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, 1998 0-1173
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.)
25 Gatewater Road
Charleston, West Virginia 25313
(Address of principal offices)
Registrant's telephone number, including area code: (304) 769-1100.
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes xx No
------ ------
The number of shares outstanding of the issuer's common stock as of August 11,
1998.
Common Stock, $2.50 Par Value - 6,707,276 shares
Index
City Holding Company and Subsidiaries
This form 10-Q may include forward-looking financial information within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking information is identified
by phrases such as the Company "expects" or "anticipates" and words of similar
effect. The Company's actual results achieved may differ materially from those
projected in the forward-looking information. Factors that could cause such a
difference include, among others: changes in interest rates and economic and
other market conditions generally and in the Company's principal markets;
competition for origination and servicing of mortgage loans, particularly loans
with high loan-to-value ratios or retail originations; disruption of retail
originations; and changes in regulations and government policies affecting banks
and their subsidiaries, including changes in monetary policies. The
forward-looking financial information is provided to assist investors and
Company stockholders in understanding anticipated future financial operations of
the Company and are included pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Further, the Company disclaims
any intent or obligation to update this forward-looking financial information.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Income (unaudited) -- Six months
ended June 30, 1998 and 1997 and the three months ended June
30, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) -- Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) -- Six
months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements (unaudited) - June
30, 1998
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
Signature
Exhibit Index
PART I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
Item I.
JUNE 30 DECEMBER
1998 1997
----------- --------
(unaudited)
ASSETS
Cash and due from banks $ 62,111 $ 47,207
Federal funds sold 570 40,028
------------ -------------
CASH AND CASH EQUIVALENTS 62,681 87,235
Securities available for sale, at fair value 166,994 162,912
Loans:
Gross loans 936,161 787,716
Unearned income (6,889) (7,354)
Allowance for possible loan losses (8,680) (7,673)
----------- -----------
NET LOANS 920,592 772,689
Loans held for sale 194,959 134,990
Bank premises and equipment 50,371 36,635
Accrued interest receivable 10,292 8,677
Other assets 95,611 63,005
------------- ------------
TOTAL ASSETS $ 1,501,500 $ 1,266,143
=========== ===========
LIABILITIES
Deposits:
Noninterest-bearing $ 174,707 $ 136,842
Interest-bearing 957,002 801,656
------------- -------------
TOTAL DEPOSITS 1,131,709 938,498
Short-term borrowings 111,974 130,191
Long-term borrowings 81,295 68,400
Other liabilities 20,414 22,799
------------- -------------
TOTAL LIABILITIES 1,345,392 1,159,888
Corporation-obligated mandatorily redeemable
capital securities of subsidiary
trust holding solely subordinated debentures
of City Holding Company ("Trust Preferred
Securities") 30,000 0
STOCKHOLDERS' EQUITY
Preferred stock, par value $25 a share:
Authorized-500,000 shares; none issued
Common stock, par value $2.50 a share: authorized
20,000,000 shares; issued 6,749,785 shares
as of June 30, 1998 and 6,427,309 shares
as of December 31, 1997, including 17,055
and 11,130 shares in treasury at June 30, 1998
and December 31, 1997, respectively. 16,874 16,067
Capital surplus 63,734 48,769
Retained earnings 44,280 40,374
Cost of common stock in treasury (591) (310)
Accumulated other comprehensive income 1,811 1,355
----------- ---------
TOTAL STOCKHOLDERS' EQUITY 126,108 106,255
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,501,500 $ 1,266,143
=========== ===========
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands, except per share data)
SIX MONTH PERIOD ENDED
JUNE 30
1998 1997
----------- -----------
(unaudited) (unaudited)
INTEREST INCOME
Interest and fees on loans $ 48,982 $ 40,563
Interest on investment securities:
Taxable 4,133 4,456
Tax-exempt 828 974
Other interest income 783 59
-------- --------
TOTAL INTEREST INCOME 54,726 46,052
INTEREST EXPENSE
Interest on deposits 19,374 15,851
Interest on short-term borrowings 3,475 3,479
Interest on long-term debt 3,409 1,252
---------- --------
TOTAL INTEREST EXPENSE 26,258 20,582
NET INTEREST INCOME 28,468 25,470
PROVISION FOR POSSIBLE LOAN LOSSES 1,201 828
--------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 27,267 24,642
OTHER INCOME
Investment securities gains 16 11
Service charges 2,392 2,086
Mortgage loan servicing fees 8,009 5,352
Net origination fees on junior mortgages 6,217 0
Gain on sale of loans 7,333 993
Other 8,029 1,457
-------- ---------
TOTAL OTHER INCOME 31,996 9,899
OTHER EXPENSES
Salaries and employee benefits 19,402 13,991
Occupancy, excluding depreciation 2,644 1,753
Depreciation 3,661 2,253
Advertising 9,119 724
Other expenses 14,375 6,471
---------- ---------
TOTAL OTHER EXPENSES 49,201 25,192
INCOME BEFORE INCOME TAXES 10,062 9,349
INCOME TAXES 3,650 3,345
--------- ---------
NET INCOME $ 6,412 $ 6,004
===== =====
Basic earnings per common share $ 0.97 $ 0.99
====== =====
Diluted earnings per common share $ 0.96 $ 0.99
======= =====
Average common shares outstanding:
Basic 6,589,368 6,069,192
========== ==========
Diluted 6,640,059 6,079,500
========== ==========
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands, except per share data)
THREE MONTH PERIOD ENDED
JUNE 30
1998 1997
----------- -----------
(unaudited) (unaudited)
INTEREST INCOME
Interest and fees on loans $ 25,796 $ 21,907
Interest on investment securities:
Taxable 2,033 2,289
Tax-exempt 416 488
Other interest income 572 3
-------- ---------
TOTAL INTEREST INCOME 28,817 24,687
INTEREST EXPENSE
Interest on deposits 10,516 8,147
Interest on short-term borrowings 1,500 2,217
Interest on long-term debt 1,934 660
---------- --------
TOTAL INTEREST EXPENSE 13,950 11,024
NET INTEREST INCOME, 14,867 13,663
PROVISION FOR POSSIBLE LOAN LOSSES 681 440
--------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 14,186 13,223
OTHER INCOME
Investment securities gains (losses) 6 (17)
Service charges 1,267 1,138
Mortgage loan servicing fees 4,126 2,570
Net origination fees on junior mortgages 4,071 0
Gain on sale of loans 4,775 183
Other 4,855 868
-------- -------
TOTAL OTHER INCOME 19,100 4,742
OTHER EXPENSES
Salaries and employee benefits 10,394 7,324
Occupancy, excluding depreciation 1,475 900
Depreciation 1,979 1,138
Advertising 6,022 400
Other expenses 8,239 3,317
--------- ---------
TOTAL OTHER EXPENSES 28,109 13,079
INCOME BEFORE INCOME TAXES 5,177 4,886
INCOME TAXES 1,878 1,711
--------- ---------
NET INCOME $ 3,299 $ 3,175
======= ======
Basic earnings per common share $ 0.49 $ 0.52
======= ======
Diluted earnings per common share $ 0.48 $ 0.52
======= ======
Average common shares outstanding:
Basic 6,728,456 6,069,161
========== ==========
Diluted 6,833,634 6,080,173
========== ==========
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (unaudited)
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS STOCK INCOME EQUITY
-------------------------------------------------------------------
Six Months Ended June 30,
1998
Balances at December 31,
1997 $ 16,067 $48,769 $ 40,374 ($310) $ 1,355 $106,255
Comprehensive Income:
Net income 6,412 6,412
Other comprehensive
income, net of tax:
Unrealized holding gain
on securities arising
during the period 466 466
Less: reclassification
adjustment for gains
realized in net income (10) (10)
Other comprehensive ------------ -------------
income 456 456
-------------
Comprehensive Income 6,868
Cash Dividends
Declared ($.38/share) (2,506) (2,506)
Purchase of 5,925 shares
of treasury stock (281) (281)
Common stock issued in
acquisitions 807 14,965 15,772
-------------------------------------------------------------------
Balances at June 30, 1998 $ 16,874 $63,734 $ 44,280 ($591) $ 1,811 $ 126,108
-------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS STOCK INCOME EQUITY
-------------------------------------------------------------------
Six Months Ended June 30,
1997
Balances at December 31,
1996 $13,998 $35,426 $ 30,246 ($300) $ 3 $79,373
Comprehensive Income:
Net income 6,004 6,004
Other comprehensive
income, net of tax:
Unrealized gains on
securities 555 555
-----------
Comprehensive Income 6,559
Cash Dividends (2,186) (2,186)
Declared ($.36/share)
Exercise of 2,627 stock
options 7 58 65
Sale of 2,511 shares of
treasury stock 13 67 80
Purchase of 2,300 shares
of treasury stock (77) (77)
Issuance of stock for Old
National Bank
of Huntington 1,202 298 2,150 19 3,669
-------------------------------------------------------------------
Balances at June 30, 1997 $15,207 $35,795 $36,214 ($310) $ 577 $ 87,483
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
SIX MONTH PERIOD ENDED
JUNE 30
1998 1997
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net Income $ 6,412 $ 6,004
Adjustments to reconcile net income to net cash
used in operating activities:
Net amortization 885 493
Provision for depreciation 3,661 2,261
Provision for possible loan losses 1,201 828
Loans originated for sale (225,403) (58,357)
Purchases of loans held for sale (408,047) (301,971)
Proceeds from loans sold 580,814 343,561
Realized gains on loans sold (7,333) (993)
Realized investment securities gains (16) (11)
Increase in accrued interest receivable (1,023) (517)
Increase in other assets (22,410) (2,011)
Increase (decrease) in other liabilities (5,439) 1,424
------- -----------
NET CASH USED IN OPERATING ACTIVITIES (76,698) (9,289)
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 9,196 17,134
Proceeds from maturities of securities available for
sale 43,096 20,095
Purchases of securities available for sale (52,418) (44,425)
Proceeds from maturities and calls of investment
securities 0 1,863
Net increase in loans (40,503) (36,702)
Net cash acquired in acquisitions 2,454 9,126
Purchases of premises and equipment (16,162) (1,940)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (54,337) (34,849)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 37,661 4,349
Net increase in interest-bearing deposits 52,982 23,443
Net (decrease) increase in short-term borrowings (18,273) 11,093
Proceeds from long-term debt 34,750 5,150
Repayment of long-term debt (27,010) 0
Proceeds from issuance of Trust Preferred Securities 29,158 0
Exercise of stock options 0 65
Purchases of treasury stock (281) (77)
Proceeds from sales of treasury stock 0 80
Cash dividends paid (2,506) (2,186)
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 106,481 41,917
------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (24,554) (2,221)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,235 47,764
----------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,681 $ 45,543
========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, 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 and six month periods ended June 30, 1998,
are not necessarily indicative of the results of operations that can be expected
for the year ending December 31, 1998. The Company's accounting and reporting
policies conform with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Such policies require management to make estimates and develop
assumptions that affect the amounts reported in the consolidated financial
statements and related footnotes. Actual results could differ from management's
estimates. Certain amounts in the unaudited consolidated financial statements
have been reclassified. Such reclassifications had no impact on net income or
stockholders' equity in any period presented. For further information, refer to
the consolidated financial statements and footnotes thereto included in the City
Holding Company annual report on Form 10-K for the year ended December 31, 1997.
NOTE B - MERGERS AND ACQUISITIONS
On August 7, 1998, the Company announced that it had signed a definitive
agreement to merge with Horizon Bancorp, Inc. Expected to be accounted for as a
pooling of interests, the merger entails an exchange of $45.00 in City Holding
common stock, subject to adjustment, for each share of Horizon common stock. If,
based on trading prices near the closing of the transaction, the value of City
Holding stock is between $40.50 and $44.40, Horizon shareholders will receive
$45.00 in City Holding common stock. If the value of City Holding common stock
is less than $40.50, Horizon shareholders will receive 1.111 shares of City
Holding stock. If the value of City Holding common stock is greater than $44.50,
Horizon shareholders will receive 1.011 shares of City Holding stock. The merger
is subject to the approval of City Holding and Horizon shareholders and
applicable regulatory authorities and is expected to close during the first
quarter of 1999. Horizon has granted City Holding the option, exercisable under
certain circumstances, to purchase up to 19.9% of Horizon shares of common stock
outstanding and City Holding has granted Horizon a similar option on its own
shares of common stock.
Effective April 1, 1998, the Company consummated its acquisition of Del
Amo Savings Bank, FSB (Del Amo). Del Amo is a federally chartered savings bank,
headquartered in Torrance, California with total assets and total deposits of
approximately $116 million and $102 million, respectively, at March 31, 1998.
The merger involved the exchange of approximately 261,000 shares of the
Company's common stock for all of the outstanding shares of Del Amo. This
transaction was accounted for under the purchase method of accounting.
Accordingly, the results of operations have been included in the consolidated
totals from the date of acquisition. Due to the immaterial impact on the
Company's financial statements, no proforma information has been included for
the information provided herein.
In January 1998, City National Bank of West Virginia (City National), a
wholly-owned subsidiary of the Company, acquired Jarrett/Aim Communications,
Inc. (Jarrett/Aim). Jarrett/Aim is a printing and direct mail corporation. In
March 1998, City National acquired Morton Specialty Insurance Partners, Inc.
(Morton Insurance). Morton Insurance offers property and casualty insurance and
bonding programs to established commercial and industrial clients, primarily in
energy-related industries. In April 1998, City National acquired CityNet
Corporation (CityNet) and MarCom, Inc. (MarCom). Both companies provide internet
access to business and individual subscribers. These transactions were accounted
for under the purchase method of accounting. Accordingly, the results of
operations attributable to these transactions have been included in the
consolidated totals from the dates of the acquisitions. The assets of
Jarrett/Aim, Morton Insurance, CityNet and MarCom represent less than 1% of the
total assets of the Company. Accordingly, no proforma information has been
included for the information provided herein.
NOTE C - STRATEGIC INVESTMENT
On June 29, 1998, the Company (through City National) completed its
strategic investment in Mego Mortgage Corporation (Mego), a specialty financial
services company that originates and purchases conventional home improvement,
high loan-to-value debt consolidation, and other similar loans. As part of the
overall recapitalization of Mego completed by several investors, the Company
invested $10 million to acquire 10,000 shares of Mego's Series A Preferred
Stock, which is convertible into 6.7 million shares of Mego common stock. The
Company also acquired an option to purchase an additional 6.7 million shares of
Mego common stock at a price of $1.50 per share. Concurrent with this
investment, City National (through its loan servicing division, City Mortgage
Services) acquired the right to service approximately $536 million of consumer
mortgage loans previously serviced by Mego and the exclusive right to service up
to an additional $ 1 billion of mortgage loans originated or acquired by Mego in
the future.
NOTE D - TRUST PREFERRED SECURITIES
During March 1998, City Holding Capital Trust (the "Trust"), a
special-purpose statutory trust subsidiary of the Company, issued $30 million of
preferred capital securities (the "Capital Securities") to qualified
institutional buyers and $928,000 of common securities (the "Common Securites")
to the Company. Distributions on the Capital Securities will be payable at an
annual rate of 9.15%, payable semi-annually, and each Capital Security has a
stated liquidation amount of $1,000. To fund the Trust, the Company sold to the
Trust Junior Subordinated Debentures (the "Debentures") with terms identical to
the Capital Securities. Cash distributions on the Capital Securities are made to
the extent interest on the Debentures is received by the Trust. The Company,
through various agreements, has irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Capital Securities regarding the payment of
distributions and payment on liquidation or redemption of the Capital
Securities, but only to the extent of funds held by the Trust. In the event of
certain changes or amendments to regulatory requirements or federal tax rules,
the Capital Securities are redeemable in whole at par or, if greater, a
make-whole amount. Otherwise, the Capital Securities are generally redeemable in
whole or in part on or after April 1, 2008, at a declining redemption price
ranging from 104.58% to 100% of the liquidation amount. On or after April 1,
2018, the Capital Securities may be redeemed at 100% of the liquidation amount.
After deducting expenses incurred in the issuance, the Company received proceeds
of $29.2 million from the Capital Securities offering.
The offering of the Capital Securities is classified as and is similar to
a minority interest and is presented as "Corporation-obligated mandatorily
redeemable capital securities of subsidiary trust holding subordinated
debentures of City Holding Company." The Company may include the proceeds from
the Capital Securities offering in its Tier I capital, and the Company's
payments on the Debentures are fully tax deductible.
NOTE E - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board (FASB) Statement 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's securities, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement 130. For the six months in the periods
ended June 30, 1998 and 1997, total comprehensive income approximated $6.9
million and $6.6 million, respectively. For the three months in the periods
ended June 30, 1998 and 1997, comprehensive income approximated $3.6 million and
$4.2 million, respectively.
As of January 1, 1998, the Company adopted the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," relating to repurchase agreements, securities lending and other
similar transactions and pledged collateral, which had been delayed until after
December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement 125, an amendment of FASB Statement 125." The
effect of adopting the additional provisions of Statement 125 as amended by
Statement 127 had no material impact on the Company's financial position or
results of operations. During 1997, the FASB issued Statement 131, "Disclosures
about Segments of an Enterprise and Related Information", which is effective for
fiscal years beginning after December 15, 1997. This statement requires public
companies to disclose certain information about reportable operating segments in
complete sets of financial statements of the company and in interim condensed
financial statements. However, the provisions of this statement do not require
the disclosure of segment information in interim financial statements in the
initial year of application; therefore no such disclosures are included herein.
These disclosure requirements will have no effect on the Company's financial
position or results of operations.
NOTE F - LONG-TERM BORROWINGS
Long-term debt consists of a $35,000,000 revolving line of credit of the
Parent Company with a variable rate based on the lesser of the adjusted LIBOR
rate plus 1.50% per annum or the lender's base rate less .25% per annum
(7.15625% at June 30, 1998) due on December 31, 1998. As of June 30, 1998, the
outstanding balance was $11,150,000. Interest on this obligation is payable
quarterly, and the Parent Company has pledged the common stock of City National
as collateral for the revolving credit loan. Management intends to refinance
this loan according to the provisions provided in the agreement. The Company
paid $27 million on the line of credit in April 1998 with proceeds received from
the issuance of the Trust Preferred Securities (See Note D).
City National maintains long-term financing from the Federal Home Loan
Bank (FHLB) in the form of Long-Term LIBOR Floaters as follows:
Amount Interest Maturity
Outstanding Rate Date
---------------------------------------------------
$ 10,000,000 5.60% July 2002
25,000,000 5.61 September 2002
25,000,000 4.89 January 2008
5,000,000 5.48 February 2008
Additionally, Del Amo maintains long-term, fixed-rate financing from the
Federal Home Loan Bank (FHLB) as follows:
Amount Interest Maturity
Outstanding Rate Date
---------------------------------------------------
$ 2,000,000 6.58% June 2000
1,500,000 6.94 June 2005
1,500,000 7.14 June 2015
As of June 30, 1998, City National has maximum available credit with the FHLB of
approximately $269 million, which is collateralized by a blanket lien on all
residential and multi-family mortgage loans, and eligible government and agency
securities.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
HIGHLIGHTS
FINANCIAL POSITION
Total assets increased $235.4 million or approximately 18.59% during the
first six months of 1998. The acquisition of Del Amo (Note B) represented
approximately $116 million of the increase. Net loans increased $147.9 million
or 19.14%, $112 million of which can be attributed to Del Amo. Loans held for
sale, consisting primarily of loans purchased or originated with the intent to
sell or securitize, increased $60 million or 44.42%. See LOAN PORTFOLIO and
LOANS HELD FOR SALE for further discussion. The increase in net loans and loans
held for sale was funded primarily by an increase in deposits and long-term
borrowings of $193.2 million and $16.4 million, respectively. Other assets
increased $32.6 million during the six months ended June 30, 1998 primarily due
to an additional $19.7 million in retained interest recorded as a result of two
asset-backed securitization transactions recorded during the six month period.
See LOANS HELD FOR SALE for further discussion. Total stockholders' equity
increased $19.9 million during the first six months of 1998 primarily due to the
net income recorded during the period of $6.4 million less dividends of $2.5
million and the $15.8 million increase due to common stock issued in
acquisitions.
QUARTER ENDED JUNE 30, 1998, COMPARED TO QUARTER ENDED JUNE 30, 1997.
The Company reported net income of $3,299,000 for the three months ended
June 30, 1998 compared to net income of $3,175,000 for the quarter ended June
30, 1997. This increase of $124,000, or 3.91%, was attributable to an increase
in net interest income, after provision for possible loan losses, of $963,000
and an increase in other income (excluding securities transactions) of
$14,335,000 which was offset with an increase in other expenses of $15,030,000.
The increase in non-interest income is a result of the Company's $4.1
million increase in net origination fees on junior lien mortgages and an
additional net increase of $4.6 million in gains on loans sold to third parties.
A $1.6 million increase from the mortgage servicing division also contributed to
the increase in non-interest income. In addition, the Company recognized $2.3
million in non-interest income from printing and insurance services combined,
with no income recorded for these services in the second quarter of 1997.
Non-interest expenses increased $15,030,000 or 115% during the second
quarter of 1998 as compared to the same period of 1997. This increase is
primarily associated with entities acquired by the Company during the fourth
quarter of 1997 and the first six months of 1998, and also attributable to new
divisions formed by the Company during that same time period. Non-interest
expenses incurred by these divisions approximated $12.3 million during the three
months in the period ended June 30, 1998. Of that total, approximately $5.3
million was incurred for advertising and nationwide direct mail solicitation of
junior lien mortgage loans. Also, approximately $796,000 was charged to expense
during the three month period related to expenses associated with the Company's
loan securitization program. Additionally, approximately $2.4 million was
attributable to personnel costs incurred by all of the new divisions within the
Company.
Net income also benefited from an increase of $1,204,000 in the Company's
net interest income during the second quarter of 1998 as compared to the same
period of 1997. See NET INTEREST INCOME for further discussion. Basic earnings
per share were $.49 and $.52 for the second quarter of 1998 and 1997,
respectively. Diluted earnings per share were .48 and .52 for the second quarter
of 1998 and 1997, respectively.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
The Company reported net income of $6,412,000 for the six months ended
June 30, 1998 compared to net income of $6,004,000 for the six months ended
June 30, 1997. This increase of $408,000 or 6.8%, was primarily due to an
increase in net interest income, after provision for possible loan losses, of
$2,625,000 and an increase in other income (excluding securities transactions)
of $22,092,000 which was offset with an increase in other expenses of
$24,009,000. The increase in non-interest income is a result of the Company's
$6.2 million increase in net origination fees on junior lien mortgages, an
additional net increase of $6.3 million in gains on loans sold to third parties
and a $2.7 million increase from the mortgage servicing division. In
addition, the Company recognized $3.6 million in non-interest income from
printing and insurance services combined, with no income recorded for these
services in the first six months of 1997.
Non-interest expenses increased $24,009,000 or 95% during the first six
months of 1998 as compared to the same period of 1997. This increase is
primarily associated with entities acquired by the Company during the fourth
quarter of 1997 and the first six months of 1998, and also attributable to new
divisions formed by the Company during that same time period. Non-interest
expenses incurred by these divisions approximated $19.4 million during the six
months in the period ended June 30, 1998. Of that total, approximately $7.9
million was incurred for advertising and nationwide direct mail solicitation of
junior lien mortgage loans. Also, approximately $1.4 million was charged to
expense during the three month period related to expenses associated with the
Company's loan securitization program. Additionally, approximately $4.3 million
was attributable to personnel costs incurred by all of the new divisions within
the Company.
Net income for the first six months also benefited from an increase of
$2,998,000 in the Company's net interest income during the first six months of
1998 as compared to the same period of 1997. Basic earnings per share were $.97
and $.99 for the six months ended June 30, 1998 and 1997, respectively. Diluted
earnings per share were $.96 and $.99 for the six months ended June 30, 1998 and
1997, respectively.
SELECTED RATIOS
The return on average assets (ROA) for the second quarter of 1998 was .92%
compared to 1.07% in the second quarter of 1997. The return on average
shareholder's equity (ROE) for the second quarter of 1998 was 10.86% compared to
14.79% ROE for the second quarter of 1997. For the six months of 1998, ROA was
.94% compared to 1.05% for the six months ended 1997. ROE was 11.13% and 14.10%
for the first six months of 1998 and 1997, respectively.
The dividend payout ratio of 38.80% for the quarter ended June 30, 1998
represents an increase of 12.07% from the dividend payout ratio of 34.62% for
the quarter ended June 30, 1997. The dividend payout ratio was 39.18% and 36.36%
for the six months ended June 30, 1998 and 1997, respectively. Since 1988, the
Company has paid dividends on a quarterly basis, and expects to continue to do
so in the future.
LOAN PORTFOLIO
The composition of the Company's loan portfolio is presented in the
following table:
LOAN PORTFOLIO BY TYPE
(Dollars in Thousands)
June 30 December 31
1998 1997
------- -----------
Commercial, financial and
Agricultural $ 249,681 $ 232,602
Real Estate-Mortgage 500,360 371,974
Real Estate-Construction 28,779 28,427
Installment and other 157,341 154,713
Unearned Income (6,889) (7,354)
------- -------
TOTAL $ 929,272 $ 780,362
======== =======
Loans Held for Sale
Program Loans $ 176,064 $ 114,462
Loans Originated for Sale 18,895 20,528
------ ------
TOTAL $ 194,959 $ 134,990
======= =======
LOANS HELD FOR SALE
Loans held for sale generally represent mortgage loans the Company has
either purchased, through its wholesale division, or originated with the intent
to sell or securitize and are carried at the lower of aggregate cost or
estimated market value. Through its three retail loan origination platforms, the
Company originates high loan-to-value (LTV) debt consolidation and other junior
lien mortgage loans on a nationwide level. These loans are expected to either be
securitized by the Company or sold to independent third parties within 90-180
days.
The Company announced on May 11, 1998, that it had discontinued its
participation in a whole loan purchasing program with a non-affiliated seller.
The Company had participated in this program since the first quarter of 1994. As
a result of discontinuing this program, the Company's average balance of loans
held for sale is expected to be less than originally forecasted, primarily in
the third and fourth quarter, but also for the months of May and June. In
addition, servicing volume increases will not be as great as was expected. The
Company has estimated that the impact of these events on 1998 earnings per share
will be a decrease of $0.30 per share to $0.40 per share, or 11-15% of its SNL
I/B/E/S consensus estimate.
The Company's origination and acquisition of loans to be securitized or
sold is expected to continue to have a positive impact on the Company's
operating results. However, this increased return is not achieved without a
degree of risk of loss to the Company. Such risks include credit risk related to
the quality of the underlying loan and the borrower's financial capability to
repay the loan, market risk related to the continued attractiveness of the loan
product to both borrowers and end-investors, and interest rate risk related to
potential changes in interest rates and the resulting repricing of both
financial assets and liabilities. The Company seeks to manage this risk by
continuously improving policies and procedures designed to reduce the risk of
loss to a level commensurate with the return being earned on the Company's
investment.
In addition to continuously focusing on improving policies and procedures
in this area, management also utilizes its asset-backed securitization program
to mitigate the risk of loss. By securitizing originated and purchased junior
lien mortgage loans, the Company effectively removes these loans from its
balance sheet by creating an investment security or securities, supported by the
cash flows generated by these loans, and selling the resulting security or
securities to independent third parties. As part of this process, the Company
provides credit enhancement, in the form of overcollateralization, with respect
to the investment security or securities created. As a result, the Company does
maintain a certain level of credit risk and interest rate risk related to these
loans.
During the first two quarters of 1998, the Company originated $225
million and purchased $408 million in loans held for sale and sold $581 million
during the same period. This compares to originations of $58 million, purchases
of $302 million, and sales of $344 million during the first two quarters of
1997.
On June 12, 1998, the Company sold approximately $87.9 million of junior
lien mortgage loans held for sale through an asset-backed securitization
transaction. As a result, the Company recorded a retained interest of
approximately $11.8 million. The amount recorded as retained interest is
computed by estimating the future cash flows of the loans and giving
consideration to certain assumptions regarding the performance of the underlying
collateral loans. The three most significant assumptions used in this valuation
process include: (1) prepayment rates, the rates at which borrowers will fully
repay loan balances in advance of established amortization periods; (2) default
rates, the rates at which collateral loans will become uncollectible; and (3)
discount rates, the rates used by management to discount the estimated future
cash flows such that the present value of those cash flows can be estimated. As
of June 30, 1998, the Company has completed three asset-backed securitization
transactions resulting in approximately $24.6 million, including accrued
interest, being recorded in Other Assets representing the Company's retained
interests in these securitized loan pools. Significant assumptions used to
estimate the value of the retained interest include:
Prepayment rates Between 17-21% CPR
Default rates Approximating 10% cumulative losses
Weighted average discount
rates Between 12-14%
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. They consist primarily of FHA Title I home
improvement loans and debt consolidation loans secured by junior lien mortgages.
The unpaid principal balances of mortgage loans serviced for others was $1.264
billion and $1.253 billion at June 30, 1998 and December 31, 1997, respectively.
The unpaid principal balances of intercompany mortgage loans serviced was
$150,023,000 at June 30, 1998.
Mortgage loan servicing rights of $3,991,000 and $2,462,000 at June 30,
1998 and December 31, 1997, respectively, are included in other assets in the
accompanying balance sheets. Amortization of mortgage loan servicing rights
approximated $302,000 and $155,000 during the six months ended June 30, 1998 and
June 30, 1997, respectively.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the Company's risk elements for the
periods ending June 30, 1998 and December 31, 1997. The Company's coverage ratio
of nonperforming assets and potential problem loans continues to be strong at
90% as of June 30, 1998.
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
1998 1997
ALLOWANCE FOR LOAN LOSSES ---- ----
Balance at beginning of period $7,673 $7,281
Charge-offs (1,193) (1,899)
Recoveries 190 419
--- -------
Net charge-offs (1,003) (1,480)
Provision for loan possible losses 1,201 1,662
Balance of acquired subsidiary 809 210
--- ----------
Balance at end of period $8,680 $7,673
====== =======
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs 0.12% .20%
Provision for possible loan losses 0.14% .22%
Allowance for loan losses 1.03% 1.01%
June 30 December 31
1998 1997
NON-PERFORMING ASSETS ---- ----
Other real estate owned $1,930 $1,263
Non-accrual loans 5,041 3,758
Accruing loans past due 90 days
or more 2,223 1,858
Restructured loans 104 331
-------- --------
Total Non-performing Assets $9,298 $7,210
POTENTIAL PROBLEM LOANS $381 $204
AS A PERCENT OF NON-PERFORMING ASSETS
AND POTENTIAL PROBLEM LOANS
Allowance for loan losses 89.68% 103.49%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AS A PERCENT OF AVERAGE TOTAL LOANS 0.26% 0.25%
INTEREST RATE SENSITIVITY AND LIQUIDITY
Interest Rate Sensitivity: The Company manages its liquidity position to
reduce interest rate risk, which is the susceptibility of assets and liabilities
to declines in value as a result of changes in general market interest rates.
The Company seeks to reduce the risk through asset and liability management,
where the goal is to optimize the balance between earnings and interest rate
risk. The Company measures interest rate risk through interest sensitivity gap
analysis as illustrated in the following table. At June 30, 1998, the one year
period shows a negative gap (liability sensitive) of $356 million. This analysis
is a "static gap" presentation and movements in deposit rates offered by City
National and Del Amo 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 banking divisions, and is based
upon historical experience with their individual markets and customers.
Management expects to continue the same pricing methodology in response to
market rate changes; however, management adjustments may change as customer
preferences, competitive market conditions, liquidity, and loan growth change.
Also presented in the management adjustment line are loan prepayment
assumptions, which may differ from the related contractual terms of the loans.
These balances have been distributed over the four periods to reflect those
loans that are expected to be repaid in full prior to their maturity date. After
management adjustments, the table shows a negative gap in the one-year period of
$90 million. A negative gap position is advantageous when interest rates are
falling because interest-bearing liabilities are being repriced at lower rates
and in greater volume, which has a positive effect on net interest income.
However, when interest rates are rising, this position produces the converse
effect. Consequently, the Company has experienced a slight decline in its net
interest margin during the past two years and is somewhat vulnerable to a rapid
rise in interest rates in 1998. 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.
INTEREST RATE SENSITIVITY GAPS
(in thousands)
1 to 3 3 to 12 1 to 5 Over 5
MO. MO. YRS. YRS. Total
----------------------------------------------------
ASSETS
Gross loans $ 227,195 $ 128,378 $443,930 $ 131,617 $ 931,120
Loans held for sale 194,959 0 0 0 194,959
Securities 23,672 24,370 93,120 25,832 166,994
Federal funds sold 570 0 0 0 570
Retained interest in
securitized loans 24,053 0 0 0 24,053
----------------------------------------------------
Total interest earning
assets $ 470,449 $ 152,748 $537,050 $ 157,449 1,317,696
----------------------------------------------------
LIABILITIES
Savings and NOW Accounts $ 412,069 $ 0 $ 0 $ 0 $ 412,069
All other interest
bearing deposits 128,841 245,120 152,776 18,196 544,933
Short term and other
borrowings 108,474 0 0 0 108,474
Long term borrowings 84,795 0 0 0 84,795
Trust preferred securities 0 0 0 30,000 30,000
----------------------------------------------------
Total interest bearing
liabilities $ 734,179 $ 245,120 $152,776 $ 48,196 $1,180,271
----------------------------------------------------
Interest sensitivity gap ($263,730) ($92,372) $384,274 $ 109,253 $ 137,425
----------------------------------------------------
Cumulative sensitivity gap ($263,730) ($356,102) $ 28,172 $ 137,425
====================================================
Management adjustments $ 336,534 ($70,455)($240,187) ($25,892)
Cumulative management
adjusted gap $ 72,804 ($90,023) $ 54,064 $ 137,425
====================================================
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.
In addition to the interest rate sensitivity gap analysis, the Company
performs an earnings sensitivity analysis to identify the impact of changes in
interest rates on its net interest income. Since the simulated gap analysis
incorporates management assumptions as noted in the previous gap analysis
discussion, actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
The Company's policy objective is to avoid negative fluctuations in net
interest income of 10% within a 12-month period. As of June 30, 1998, the
Company had the following estimated earnings sensitivity profile:
Immediate Change in Rates
-------------------------
Pretax Earnings Changes + 200 bp - 200 bp
($41,000) $41,000
Based on the results of the simulation model as of June 30, 1998, the
Company would expect a decrease in net interest income of $21,000 and an
increase in net interest income of $21,000 if interest rates gradually increase
or decrease, respectively, from current rates by 100 basis points over a
12-month period.
Liquidity: Although management is comfortable with its liquidity position,
it recognizes the need to pursue additional liquidity sources in an effort to
reduce the Company's reliance on funding received from the Federal Home Loan
Bank.
In the fourth quarter of 1997, a New York investment bank committed to
issue up to $100 million of the Company's certificates of deposit. The
activation of this commitment is solely at the discretion of the Company. The
certificates of deposit could be issued in maturities up to five years at a rate
equal to a comparable treasury maturity plus a market based spread. At June 30,
1998, $2 million of the certificates of deposit had been sold under this
commitment at an average rate and term of approximately 5.70% and two years,
respectively. There can be no assurance that the Company will issue additional
certificates of deposit pursuant to this arrangement.
Additionally, the Company has been successful in utilizing the capital
markets as an additional source of liquidity. Through the Company's asset-backed
securitization program and through the Company's issuance of Trust Preferred
Securities, the Company has been able to diversify its available funding
sources. Sales of the Company's junior lien mortgage loans to independent third
parties have also provided the Company with an additional source of liquidity.
Management seeks to maintain adequate liquidity to generate sufficient
cash flow to fund the Company's operations on a timely basis, to continue its
dividend distribution to shareholders, and to manage its liquidity position to
provide for continued asset growth. The Company does not have a high
concentration of volatile funds and all such funds are invested in assets of
comparable maturity. Management is not aware of any trends, demands, commitments
or uncertainties that have resulted or are reasonably likely to result in
material changes in liquidity.
The Company's cash and cash equivalents, represented by cash, due from
banks and federal funds sold, are a product of its operating, investing and
financing activities. These activities are set forth in the Company's
Consolidated Statements of Cash Flows included elsewhere herein. Cash was used
from operating activities in the first six months of 1998 and 1997 due to cash
outlays for loans originated for sale and purchases of loans held for sale. Net
cash was used in investing activities for both periods presented which is
indicative of the Company's net increases in loan volume and purchases of
securities available for sale. Cash was provided by financing activities during
each period, as a result of net increases in deposits and long-term borrowings,
and the issuance of Trust Preferred Securities in March 1998.
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, 1998, the
regulatory minimum ratio of qualified total capital to risk-weighted assets
(including certain off-balance-sheet items, such as standby letters of credit)
is 8 percent. At least half of the total capital is to be comprised of "Tier 1
capital", or the Company's common stockholders' equity, and minority interest in
consolidated subsidiary, net of intangibles. The remainder ("Tier 2 capital")
may consist of certain other prescribed instruments and a limited amount of loan
loss reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier 1 capital to quarterly average tangible assets) guidelines for bank
holding companies. These guidelines provide for a minimum ratio of 3 percent for
bank holding companies that meet certain specified criteria, including that they
have the highest regulatory rating. All other bank holding companies will be
required to maintain a leverage ratio of 3 percent plus an additional cushion of
a least 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
The following table presents comparative capital ratios and related dollar
amounts of capital for the Company, including minimal amounts required by the
Company's regulatory authorities:
Dollars in Thousands
June 30 December 31
1998 1997
----- ----
Capital Components
Tier 1 risk-based capital $ 119,094 $ 82,842
Total risk-based capital 127,774 90,515
Capital Ratios
Tier 1 risk-based 9.37% 9.16%
Total risk-based 10.05 10.00
Leverage 8.55 6.49
Regulatory Minimum
Tier 1 risk-based (dollar/ratio) $50,863/4.00% $36,191/4.00%
Total risk-based (dollar/ratio) 101,727/8.00 72,381/8.00
Leverage (dollar/ratio) 55,712/4.00 51,094/4.00
Actual capital ratios noted above reflect management's emphasis on strong
asset quality and a history of retained net income. However, the asset-backed
securitization program undertaken by the Company to generate future earnings
does, in the short-term, negatively impact the aforementioned ratios. As of June
30, 1998, the Company is required to provide equity capital against
approximately $180 million of off-balance sheet items. The unpaid principal
balance of securitized loan pools approximated $180 million at June 30, 1998.
Under the low-level recourse rules required by the Company's regulatory
authorities, the Company, as a result of maintaining a retained interest in its
securitized loan pools, is required to include the lesser of: (1) the product of
the recorded balance of its retained interests multiplied by a factor of 12.5,
or (2) the unpaid principal balance of the securitized loans in its
risk-weighted assets when computing capital ratios. Thus, actual capital ratios
are less than they would have been had the Company not maintained a retained
interest in its securitization transactions or had the Company sold those loans
to independent third parties separate from a securitization transaction.
However, as evidenced above, the Company's actual capital ratios
sufficiently exceed minimum levels of capital as required by the Company's
regulatory authorities and management is committed to maintaining its capital
ratios at such levels. Through continued improvement in operating results, in
part from future earnings to be derived from completed securitization
transactions, continued emphasis on high asset quality, and effective management
of risk, management expects that the Company will continue to maintain its
capital position. Doing so enables the Company to continue its pursuit of
strategic acquisitions and other growth opportunities which, when transacted,
further enhance the overall capital position of the Company.
As more fully discussed in Note D to the financial statements, the
Company, pursuant to rulings released by the Federal Reserve Board in October
1996, has included its Trust Preferred Securities in its Tier I capital
calculations.
IMPACT OF THE YEAR 2000
The Company's Year 2000 project plan was initiated throughout the Company
in January 1997. The project is sponsored and closely monitored by both senior
and executive level management. The Office of the Comptroller of the Currency
(OCC) and the Federal Financial Institutions Examination Council recommends
that all
systems reprogramming efforts be completed by December 31, 1998 to allow for
sufficient testing and implementation. Management intends to meet or exceed this
recommendation. Plan components are being executed in accordance with guidelines
that have been mandated by the OCC. The Company's approach to Year 2000
compliance encompasses five industry standard phases:
1. Awareness Phase
2. Assessment Phase
3. Renovation Phase
4. Validation Phase
5. Implementation Phase
The Company has completed the Awareness, Assessment, and Renovation phases of
the project. Currently, the Company is approximately 70% complete in the
validation phase and has recently begun the implementation phase in certain
areas.
Having begun the implementation phase, management believes that the
risks affecting the Company associated with the Year 2000 issue should be
minimal. The majority of the critical applications affecting the Company have
been addressed and management believes that solid solutions have been
implemented to address areas of concern. The sum of the costs incurred to-date
and the estimated costs remaining to be incurred is not expected to be material
to the consolidated financial statements.
NET INTEREST INCOME
Net interest income, on a fully federal tax-equivalent basis,
improved from the second quarter of 1997 to the second quarter of 1998 by
approximately $1,176,000 due to an increase in net earning assets. Net yield on
earning assets decreased between the respective periods from 5.0% to 4.71%.
Earning asset yields increased 10 basis points (100 basis points equal one
percent) to 9.06%, and the cost of interest-bearing liabilities increased 45
basis points to 5.06%. The $2,039,000 decrease in net interest income due to a
change in the rate, as shown in the following table, was coupled with a
$3,215,000 increase in net interest income due to a change in the volume. The
major component of this favorable volume change was increased average loans held
for sale.
Net interest income, on a fully federal tax-equivalent basis,
improved from the six months ended June 30, 1997 to the six months ended June
30, 1998 by approximately $2,942,000 due to an increase in net earning assets.
Net yield on earning assets decreased between periods from 4.85% to 4.69%.
Earning asset yields increased 25 basis points (100 basis points equal one
percent) to 8.95%, and the cost of interest-bearing liabilities increased 42
basis points to 4.87%. The $1,283,000 decrease in net interest income due to a
change in the rate, as shown in the following table, was coupled with a
$4,225,000 increase in net interest income due to a change in the volume. The
major component of this favorable volume change was the increased average
balance of loans held for sale.
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Quarter Ended
June 30
1998 1997
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------
EARNING ASSETS:
Loans (1)
Commercial and industrial $243,965 $5,651 9.27% $235,324 $5,337 9.07%
Real estate 495,925 10,622 8.57% 365,717 7,833 8.57%
Consumer obligations 146,142 3,676 10.06% 147,059 3,663 9.96%
-------------------------------------------------------
Total loans 886,032 19,949 9.01% 748,100 16,833 9.00%
Loans held for sale 216,956 5,847 10.78% 183,026 5,074 11.09%
Securities
Taxable 129,170 2,033 6.30% 146,622 2,289 6.24%
Tax-exempt (2) 31,778 640 8.06% 35,022 740 8.45%
-------------------------------------------------------
Total securities 160,948 2,673 6.64% 181,644 3,029 6.67%
Retained interest in
securitized loans 12,644 493 15.60% 0 0 0.00%
Federal funds sold 5,997 79 5.27% 189 3 6.35%
-------------------------------------------------------
Total earning assets 1,282,577 29,041 9.06% 1,112,959 24,939 8.96%
Cash and due from banks 31,830 33,461
Bank premises and equipment 47,276 31,304
Other assets 74,667 19,087
Less: allowance for
possible loan losses (8,355) (7,665)
-------------------------------------------------------
Total assets $1,427,995 $1,189,146
=======================================================
INTEREST-BEARING LIABILITIES:
Demand deposits $162,804 $1,365 3.35% $123,982 $ 820 2.65%
Savings deposits 234,009 1,799 3.08% 221,982 1,851 3.34%
Time deposits 518,005 7,352 5.68% 410,218 5,476 5.34%
Short-term borrowings 101,117 1,500 5.93% 163,039 2,217 5.44%
Long-term debt 86,335 1,934 8.96% 36,927 660 7.15%
-------------------------------------------------------
Total interest-bearing
liabilities 1,102,207 13,950 5.06% 956,148 11,024 4.61%
Demand deposits 151,698 135,484
Other liabilities 22,540 11,631
Trust preferred securities 30,000 0
Stockholders' equity 121,487 85,883
-------------------------------------------------------
Total liabilities and
Stockholders' equity $1,427,995 $1,189,146
=======================================================
Net interest income $15,091 $13,915
=======================================================
Net yield on earning
assets 4.71% 5.00%
=======================================================
(1) For purposes of this table, non-accruing loans have been included in average
balances and loan fees, which are immaterial, have been included in
interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35% in 1998 and 34% in 1997.
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Quarter Ended
June 30
1998 VS. 1997
Increase (Decrease)
Due to Change In:
Volume Rate Net
----------------------------------------
INTEREST INCOME FROM:
Loans
Commercial and Industrial $ 199 $ 115 $ 314
Real estate 2,789 0 2,789
Consumer obligations (107) 120 13
----------------------------------------
Total loans 2,881 235 3,116
Loans held for sale 1,655 (882) 773
Investment securities
Taxable (379) 123 (256)
Tax-exempt (1) (66) (34) (100)
----------------------------------------
Total investment securities (445) 89 (356)
Retained interest in securitized loans 493 0 493
Federal funds sold 80 (4) 76
----------------------------------------
Total interest-earning assets $4,664 $(562) $ 4,102
INTEREST EXPENSE ON:
Demand deposits 294 251 545
Savings deposits 452 (504) (52)
Time deposits 1,512 364 1,876
Short-term borrowings (1,880) 1,163 (717)
Long-term debt 1,071 203 1,274
----------------------------------------
Total interest-bearing liabilities $ 1,449 $ 1,477 $ 2,926
----------------------------------------
NET INTEREST INCOME $ 3,215 $ (2,039) $ 1,176
========================================
(1) Fully federal taxable equivalent using a tax rate of 35% in 1998 and 34%
in 1997.
The change in interest due to both rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
Six Months Ended
June 30
1998 1997
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------
EARNING ASSETS:
Loans (1)
Commercial and industrial $240,960 $11,054 9.17% $233,078 $10,454 8.97%
Real estate 455,309 19,013 8.35% 360,274 15,165 8.42%
Consumer obligations 144,098 7,221 9.95% 146,010 7,199 9.86%
-------------------------------------------------------
Total loans 841,367 37,288 8.86% 739,362 32,818 8.88%
Loans held for sale 216,978 11,694 10.78% 148,707 7,745 10.42%
Securities
Taxable 130,390 4,133 6.34% 143,922 4,456 6.19%
Tax-exempt (2) 31,684 1,274 8.04% 35,525 1,476 8.31%
-------------------------------------------------------
Total securities 162,074 5,407 6.67% 179,447 5,932 6.61%
Retained interest in
securitized loans 8,593 67 15.66% 0 0 0.00%
Federal funds sold 4,121 110 5.34% 2,969 59 3.97%
-------------------------------------------------------
Total earning assets 1,233,133 55,172 8.95% 1,070,485 46,554 8.70%
Cash and due from banks 31,297 35,699
Bank premises and equipment 44,232 30,880
Other assets 71,499 18,267
Less: allowance for
possible loan losses (8,623) (7,619)
-------------------------------------------------------
Total assets $1,371,538 $1,147,712
=======================================================
INTEREST-BEARING LIABILITIES:
Demand deposits $156,659 $2,611 3.33% $120,983 $1,717 2.84%
Savings deposits 225,992 3,390 3.00% 221,749 3,478 3.14%
Time deposits 487,876 13,373 5.48% 407,715 10,656 5.23%
Short-term borrowings 119,408 3,475 5.82% 137,448 3,479 5.06%
Long-term debt 88,313 3,409 7.72% 37,504 1,252 6.68%
-------------------------------------------------------
Total interest-bearing
liabilities 1,078,248 26,258 4.87% 925,399 20,582 4.45%
Demand deposits 140,027 126,440
Other liabilities 22,785 10,701
Trust preferred securities 15,249 0
Stockholders' equity 115,229 85,172
-------------------------------------------------------
Total liabilities and
Stockholders' equity $1,371,538 $1,147,712
=======================================================
Net interest income $ 28,914 $ 25,972
=======================================================
Net yield on earning
assets 4.69% 4.85%
=======================================================
(1) For purposes of this table, non-accruing loans have been included in average
balances and loan fees, which are immaterial, have been included in
interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35% in 1998 and 34% in 1997.
RATE VOLUME ANALYSIS OF
CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
Six Months Ended
June 30
1998 VS. 1997
Increase (Decrease)
Due to Change In:
Volume Rate Net
----------------------------------------
INTEREST INCOME FROM:
Loans
Commercial and Industrial $ 358 $ 242 $ 600
Real estate 4,203 (355) 3,848
Consumer obligations (99) 121 22
----------------------------------------
Total loans 4,462 8 4,470
Loans held for sale 3,671 278 3,949
Investment securities
Taxable (596) 273 (323)
Tax-exempt (1) (156) (46) (202)
----------------------------------------
Total investment securities (752) 227 (525)
Retained interest in securitized loans 673 0 673
Federal funds sold 27 24 51
----------------------------------------
Total interest-earning assets $ 8,081 $ 537 $ 8,618
INTEREST EXPENSE ON:
Demand deposits 562 332 894
Savings deposits 158 (246) (88)
Time deposits 2,177 540 2,717
Short-term borrowings (975) 971 (4)
Long-term debt 1,934 223 2,157
----------------------------------------
Total interest-bearing liabilities $ 3,856 $ 1,820 $ 5,676
----------------------------------------
NET INTEREST INCOME $ 4,225 $ (1,283) $ 2,942
========================================
(2)Fully federal taxable equivalent using a tax rate of 35% in 1998 and 34% in
1997.
The change in interest due to both rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Item 3. Quantitative and
Qualitative
Disclosures and Market
Risk Not Applicable
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior
Securities- None
Item 4. Submission of Matters to
a Vote of Security
Holders-
On April 28, 1998, the Company held its Annual Meeting of Shareholders. Two
matters were submitted to the shareholders for consideration:
1. Election of five Class III Directors to the Board of Directors.
2. Ratification of the Board of Directors' appointment of Ernst &
Young LLP as auditors for the Company for 1998.
The vote tabulation for each matter was as follows:
1. Election of five Class III Directors to the Board of Directors:
Authority
Director For With held Abstain
-------- --- --------- -------
D. K. Cales 4,412,083 13,466 0
Robert D. Fisher 4,409,163 16,386 0
Jay Goldman 4,411,214 14,335 0
C. Dallas Kayser 4,406,458 19,091 0
William M. Frazier 4,412,133 13,416 0
Continuing directors whose terms did not expire at the annual meeting were:
Samuel M. Bowling, Steven J. Day, Jack E. Fruth, Otis L. O'Conner, Bob F.
Richmond, Leon K. Oxley, Carlin K. Harmon, Mark Schaul, Van R. Thorn, C. Scott
Briers, Hugh R. Clonch, David E. Haden.
2. Ratification of appointment of Ernst & Young LLP:
For Against Abstain
--- ------- -------
4,410,375 1,945 13,229
Item 5. Other Information- On June 1, 1998, the Company and SunTrust
Bank, Atlanta ("SunTrust"), executed a
second supplement (the "Supplement") to
the Amended and Restated Rights
Agreement, providing that SunTrust was to
serve as the rights agent under the
company's Amended and Restated Rights
Agreement dated as of May 7, 1991. A copy
of the Supplement is attached as an
exhibit hereto.
The Company and Horizon Bancorp, Inc.
("Horizon") signed a definitive Agreement
and Plan of Reorganization (the
"Agreement") to merge on August 7, 1998.
Upon the completion of the merger,
expected to occur during the first
quarter of 1999, Horizon's five bank
subsidiaries will be merged into City
Holding's commercial banking subsidiary.
A copy of the press release discussing
the terms of the Agreement is attached as
an exhibit hereto. Also attached are a
copy of the Agreement and a copy of a
Stock Option Agreement granting Horizon
an option, exercisable under certain
conditions, to purchase up to 19.9% of
outstanding shares of common stock
of the Company.
Item 6. Exhibits and Reports on 8-K
Exhibit
Number Exhibit
------- -------
11 Computation of Earnings per Share
27 Financial Data Schedule for the six
months ended June 30, 1998
99.1 Second Supplement to Amended and
Restated Rights Agreement
99.2 Press Release issued August 7, 1998
99.3 Agreement and Plan of Reorganization
between City Holding Company and
Horizon Bancorp, Inc., dated August
7, 1998
99.4 Stock Option Agreement between City
Holding Company and Horizon Bancorp,
Inc., dated August 7, 1998
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITY HOLDING COMPANY
August 11, 1998 By /s/ Michael D. Dean
-----------------------
Michael D. Dean
Senior Vice President - Finance
Principal Accounting Officer and
Duly Authorized Officer
EXHIBIT INDEX
Exhibit Index
- -------------
11 Computation of Earnings per Share
27 Financial Data Schedule for the Six Months
Ending June 30, 1998
99.1 Second Supplement to Amended and Restated Rights
Agreement
99.2 Press Release issued August 7, 1998
99.3 Agreement and Plan of Reorganization between
City Holding Company and Horizon Bancorp, Inc.,
dated August 7, 1998
99.4 Stock Option Agreement between City Holding
Company and Horizon Bancorp, Inc., dated
August 7, 1998