==========
See notes to consolidated financial statements PAGE 5 OF 34 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES Six Months Ended June 30, 1997
UNREALIZED GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY ----- ------- -------- -------- ----- ----- Balances at December 31, 1996 $ 13,998,000 $ 35,426,000 $ 30,246,000 $ 3,000 ($ 300,000) $ 79,373,000 Net income 6,004,000 6,004,000 Cash dividends declared ($.36/share) (2,186,000) (2,186,000) Change in unrealized gain/(loss), net of income taxes of $370,000 555,000 555,000 Exercise of 2,627 stock options 7,000 58,000 65,000 Sale of 2,511 shares of treasury stock 13,000 67,000 80,000 Purchase of 2,300 shares of treasury stock (77,000) (77,000) Acquisition of subsidiary 1,202,000 298,000 2,150,000 19,000 3,669,000 ------------ ------------ ------------ ------------ ------------ ------------ Balances at June 30, 1997 $ 15,207,000 $ 35,795,000 $ 36,214,000 $ 577,000 ($ 310,000) $ 87,483,000 ============ ============ ============ ============ ============ ============
Six Months Ended June 30, 1996
UNREALIZED GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY ----- ------- -------- -------- ----- ------ Balances at December 31, 1995 $ 12,730,000 $ 25,942,000 $ 34,432,000 $ 395,000 ($ 360,000) $ 73,139,000 Net income 5,027,000 5,027,000 Cash dividends declared ($.31/share) (1,727,000) (1,727,000) Changes in unrealized gain/(loss), net of income taxes of $755,000 (1,132,000) (1,132,000) ------------ ------------ ------------ ------------ ------------ ------------ Balances at June 30, 1996 $ 12,730,000 $ 25,942,000 $ 37,732,000 ($ 737,000) ($ 360,000) $ 75,307,000 ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements PAGE 6 OF 34 CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED JUNE 30 1997 1996 ---- ---- OPERATING ACTIVITIES Net Income $6,004,000 $5,027,000 Adjustments to reconcile net income to net cash used in operating activities: Net amortization 493,000 430,000 Provision for depreciation 2,261,000 1,613,000 Provision for loan losses 938,000 561,000 Realized securities gains (11,000) (63,000) Loans originated for sale (58,357,000) (59,563,000) Purchases of loans held for sale (301,971,000) (541,519,000) Proceeds from loans sold 343,004,000 560,532,000 Realized gains on loans sold (546,000) (478,000) Increase in accrued interest receivable (517,000) (428,000) Increase in other assets (2,011,000) (681,000) Increase in other liabilities 1,424,000 1,199,000 --------- ------------- NET CASH USED IN OPERATING ACTIVITIES (9,289,000) (33,370,000) INVESTING ACTIVITIES Proceeds from sales of securities available for sale 17,134,000 33,825,000 Proceeds from maturities of securities available for sale 20,095,000 24,236,000 Purchases of securities available for sale (44,425,000) (32,554,000) Proceeds from maturities of securities 1,863,000 130,352,000 Purchases of securities 0 (122,979,000) Net increase in loans (36,702,000) (10,292,000) Net cash acquired in acquisitions 9,126,000 0 Purchases of premises and equipment (1,940,000) (7,235,000) ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (34,849,000) 15,353,000 FINANCING ACTIVITIES Net increase (decrease) in noninterest bearing deposits 4,349,000 (1,475,000) Net increase in interest-bearing deposits 23,443,000 20,571,000 Net increase in short-term borrowings 11,093,000 7,090,000 Proceeds from long-term-debt 5,150,000 4,200,000 Exercise of stock options 65,000 0 Purchases of treasury stock (77,000) 0 Proceeds from sales of treasury stock 80,000 0 Cash dividends paid (2,186,000) (1,727,000) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 41,917,000 28,659,000 ------------ ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,221,000) 10,642,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,764,000 28,460,000 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,543,000 $ 39,102,000 ============= ============
See notes to consolidated financial statements PAGE 7 OF 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1997 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements, which are unaudited, include all the accounts of City Holding Company (the Parent Company) and its wholly owned subsidiaries (collectively, the Company). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 1997, are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 1997. The Company's accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management's estimates. Certain amounts in the unaudited consolidated financial statements have been reclassified. Such reclassifications had no effect on operating results in any period presented. For further information, refer to the consolidated financial statements and footnotes thereto included in the City Holding Company annual report on Form 10- K for the year ended December 31, 1996. PAGE 8 OF 34 NOTE B - ACQUISITIONS On January 24, 1997, the Company consummated its acquisition of the Old National Bank of Huntington in Huntington, West Virginia (Old National). The merger involved the exchange of 480,917 shares of the Company's common stock for all of the outstanding shares of Old National. This transaction was accounted for under the pooling of interests method of accounting. However, due to the immateriality of the impact of this transaction to the Company's consolidated financial statements, prior period financial statements have not been restated. NOTE C - PENDING ACQUISITION On January 8, 1997, City National Bank, a wholly-owned subsidiary, 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 in the third quarter of 1997. The acquisition, subject to the negotiation of a definitive acquisition agreement, would have less than a 1% impact on total assets and net income reported in the Company's second quarter 1997 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. NOTE D - INCOME TAXES The consolidated provision for income taxes is based upon financial statement earnings. The effective tax rate for the six months ended June 30, 1997, of 35.78% varied from the statutory federal income tax rate primarily due to state income taxes and the tax effects of nontaxable interest income and the amortization of goodwill. PAGE 9 OF 34 NOTE E - INVESTMENT RECLASSIFICATION In June 1997, the Company reclassified its entire held-to-maturity securities portfolio to the available-for-sale classification. The securities transferred consisted of investment securities with approximate amortized cost and market value of $46,520,000 and $46,781,000, respectively. This action was taken by the Company to provide management more flexibility in managing the Company's liquidity and interest rate risk. NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, that are not included in the consolidated financial statements. These commitments approximated $91,850,000 at June 30, 1997. These arrangements, consisting principally of unused lines of credit issued in the normal course of business, have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Standby letters of credit, which total $2,755,000, have historically expired unfunded. NOTE G - NEW ACCOUNTING PRONOUNCEMENTS On January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which requires that entities recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The adoption of SFAS No. 125 did not have a material impact on the Company's financial position or results of operations during 1997. The company is further evaluating the impact it will have in 1998. PAGE 10 OF 34 The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," (SFAS No. 128) which establishes new standards for computing and presenting earnings per share. SFAS No. 128 is effective for all financial statements issued subsequent to December 15, 1997. The basic and diluted earnings per share computed under SFAS No. 128 are not anticipated to be materially different from earnings per common share presented herein. NOTE H - LONG-TERM BORROWINGS Long-term debt consists of a $35,000,000 revolving line of credit of the Parent Company with a variable rate based on the lesser of the adjusted LIBOR rate plus 1.875% per annum or the lender's base rate less .25% per annum (7.5625% at June 30, 1997) due on December 31, 1997. As of June 30, 1997, the outstanding balance was equal to $29,400,000. Interest on this obligation is payable quarterly, and the Parent Company has pledged the common stock of each of its wholly-owned banking subsidiaries as collateral for the revolving credit loan. Management intends to refinance this loan according to the provisions provided in the agreement. Additionally, two banking subsidiaries maintain long-term financing from the Federal Home Loan Bank (FHLB) in the form of Long-Term LIBOR Floaters as follows: Amount Amount Interest Maturity Available Outstanding Rate Date - --------------------------------------------------------------- $5,000,000 $5,000,000 5.29% December 2002 5,000,000 5,000,000 5.29 December 2002 PAGE 11 OF 34 NOTE I - SUBSEQUENT EVENT On July 3, 1997, the Company consolidated its Pennsylvania mortgage operations into a central West Virginia location and sold substantially all of the assets of City Mortgage Corporation to a third party. PAGE 12 OF 34 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This form 10-Q may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are identified by phrases such as the Company "expects" or "anticipates" and words of similar effect. The Company's actual results may differ materially from those projected. Factors that could cause such a difference include, among others: changes in interest rates and economic and other market conditions generally and in the Company's principal markets; competition for origination and servicing of mortgage loans, particularly the types of loans purchased by the Company through its whole loan purchasing program; disruption of the Company's participation in its whole loan purchasing program; and changes in regulations and government policies affecting banks and their subsidiaries, including changes in monetary policies. HIGHLIGHTS FINANCIAL POSITION Total assets increased $98.9 million or approximately 9.4% during the first six months of 1997. Net loans increased $61.8 million or 9.0%. Loans held for sale, consisting primarily of loans received through the Company's participation in a whole loan purchasing program, increased $17.9 million or 19.3%. As of June 30, 1997, program loans owned by the Company had an outstanding principal balance of approximately $67.5 million. See LOAN PORTFOLIO for further discussion. The Company earned interest income of approximately $6,209,000 on program loans during the six months ended June 30, 1997. See NET INTEREST PAGE 13 OF 34 INCOME for further discussion. The increase in loans held for sale was funded primarily by an increase in deposits and short-term borrowings of $72.4 million and $11.5 million, respectively. Total stockholders' equity increased $8.1 million during the first six months of 1997 primarily due to the Company's $3.7 million acquisition of Old National and retained net profits. QUARTER ENDED JUNE 30, 1997, COMPARED TO QUARTER ENDED JUNE 30, 1996. The Company reported net income of $3,175,000 for the three months ended June 30, 1997 compared to net income of $2,566,000 for the quarter ended June 30, 1996. This increase of $609,000, or 23.73%, was primarily due to an increase of $2,763,000 in the Company's total other income (excluding securities transactions) during the second quarter of 1997 as compared to the same period of 1996. This increase is attributable to an additional $2.3 million in mortgage loan servicing fees generated by the Company's mortgage servicing division, City Mortgage Services. Non-interest expenses increased $3,207,000 or 32.49% during the second quarter of 1997 as compared to the same period of 1996, primarily due to the Company's expansion of its mortgage servicing division. City Mortgage Services incurred $2.2 million in expenses, which includes $1.3 million in personnel costs. In addition, 1997 non-interest expenses include $474,000 in expenses incurred by Old National. Because prior periods were not restated for this acquisition, no expenses for this new subsidiary are included in the 1996 results. Net income for the second quarter also benefited from an increase of $1,595,000 in the Company's net interest income during the second quarter of 1997 as compared to the same period of 1996. See NET INTEREST INCOME for further discussion. Earnings per share were $.52 and $.46 for the second quarter of 1997 and 1996, respectively. PAGE 14 OF 34 SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996. The Company reported net income of $6,004,000 for the six months ended June 30, 1997 compared to net income of $5,027,000 for the six months ended June 30, 1996. This increase of $977,000 or 19.44%, was primarily due to an increase of $6,040,000 in the Company's total other income (excluding securities transactions) during the first six months of 1997 as compared to the same period of 1996. This increase is attributable to an additional $4.8 million in mortgage loan servicing fees and $557,000 of originated mortgage servicing rights. Non-interest expenses increased $5,807,000 or 30.0% during the first six months of 1997 as compared to the same period of 1996, primarily due to the Company's expansion of its mortgage servicing division. City Mortgage Services incurred $4.2 million in expenses, which includes $2.5 million in personnel costs and $239,000 in expenses related to equipment. In addition, non-interest expenses include $802,000 in expenses incurred by Old National with no expenses for this new subsidiary included in the 1996 results. Net income for the first six months also benefitted from an increase of $1,992,000 in the Company's net interest income during the first six months of 1997 as compared to the same period of 1996. Earnings per share were $.99 and $.90 for the six months ended June 30, 1997 and 1996, respectively. SELECTED RATIOS The return on average assets (ROA) for the second quarter of 1997 was 1.07% compared to .96% in the second quarter of 1996. The return on average shareholder's equity (ROE) for the second quarter of 1997 was 14.79% compared to 13.61% ROE for the second PAGE 15 OF 34 quarter of 1996. For the six months of 1997, ROA was 1.05% compared to .95% for the six months ended 1996. ROE was 14.10% and 13.44% for the first six months of 1997 and 1996, respectively. The dividend payout ratio of 34.62% for the quarter ended June 30, 1997 represents an increase of 2.73% from the dividend payout ratio of 33.70% for the quarter ended June 30, 1996. The dividend payout ratio was 36.36% and 34.44% for the six months ended June 30, 1997 and 1996, respectively. Since 1988, the Company has paid dividends on a quarterly basis, and expects to continue to do so in the future. LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: LOAN PORTFOLIO BY TYPE (Dollars in Thousands)
June 30 December 31 1997 1996 ---- ---- Commercial, financial and agricultural $ 238,255 $ 224,267 Real Estate-Mortgage 344,390 312,421 Real Estate-Construction 28,927 25,964 Installment and other 156,981 142,123 Unearned Income (8,150) (6,793) --------- --------- TOTAL $ 760,403 $ 697,982 ========= ========= Loans Held for Sale Program Loans $ 67,502 $ 37,043 Loans Originated for Sale 42,840 55,429 --------- --------- TOTAL $ 110,342 $ 92,472 ========= =========
The Company grants loans to customers generally within the market areas of its subsidiaries. There have been no significant changes in the Company's loan policy or credit standards. The Company continues to shift its marketing efforts more towards direct loan PAGE 16 OF 34 business. There are no significant concentrations of credit and speculative or highly leveraged transactions are insignificant. Also, in order to increase the repricing frequency of the loan portfolio, the Company has significantly increased its portfolio of variable rate commercial and residential mortgage loans. In November 1996, the Company restructured its whole loan purchasing 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 (a weighted average of 13.59% at June 30, 1997) during the 30 to 90 days that the loans typically 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. ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the Company's risk elements for the periods ending June 30, 1997 and December 31, 1996. The Company's coverage ratio of nonperforming assets and potential problem loans continues to be strong at 108% as of June 30, 1997. With the increased return on investment earned under the restructured whole loan purchasing program, there is also an increase in the risk of loss due to delinquencies and uncollectibility. As a result, management has increased its 1997 provision for possible loan losses to provide for potentially uncollectible loans inherent in the pools of loans acquired in this program. Management is of the opinion that the allowance for loan losses is adequate to provide for probable future losses inherent in the portfolio. PAGE 17 OF 34 RISK ELEMENTS (in thousands) Six Months Ended Year Ended June 30 December 31 1997 1996 ---- ---- ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $ 7,281 $ 6,566 Charge-offs (809) (1,375) Recoveries 244 412 ------- ------- Net charge-offs (565) (963) Provision for loan possible losses 938 1,678 Balance of acquired subsidiary 210 0 ------- ------- Balance at end of period $ 7,864 $ 7,281 ======= ======= AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs 0.08% 0.14% Provision for possible loan losses 0.13% 0.25% Allowance for loan losses 1.06% 1.09% June 30 December 31 1997 1996 ---- ---- NON -PERFORMING ASSETS Other real estate owned $ 1,080 $ 1,054 Non-accrual loans 2,537 1,734 Accruing loans past due 90 days or more 3,046 2,674 Restructured loans 368 235 ------ ------ Total Non-performing Assets $ 7,031 $ 5,697 POTENTIAL PROBLEM LOANS $ 221 $ 235 AS A PERCENT OF NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS Allowance for loan losses 108.44% 122.74% ACCRUING LOANS PAST DUE 90 DAYS OR MORE AS A PERCENT OF AVERAGE TOTAL LOANS 0.41% 0.40% PAGE 18 OF 34 LIQUIDITY AND INTEREST RATE SENSITIVITY The Company's cash and cash equivalents, represented by cash and due from banks and overnight federal funds sold, is a product of its operating, investing and financing activities. These activities are set forth in the City Holding Company Consolidated Statements of Cash Flows included elsewhere herein. Cash was used in operating activities in each period presented, primarily for loans originated for sale and purchases of loans held for sale. Net cash was used in investing activities during the second quarter of 1997 due to funding the Company's loan growth. Net cash was provided by investing activities during the second quarter of 1996 due primarily to maturing investment securities. The net cash provided by financing activities in the respective periods is a result of an increase in interest-bearing deposits. In the second quarter of 1997, financing activities also provided cash due to the increase in short-term borrowings to fund the loan growth. The Company seeks to maintain a strong liquidity position to reduce interest rate risk, which is the susceptibility of assets and liabilities to decline in value as a result of changes in general market interest rates. The Company minimizes this risk through asset and liability management, where the goal is to optimize earnings while managing interest rate risk. The Company measures this interest rate risk through interest sensitivity gap analysis as illustrated in the following table. At June 30, 1997, the one year period shows a negative gap (liability sensitive) of $317 million. This analysis is a "static gap" presentation and movements in deposit rates offered by the Company's subsidiary banks lag behind movements in market rates. 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 PAGE 19 OF 34 contractual terms. The table is first presented without adjustment for expected repricing behavior. Then, as presented in the "management adjustment" line, these balances have been notionally distributed over the first three periods to reflect those portions of such accounts that are expected to reprice fully with market rates over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of such allocations by each of the affiliate banks, and is based upon historical experience with their individual markets and customers. Management expects to continue the same pricing methodology in response to market rate changes; however, management adjustments may change as customer preferences, competitive market conditions, liquidity, and loan growth change. Also presented in the management adjustment line are loan prepayment assumptions which may differ from the related contractual term of the loans. These balances have been distributed over the four periods to reflect those loans that are expected to be repaid in full prior to their maturity date. After management adjustments, the table shows a negative gap in the one year period of $98 million. A negative gap position is advantageous when interest rates are falling because interest-bearing liabilities are being repriced at lower rates and in greater volume, which has a positive effect on net interest income. Consequently, the Company has experienced a decline in its net interest margin during the past year and is somewhat vulnerable to a rapid rise in interest rates during 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. The Company's net interest margin is effected by a number of factors, including economic conditions generally, the level of the Company's participation in its whole loan purchasing program, Federal Reserve Board economic policies, demand for loans and deposits, PAGE 20 OF 34 and competition with other financial institutions. Changes in any of these factors could reduce the Company's net interest margin. There are no known trends, demands, commitments or uncertainties that have resulted or are reasonably likely to result in material changes in liquidity. INTEREST RATE SENSITIVITY GAPS (in thousands)
1 to 3 3 to 12 1 to 5 Over 5 Months Months Years Years Total ------ ------ ----- ----- ----- ASSETS Gross loans $ 176,407 $ 112,990 $ 381,376 $ 95,243 $ 766,016 Loans held for sale 110,342 0 0 0 110,342 Securities 21,899 31,764 99,285 29,445 182,393 Federal funds sold 532 0 0 0 532 ---------- ---------- ---------- ---------- ---------- Total interest earning assets $ 309,180 $ 144,754 $ 480,661 $ 124,688 $1,059,283 ---------- ---------- ---------- ---------- ---------- LIABILITIES Savings and NOW Accounts 349,217 0 0 0 349,217 All other interest bearing deposits 100,406 180,547 132,319 561 413,833 Short term and other borrowings 101,832 0 0 0 101,832 Long term borrowings 39,400 0 0 0 39,400 ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities $ 590,855 $ 180,547 $ 132,319 $ 561 $ 904,282 ---------- ---------- ---------- ---------- ---------- Interest sensitivity gap ($ 281,675) ($ 35,793) $ 348,342 $ 124,127 $ 155,001 ---------- ---------- ---------- ---------- ---------- Cumulative sensitivity gap ($ 281,675) ($ 317,468) $ 30,874 $ 155,001 ========== ========== ========== ========== Management adjustments $ 304,163 ($ 85,091) ($ 207,681) ($ 11,391) ========== ========== ========== ========== Cumulative management adjusted gap $ 22,488 ($ 98,396) $ 42,265 $ 155,001 ========== ========== ========== ==========
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. PAGE 21 OF 34 CAPITAL RESOURCES As a bank holding company, City Holding Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In January 1989, the Federal Reserve published risk-based capital guidelines in final form which are applicable to bank holding companies. Such guidelines define items in the calculation of risk-weighted assets. At June 30, 1997, the regulatory minimum ratio of qualified total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8 percent. At least half of the total capital is to be comprised of "Tier 1 capital", or the Company's common stockholders' equity, and minority interest in consolidated subsidiary, net of intangibles. The remainder ("Tier 2 capital") may consist of certain other prescribed instruments and a limited amount of loan loss reserves. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 capital to quarterly average tangible assets) guidelines for bank holding companies. These guidelines provide for a minimum ratio of 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies will be required to maintain a leverage ratio of 3 percent plus an additional cushion of a least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The following table presents comparative capital ratios and related dollar amounts of capital for the Company: PAGE 22 OF 34 Dollars in Thousands June 30 December 31 1997 1996 ---- ---- Capital Components Tier 1 risk-based capital $79,683 $72,157 Total risk-based capital 87,547 79,439 Capital Ratios Tier 1 risk-based 10.17% 10.20% Total risk-based 11.17% 11.23% Leverage 6.75% 6.58% Regulatory Minimum Tier 1 risk-based (dollar/ratio) $31,351/4.00% $28,290/4.00% Total risk-based (dollar/ratio) 62,703/8.00% 56,579/8.00% Leverage (dollar/ratio) 47,291/4.00% 43,872/4.00% 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. The continued expansion of the Company's Operations Center and mortgage loan servicing division will be funded by the Company's long-term debt. See NOTE H for further discussion. 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 normal cash requirements of the Company. PAGE 23 OF 34 NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, improved from the second quarter of 1996 to the second quarter of 1997 by approximately $1,589,000 due to an increase in net earning assets. Net yield on earning assets increased between the respective periods from 4.98% to 5.00%. Earning asset yields increased 18 basis points (100 basis points equal one percent) to 8.96%, and the cost of interest-bearing liabilities increased 25 basis points to 4.61%. The $523,000 decrease in net interest income due to a change in the rate, as shown in the following table, was coupled with a $2,112,000 increase in net interest income due to a change in the volume. The major component of this favorable volume change was increased average loans. Net interest income, on a fully federal tax-equivalent basis, improved from the six months ended June 30, 1996 to the six months ended June 30, 1997 by approximately $1,962,000 due to an increase in net earning assets. Net yield on earning assets increased between periods from 4.84% to 4.85%, as earning asset yields remained the same at 8.70%, and the cost of interest bearing liabilities increased 3 basis points to 4.45%. The $285,000 increase in net interest income due to a change in the rate, as shown in the following table, was coupled with a $1,677,000 increase in net interest income due to a change in the volume. The major component of this favorable volume change was increased average loans. PAGE 24 OF 34 EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Quarter Ended June 30 1997 1996 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------- EARNING ASSETS: Loans (1) Commercial and industrial $ 235,324 $ 5,337 9.07% 210,465 4,793 9.11% Real estate 365,717 7,833 8.57 308,576 6,727 8.72 Consumer obligations 147,059 3,663 9.96 133,966 3,308 9.88 -------------------------------------------------------------------- Total loans 748,100 16,833 9.00 653,007 14,828 9.08 Loans held for sale 183,026 5,074 11.09 173,821 4,187 9.64 Securities Taxable 146,622 2,289 6.24 127,543 1,974 6.19 Tax-exempt (2) 35,022 740 8.45 35,617 758 8.51 -------------------------------------------------------------------- Total securities 181,644 3,029 6.67 163,160 2,732 6.70 Federal funds sold 189 3 6.35 971 14 5.77 -------------------------------------------------------------------- Total earning assets 1,112,959 24,939 8.96 990,959 21,761 8.78 Cash and due from banks 33,461 29,992 Bank premises and equipment 31,304 26,979 Other assets 19,087 22,551 Less: allowance for possible loan losses (7,665) (6,685) -------------------------------------------------------------------- Total assets $ 1,189,146 $1,063,796 ==================================================================== INTEREST BEARING LIABILITIES Demand deposits $ 123,982 $ 820 2.65% $ 108,365 $ 783 2.89% Savings deposits 221,982 1,851 3.34 226,770 1,802 3.18 Time deposits 410,218 5,476 5.34 365,531 4,769 5.22 Short-term borrowings 163,039 2,217 5.44 142,560 1,670 4.69 Long-term debt 36,927 660 7.15 23,011 411 7.14 -------------------------------------------------------------------- Total interest-bearing liabilities 956,148 11,024 4.61 866,237 9,435 4.36 Demand deposits 135,484 111,648 Other liabilities 11,631 10,501 Stockholders' equity 85,883 75,410 -------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,189,146 $1,063,796 ==================================================================== Net interest income $13,915 $ 12,326 ==================================================================== Net yield on earning assets 5.00% 4.98% ====================================================================
(1) For purposes of this table, nonaccruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of 34% in all years. PAGE 25 OF 34 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) Quarter Ended June 30 1997 VS. 1996 Increase (Decrease) Due to Change In: INTEREST INCOME FROM: Volume Rate Net ----------------------------- Loans Commercial and industrial $ 679 $ (135) $ 544 Real estate 1,872 (766) 1,106 Consumer obligation 326 29 355 ----------------------------- Total loans 2,877 (872) 2,005 Loans held for sale 230 657 887 Investment Securities Taxable 298 17 315 Tax-exempt (1) (13) (5) (18) ----------------------------- Total Investment Securities 285 12 297 Federal funds sold (20) 9 (11) ----------------------------- Total interest-earning assets $ 3,372 $ (194) $ 3,178 INTEREST EXPENSE ON: Demand deposits 357 (320) 37 Savings deposits (198) 247 49 Time deposits 594 113 707 Short-term borrowings 258 289 547 Long-term debt 249 0 249 ----------------------------- Total interest-bearing liabilities $ 1,260 $ 329 $ 1,589 ----------------------------- NET INTEREST INCOME $ 2,112 $ (523) $ 1,589 ============================= (1) Fully federal taxable equivalent using a tax rate of 34% in all years. PAGE 26 OF 34 EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Six Months Ended June 30 1997 1996 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------- EARNING ASSETS: Loans (1) Commercial and industrial $ 233,078 $ 10,454 8.97% $ 210,181 $ 9,646 9.18% Real estate 360,274 15,165 8.42 306,561 13,250 8.64 Consumer obligations 146,010 7,199 9.86 134,429 6,612 9.84 --------------------------------------------------------------------------------- Total loans 739,362 32,818 8.88 651,171 29,508 9.06 Loans held for sale 148,707 7,745 10.42 167,581 7,810 9.32 Securities Taxable 143,922 4,456 6.19 135,421 4,227 6.24 Tax-exempt (2) 35,525 1,476 8.31 36,816 1,564 8.50 --------------------------------------------------------------------------------- Total securities 179,447 5,932 6.61 172,237 5,791 6.72 Federal funds sold 2,969 59 3.97 708 19 5.37 --------------------------------------------------------------------------------- Total earning assets 1,070,485 46,554 8.70 991,697 43,128 8.70 Cash and due from banks 35,699 29,192 Bank premises and equipment 30,880 25,401 Other assets 18,267 22,662 Less: allowance for possible loan losses (7,619) (6,646) --------------------------------------------------------------------------------- Total assets $ 1,147,712 $ 1,062,306 ================================================================================= INTEREST BEARING LIABILITIES Demand deposits $ 120,983 $ 1,717 2.84% $ 102,775 $ 1,543 3.00% Savings deposits 221,749 3,478 3.14 224,286 3,499 3.12 Time deposits 407,715 10,656 5.23 364,181 9,545 5.24 Short-term borrowings 137,448 3,479 5.06 151,045 3,749 4.96 Long-term debt 37,504 1,252 6.68 22,042 782 7.10 --------------------------------------------------------------------------------- Total interest-bearing liabilities 925,399 20,582 4.45 864,329 19,118 4.42 Demand deposits 126,440 114,802 Other liabilities 10,701 8,349 Stockholders' equity 85,172 74,826 --------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,147,712 $ 1,062,306 ================================================================================= Net interest income $ 25,972 $ 24,010 ================================================================================= Net yield on earning assets 4.85% 4.84% =================================================================================
(1) For purposes of this table, nonaccruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of 34% in all years. PAGE 27 OF 34 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) Six Months Ended June 30 1997 VS. 1996 Increase (Decrease) Due to Change In: INTEREST INCOME FROM: Volume Rate Net ------ ---- --- Loans Commercial and industrial $ 1,394 $ (586) $ 808 Real estate 2,871 (956) 1,915 Consumer obligations 571 16 587 ------- ------- ------- Total loans 4,836 (1,526) 3,310 Loans held for sale (1,829) 1,764 (65) Investment Securities Taxable 324 (95) 229 Tax-exempt (1) (54) (34) (88) ------- ------- ------- Total Investment Securities 270 (129) 141 Federal funds sold 55 (15) 40 ------- ------- ------- Total interest-earning assets $ 3,332 $ 94 $ 3,426 INTEREST EXPENSE ON: Demand deposits 391 (217) 174 Savings deposits (65) 44 (21) Time deposits 1,190 (79) 1,111 Short-term borrowings (465) 195 (270) Long-term debt 604 (134) 470 ------- ------- ------- Total interest-bearing liabilities $ 1,655 $ (191) $ 1,464 ------- ------- ------- NET INTEREST INCOME $ 1,677 $ 285 $ 1,962 ======= ======= ======= (1) Fully federal taxable equivalent using a tax rate of 34% in all years. PAGE 28 OF 34 Item 3. Quantitative and Qualitative - Not Applicable Disclosures about Market Risk PART II OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Seller Securities - None Item 4. Submission of Matters to a Vote of Security Holders - On May 13, 1997, the Company held its Annual Meeting of Shareholders. Two matters were submitted to the shareholders for consideration: 1. Election of six Class II directors; and 2. Ratification of the Board of Directors'appointment of Ernst & Young LLP as auditors for the Company for 1997. The vote tabulation for each matter was as follows: 1. Election of six Class II directors: Authority Directors For Withheld Abstain Carlin K. Harmon 4,149,803 19,874 0 Dale Nibert 4,150,434 19,243 0 Mark Schaul 4,150,570 19,107 0 Van R. Thorn 4,150,570 19,107 0 C. Scott Briers 4,150,184 19,493 0 Hugh R. Clonch 4,150,189 19,488 0 Continuing directors whose terms did not expire at the annual meeting were: D. K. Cales, J. Goldman, C. Dallas Kayser, Robert D. Fisher, George F. Davis, William F. Frazier, Samuel M. Bowling, Steven J. Day, Jack E. Fruth, Otis L. O'Connor, Bob F. Richmond, and Leon K. Oxley. 2. Ratification of Appointment of Ernst & Young LLP: For Against Abstain 4,156,257 10,881 2,539 PAGE 29 OF 34 Item 5. Other Information - None Item 6. Exhibits and Reports on 8-K - None PAGE 30 OF 34 S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY August 11, 1997 By /s/ Dawn Woolsey ----------------------------- Dawn Woolsey, Chief Accounting Officer (Principal Accounting Officer) PAGE 31 OF 34 EXHIBIT INDEX Exhibit Page Number Index 27 Financial Data Schedule for the six months ending June 30, 1997 33 - 34 PAGE 32 OF 34 EX-27 2 ARTICLE 9 FDS FOR 10-Q
9 1,000 3-MOS DEC-31-1997 JUN-30-1997 45,011 0 532 0 182,393 0 0 760,403 7,864 1,147,684 901,087 101,832 17,882 39,400 0 0 15,207 72,276 1,147,684 40,563 5,430 59 46,052 15,851 20,582 25,470 938 11 25,192 9,349 0 0 0 6,004 .99 .99 4.85 2,537 3,046 368 221 7,281 (809) 244 7,864 0 0 0
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