-----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, IPb0vCTX/mlKkn6wf3qNHF1hHwohpVX8OmdTkftrF0hIThR1Icv/kI5bKC0kjE4w U0ZaZOlrHDGYTLQjFrqFEQ== 0000916641-97-000507.txt : 19970515 0000916641-97-000507.hdr.sgml : 19970515 ACCESSION NUMBER: 0000916641-97-000507 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 97604839 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 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number March 31, 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 May 5, 1997: Common Stock, $2.50 Par Value -- 6,068,608 shares THIS REPORT CONTAINS 31 PAGES. EXHIBIT INDEX IS LOCATED ON PAGE 29. Index City Holding Company and Subsidiaries PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets -- March 31, 1997 (unaudited) and December 31, 1996 Consolidated Statements of Income (unaudited) -- Three months ended March 31, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity (unaudited) -- Three months ended March 31, 1997 and 1996 Consolidated Statements of Cash Flows (unaudited) --Three months ended March 31, 1997 and 1996 Notes to Consolidated Financial Statements (unaudited) -- March 31, 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 31 PART I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES
Item I. MARCH 31 DECEMBER 1997 1996 -------------- -------------- ASSETS (unaudited) Cash and due from banks $ 43,069,000 $ 47,351,000 Federal funds sold 616,000 413,000 Securities available for sale, at fair value 132,121,000 122,944,000 Investment securities (approximate market values: March 31, 1997-$47,442,000; December 31, 1996-$41,826,000) 46,946,000 40,978,000 Loans: Gross loans 743,959,000 704,775,000 Unearned income (8,315,000) (6,793,000) Allowance for possible loan losses (7,629,000) (7,281,000) -------------- -------------- NET LOANS 728,015,000 690,701,000 Loans held for sale 150,127,000 92,472,000 Bank premises and equipment 30,886,000 30,025,000 Accrued interest receivable 8,852,000 7,510,000 Other assets 17,662,000 16,216,000 -------------- -------------- TOTAL ASSETS $ 1,158,294,000 $ 1,048,810,000 ============== ============== LIABILITIES Deposits: Noninterest-bearing $ 136,946,000 $ 118,976,000 Interest-bearing 755,310,000 709,694,000 -------------- -------------- TOTAL DEPOSITS 892,256,000 828,670,000 Short-term borrowings 126,912,000 90,298,000 Long-term debt 36,900,000 34,250,000 Other liabilities 17,900,000 16,219,000 -------------- -------------- TOTAL LIABILITIES 1,073,968,000 969,437,000 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 and outstanding 6,079,829 and 5,598,912 shares as of March 31, 1997 and December 31, 1996, respectively, including 11,341 shares in treasury at March 31, 1997 and December 31, 1996. 15,200,000 13,998,000 Capital surplus 35,724,000 35,426,000 Retained earnings 34,133,000 30,246,000 Cost of common stock in treasury (300,000) (300,000) Net unrealized (loss) gain on securities available for sale, net of deferred income taxes (431,000) 3,000 -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 84,326,000 79,373,000 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,158,294,000 $ 1,048,810,000 ============== ============== See notes to consolidated financial statements PAGE 3 OF 31 CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES THREE MONTH PERIOD ENDED March 31 1997 1996 ---------- ---------- INTEREST INCOME Interest and fees on loans $ 18,656,000 $ 18,303,000 Interest and dividends on securities: Taxable 2,167,000 2,253,000 Tax-exempt 486,000 532,000 Other interest income 56,000 5,000 ----------- ----------- TOTAL INTEREST INCOME 21,365,000 21,093,000 INTEREST EXPENSE Interest on deposits 7,704,000 7,233,000 Interest on short-term borrowings 1,262,000 2,153,000 Interest on long-term debt 592,000 297,000 ----------- ----------- TOTAL INTEREST EXPENSE 9,558,000 9,683,000 NET INTEREST INCOME 11,807,000 11,410,000 PROVISION FOR POSSIBLE LOAN LOSSES 388,000 271,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 11,419,000 11,139,000 OTHER INCOME Securities gains 28,000 61,000 Service charges 948,000 839,000 Other 4,181,000 1,013,000 ----------- ----------- TOTAL OTHER INCOME 5,157,000 1,913,000 OTHER EXPENSES Salaries and employee benefits 6,667,000 5,254,000 Net occupancy expense 1,968,000 1,370,000 Other 3,478,000 2,887,000 ----------- ----------- TOTAL OTHER EXPENSES 12,113,000 9,511,000 INCOME BEFORE INCOME TAXES 4,463,000 3,541,000 INCOME TAXES 1,634,000 1,080,000 ----------- ----------- NET INCOME $ 2,829,000 $ 2,461,000 =========== =========== Net income per common share $ .47 $ .44 =========== =========== Average common shares outstanding 6,068,488 5,586,247 =========== ===========
See notes to consolidated financial statements PAGE 4 OF 31 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES Three Months Ended March 31, 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) $79,373,000 Net income 2,829,000 2,829,000 Cash dividends declared ($.18/share) (1,092,000) (1,092,000) Change in unrealized gain/(loss), net of income taxes of $302,000 (453,000) (453,000) Acquisition of subsidiary 1,202,000 298,000 2,150,000 19,000 3,669,000 ----------- ----------- ----------- ---------- ---------- ----------- Balances at March 31, 1997 $15,200,000 $35,724,000 $34,133,000 ($431,000) ($300,000) $84,326,000 ----------- ----------- ----------- ---------- ---------- -----------
Three Months Ended March 31, 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) $73,139,000 Net income 2,461,000 2,461,000 Cash dividends declared ($.155/share) (862,000) (862,000) Changes in unrealized gain/(loss), net of income taxes of $311,000 (466,000) (466,000) ----------- ----------- ----------- --------- ----------- ----------- Balances at March 31, 1996 $12,730,000 $25,942,000 $36,031,000 $(71,000) ($ 360,000) $74,272,000 ----------- ----------- ----------- --------- ----------- -----------
See notes to consolidated financial statements PAGE 5 OF 31 CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTH PERIOD ENDED MARCH 31 1997 1996 ---- ---- OPERATING ACTIVITIES Net Income $2,829,000 $2,461,000 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization 237,000 220,000 Provision for depreciation 1,123,000 743,000 Provision for loan losses 388,000 271,000 Realized securities gains (28,000) (61,000) Loan originated for sale (23,149,000) (25,708,000) Purchases of loans held for sale (135,753,000) (219,599,000) Proceeds from loans sold 101,543,000 202,535,000 Realized gains on loans sold (296,000) (268,000) Increase in accrued interest receivable (1,052,000) (436,000) Increase in other assets (1,048,000) (482,000) Increase in other liabilities 1,442,000 1,196,000 --------- --------- NET CASH USED IN OPERATING ACTIVITIES (53,764,000) (39,128,000) INVESTING ACTIVITIES Proceeds from sales of securities available for sale 9,254,000 17,859,000 Proceeds from maturities of securities available for sale 10,209,000 20,270,000 Purchases of securities available for sale (24,566,000) (16,581,000) Proceeds from maturities of securities 1,438,000 9,608,000 Net (increase) decrease in loans (11,628,000) 2,591,000 Net cash acquired in acquisition 9,126,000 0 Purchases of premises and equipment (840,000) (2,997,000) -------- ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (7,007,000) 30,750,000 FINANCING ACTIVITIES Net increase in non-interest bearing deposits 3,258,000 5,204,000 Net increase in interest-bearing deposits 15,703,000 10,178,000 Net increase (decrease) in short-term borrowings 36,173,000 (6,869,000) Proceeds from long-term debt 2,650,000 3,200,000 Cash dividends paid (1,092,000) (862,000) ----------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 56,692,000 10,851,000 ---------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,079,000) 2,473,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,764,000 28,460,000 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $43,685,000 $30,933,000 =========== ===========
See notes to consolidated financial statements PAGE 6 OF 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 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 three months ended March 31, 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. 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 7 OF 31 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. 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 $600 million. As a result of a servicing agreement 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. With this acquisition, City Mortgage Services, a mortgage loan servicing division created during 1996, has loan servicing facilities located in West Virginia and California. 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 PAGE 8 OF 31 a 1% impact on total assets and net income reported in the Company's first 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 three months ended March 31, 1997, of 36.61% varied from the statutory federal income tax rate primarily due to state income taxes and the tax effects of nontaxable interest income and the amortization of goodwill. NOTE E - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, that are not included in the consolidated financial statements. These commitments approximate $85,928,000 at March 31, 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 $2,833,000, have historically expired unfunded. PAGE 9 OF 31 NOTE F - 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 is not expected to 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. 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. SFAS No. 128 is not expected to have a material impact on the Company's consolidated financial statements. NOTE G - LONG-TERM BORROWINGS Long-term debt consists of a $28,000,000 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 (7.3125% at March 31, 1997) due on July 31, 1997. As of March 31, 1997, the outstanding balance was equal to $26,900,000. 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. PAGE 10 OF 31 Additionally, two 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 31 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS FINANCIAL POSITION Total assets increased $109 million or approximately 10.4% during the first three months of 1997. Net loans increased $37.3 million or 5.4%. Loans held for sale, consisting primarily of loans received through the Company's participation in a whole loan purchasing program, increased $57.7 million or 62.3%. As of March 31, 1997, program loans owned by the Company had an outstanding principal balance of approximately $107.5 million. See LOAN PORTFOLIO. The Company earned interest income of approximately $1,959,000 on program loans during the first quarter of 1997. See NET INTEREST INCOME. The increase in loans held for sale was funded primarily by the increase in deposits of $63.6 million, plus the $36.6 million increase in short-term borrowings. Net stockholders' equity increased $5.0 million during the first three months of 1997 representing the Company's $3.7 million acquisition of Old National and retained net profits. QUARTER ENDED MARCH 31, 1997, COMPARED TO QUARTER ENDED MARCH 31, 1996. The Company reported net income of $2,829,000 for the three months ended March 31, 1997 compared to net income of $2,461,000 for the quarter ended March 31, 1996. This increase of $368,000, or 14.95%, was primarily due to an increase of $3,277,000 in the PAGE 12 OF 31 Company's total other income (excluding securities transactions) during the first quarter of 1997 as compared to the same period of 1996. This increase is attributable to fees generated from the increase in mortgage loan servicing and the originated mortgage servicing rights recorded in the first quarter of 1997. Non-interest expenses increased $2,602,000 or 27.4% during the first 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 $2.0 million in expenses, which includes $1.2 million in personnel costs and $146,000 in expenses related to equipment. In addition, non-interest expenses include $328,000 in expenses incurred by Old National with no expenses for this new subsidiary included in the 1996 results. Net income for the first quarter also benefitted from an increase of $397,000 in the Company's net interest income during the first quarter of 1997 as compared to the same period of 1996. See NET INTEREST INCOME for further discussion. Earnings per share were $.47 and $.44 for the first quarter of 1997 and 1996, respectively. SELECTED RATIOS The return on average assets (ROA) for the first quarter of 1997 was 1.02% compared to 0.93% in the first quarter of 1996. The return on average shareholder's equity (ROE) for the first quarter of 1997 was 13.39% compared to 13.24% ROE for the first quarter of 1996. The dividend payout ratio of 38.30% for the quarter ended March 31, 1997 represents an increase of 8.10% from the dividend payout ratio of 35.42% for the quarter ended March 31, 1996. Since 1988, the Company has paid dividends on a quarterly basis, and expects to continue to do so in the future. PAGE 13 OF 31 PAGE 14 OF 31 LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: LOAN PORTFOLIO BY TYPE (Dollars in Thousands) March 31 December 31 1997 1996 -------- ----------- Commercial, financial and agricultural $243,647 $224,267 Real Estate-Mortgage 319,307 312,421 Real Estate-Construction 26,814 25,964 Installment and other 154,191 142,123 Unearned Income (8,315) (6,793) ------- ------- TOTAL $735,644 $697,982 ======= ======= Loans Held for Sale Program loans $107,512 $ 37,043 Loans Originated for Sale 42,615 55,429 ------- ------- TOTAL $150,127 $ 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 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 12.23% at PAGE 15 OF 31 March 31, 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 March 31, 1997 and December 31, 1996. The Company's coverage ratio of non-performing assets and potential problem loans continues to be strong, at 131% as of March 31, 1997. As a result of the increased return on the Company's investment in the whole loan purchasing program, 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 16 OF 31 RISK ELEMENTS (in thousands) Three Months Ended Year Ended March 31 December 31 1997 1996 ---- ---- ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $7,281 $6,566 Charge-offs (410) (1,375) Recoveries 160 412 ---- --- Net charge-offs (250) (963) Provision for loan possible losses 388 1,678 Balance of acquired subsidiary 210 0 ----- ----- Balance at end of period $7,629 $7,281 ===== ===== AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs 0.03% 0.14% Provision for possible loan losses 0.05% 0.25% Allowance for loan losses 1.04% 1.09% March 31 December 31 1997 1996 ---- ---- NON -PERFORMING ASSETS Other real estate owned $1,104 $1,054 Non-accrual loans 2,240 1,734 Accruing loans past due 90 days or more 2,004 2,674 Restructured loans 234 235 ------ ------ Total Non-performing Assets $5,582 $5,697 POTENTIAL PROBLEM LOANS $229 $235 AS A PERCENT OF NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS Allowance for loan losses 131.29% 122.74% ACCRUING LOANS PAST DUE 90 DAYS OR MORE AS A PERCENT OF AVERAGE TOTAL LOANS 0.27% 0.40% PAGE 17 OF 31 LIQUIDITY AND INTEREST RATE SENSITIVITY The Company's cash and cash equivalents, represented by cash and due from banks and overnight federal funds sold, is a product of its operating, investing and financing activities. These activities are set forth in the City Holding Company Consolidated Statements of Cash Flows included elsewhere herein. Cash was used in operating activities in each period presented, primarily from loans originated for sale and purchases of loans held for sale. Net cash was used in investing activities during the first quarter of 1997 funding the Company's loan growth. Net cash was provided by investing activities during the first 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 1997, financing activities also provided cash due to the increase in short-term borrowings. The Company is satisfied with its liquidity position as it relates to 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 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 the following table. At March 31, 1997, the one year period shows a negative gap (liability sensitive) of $321 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 PAGE 18 OF 31 the related contractual terms. The table is first presented without adjustment for expected repricing behavior. Then, as presented in the "management adjustment" line, these balances have been notionally distributed over the first three periods to reflect those portions of such accounts that are expected to reprice fully with market rates over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of such allocations by each of the affiliate banks, and is based upon historical experience with their individual markets and customers. Management expects to continue the same pricing methodology in response to 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 $103 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 19 OF 31 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. PAGE 20 OF 31 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 $165,662 $106,368 $374,072 $95,617 $741,719 Loans held for sale 150,127 0 0 0 150,127 Securities 23,788 26,500 98,395 30,384 179,067 Federal funds sold 616 0 0 0 616 -------- -------- -------- ------- --------- Total interest earning assets 340,193 132,868 472,467 126,001 1,071,529 LIABILITIES Savings and NOW Accounts 346,834 0 0 0 346,834 All other interest bearing deposits 100,012 182,978 125,091 395 408,476 Short term and other borrowings 126,912 0 0 0 126,912 Long term borrowings 36,900 0 0 0 36,900 -------- --------- --------- --------- --------- Total interest bearing liabilities $610,658 $182,978 $125,091 $395 $919,122 -------- -------- -------- --------- -------- Interest sensitivity gap ($270,465) ($50,110) $347,376 $125,606 $152,407 --------- --------- --------- --------- -------- Cumulative sensitivity gap ($270,465) ($320,575) $26,801 $152,407 ========= ========= ========= ========= Management adjustments $310,239 ($92,889) ($206,031) ($11,319) --------- --------- --------- --------- Cumulative management adjusted gap $ 39,774 ($103,225) $38,120 $152,407 ========= ========= ========= =========
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 31 CAPITAL RESOURCES As a bank holding company, City Holding Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In January 1989, the Federal Reserve published risk-based capital guidelines in final form which are applicable to bank holding companies. Such guidelines define items in the calculation of risk-weighted assets. At March 31, 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 4 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 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. PAGE 22 OF 31 The following table presents comparative capital ratios and related dollar amounts of capital for the Company: Dollars in Thousands March 31 December 31 1997 1996 ---- ---- Capital Components Tier 1 risk-based capital $77,195 $72,157 Total risk-based capital 84,823 79,439 Capital Ratios Tier 1 risk-based 9.55% 10.20% Total risk-based 10.50% 11.23% Leverage 7.02% 6.58% Regulatory Minimum Tier 1 risk-based (dollar/ratio) $32,328/4.00% $28,290/4.00% Total risk-based (dollar/ratio) 64,656/8.00 56,579/8.00 Leverage (dollar/ratio) 43,994/4.00 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. Earnings from subsidiary bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, subsidiary banks have the capability to upstream sufficient dividends to meet the cash requirements of the Company. PAGE 23 OF 31 NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, improved from the first quarter of 1996 to the first quarter of 1997 by approximately $373,000 due to an increase in net earning assets. Net yield on earning assets decreased between periods from 4.70% to 4.69%, as earning asset yields decreased 18 basis points (100 basis points equal one percent) to 8.41%, and the cost of interest-bearing liabilities decreased 22 basis points to 4.27%. The $211,000 increase in net interest income due to rate, as shown in the following table, was coupled with a $162,000 increase in net interest income due to volume. The major component of this favorable volume change was increased average loans. PAGE 24 OF 31 EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Quarter Ended March 31 1997 1996 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------------------------------------------------------------------------------- EARNING ASSETS: Loans (1) Commercial and industrial $ 243,748 $5,117 8.40% $ 210,023 $4,853 9.24% Real estate 341,740 7,332 8.58 304,736 6,523 8.56 Consumer obligations 144,986 3,536 9.76 134,888 3,304 9.80 ---------------------------------------------------------------------------------- Total loans 730,474 15,985 8.75 649,647 14,680 9.04 Loans held for sale 114,006 2,671 9.37 161,246 3,623 8.89 Securities Taxable 141,388 2,167 6.13 145,355 2,253 6.20 Tax-exempt (2) 35,837 736 8.21 37,975 806 8.49 ---------------------------------------------------------------------------------- Total securities 177,225 2,903 6.55 183,330 3,059 6.67 Federal funds sold 6,861 56 3.26 396 5 5.05 ---------------------------------------------------------------------------------- Total earning assets 1,028,566 21,615 8.41 994,619 21,367 8.59 Cash and due from banks 37,933 29,147 Bank premises and equipment 30,847 23,880 Other assets 17,133 22,770 Less: allowance for possible loan losses (7,574) (6,610) ---------------------------------------------------------------------------------- Total assets $1,106,905 $1,063,806 ================================================================================== INTEREST BEARING LIABILITIES Demand deposits $ 117,948 $ 897 3.04% $110,568 $ 760 2.75% Savings deposits 221,511 1,627 2.94 208,634 1,697 3.25 Time deposits 405,148 5,180 5.11 362,832 4,776 5.27 Short-term borrowings 112,500 1,262 4.49 159,436 2,153 5.40 Long-term debt 38,108 592 6.21 21,042 297 5.65 ---------------------------------------------------------------------------------- Total interest-bearing liabilities 895,215 9,558 4.27 862,512 9,683 4.49 Demand deposits 117,389 117,968 Other liabilities 9,795 8,988 Stockholders' equity 84,506 74,338 ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,106,905 $1,063,806 ================================================================================== Net interest income $12,057 $11,684 ================================================================================== Net yield on earning assets 4.69% 4.70% ==================================================================================
(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 31 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) Quarter Ended March 31 1997 VS. 1996 Increase (Decrease) Due to Change In: INTEREST INCOME FROM: Volume Rate Net Loans Commercial and industrial $2,431 $(2,167) $264 Real estate 794 15 809 Consumer obligations 327 (95) 232 ----------------------------- Total loans 3,552 (2,247) 1,305 Loans held for sale (1,911) 959 (952) Securities Taxable (61) (25) (86) Tax-exempt (1) (44) (26) (70) Total Securities (105) (51) (156) Federal funds sold 64 (13) 51 ----------------------------- Total interest-earning assets $1,600 $(1,352) $248 INTEREST EXPENSE ON: Demand deposits $53 $84 $137 Savings deposits 485 (555) (70) Time deposits 1,204 (800) 404 Short-term borrowings (566) (325) (891) Long-term debt 262 33 295 ----------------------------- Total interest-bearing liabilities $1,438 $(1,563) $(125) ----------------------------- NET INTEREST INCOME $162 $211 $373 ============================= (1) Fully federal taxable equivalent using a tax rate of 34% in all years. PAGE 26 OF 31 Item 3. Quantitative and Qualitative - Not Applicable Disclosures about Market Risk PART II OTHER INFORMATION Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities - (c) On January 21, 1997, the Company contributed approximately $1,567,000 to its Employees' Stock Ownership Plan. These funds were used to purchase 36,974 shares of Common Stock on the open market which were then credited to the accounts of Plan participants in transactions exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933, as amended, and by virtue of the fact that no "sale" was involved in the transaction. Item 3. Defaults Upon Seller Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on 8-K - Not Applicable The Company did not file any reports on Form 8-K during the three months ended March 31, 1997. PAGE 27 OF 31 S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY May 7, 1997 By ------------------------ Dawn Woolsey, Chief Accounting Officer (Principal Accounting Officer) PAGE 28 OF 31 EXHIBIT INDEX Exhibit Page Number Index ----------- - ----- 27 Financial Data Schedule for the quarter ending March 31, 1997 30 PAGE 29 OF 31 EX-27 2 EXHIBIT 27
9 1,000 3-MOS DEC-31-1997 MAR-31-1997 43,069 0 616 0 132,121 46,946 47,442 735,644 7,629 1,158,294 892,256 126,912 17,900 36,900 0 0 15,200 69,126 1,158,294 18,656 2,653 56 21,365 7,704 9,558 11,807 388 28 12,113 4,463 0 0 0 2,829 .47 .47 4.69 2,240 2,004 234 229 7,281 410 160 7,629 0 0 0
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