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, 1995 0-11733
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia 55-0619957
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 MacCorkle Avenue, Southeast
Charleston, West Virginia 25304
(Address of principal offices)
Registrant's telephone number, including area code: (304) 925-6611
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes xx No
The number of shares outstanding of the issuer's common stock as of August
10, 1995:
Common Stock, $2.50 Par Value -- 3,777,933 shares
THIS REPORT CONTAINS 32 PAGES.
EXHIBIT INDEX IS LOCATED ON PAGE 30 .
Index
City Holding Company and Subsidiaries
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated balance sheets -- June 30, 1995 (unaudited) and
December 31, 1994
Consolidated Statements of Income (unaudited) -- Six months
ended June 30, 1995 and 1994 and three months ended
June 30, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) -- Six months ended June 30, 1995
Consolidated Statements of Cash Flows (unaudited) --Six months
ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements (unaudited) -- June
30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
Item I. JUNE 30 DECEMBER 31
1995 1994
ASSETS (unaudited)
Cash and due from banks $ 23,652,000 $ 27,591,000
Securities available for sale, at fair value 71,217,000 67,920,000
Investment securities (approximate market values:
June 30, 1995--$115,203,000; December 31, 1994--$123,995,000) 114,543,000 128,457,000
Loans
Gross loans 564,722,000 504,956,000
Unearned income (8,817,000) (9,544,000)
Allowance for possible loan losses (6,034,000) (6,017,000)
NET LOANS 549,871,000 489,395,000
Loans held for sale 77,198,000 30,227,000
Bank premises and equipment 18,771,000 17,678,000
Accrued interest receivable 5,887,000 5,922,000
Other assets 12,404,000 13,336,000
TOTAL ASSETS $ 873,543,000 $ 780,526,000
LIABILITIES
Deposits:
Noninterest-bearing $ 86,131,000 $ 80,694,000
Interest-bearing 585,663,000 570,570,000
TOTAL DEPOSITS 671,794,000 651,264,000
Short-term borrowings 128,149,000 57,483,000
Long-term debt 5,325,000 6,875,000
Other liabilities 6,903,000 8,035,000
TOTAL LIABILITIES 812,171,000 723,657,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $25 a share:
Authorized-500,000 shares; none issued
Common stock, par value $2.50 a share: authorized
20,000,000 shares; issued and outstanding
3,779,818 shares as of June 30, 1995 and
December 31, 1994, including 1,885 shares in
treasury at June 30, 1995. 9,451,000 9,451,000
Capital Surplus 18,887,000 18,887,000
Retained Earnings 32,956,000 30,605,000
Cost of common stock in treasury (53,000) NONE
Net unrealized gain/(loss) on securities available for sale,
net of deferred income taxes 131,000 (2,074,000)
TOTAL STOCKHOLDERS' EQUITY 61,372,000 56,869,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 873,543,000 $ 780,526,000
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED
June 30
1995 1994
INTEREST INCOME
Interest and fees on loans $ 25,003,000 $ 18,804,000
Interest and dividends on securities:
Taxable 5,113,000 6,176,000
Tax-exempt 826,000 904,000
Other interest income 10,000 140,000
TOTAL INTEREST INCOME 30,952,000 26,024,000
INTEREST EXPENSE
Interest on deposits 11,245,000 9,822,000
Interest on short-term borrowings 2,182,000 323,000
Interest on long-term debt 228,000 209,000
TOTAL INTEREST EXPENSE 13,655,000 10,354,000
NET INTEREST INCOME 17,297,000 15,670,000
PROVISION FOR POSSIBLE LOAN LOSSES 373,000 416,000
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 16,924,000 15,254,000
OTHER INCOME
Securities gains 6,000 72,000
Service charges 1,309,000 1,186,000
Other 1,311,000 601,000
TOTAL OTHER INCOME 2,626,000 1,859,000
OTHER EXPENSES
Salaries and employee benefits 7,481,000 6,224,000
Net occupancy expense 2,238,000 2,015,000
Other 4,621,000 4,035,000
TOTAL OTHER EXPENSES 14,340,000 12,274,000
INCOME BEFORE INCOME TAXES 5,210,000 4,839,000
INCOME TAXES 1,656,000 1,537,000
NET INCOME $ 3,554,000 $ 3,302,000
Net income per common share $ .94 $ .88
Average common shares outstanding 3,778,446 3,769,381
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTH PERIOD ENDED
June 30
1995 1994
INTEREST INCOME
Interest and fees on loans $ 13,277,000 $ 9,819,000
Interest and dividends on securities:
Taxable 2,474,000 3,041,000
Tax-exempt 406,000 457,000
Other interest income 10,000 42,000
TOTAL INTEREST INCOME 16,167,000 13,359,000
INTEREST EXPENSE
Interest on deposits 5,876,000 4,933,000
Interest on short-term borrowings 1,383,000 214,000
Interest on long-term debt 98,000 112,000
TOTAL INTEREST EXPENSE 7,357,000 5,259,000
NET INTEREST INCOME 8,810,000 8,100,000
PROVISION FOR POSSIBLE LOAN LOSSES 190,000 215,000
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 8,620,000 7,885,000
OTHER INCOME
Securities gains 3,000 3,000
Service charges 689,000 688,000
Other 839,000 283,000
TOTAL OTHER INCOME 1,531,000 974,000
OTHER EXPENSES
Salaries and employee benefits 3,916,000 3,200,000
Net occupancy expense 1,145,000 1,046,000
Other 2,437,000 2,198,000
TOTAL OTHER EXPENSES 7,498,000 6,444,000
INCOME BEFORE INCOME TAXES 2,653,000 2,415,000
INCOME TAXES 843,000 771,000
NET INCOME $ 1,810,000 $ 1,644,000
Net income per common share $ .48 $ .44
Average common shares outstanding 3,777,933 3,766,786
See notes to consolidated financial statements
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
Six months Ended June 30, 1995
NET
UNREALIZED
GAIN/(LOSS)
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
Balances
at December 31, 1994 $9,451,000 $18,887,000 $30,605,000 ($2,074,000) 0 $56,869,000
Net income 3,554,000 3,554,000
Cash dividends
declared ($.32/share) (1,203,000) (1,203,000)
Change in unrealized gain/(loss)
net of income taxes of $1,470,000 2,205,000 2,205,000
Cost of 2,313 shares of
common stock acquired
for treasury (65,000) (65,000)
Issuance of 428 shares
of treasury stock 12,000 12,000
Balances
at June 30, 1995 $9,451,000 $18,887,000 $32,956,000 $ 131,000 ($53,000) $61,372,000
NET
Six months Ended June 30, 1994 UNREALIZED
GAIN/(LOSS)
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
Balances
at December 31, 1993 $8,846,000 $13,999,000 $35,222,000 ($23,000) ($2,210,000) $55,834,000
Net income 3,302,000 3,302,000
Cash dividends
declared ($.30/share) (950,000) (950,000)
Cash dividends of acquired
subsidiary (180,000) (180,000)
Adjustment to beginning balance
of unrealized gain on securities
for change in accounting method,
net of income taxes of $704,000 1,055,000 1,055,000
Changes in net unrealized
gain/(loss), net of income
taxes of $1,349,000 (2,023,000) (2,023,000)
Cost of 7,001 shares of common
stock acquired for treasury (193,000) (193,000)
Issuance of 6,613 shares of
treasury stock 22,000 178,000 200,000
Balances
at June 30, 1994 $8,846,000 $14,021,000 $37,394,000 $(991,000) ($2,225,000) $57,045,000
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED
JUNE 30
1995 1994
OPERATING ACTIVITIES
Net Income $3,554,000 $3,302,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization 503,000 481,000
Provision for depreciation 1,097,000 834,000
Provision for loan losses 373,000 416,000
Realized securities gains (6,000) (72,000)
Loan originated for sale (26,665,000) (5,476,000)
Purchases of loans held for sale (231,972,000) (54,092,000)
Proceeds from loans sold 211,722,000 35,274,000
Realized gains on loans sold (56,000) 0
Minority interest in income of subsidiary 0 27,000
Decrease (increase) in accrued interest receivable 35,000 (237,000)
Increase in other assets (865,000) (1,979,000)
Decrease (increase) in other liabilities (1,132,000) (1,344,000)
NET CASH USED IN OPERATING ACTIVITIES (43,412,000) (22,866,000)
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 6,101,000 9,337,000
Proceeds from maturities of securities available for sale 19,630,000 11,661,000
Purchases of securities available for sale (25,146,000) (17,359,000)
Proceeds from sales of securities 0 0
Proceeds from maturities of securities 14,537,000 63,761,000
Purchases of securities (1,000,000) (52,858,000)
Net increase in loans (60,849,000) (35,894,000)
Purchases of premises and equipment (2,190,000) (1,630,000)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (48,917,000) (22,982,000)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 5,437,000 7,197,000
Net increase in interest-bearing deposits 15,093,000 18,160,000
Net increase (decrease) in short-term borrowings 70,666,000 20,853,000
Proceeds from long-term-debt 2,850,000 0
Repayment of long-term debt (4,400,000) 0
Purchases of treasury stock (65,000) (193,000)
Proceeds from sales of treasury stock 12,000 200,000
Cash dividends paid (1,203,000) (1,130,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 88,390,000 45,087,000
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,939,000) (761,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,591,000 27,436,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $23,652,000 $26,675,000
See notes to consolidated financial statement
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1995
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements, which are
unaudited, include all the accounts of City Holding Company (the Parent
Company) and its wholly owned subsidiaries (collectively, the Company). All
material intercompany transactions have been eliminated. The consolidated
financial statements include all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results of
operations and financial condition for each of the periods presented. Such
adjustments are of a normal recurring nature. The results of operations for
the six months ended June 30, 1995, are not necessarily indicative of the
results of operations that can be expected for the year ending December 31,
1995. The Company's accounting and reporting policies conform with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the City Holding Company annual report on Form 10-K for
the year ended December 31, 1994.
NOTE B - INCOME TAXES
The consolidated provision for income taxes is based upon
financial statement earnings. The effective tax rate for the six months
ended June 30, 1995, of 31.79% varied from the statutory federal income tax
rate primarily due to state income taxes and the tax effects of nontaxable
interest income and the amortization of goodwill.
NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various
commitments and contingent liabilities, such as commitments to extend credit
and standby letters of credit, that are not included in the consolidated
financial statements. These commitments approximate $62,309,000 at June 30,
1995. These arrangements, consisting principally of unused lines of credit
issued in the normal course of business, have credit risks essentially the
same as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Standby letters of credit, which total
$3,456,000, have historically expired unfunded.
NOTE D - STOCKHOLDERS' EQUITY
In April 1994, the Company announced the implementation of an
Open Market Stock Purchase Plan (the Plan). The Board of Directors allocated
$5 million to be used over the next two years to purchase shares of the
Company's common stock. The Plan was authorized to commence May 1, 1994.
The Plan as of June 30, 1995 has not reacquired a material number of shares.
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 114, "Accounting by Creditors for Impairment
of a Loan", which requires that impaired loans be identified and measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate on the fair value of the collateral if the
loan is collateral dependent. FAS No. 114 did not have a material impact on
the Company's financial position or results of operations.
NOTE F - PENDING MERGER
In March 1995, the Company signed a definitive agreement to
acquire First Merchants Bancorp, Montgomery, West Virginia (Merchants). At
June 30, 1995, Merchants reported total assets of approximately $111 million.
Under the definitive agreement signed by the parties, Merchants shareholders
will receive 1.60 shares of the Company's common stock for each share of
Merchants' 576,000 outstanding shares. It is anticipated that the
transaction will be accounted for under the pooling of interests method of
accounting. It is expected that the merger will be consummated in the third
quarter of 1995. The following condensed unaudited proforma financial
information presents selected balance sheet amounts and operating results of
the Company and Merchants as though they had been combined during all periods
indicated below, assuming that all of the outstanding shares of Merchants
common stock are converted into shares of the Company's common stock and
excluding nonrecurring expenses that are directly attributable to the
transaction. Such expenses are expected to approximate $400,000.
(In thousands, except per share data)
December 31 June 30 June 30
1994 1995 1994
AT PERIOD END
Net loans $547,809 $607,397 $496,832
Total deposits 746,805 767,627 738,629
Total assets 895,817 984,377 861,286
SUMMARY OF OPERATIONS Year Ended Six Months Ended
December 31 June 30
1994 1995 1994
Net interest income $ 37,594 $ 19,768 $ 17,935
Net income 8,142 4,165 3,808
Net income per common share 1.74 .89 .81
NOTE G - LONG-TERM BORROWINGS
Long-term debt consists of a $10,000,000 revolving line of credit of the
Parent Company with a variable rate based on the lesser of the adjusted LIBOR
rate plus 1.875% per annum or the lender's base rate less .25% per annum
(7.9375% at June 30, 1995) due on June 30, 1996. The lender has the option
to extend the maturity date for an additional twelve months. As of June 30,
1995, the outstanding balance was equal to $5,325,000. Interest on this
obligation is payable quarterly, and the Parent Company has pledged the
common stock of The City National Bank of Charleston and the Peoples Bank of
Point Pleasant as security for the loan.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENT
On March 14, 1995, the Company agreed to acquire First Merchants
Bancorp ("Merchants"), the parent company of First Merchants National Bank
("First Merchants"). At June 30, 1995, Merchants operated five branches in
Montgomery and Charleston, West Virginia and had total assets of
approximately $111 million, total deposits of $96 million and stockholders'
equity of approximately $11 million. For additional information with respect
to the acquisition, including summary pro forma financial information, see
Note F, Pending Merger, to the Company's financial statements included
herein.
With the acquisition of Merchants and First Merchants, the Company
continues to implement its strategy of building shareholder value by
combining with healthy institutions in attractive markets.
HIGHLIGHTS
FINANCIAL POSITION
Total assets increased $93.0 million or approximately 11.9% during
the first six months of 1995. Net loans increased $60.5 million or 12.4%.
Loans held for sale, consisting primarily of loans received through the
Company's participation in a short-term whole loan bulk purchasing program,
increased $47.0 million or 155%. As of June 30, 1995, program loans owned by
the Company had an outstanding principal balance of approximately $59.5
million. See LOAN PORTFOLIO. The Company earned interest income of
approximately $1.25 million on program loans during the six months ended June
30, 1995. See NET INTEREST INCOME. The increases in net loans and loans
held for sale were funded by an increase in deposits and short-term
borrowings of $20.5 million and $70.7 million, respectively. Net
stockholders' equity increased $4.5 million during the first six months of
1995 representing the Company's retained net profits, plus the $2.2 million
change in the net unrealized gain on securities available for sale.
QUARTER ENDED JUNE 30, 1995, COMPARED TO QUARTER ENDED JUNE 30, 1994.
The Company reported net income of $1,810,000 for the three months
ended June 30, 1995 compared to net income of $1,644,000 for the quarter
ended June 30, 1994. This increase of $166,000, or 10.10%, was primarily due
to an increase of $491,000 in the Company's fee income earned on loans
originated for sale and/or sold during the second quarter of 1995 as compared
to the same period of 1994. However, the increase in fee income did not
translate into a corresponding increase in net income because of the level of
non-interest expense associated with Company expansion, which increased
$1,054,000 or 16% during the second quarter of 1995 as compared to the same
period of 1994. Earnings per share were $.48 and $.44 for the second
quarter of 1995 and 1994, respectively.
Net income for the second quarter also benefitted from an increase
of $710,000 in the Company's net interest income during the second quarter of
1995 as compared to the same period of 1994. See NET INTEREST INCOME for
further discussion.
SIX MONTHS ENDED JUNE 30, 1995, COMPARED TO SIX MONTHS ENDED JUNE 30,
1994.
The Company reported net income of $3,554,000 for the six months ended
June 30, 1995 compared to net income of $3,302,000 for the six months ended
June 30, 1994. This increase of $252,000 or 7.63%, was primarily due to an
increase in the Company's fee income earned on loans originated for sale
and/or sold during the first six months of 1995 as compared to the same
period of 1994 as discussed above. Total non-interest expense increased $2.1
million of 17% during the first six months of 1995 as compared to the same
period of 1994, due to increases in salaries and employee benefits related
to the Company's growth. Earnings per share were $.94 and $.88 for the six
months ended June 30, 1995 and 1994, respectively.
SELECTED RATIOS
The return on average assets (ROA) for the second quarter of 1995
was .87% compared to .89% in the second quarter of 1994. The return on
average shareholder's equity (ROE) for the second quarter of 1995 was 11.99%
compared to 11.37% ROE for the second quarter of 1994. For the first six
months of 1995, ROA was .88% compared to .91% for the six months ended 1994.
ROE was 12.37% and 11.47% for the first six months of 1995 and 1994,
respectively.
The dividend payout ratio of 33.33% for the quarter ended June 30,
1995 represents a slight increase of 2.23% from the quarter ended June 30,
1994. The dividend payout ratio was 34.04% and 33.67% for the six months
ended June 30, 1995 and 1994, respectively. (The dividend payout ratios for
the quarter and six months ended June 30, 1994 are based on historical
results of the Company and do not include cash dividends of the acquired
subsidiaries prior to the date of acquisition.) 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
1995 1994
Commercial, financial and
agricultural $170,141 $137,425
Real Estate-Mortgage 240,924 223,113
Real Estate-Construction 21,338 15,118
Installment and other 132,319 129,300
Unearned Income (8,817) (9,544)
TOTAL $555,905 $495,412
Loans Held for Sale
Program loans $ 59,500 $ 22,379
Loans Originated for Sale 17,698 7,848
TOTAL $ 77,198 $ 30,227
The Company grants loans to customers generally within the
market areas of its subsidiaries. Loans have been trending up significantly
over the past two years primarily due to the Company's more active
solicitation of commercial business, introduction of new loan products, and
continued expansion. There have been no significant changes in the
Company's loan policy or credit standards. The Company continues to shift
its marketing efforts more towards direct loan business. There are no
significant concentrations of credit and speculative or highly leveraged
transactions are insignificant. Also, in order to increase the repricing
frequency of the loan portfolio, the Company has significantly increased its
portfolio of variable rate commercial and residential mortgage loans.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the Company's risk elements for
the periods ending June 30, 1995 and December 31, 1994. The Company's
coverage ratio of nonperforming assets and potential problem loans continues
to be strong in comparison to the Company's peer group, at 157% as of June
30, 1995.
Management is of the opinion that the allowance for loan
losses is adequate to provide for probable future losses inherent in the
portfolio.
RISK ELEMENTS
(in thousands)
Six Months
Ended Year Ended
June 30 December 31
1995 1994
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $6,017 $ 5,764
Charge-offs (547) (1,093)
Recoveries 191 393
Net charge-offs (356) (700)
Provision for loan possible losses 373 953
Balance at end of period $6,034 $6,017
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs 0.07% 0.16%
Provision for possible loan losses 0.07% 0.21%
Allowance for loan losses 1.15% 1.34%
June 30 December 31
1995 1994
NON -PERFORMING ASSETS
Other real estate owned $754 $679
Non-accrual loans 1,577 2,600
Accruing loans past due 90 days
or more 736 1,218
Restructured loans 258 472
Total Non-performing Assets $3,325 $4,969
POTENTIAL PROBLEM LOANS $514 $529
AS A PERCENT OF NON-PERFORMING ASSETS
AND POTENTIAL PROBLEM LOANS
Allowance for loan losses 157.18% 109.44%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AS A PERCENT OF AVERAGE TOTAL LOANS 0.14% 0.27%
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company's cash and cash equivalents, represented by cash and
due from banks and overnight federal funds sold, is a product of its
operating, investing and financing activities. These activities are set
forth in the City Holding Company Consolidated Statements of Cash Flows
included elsewhere herein. Cash was used in operating activities in each
period presented, primarily from loans originated for sale and purchase of
loans held for sale. Net cash was used in investing activities during the
second quarter of 1995 and 1994 funding the Company's loan growth. The net
cash provided by financing activities in the respective periods is a result
of an increase in interest-bearing deposits and short-term borrowings.
The Company seeks to maintain a strong liquidity position to reduce
interest rate risk, which is the susceptibility of assets and liabilities to
decline in value as a result of changes in general market interest rates.
The Company minimizes this risk through asset and liability management, where
the goal is to optimize earnings while managing interest rate risk. The
Company measures this interest rate risk through interest sensitivity gap
analysis as illustrated in the following table. At June 30, 1995, the one
year period shows a negative gap (liability sensitive) of $308 million. This
analysis is a "static gap" presentation and movements in deposit rates
offered by the Company's subsidiary banks lag behind movements in the prime
rate. Such time lags affect the repricing frequency of many items on the
Company's balance sheet. Accordingly, the sensitivity of deposits to changes
in market rates may differ significantly from the related contractual terms.
The table is first presented without adjustment for expected repricing
behavior. Then, as presented in the "management adjustment" line, these
balances have been notionally distributed over the first three periods to
reflect those portions of such accounts that are expected to reprice fully
with market rates over the respective periods. The distribution of the
balances over the repricing periods represents an aggregation of such
allocations by each of the affiliate banks, and is based upon historical
experience with their individual markets and customers. Management expects
to continue the same pricing methodology in response to future market rate
changes; however, management adjustments may change as customer preferences,
competitive market conditions, liquidity, and loan growth change. Also
presented in the management adjustment line are loan prepayment assumptions
which may differ from the related contractual term of the loans. These
balances have been distributed over the four periods to reflect those loans
that are expected to be repaid in full prior to their maturity date over the
respected periods. After management adjustments, the table shows a negative
gap in the one year period of $130 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 as
interest rates have risen and is somewhat vulnerable to a rapid rise in
interest rates during 1995. These declines in net interest margin did not
translate into declines in net interest income because of increases in the
volume of interest-earning assets.
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 $130,385 $71,466 $274,647 $86,647 $563,145
Loans Held for Sale 77,198 0 0 0 77,198
Securities 23,958 19,882 91,351 50,569 185,760
Total Interest earning assets 231,541 91,348 365,998 137,216 826,103
LIABILITIES
Savings and NOW Accounts 286,454 0 0 0 286,454
All other interest bearing deposits 82,382 128,888 87,384 555 299,209
Short term and other borrowings 128,149 0 0 0 128,149
Long term borrowings 5,325 0 0 0 5,325
Total interest bearing liabilities $502,310 $ 128,888 $ 87,384 $ 555 $719,137
Interest sensitivity gap ($270,769) ($ 37,540) $278,614 $136,661 $106,966
Cumulative sensitivity gap ($270,769) ($308,309) ($ 29,695) $106,966
Management adjustments $257,729 ($ 79,228) ($168,778) ($ 9,723)
Cumulative management adjusted gap ($ 13,040) ($129,808) ($ 19,972) $106,966
The table above includes various assumptions and estimates by management as
to maturity and repricing patterns. Future interest margins will be impacted
by balances and rates which are subject to change periodically throughout the
year.
CAPITAL RESOURCES
As a bank holding company, City Holding Company is subject to
regulation by the Federal Reserve Board under the Bank Holding Company Act of
1956. The Federal Reserve has published risk-based capital guidelines
applicable to bank holding companies which define items in the calculation of
risk-weighted assets. At June 30, 1995, the regulatory minimum ratio of
qualified total capital to risk-weighted assets (including certain off-
balance-sheet items, such as standby letters of credit) was 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 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
June 30 December 31
1995 1994
Capital Components
Tier 1 risk-based capital $55,367 $52,408
Total risk-based capital 61,401 58,425
Capital Ratios
Tier 1 risk-based 9.48% 10.65%
Total risk-based 10.51 11.88
Leverage 6.72 6.65
Regulatory Minimum
Tier 1 risk-based (dollar/ratio) $23,374/4.00% $19,677/4.00%
Total risk-based (dollar/ratio) 46,747/8.00 39,354/8.00
Leverage (dollar/ratio) 24,725/3.00 23,628/3.00
The capital position of the Company is indicative of management's
emphasis on asset quality and a history of retaining between 60% and 70% of
annual net income. The ratios have declined from those reported at December
31, 1994, due to increased volume of the short-term whole loans purchased
during the first six months of 1995. These loans have been assigned a risk
weight of 100%. 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.
A subsidiary bank will purchase approximately $2.2 million in
equipment sometime during the third quarter. This purchase, however, will
not effect the Company's liquidity or ability to pay dividends to
shareholders. No other material capital expenditures are anticipated in
1995. Earnings from subsidiary bank operations are expected to remain
adequate to fund payment of stockholders' dividends and internal growth. In
management's opinion, subsidiary banks have the capability to upstream
sufficient dividends to meet the cash requirements of the Company. As of
June 30, 1995, the subsidiary banks could have paid aggregate dividends to
the Parent Company of $7.9 million without obtaining approval of their
respective regulators.
NET INTEREST INCOME
Net interest income, on a fully federal tax-equivalent basis,
improved from the second quarter of 1994 to the second quarter of 1995 by
approximately $691,000 due to an increase in net earning assets. Net yield
on earning assets decreased between periods from 4.84% to 4.64%, as earning
asset yields increased 53 basis points (100 basis points equal one percent)
to 8.42%, and the cost of interest-bearing liabilities increased 83 basis
points to 4.35%. The $483,000 decrease in net interest income due to rate,
as shown in the following table, was coupled with a $1.2 million increase in
net interest income due to 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, 1994 to the six months ended June
30, 1995 by approximately $1.6 million due to an increase in net earning
assets. Net yield on earning assets decreased between periods from 4.77% to
4.71%, as earning asset yields increased 52 basis points to 8.34%, and the
cost of interest-bearing liabilities increased 64 basis points to 4.16%. The
$252,000 decrease in net interest income due to rate, as shown in the
following table, was coupled with a $1.8 million increase in net interest
income due to volume. The major component of this favorable volume change
was increased average loans.
A significant part of the increase in net earning assets for the
second quarter of 1995 and the six months ended June 30, 1995, is
attributable to the Company's participation in a short-term, whole-loan bulk
purchasing program. Under the program, the Company purchases from a third
party whole loans secured by residential mortgages and insured by an agency
of the United States government. The loans typically have balances of less
than $25,000 and are not concentrated geographically. Additionally, the
program permits the Company to require the seller to repurchase or replace
certain non-conforming loans. The loans are generally repurchased from the
Company within 30 to 90 days. Although the loans usually are located outside
the Company's primary market areas, management believes that these loans pose
no greater risk than similar inmarket loans because of the Company's review
of the loans, the credit support associated with the loans, the short
duration of the Company's investment and the other terms of the program. The
loans are serviced by third parties and the Company earns a fixed rate of
return on the loans. The Company earned approximately $860,000 in interest
income on program loans for the quarter ended June 30, 1995, on an average
balance of approximately $36.8 million. The Company earned approximately
$1.3 million in interest income on an average balance of approximately $27.1
million for the six months ended June 30, 1995. These loans are being funded
through short-term borrowings which consist primarily of securities sold
under agreement to repurchase. This has resulted in an increase in short-
term borrowing interest expense of $1.2 million for the quarter ended June
30, 1995, and $1.9 million for the six months ended June 30, 1995.
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Quarter Ended
June 30
1995 1994
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
EARNING ASSETS:
Loans (1)
Commercial and industrial $ 163,904 $3,813 9.31% $ 123,926 $2,582 8.33%
Real estate 255,238 5,369 8.41 203,219 4,191 8.25
Consumer obligations 122,503 3,003 9.81 103,637 2,514 9.70
Total loans 541,645 12,185 9.00 430,782 9,287 8.62
Loans held for sale 48,830 1,092 8.95 24,145 479 7.94
Securities
Taxable 157,599 2,474 6.28 199,130 3,111 6.25
Tax-exempt (2) 29,405 615 8.37 30,551 666 8.72
Total securities 187,004 3,089 6.61 229,681 3,777 6.58
Federal funds sold 647 10 6.18 4,330 43 3.97
Total earning assets 778,126 16,376 8.42 688,938 13,586 7.89
Cash and due from banks 20,583 21,761
Bank premises and equipment 18,705 15,835
Other assets 18,570 15,385
Less: allowance for possible
loan losses (5,986) (5,888)
Total assets $829,998 $736,031
INTEREST BEARING LIABILITIES
Demand deposits $ 94,887 $ 685 2.89% $ 74,562 $ 640 3.43%
Savings deposits 194,391 1,493 3.07 244,424 1,746 2.86
Time deposits 289,506 3,698 5.11 247,174 2,546 4.12
Short-term borrowings 92,668 1,383 5.97 25,148 214 3.40
Long-term debt 4,831 98 8.11 5,875 112 7.63
Total interest-bearing liabilities 676,283 7,357 4.35 597,183 5,258 3.52
Demand deposits 86,041 74,584
Other liabilities 7,290 6,408
Stockholders' equity 60,384 57,856
Total liabilities and
stockholders' equity $829,998 $736,031
Net interest income $9,019 $ 8,328
Net yield on earning assets 4.64% 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.
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Quarter Ended
June 30
1995 vs. 1994
Increase (Decrease)
Due to Change In:
INTEREST INCOME FROM: Volume Rate Net
Loans
Commercial and industrial $ 904 $ 327 $ 1,231
Real estate 1,093 85 1,178
Consumer obligations 462 27 489
Total loans 2,459 439 2,898
Loans held for sale 545 68 613
Securities
Taxable (740) 103 (637)
Tax-exempt (1) (24) (27) (51)
Total Securities (764) 76 (688)
Federal funds sold (136) 103 (33)
Total interest-earning assets $ 2,104 $ 686 $ 2,790
INTEREST EXPENSE ON:
Demand deposits 542 (497) 45
Savings deposits (953) 700 (253)
Time deposits 480 672 1,152
Short-term borrowings 913 256 1,169
Long-term debt (52) 38 (14)
Total interest-bearing liabilities $ 930 $ 1,169 $ 2,099
NET INTEREST INCOME $ 1,174 $ (483) $ 691
(1) Fully federal taxable equivalent using a tax rate of 34% in all years.
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Six Months Ended
June 30
1995 1994
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
EARNING ASSETS:
Loans (1)
Commercial and industrial $ 157,206 $ 7,173 9.13% $ 125,365 $5,123 8.17%
Real estate 247,984 10,314 8.32 196,768 8,061 8.19
Consumer obligations 120,009 5,851 9.75 102,553 5,032 9.81
Total loans 525,199 23,338 8.89 424,686 18,216 8.58
Loans held for sale 37,426 1,665 8.90 12,580 535 8.51
Securities
Taxable 160,081 5,113 6.39 200,883 6,246 6.22
Tax-exempt (2) 29,805 1,252 8.40 30,598 1,345 8.79
Total securities 189,886 6,365 6.70 231,481 7,591 6.56
Federal funds sold 345 10 5.80 8,192 141 3.44
Total earning assets 752,856 31,378 8.34 676,939 26,483 7.82
Cash and due from banks 21,088 21,516
Bank premises and equipment 18,461 15,596
Other assets 18,963 14,987
Less: allowance for possible
loan losses (5,970) (5,869)
Total assets $805,398 $723,169
INTEREST BEARING LIABILITIES
Demand deposits $ 95,343 $ 1,371 2.88% $ 76,250 $ 1,243 3.26%
Savings deposits 198,906 3,056 3.07 237,256 3,448 2.91
Time deposits 280,276 6,818 4.87 247,295 5,130 4.15
Short-term borrowings 75,330 2,182 5.79 21,252 323 3.04
Long-term debt 6,817 228 6.69 5,875 209 7.11
Total interest-bearing liabilities 656,672 13,655 4.16 587,928 10,353 3.52
Demand deposits 83,461 71,190
Other liabilities 7,806 6,461
Stockholders' equity 57,459 57,590
Total liabilities and
stockholders' equity $805,398 $723,169
Net interest income $17,723 $16,130
Net yield on earning assets 4.71% 4.77%
(1) For purposes of this table, nonaccruing loans have been included in
average balances and loan fees, which are immaterial, have been included in
interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of
34% in all years.
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Six Months Ended
June 30
1995 vs. 1994
Increase (Decrease)
Due to Change In:
INTEREST INCOME FROM: Volume Rate Net
Loans
Commercial and industrial $ 1,405 $ 645 $ 2,050
Real estate 2,128 125 2,253
Consumer obligations 913 (94) 819
Total loans 4,446 676 5,122
Loans held for sale 1,104 26 1,130
Securities
Taxable (1,599) 466 (1,133)
Tax-exempt (1) (34) (59) (93)
Total Securities (1,633) 407 (1,226)
Federal funds sold (301) 170 (131)
Total interest-earning assets $ 3,616 $ 1,279 $ 4,895
INTEREST EXPENSE ON:
Demand deposits 486 (358) 128
Savings deposits (872) 480 (392)
Time deposits 736 952 1,688
Short-term borrowings 1,371 488 1,859
Long-term debt 50 (31) 19
Total interest-bearing liabilities $ 1,771 $ 1,531 $ 3,302
NET INTEREST INCOME $ 1,845 $ (252) $ 1,593
(1) Fully federal taxable equivalent using a tax rate of 34% in all years.
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3.Defaults Upon Senior Securities - Not Applicable
Item 4.Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K -
(a) Exhibits
27 Financial Data Schedule for the six months ended June 30,
1995.
(b) The Company did not file any reports on Form 8-K during the
three months ended June 30, 1995.
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 10, 1995 By /s/ Dawn Woolsey,
Dawn Woolsey,
Chief Accounting Officer
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit Page Number
Index
27 Financial Data Schedule for the six months ended June 30, 1995 31