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, 1996 0-11733
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia 55-0619957
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 MacCorkle Avenue, Southeast
Charleston, West Virginia 25304
(Address of principal offices)
Registrant's telephone number, including area code: (304) 925-6611
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 13,
1996:
Common Stock, $2.50 Par Value -- 5,078,194 shares
THIS REPORT CONTAINS 32 PAGES.
EXHIBIT INDEX IS LOCATED ON PAGE 31 .
PAGE 1 OF 32
Index
City Holding Company and Subsidiaries
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- June 30, 1996 (unaudited)
and December 31, 1995
Consolidated Statements of Income (unaudited) -- Six
months ended June 30, 1996 and 1995 and the three months
ended June 30, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) -- Six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows (unaudited) --Six
months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements (unaudited) --
June 30, 1996
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
PAGE 2 OF 32
PART I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
Item I.
JUNE 30 DECEMBER 31
1996 1995
------------ --------
ASSETS (unaudited)
Cash and due from banks $ 39,102,000 $ 28,460,000
Securities available for sale, at fair value 116,595,000 143,649,000
Investment securities (approximate market values:
June 30, 1996--$43,422,000; December 31, 1995--$52,183,000) 43,146,000 50,719,000
Loans:
Gross loans 673,907,000 664,886,000
Unearned income (7,208,000) (8,125,000)
Allowance for possible loan losses (6,773,000) (6,566,000)
--------- ----------
NET LOANS 659,926,000 650,195,000
Loans held for sale 163,250,000 122,222,000
Bank premises and equipment 29,273,000 23,651,000
Accrued interest receivable 8,459,000 8,031,000
Other assets 14,971,000 14,042,000
------------ -----------
TOTAL ASSETS $ 1,074,722,000 $ 1,040,969,000
============= =============
LIABILITIES
Deposits:
Noninterest-bearing $ 115,517,000 $ 116,992,000
Interest-bearing 700,994,000 680,423,000
----------- -----------
TOTAL DEPOSITS 816,511,000 797,415,000
Short-term borrowings 148,399,000 141,309,000
Long-term debt 24,200,000 20,000,000
Other liabilities 10,305,000 9,106,000
------------- ------------
TOTAL LIABILITIES 999,415,000 967,830,000
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 5,092,046 shares
as of June 30, 1996 and December 31, 1995, respectively,
including 13,852 and 13,640 shares in treasury at
June 30, 1996 and December 31, 1995, respectively. 12,730,000 12,730,000
Capital surplus 25,942,000 25,942,000
Retained earnings 37,732,000 34,432,000
Cost of common stock in treasury (360,000) (360,000)
Net unrealized (loss) gain on securities available for sale,
net of deferred income taxes (737,000) 395,000
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 75,307,000 73,139,000
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,074,722,000 $ 1,040,969,000
============== ==============
See notes to consolidated financial statements
PAGE 3 OF 32
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED
June 30
1996 1995
---------- -------
INTEREST INCOME
Interest and fees on loans $ 37,318,000 $ 27,620,000
Interest and dividends on securities:
Taxable 4,227,000 6,203,000
Tax-exempt 1,032,000 1,156,000
Other interest income 19,000 35,000
--------------- -----------
TOTAL INTEREST INCOME 42,596,000 35,014,000
INTEREST EXPENSE
Interest on deposits 14,587,000 12,753,000
Interest on short-term borrowings 3,749,000 2,265,000
Interest on long-term debt 782,000 228,000
------------ ------------
TOTAL INTEREST EXPENSE 19,118,000 15,246,000
NET INTEREST INCOME 23,478,000 19,768,000
PROVISION FOR POSSIBLE LOAN LOSSES 561,000 409,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 22,917,000 19,359,000
OTHER INCOME
Securities gains 63,000 2,000
Service charges 1,784,000 1,499,000
Other 2,174,000 1,420,000
----------- -----------
TOTAL OTHER INCOME 4,021,000 2,921,000
OTHER EXPENSES
Salaries and employee benefits 10,456,000 8,417,000
Net occupancy expense 2,876,000 2,537,000
Other 6,053,000 5,289,000
----------- -----------
TOTAL OTHER EXPENSES 19,385,000 16,243,000
INCOME BEFORE INCOME TAXES 7,553,000 6,037,000
INCOME TAXES 2,526,000 1,872,000
----------- -----------
NET INCOME $ 5,027,000 $ 4,165,000
=========== ===========
Net income per common share $ .99 $ .81
=========== ===========
Average common shares outstanding 5,078,336 5,166,494
=========== ===========
See notes to consolidated financial statements
PAGE 4 OF 32
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTH PERIOD ENDED
June 30
1996 1995
---------- -------
INTEREST INCOME
Interest and fees on loans $ 19,015,000 $ 14,638,000
Interest and dividends on securities:
Taxable 1,974,000 2,998,000
Tax-exempt 500,000 567,000
Other interest income 14,000 24,000
--------------- -----------
TOTAL INTEREST INCOME 21,503,000 18,227,000
INTEREST EXPENSE
Interest on deposits 7,354,000 6,659,000
Interest on short-term borrowings 1,670,000 1,409,000
Interest on long-term debt 411,000 98,000
------------ ------------
TOTAL INTEREST EXPENSE 9,435,000 8,166,000
NET INTEREST INCOME 12,068,000 10,061,000
PROVISION FOR POSSIBLE LOAN LOSSES 290,000 208,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 11,778,000 9,853,000
OTHER INCOME
Securities gains(losses) 2,000 (1,000)
Service charges 945,000 791,000
Other 1,161,000 882,000
----------- -----------
TOTAL OTHER INCOME 2,108,000 1,672,000
OTHER EXPENSES
Salaries and employee benefits 5,202,000 4,381,000
Net occupancy expense 1,506,000 1,292,000
Other 3,164,000 2,768,000
----------- -----------
TOTAL OTHER EXPENSES 9,872,000 8,441,000
INCOME BEFORE INCOME TAXES 4,014,000 3,084,000
INCOME TAXES 1,448,000 959,000
----------- -----------
NET INCOME $ 2,566,000 $ 2,125,000
=========== ===========
Net income per common share $ .51 $ .41
=========== ===========
Average common shares outstanding 5,078,266 5,165,930
=========== ===========
See notes to consolidated financial statements
PAGE 5 OF 32
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
Six Months Ended June 30, 1996
NET
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) $73,139,000
Net income 5,027,000 5,027,000
Cash dividends
declared ($.34/share) (1,727,000) (1,727,000)
Change 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
---------- ----------- ----------- ----------- ---------- -----------
NET
UNREALIZED
Six Months Ended June 30, 1995 GAIN/(LOSS)
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
Balances
at December 31, 1994 $11,753,000 $18,366,000 $39,075,000 ($2,863,000) ($ 32,000) $66,299,000
Net income 4,165,000 4,165,000
Cash dividends
declared ($.29/share) (1,203,000) (1,203,000)
Cash dividends of acquired
subsidiary (150,000) (150,000)
Changes in net unrealized
gain/(loss), net of income
taxes of $1,820,000 2,730,000 2,730,000
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 $11,753,000 $18,366,000 $41,887,000 $(133,000) $ (85,000) $71,788,000
----------- ----------- ----------- ---------- ----------- -----------
See notes to consolidated financial statements
PAGE 6 OF 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTH PERIOD ENDED
JUNE 30
1996 1995
---- ----
OPERATING ACTIVITIES
Net Income $5,027,000 $4,165,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization 430,000 480,000
Provision for depreciation 1,613,000 1,198,000
Provision for loan losses 561,000 409,000
Realized securities gains (63,000) (2,000)
Loans originated for sale (59,563,000) (26,665,000)
Purchases of loans held for sale (541,519,000) (231,972,000)
Proceeds from loans sold 560,532,000 211,722,000
Realized gains on loans sold (478,000) (56,000)
Gain on sale of premises and equipment 0 (7,000)
(Increase) decrease in accrued interest receivable (428,000) 122,000
Increase in other assets (681,000) (1,230,000)
Increase (decrease) in other liabilities 1,199,000 (1,002,000)
------------ --------------
NET CASH USED IN OPERATING ACTIVITIES (33,370,000) (42,838,000)
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 33,825,000 10,744,000
Proceeds from maturities of securities available for sale 24,236,000 19,637,000
Purchases of securities available for sale (32,554,000) (25,165,000)
Proceeds from maturities of securities 130,352,000 16,662,000
Purchases of securities (122,979,000) (3,238,000)
Net increase in loans (10,292,000) (60,030,000)
Sale of foreclosed properties 0 10,000
Purchases of premises and equipment (7,235,000) (2,627,000)
------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,353,000 (44,007,000)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (1,475,000) 5,617,000
Net increase in interest-bearing deposits 20,571,000 15,199,000
Net increase in short-term borrowings 7,090,000 64,905,000
Proceeds from long-term-debt 4,200,000 2,850,000
Repayment of long-term debt 0 (4,400,000)
Purchases of treasury stock 0 (65,000)
Proceeds from sales of treasury stock 0 12,000
Cash dividends paid (1,727,000) (1,451,000)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,659,000 82,667,000
------------ ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,642,000 (4,178,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,460,000 34,284,000
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $39,102,000 $30,106,000
============ ===========
See notes to consolidated financial statements
PAGE 7 OF 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1996
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,
1996, are not necessarily indicative of the results of operations that can be
expected for the year ending December 31, 1996. 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, 1995.
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, 1996, of 33.44% 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 8 OF 32
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 $70,814,000 at June 30, 1996. 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 $4,368,000,
have historically expired unfunded.
NOTE D - STOCKHOLDERS' EQUITY
The Company maintained an Open Market Stock Purchase Plan (the
Plan) whereby the Board of Directors allocated $5 million to be used to purchase
shares of the Company's common stock through May 1996. During the plan's two
year duration, the Company reacquired approximately 87,000 shares at market
prices ranging from $23.30 to $24.08 per share for total purchases of
approximately $2,286,000.
NOTE E - ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights,"
which requires that entities recognize rights to service mortgage loans for
others as separate assets, whether those rights are acquired through loan
origination or purchase activities. Additionally, management must periodically
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. The adoption of SFAS No. 122 did not have a material
impact on the Company's financial position or results of operations.
PAGE 9 OF 32
NOTE F - LONG-TERM BORROWINGS
Long-term debt includes a $23,000,000 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 June 30, 1996) due on July 31, 1997. As of June 30, 1996, the
outstanding balance was equal to $19,200,000. Interest on this obligation is
payable quarterly, and the Parent Company has pledged the common stock of The
City National Bank of Charleston, The Peoples Bank of Point Pleasant, First
State Bank and Trust, Merchants National Bank and The Home National Bank of
Sutton as security for the loan. Management intends to refinance this loan
according to the provisions provided in the agreement.
Additionally, a subsidiary maintains long-term financing with the
Federal Home Loan Bank (FHLB) in the form of a Long-Term LIBOR Floater with
maximum available credit of $5 million. At June 30, 1996, $5 million was
outstanding with an interest rate of 5.71156%. The agreement matures in
December, 1998.
PAGE 10 OF 32
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
HIGHLIGHTS
RECENT DEVELOPMENT
In May 1996, the Company signed a letter of intent to acquire The
Old National Bank of Huntington, Huntington, West Virginia ("Old National").
Under the letter of intent signed by the parties, the Company will exchange
approximately 5.7 shares of its common stock, approximately 418,000 shares in
total, for each of the outstanding shares of Old National. 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 fourth
quarter of 1996.
The acquisition will bring assets of $45.2 million and deposits
of $40.4 million to the Company, giving the Company total assets of $1.1 billion
and total deposits of $856.9 million, as of June 30, 1996.
FINANCIAL POSITION
Total assets increased $33.8 million or approximately 3.2% during
the first six months of 1996. Net loans increased $9.7 million or 1.5%. Loans
held for sale, consisting primarily of loans received through the Company's
participation in a whole loan bulk purchasing program, increased $41.0 million
or 33.6%. As of June 30, 1996, program loans owned by the Company had an
outstanding principal balance of approximately $125.3 million. See LOAN
PORTFOLIO. The Company earned interest income of approximately $6,536,000 on
program loans during the six months ended June 30, 1996. See NET INTEREST
INCOME. The increases in net loans held for sale were funded primarily by an
increase in deposits and short-term borrowings of $19.1 million and $7.1
million, respectively. Net stockholders' equity
PAGE 11 OF 32
increased $2.2 million during the first six months of 1996 representing the
Company's retained net profits.
QUARTER ENDED JUNE 30, 1996, COMPARED TO QUARTER ENDED JUNE 30, 1995.
The Company reported net income of $2,566,000 for the three
months ended June 30, 1996 compared to net income of $2,125,000 for the quarter
ended June 30, 1995. This increase of $441,000, or 20.75%, was primarily due to
an increase of $2,007,000 in the Company's net interest income during the second
quarter of 1996 as compared to the same period of 1995. See NET INTEREST INCOME.
Non-interest expenses increased $1,431,000 or 17% during the second quarter of
1996 as compared to the same period of 1995, primarily due to the Company's
continued expansion of its Operations Center. Earnings per share were $.51 and
$.41 for the second quarter of 1996 and 1995, respectively.
Total other income, excluding securities transactions, increased
$433,000 or 25.9% primarily due to fees generated from the increased volume of
loans originated and held for sale and return item fees on deposits collected
through the ordinary course of business.
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30,
1995
The Company reported net income of $5,027,000 for the six months
ended June 30, 1996 compared to net income of $4,165,000 for the six months
ended June 30, 1995. This increase of $862,000 or 20.70%, was primarily due to
an increase in the Company's net interest income earned during the first six
months of 1996 as compared to the same period of 1995 as discussed above. Total
non-interest expense increased $3,142,000 of 19.34% during the first
PAGE 12 OF 32
six months of 1996 as compared to the same period of 1995, due to increases in
salaries and employee benefits related to the Company's growth as well as the
expansion of its Operation Center. Earnings per share were $.99 and $.81 for the
six months ended June 30, 1996 and 1995, respectively.
SELECTED RATIOS
The return on average assets (ROA) for the first quarter of 1996
was .96% compared to .91% in the second quarter of 1995. The return on average
shareholder's equity (ROE) for the first quarter of 1996 was 13.61% compared to
12.03% ROE for the second quarter of 1995. For the six months of 1996, ROA was
.95% compared to .91% for the six months ended 1995. ROE was 13.44% and 12.34%
for the first six months of 1996 and 1995, respectively.
The dividend payout ratio of 33.33% for the quarter ended June
30, 1996 represents a decrease of 5.77% from the dividend payout ratio of 35.37%
for the quarter ended June 30, 1995. The dividend payout ratio was 34.34% and
35.80% for the six months ended June 30, 1996 and 1995, respectively. Since
1988, the Company has paid dividends on a quarterly basis, and expects to
continue to do so in the future.
PAGE 13 OF 32
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
1996 1995
Commercial, financial and
agricultural $217,329 $214,304
Real Estate-Mortgage 290,392 277,608
Real Estate-Construction 24,775 27,240
Installment and other 141,411 145,734
Unearned Income (7,208) (8,125)
-------- --------
TOTAL $666,699 $656,761
======== ========
Loans Held for Sale
Program loans $ 125,296 $101,843
Loans Originated for Sale 37,954 20,379
-------- --------
TOTAL $ 163,250 $ 122,222
======== ========
The Company grants loans to customers generally within the market
areas of its subsidiaries. While 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,
a downward trend in the installment loan portfolio is representative of the
increased level of mortgage refinancing during the first six months of 1996 that
historically is not typical. The rate environment during this period was
conducive to consumers refinancing their total indebtedness to a fixed rate
secondary market product through our mortgage company. 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
PAGE 14 OF 32
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, 1996 and December 31, 1995. The Company's coverage
ratio of nonperforming assets and potential problem loans continues to be strong
at 101% as of June 30, 1996.
Management is of the opinion that the allowance for loan losses
is adequate to provide for probable future losses inherent in the portfolio.
PAGE 15 OF 32
RISK ELEMENTS
(in thousands)
Six Months
Ended Year Ended
June 30 December 31
1996 1995
---- ----
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $6,566 $ 6,477
Charge-offs (534) (1,331)
Recoveries 180 316
------ -------
Net charge-offs (354) (1,015)
Provision for loan possible losses 561 1,104
------ ------
Balance at end of period $6,773 $6,566
===== =====
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs 0.05% 0.17%
Provision for possible loan losses 0.09% 0.18%
Allowance for loan losses 1.04% 1.08%
June 30 December 31
1996 1995
NON-PERFORMING ASSETS
Other real estate owned $1,559 $1,027
Non-accrual loans 1,982 2,525
Accruing loans past due 90 days
or more 2,696 1,421
Restructured loans 250 141
------ ------
Total Non-performing Assets $6,487 $5,114
POTENTIAL PROBLEM LOANS $250 $266
AS A PERCENT OF NON-PERFORMING ASSETS
AND POTENTIAL PROBLEM LOANS
Allowance for loan losses 100.53% 122.04%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AS A PERCENT OF AVERAGE TOTAL LOANS 0.41% 0.23%
PAGE 16 OF 32
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 second quarter of 1995 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 1995, financing activities provided
cash due to the increase in 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, 1996, the one year period shows
a negative gap (liability sensitive) of $296 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
PAGE 17 OF 32
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 $85 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 1996. 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.
PAGE 18 OF 32
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 $156,138 $ 95,747 $328,445 $ 91,595 $671,925
Loans held for sale 163,250 0 0 0 163,250
Securities 27,166 20,744 79,797 32,034 159,741
-------- --------- ---------- --------- --------
Total interest earning assets 346,554 116,491 408,242 123,629 994,916
------- --------- ---------- ------- -------
LIABILITIES
Savings and NOW Accounts 336,814 0 0 0 336,814
All other interest bearing
deposits 93,106 156,363 114,285 426 364,180
Short term and other borrowings 148,399 0 0 0 148,399
Long term borrowings 24,200 0 0 0 24,200
-------- ----------- ----------- ---------- --------
Total interest bearing
liabilities $602,519 $ 156,363 $114,285 $ 426 $ 873,593
------- -------- ------- --------- -------
Interest sensitivity gap ($255,965) ($ 39,872) $293,957 $123,203 $121,323
------- -------- ------- ------- -------
Cumulative sensitivity gap ($255,965) ($295,837) ($ 1,880) $121,323
======= ======= ======== =======
Management adjustments $305,668 ($ 95,240) ($199,876) ($ 10,552)
------- ------- ------- -------
Cumulative management
adjusted gap $ 49,703 ($ 85,409) $ 8,672 $121,323
======== ======= ======== =======
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 19 OF 32
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,
1996, the regulatory minimum ratio of qualified total capital to riskweighted
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 20 OF 32
Dollars in Thousands
June 30 December 31
1996 1995
---- ----
Capital Components
Tier 1 risk-based capital $70,598 $66,260
Total risk-based capital 77,371 72,826
Capital Ratios
Tier 1 risk-based 9.29% 8.87%
Total risk-based 10.18 9.75
Leverage 6.67 6.45
Regulatory Minimum
Tier 1 risk-based (dollar/ratio) $30,412/4.00% $29,888/4.00%
Total risk-based (dollar/ratio) 60,826/8.00 59,776/8.00
Leverage (dollar/ratio) 31,735/3.00 30,801/3.00
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 1996. The continued expansion of the Company's Operations Center will be
funded by the Company's long-term debt. SEE NOTE F. Earnings from subsidiary
bank operations are expected to remain adequate to fund payment of stockholders'
dividends and normal 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 21 OF 32
NET INTEREST INCOME
Net interest income, on a fully federal tax-equivalent basis,
improved from the second quarter of 1995 to the second quarter of 1996 by
approximately $1,972,000 due to an increase in net earning assets. Net yield on
earning assets increased between the respective periods from 4.72% to 4.98%, as
earning asset yields increased 33 basis points (100 basis points equal one
percent) to 8.78%, and the cost of interest-bearing liabilities increased 6
basis points to 4.36%. The $971,000 increase in net interest income due to rate,
as shown in the following table, was coupled with a $1,001,000 increase in net
interest income due to volume. The major component of this favorable volume
change was increased average loans and average loans held for sale.
Net interest income, on a fully federal tax-equivalent basis,
improved from the six months ended June 30, 1995 to the six months ended June
30, 1996 by approximately $3,646,000 million due to an increase in net earning
assets. Net yield on earning assets increased between periods from 4.78% to
4.84%, as earning asset yields increased 34 basis points to 8.70%, and the cost
of interest bearing liabilities increased 30 basis points to 4.42%. The $116,000
increase in net interest income due to rate, as shown in the following table,
was coupled with a $3,530,000 increase in net interest income due to volume. The
major component of this favorable volume change was increased average loans held
for sale.
A significant part of the increase in net earning assets for the
second quarter of 1996 and the six months ended June 30, 1996, is attributable
to the Company's participation in a whole-loan bulk purchasing program. Under
the program, the Company purchases from a third party whole loans secured by
residential mortgages and partially insured by the Federal Housing Association.
The loans typically have balances of less than $25,000 and are not concentrated
geographically. Additionally, the program permits the Company to require the
PAGE 22 OF 32
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 "in-market" loans
because of the Company's review of the loans, the insurance reserve associated
with the loans and the other terms of the program. The loans are generally
serviced by third parties and the Company earns a fixed rate of return on the
loans. The Company earned approximately $3,318,000 in interest income on program
loans for the quarter ended June 30, 1996 on an average balance of approximately
$145.8 million compared to $857,000 in interest income for the same period in
1995. The Company earned approximately $6,536,000 million in interest income on
an average balance of approximately $143.6 million for the six months ended June
30, 1996 compared to $1,252,000 in interest income for the same period in 1995.
These loans are being funded through short-term secured and unsecured
borrowings.
PAGE 23 OF 32
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Quarter Ended
June 30
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------
EARNING ASSETS:
Loans (1)
Commercial and industrial $ 210,465 $4,793 9.11% $ 181,911 $4,255 9.36%
Real estate 308,576 6,727 8.72 276,768 5,854 8.46
Consumer obligations 133,966 3,308 9.88 138,249 3,436 9.94
---------------------------------------------------------------------
Total loans 653,007 14,828 9.08 596,928 13,545 9.08
Loans held for sale 173,821 4,187 9.64 48,830 1,093 8.95
Securities
Taxable 127,543 1,974 6.19 188,180 2,998 6.37
Tax-exempt (2) 35,617 758 8.51 41,268 859 8.33
--------------------------------------------------------------------
Total securities 163,160 2,732 6.70 229,448 3,857 6.72
Federal funds sold 971 14 5.77 1,556 24 6.17
----------------------------------------------------------------------
Total earning assets 990,959 21,761 8.78 876,762 18,519 8.45
Cash and due from bank 29,992 24,696
Bank premises and equipment 26,979 22,227
Other assets 22,551 21,491
Less: allowance for possible
loan losses (6,685) (6,465)
------------------------------------------------------------------------
Total assets $1,063,796 $938,711
========================================================================
INTEREST BEARING LIABILITIES
Demand deposits $ 108,365 $ 783 2.89% $ 94,887 $ 597 2.52%
Savings deposits 226,770 1,802 3.18 237,301 1,893 3.19
Time deposits 365,531 4,769 5.22 327,355 4,169 5.09
Short-term borrowings 142,560 1,670 4.69 95,050 1,409 5.93
Long-term debt 23,011 411 7.14 4,831 98 8.11
------------------------------------------------------------------------
Total interest-bearing
liabilities 866,437 9,435 4.36 759,424 8,166 4.30
Demand deposits 111,648 100,110
Other liabilities 10,501 8,471
Stockholders' equity 75,410 70,706
-------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,063,796 $938,711
========================================================================
Net interest income $12,326 $10,353
========================================================================
Net yield on earning assets 4.98% 4.72%
========================================================================
(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 24 OF 32
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Quarter Ended
June 30
1996 VS. 1995
Increase (Decrease)
Due to Change In:
INTEREST INCOME FROM: Volume Rate Net
Loans
Commercial and industrial $ 1,229 $ (691) $ 538
Real estate 689 184 873
Consumer obligations (106) (22) (128)
-------------------------------------------
Total loans 1,812 (529) 1,283
Loans held for sale 3,005 89 3,094
Securities
Taxable (941) (83) (1,024)
Tax-exempt (1) (219) 118 (101)
------------------------------------------
Total Securities (1,160) 35 (1,125)
Federal funds sold (9) (1) (10)
------------------------------------------
Total interest-earning assets $ 3,648 $(406) $ 3,242
INTEREST EXPENSE ON:
Demand deposits 91 95 186
Savings deposits (84) (7) (91)
Time deposits 496 104 600
Short-term borrowings 1,849 (1,588) 261
Long-term debt 394 (81) 313
-------------------------------------------
Total interest-bearing liabilities $ 2,746 $(1,477) $ 1,269
------------------------------------------
NET INTEREST INCOME $ 972 $ 1,071 $ 1,973
==========================================
(1) Fully federal taxable equivalent using a tax rate of 34% in all years.
PAGE 25 OF 32
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Six Months Ended
June 30
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
EARNING ASSETS:
Loans (1)
Commercial and industrial $ 210,181 $9,646 9.18% $ 176,666 $8,087 9.16%
Real estate 306,561 13,250 8.64 269,296 11,261 8.36
Consumer obligations 134,429 6,612 9.84 133,900 6,607 9.87
---------------------------------------------------------------------
Total loans 651,171 29,508 9.06 579,862 25,955 8.95
Loans held for sale 167,581 7,810 9.32 37,426 1,665 8.90
Securities
Taxable 135,421 4,227 6.24 191,692 6,203 6.47
Tax-exempt (2) 36,816 1,564 8.50 41,844 1,752 8.37
--------------------------------------------------------------------
Total securities 172,237 5,791 6.72 233,536 7,955 6.81
Federal funds sold 708 19 5.37 1,207 35 5.80
----------------------------------------------------------------------
Total earning assets 991,697 43,128 8.70 852,031 35,610 8.36
Cash and due from bank 29,192 25,181
Bank premises and equipment 25,401 21,884
Other assets 22,662 21,834
Less: allowance for possible
loan losses (6,646) (6,438)
-------------------------------------------------------------------------
Total assets $1,062,306 $914,492
=======================================================================
INTEREST BEARING LIABILITIES
Demand deposits $ 102,775 $ 1,543 3.00% $ 95,343 $ 1,371 2.88%
Savings deposits 224,286 3,499 3.12 242,671 3,689 3.04
Time deposits 364,181 9,545 5.24 317,265 7,693 4.85
Short-term borrowings 151,045 3,749 4.96 78,804 2,265 5.75
Long-term debt 22,042 782 7.10 6,817 228 6.69
------------------------------------------------------------------------
Total interest-bearing
liabilities 864,289 19,118 4.42 740,900 15,246 4.12
Demand deposits 114,802 97,147
Other liabilities 8,349 8,934
Stockholders' equity 74,826 67,511
-------------------------------------------------------------------------
Total liabilities and826
stockholders' equity $1,062,306 $914,492
========================================================================
Net interest income $24,010 $20,364
============================================================================
Net yield on earning assets 4.84% 4.78%
=============================================================================
(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 26 OF 32
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Six Months Ended
June 30
1996 VS. 1995
Increase (Decrease)
Due to Change In:
INTEREST INCOME FROM: Volume Rate Net
Loans
Commercial and industrial $ 1,538 $ 21 $ 1,559
Real estate 1,600 389 1,989
Consumer obligations 49 (44) 5
-------------------------------------------
Total loans 3,187 366 3,553
Loans held for sale 6,062 83 6,145
Securities
Taxable (1,763) (213) (1,976)
Tax-exempt (1) (259) 71 (188)
------------------------------------------
Total Securities (2,022) (142) (2,164)
Federal funds sold (14) (2) (16)
-------------------------------------------
Total interest-earning assets $ 7,213 $ 305 $ 7,518
INTEREST EXPENSE ON:
Demand deposits 110 62 172
Savings deposits (429) 239 (190)
Time deposits 1,197 655 1,852
Short-term borrowings 2,368 (884) 1,484
Long-term debt 539 15 554
-------------------------------------------
Total interest-bearing liabilities $ 3,785 $ 87 $ 3,872
------------------------------------------
NET INTEREST INCOME $ 3,428 $ 218 $ 3,646
===========================================
(1) Fully federal taxable equivalent using a tax rate of 34% in all years.
PAGE 27 OF 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Seller Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K - Not Applicable
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1996.
PAGE 28 OF 32
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 13, 1996 By /s/ Dawn Woolsey
Dawn Woolsey,
Chief Accounting Officer
(Principal Accounting Officer)
PAGE 29 OF 32
EXHIBIT INDEX
Exhibit Page Number
Index
27 Financial Data Schedule for the six months ending
June 30, 1996 31
PAGE 30 OF 32