SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number March 31, 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 May 5, 1996: Common Stock, $2.50 Par Value -- 5,078,406 shares THIS REPORT CONTAINS 111 PAGES. EXHIBIT INDEX IS LOCATED ON PAGE 25 . PAGE 1 OF 111
Index City Holding Company and Subsidiaries PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets -- March 31, 1996 (unaudited) and December 31, 1995 Consolidated Statements of Income (unaudited) -- Three months ended March 31, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity (unaudited) -- Three months ended March 31, 1996 and 1995 Consolidated Statements of Cash Flows (unaudited) --Three months ended March 31, 1996 and 1995 Notes to Consolidated Financial Statements (unaudited) -- March 31, 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. xhibits and Reports on Form 8-K Signatures PAGE 2 OF 111
PART I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> Item I. MARCH 31 DECEMBER 31 1996 1995 ------------ ------------- <S> <C> <C> ASSETS (unaudited) Cash and due from banks $ 30,933,000 $ 28,460,000 Securities available for sale, at fair value 121,475,000 143,649,000 Investment securities (approximate market values: March 31, 1996--$41,911,000; December 31, 1995--$52,183,000) 40,964,000 50,719,000 Loans: Gross loans 661,542,000 664,886,000 Unearned income (7,576,000) (8,125,000) Allowance for possible loan losses (6,633,000) (6,566,000) --------- --------- NET LOANS 647,333,000 650,195,000 Loans held for sale 165,262,000 122,222,000 Bank premises and equipment 25,905,000 23,651,000 Accrued interest receivable 8,467,000 8,031,000 Other assets 14,672,000 14,042,000 ------------ ----------- TOTAL ASSETS $ 1,055,011,000 $ 1,040,969,000 ============= ============= LIABILITIES Deposits: Noninterest-bearing $ 122,196,000 $ 116,992,000 Interest-bearing 690,601,000 680,423,000 ----------- ----------- TOTAL DEPOSITS 812,797,000 797,415,000 Short-term borrowings 134,440,000 141,309,000 Long-term debt 23,200,000 20,000,000 Other liabilities 10,302,000 9,106,000 ------------- ------------ TOTAL LIABILITIES 980,739,000 967,830,000 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 March 31, 1996 and December 31, 1995, including 13,640 shares in treasury at March 31, 1996 and December 31, 1995. 12,730,000 12,730,000 Capital surplus 25,942,000 25,942,000 Retained earnings 36,031,000 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 (71,000) 395,000 -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 74,272,000 73,139,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,055,011,000 $ 1,040,969,000 ============== ============== </TABLE> See notes to consolidated financial statements PAGE 3 OF 111
CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTH PERIOD ENDED March 31 1996 1995 ---------- ---------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 18,303,000 $ 12,981,000 Interest and dividends on securities: Taxable 2,253,000 3,206,000 Tax-exempt 532,000 589,000 Other interest income 5,000 11,000 ------------ ----------- TOTAL INTEREST INCOME 21,093,000 16,787,000 INTEREST EXPENSE Interest on deposits 7,233,000 6,094,000 Interest on short-term borrowings 2,153,000 856,000 Interest on long-term debt 297,000 130,000 ------------ ----------- TOTAL INTEREST EXPENSE 9,683,000 7,080,000 NET INTEREST INCOME 11,410,000 9,707,000 PROVISION FOR POSSIBLE LOAN LOSSES 271,000 201,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 11,139,000 9,506,000 OTHER INCOME Securities gains(losses) 61,000 3,000 Service charges 839,000 708,000 Other 1,013,000 538,000 ----------- ---------- TOTAL OTHER INCOME 1,913,000 1,249,000 OTHER EXPENSES Salaries and employee benefits 5,254,000 4,036,000 Net occupancy expense 1,370,000 1,245,000 Other 2,887,000 2,521,000 ----------- ----------- TOTAL OTHER EXPENSES 9,511,000 7,802,000 INCOME BEFORE INCOME TAXES 3,541,000 2,953,000 INCOME TAXES 1,080,000 913,000 ----------- ----------- NET INCOME $ 2,461,000 $ 2,040,000 =========== =========== Net income per common share $ .48 $ .40 =========== =========== Average common shares outstanding 5,078,406 5,167,065 =========== =========== </TABLE> See notes to consolidated financial statements PAGE 4 OF 111
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES Three Months Ended March 31, 1996 <TABLE> <CAPTION> NET UNREALIZED GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY ------ ------- -------- -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1995 $12,730,000 $25,942,000 $34,432,000 $395,000 (360,000) $73,139,000 Net income 2,461,000 2,461,000 Cash dividends declared ($.17/share) (862,000) (862,000) Change in unrealized gain/(loss), net of income taxes of $311,000 (466,000) (466,000) Balances at March 31, 1996 $12,730,000 $25,942,000 $36,031,000 ($ 71,000) ($360,000) $74,272,000 ---------- ----------- ----------- ----------- ---------- ----------- <CAPTION> NET UNREALIZED Three Months Ended March 31, 1995 GAIN/(LOSS) SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY ------ ------- -------- -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1994 $11,753,000 $18,366,000 $39,075,000 ($2,863,000) ($ 32,000) $66,299,000 Net income 2,040,000 2,040,000 Cash dividends declared ($.145/share) (599,000) (599,000) Cash dividends of acquired subsidiary (75,000) (75,000) Changes in net unrealized gain/(loss), net of income taxes of $878,000 1,317,000 1,317,000 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 March 31, 1995 $11,753,000 $18,366,000 $40,441,000 $(1,546,000) ($ 85,000) $68,929,000 ----------- ----------- ----------- ------------ ----------- ----------- </TABLE> See notes to consolidated financial statements PAGE 5 OF 111
CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTH PERIOD ENDED MARCH 31 1996 1995 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net Income $2,461,000 $2,040,000 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization 220,000 224,000 Provision for depreciation 743,000 584,000 Provision for loan losses 271,000 201,000 Realized securities gains (61,000) (3,000) Loan originated for sale (25,708,000) (9,114,000) Purchases of loans held for sale (219,599,000) (43,448,000) Proceeds from loans sold 202,535,000 37,998,000 Realized gains on loans sold (268,000) (42,000) Minority interest in income of subsidiary 0 0 (Increase) decrease in accrued interest receivable (436,000) 261,000 Increase in other assets (482,000) (612,000) Increase (decrease) in other liabilities 1,196,000 (857,000) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (39,128,000) (12,768,000) INVESTING ACTIVITIES Proceeds from sales of securities available for sale 17,859,000 10,533,000 Proceeds from maturities of securities available for sale 20,270,000 2,325,000 Purchases of securities available for sale (16,581,000) (11,292,000) Proceeds from sales of securities 0 3,000,000 Proceeds from maturities of securities 9,608,000 5,024,000 Purchases of securities 0 (3,239,000) Net decrease (increase) in loans 2,591,000 (25,633,000) Sale of foreclosed properties 0 7,000 Purchases of premises and equipment (2,997,000) (1,458,000) ------------- ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 30,750,000 (20,733,000) FINANCING ACTIVITIES Net increase in noninterest bearing deposits 5,204,000 1,057,000 Net increase in interest-bearing deposits 10,178,000 3,143,000 Net (decrease) increase in short-term borrowings (6,869,000) 24,141,000 Proceeds from long-term-debt 3,200,000 2,150,000 Repayment of long-term debt 0 (4,200,000) Purchases of treasury stock 0 (65,000) Proceeds from sales of treasury stock 0 12,000 Cash dividends paid (862,000) (772,000) ------------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 10,851,000 25,466,000 ------------ ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 2,473,000 (8,035,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,460,000 34,284,000 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,933,000 $26,249,000 ============ =========== </TABLE> See notes to consolidated financial statements PAGE 6 OF 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 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 three months ended March 31, 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 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 three months ended March 31, 1996, of 30.50% 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 7 OF 111
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 $68,029,000 at March 31, 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 $3,567,000, have historically expired unfunded. NOTE D - STOCKHOLDERS' EQUITY The Company maintains an Open Market Stock Purchase Plan (the Plan) whereby the Board of Directors have allocated $5 million to be used to purchase shares of the Company's common stock through May 1996. The Plan as of March 31, 1996 has 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 8 OF 111
NOTE F - LONG-TERM BORROWINGS Long-term debt consists of a $20,000,000 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 (7.1875% at March 31, 1996) due on June 30, 1996. As of March 31, 1996, the outstanding balance was equal to $18,200,000. 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. During 1995, a subsidiary obtained long-term financing from the Federal Home Loan Bank (FHLB) in the form of a Long-Term LIBOR Floater with maximum available credit of $5 million. At March 31, 1996, $5 million was outstanding with an interest rate of 5.4185%. The agreement matures in December, 1998. PAGE 9 OF 111
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS FINANCIAL POSITION Total assets increased $14.0 million or approximately 1.3% during the first three months of 1996. Net loans decreased $2.9 million or 0.4%. Loans held for sale, consisting primarily of loans received through the Company's participation in a short-term whole loan bulk purchasing program, increased $43 million or 35.2%. As of March 31, 1996, program loans owned by the Company had an outstanding principal balance of approximately $139.8 million. See LOAN PORTFOLIO. The Company earned interest income of approximately $3,230,000 on program loans during the first quarter of 1996. See NET INTEREST INCOME. The increase in loans held for sale was funded primarily by the various securities sales, calls and maturities of $47.7 million, plus the $15.4 million increase in deposits. Net stockholders' equity increased $1.1 million during the first three months of 1996 representing the Company's retained net profits. QUARTER ENDED MARCH 31, 1996, COMPARED TO QUARTER ENDED MARCH 31, 1995. The Company reported net income of $2,461,000 for the three months ended March 31, 1996 compared to net income of $2,040,000 for the quarter ended March 31, 1995. This increase of $421,000, or 20.6%, was primarily due to an increase of $1,703,000 in the Company's net interest income during the first quarter of 1996 as compared to the same period of 1995. However, the increase in net interest income did not translate into a corresponding PAGE 10 OF 111
increase in net income because of the level of non-interest expense associated with the Company's expansion of its Operations Center, which increased $1,709,000 or 21.9% during the first quarter of 1996 as compared to the same period of 1995. See NET INTEREST INCOME. Earnings per share were $.48 and $.40 for the first quarter of 1996 and 1995, respectively. Total other income, excluding securities transactions, increased $606,000 or 48.6% primarily due to fees generated from increased loans held for sale volume and return item fees on deposits collected through the ordinary course of business. SELECTED RATIOS The return on average assets (ROA) for the first quarter of 1996 was .93% compared to .92% in the first quarter of 1995. The return on average shareholder's equity (ROE) for the first quarter of 1996 was 13.24% compared to 12.38% ROE for the first quarter of 1995. The dividend payout ratio of 35.42% for the quarter ended March 31, 1996 represents a decrease of 2.29% from the dividend payout ratio of 36.25% for the quarter ended March 31, 1995. Since 1988, the Company has paid dividends on a quarterly basis, and expects to continue to do so in the future. PAGE 11 OF 111
LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: LOAN PORTFOLIO BY TYPE (Dollars in Thousands) March 31 December 31 1996 1995 -------- ------- Commercial, financial and agricultural $ 215,540 $ 214,304 Real Estate-Mortgage 277,702 277,608 Real Estate-Construction 26,175 27,240 Installment and other 142,125 145,734 Unearned Income (7,576) (8,125) --------- --------- TOTAL $ 653,966 $ 656,761 ========= ========= Loans Held for Sale Program loans $ 139,799 $ 101,843 Loans Originated for Sale 25,463 20,379 --------- --------- TOTAL $ 165,262 $ 122,222 ========= ========= The Company grants loans to customers generally within the market areas of its subsidiaries. Loans have been trending up significantly over the past two years primarily due to the Company's more active solicitation of commercial business, introduction of new loan products, and continued expansion. There have been no significant changes in the Company's loan policy or credit standards. The Company continues to shift its marketing efforts more towards direct loan business. There are no significant concentrations of credit and speculative or highly leveraged transactions are insignificant. Also, in order to increase the repricing frequency of the loan portfolio, the Company has significantly increased its portfolio of variable rate commercial and residential mortgage loans. PAGE 12 OF 111
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the Company's risk elements for the periods ending March 31, 1996 and December 31, 1995. The Company's coverage ratio of nonperforming assets and potential problem loans continues to be strong, at 119% as of March 31, 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 13 OF 111
RISK ELEMENTS (in thousands) <TABLE> <CAPTION> Three Months Ended Year Ended March 31 December 31 1996 1995 ---- ---- <S> <C> <C> ALLOWANCE FOR LOAN LOSSES Balance at beginning of period $6,566 $ 6,477 Charge-offs (260) (1,331) Recoveries 56 316 ------ ------- Net charge-offs (204) (1,015) Provision for loan possible losses 271 1,104 ------ ------ Balance at end of period $6,633 $6,566 ====== ====== AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs 0.03% 0.17% Provision for possible loan losses 0.04% 0.18% Allowance for loan losses 1.02% 1.08% March 31 December 31 1996 1995 ---- ---- NON -PERFORMING ASSETS Other real estate owned $1,038 $1,027 Non-accrual loans 2,703 2,525 Accruing loans past due 90 days or more 1,448 1,421 Restructured loans 139 141 ------ ------ Total Non-performing Assets $5,328 $5,114 POTENTIAL PROBLEM LOANS $264 $266 AS A PERCENT OF NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS Allowance for loan losses 118.62% 122.04% ACCRUING LOANS PAST DUE 90 DAYS OR MORE AS A PERCENT OF AVERAGE TOTAL LOANS 0.22% 0.23% </TABLE> PAGE 14 OF 111
LIQUIDITY AND INTEREST RATE SENSITIVITY The Company's cash and cash equivalents, represented by cash and due from banks and overnight federal funds sold, is a product of its operating, investing and financing activities. These activities are set forth in the City Holding Company Consolidated Statements of Cash Flows included elsewhere herein. Cash was used in operating activities in each period presented, primarily from loans originated for sale and purchase of loans held for sale. Net cash was used in investing activities during the first quarter of 1995 funding the Company's loan growth. Net cash was provided by investing activities during the first quarter of 1996 due primarily to maturing investment securities. The net cash provided by financing activities in the respective periods is a result of an increase in interest-bearing deposits. In 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 March 31, 1996, the one year period shows a negative gap (liability sensitive) of $254 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 15 OF 111
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 $51 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 16 OF 111
INTEREST RATE SENSITIVITY GAPS (in thousands) <TABLE> <CAPTION> 1 to 3 3 to 12 1 to 5 Over 5 Months Months Years Years Total ------ ------ ----- ----- ----- <S> <C> <C> <C> <C> <C> ASSETS Gross loans $167,189 $89,692 $316,357 $85,601 $658,839 Loans held for sale 165,262 0 0 0 165,262 Securities 33,380 19,604 71,607 37,848 162,439 -------- --------- --------- --------- -------- Total interest earning assets 365,831 109,296 387,964 123,449 986,540 -------- --------- --------- --------- -------- LIABILITIES Savings and NOW Accounts 324,472 0 0 0 324,472 All other interest bearing deposits 96,767 150,446 118,416 500 366,129 Short term and other borrowings 134,440 0 0 0 134,440 Long term borrowings 23,000 0 0 0 23,200 --------- --------- --------- ---------- -------- Total interest bearing liabilities $578,879 $ 150,446 $118,416 $ 500 $848,241 --------- --------- --------- --------- -------- Interest sensitivity gap ($213,048) ($ 41,150) $269,548 $122,949 $138,299 --------- --------- --------- --------- -------- Cumulative sensitivity gap ($213,048) ($254,198) $ 15,350 $138,299 ======== ======== ======= ======= Management adjustments $292,505 ($ 89,796) ($192,380) ($10,329) ------- ------- ------- ------ Cumulative management adjusted gap $ 79,457 ($ 51,489) $ 25,679 $138,299 ======== ======= ======= ======= </TABLE> 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 17 OF 111
CAPITAL RESOURCES As a bank holding company, City Holding Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In January 1989, the Federal Reserve published risk-based capital guidelines in final form which are applicable to bank holding companies. Such guidelines define items in the calculation of risk-weighted assets. At March 31, 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 18 OF 111
<TABLE> <CAPTION> Dollars in Thousands March 31 December 31 1996 1995 ---- ---- <S> <C> <C> <C> Capital Components Tier 1 risk-based capital $67,907 $66,260 Total risk-based capital 74,540 72,826 Capital Ratios Tier 1 risk-based 8.78% 8.87% Total risk-based 9.63 9.75 Leverage 6.42 6.45 Regulatory Minimum Tier 1 risk-based (dollar/ratio) $30,949/4.00% $29,888/4.00% Total risk-based (dollar/ratio) 61,898/8.00 59,776/8.00 Leverage (dollar/ratio) 31,734/3.00 30,801/3.00 </TABLE> 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. Earnings from subsidiary bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, subsidiary banks have the capability to upstream sufficient dividends to meet the cash requirements of the Company. NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, improved from the first quarter of 1995 to the first quarter of 1996 by approximately $1,674,000 due to an increase in net earning assets. Net yield on earning assets decreased between periods from 4.84% to PAGE 19 OF 111
4.70%, as earning asset yields increased 32 basis points (100 basis points equal one percent) to 8.59%, and the cost of interest-bearing liabilities increased 56 basis points to 4.49%. The $530,000 decrease in net interest income due to rate, as shown in the following table, was coupled with a $2,204 000 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. A significant part of the increase in net earning assets for the first quarter of 1996 is attributable to the Company's participation in a short-term, whole-loan bulk purchasing program. Under the program, the Company purchases from a third party whole loans secured by residential mortgages and 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 seller to repurchase or replace certain non-performing 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 credit support associated with the loans, the short duration of the Company's investment 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 $3,230,000 in interest income on program loans for the quarter ended March 31, 1996 compared to $395,000 in interest income for the same period in 1995. These loans are being funded through short-term borrowings which consist primarily of securities sold under agreement to repurchase. PAGE 20 OF 111
EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands) <TABLE> <CAPTION> Quarter Ended March 31 1996 1995 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS: Loans (1) Commercial and industrial $ 210,023 $4,853 9.24% $ 171,329 $3,832 8.95% Real estate 304,736 6,523 8.56 261,630 5,407 8.27 Consumer obligations 134,888 3,304 9.80 129,547 3,170 9.79 ----------------------------------------------------------------------------------- Total loans 649,647 14,680 9.04 562,506 12,409 8.82 Loans held for sale 161,246 3,623 8.99 25,894 572 8.84 Securities Taxable 145,355 2,253 6.20 195,128 3,206 6.57 Tax-exempt (2) 37,975 806 8.49 42,424 892 8.41 ---------------------------------------------------------------------------------- Total securities 183,330 3,059 6.67 237,552 4,098 6.90 Federal funds sold 396 5 5.05 810 11 5.43 ------------------------------------------------------------------------------------ Total earning assets 994,619 21,367 8.59 826,762 17,090 8.27 Cash and due from banks 29,147 25,016 Bank premises and equipment 23,880 21,540 Other assets 22,770 22,196 Less: allowance for possible loan losses (6,610) (6,417) -------------------------------------------------------------- Total assets $1,063,806 $889,097 ============================================================= INTEREST BEARING LIABILITIES Demand deposits $ 110,568 $ 760 2.75% $104,453 $ 774 2.96% Savings deposits 208,634 1,697 3.25 239,148 1,796 3.00 Time deposits 362,832 4,776 5.27 307,048 3,524 4.59 Short-term borrowings 159,436 2,153 5.40 62,263 856 5.50 Long-term debt 21,042 297 5.65 7,201 130 7.22 -------------------------------------------------------------------------------------- Total interest-bearing liabilities 862,512 9,683 4.49 720,113 7,080 3.93 Demand deposits 117,968 94,401 Other liabilities 8,988 8,650 Stockholders' equity 74,338 65,933 ------------------------------------------------------------- Total liabilities and stockholders' equity $1,063,806 $889,097 ============================================================= Net interest income $11,684 $10,010 ============================================================================ Net yield on earning assets 4.70% 4.84% ======================================================================================== </TABLE> (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 21 OF 111
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) <TABLE> <CAPTION> Quarter Ended March 31 1996 VS. 1995 Increase (Decrease) Due to Change In: INTEREST INCOME FROM: Volume Rate Net ------------------------------------------------- <S> <C> <C> <C> Loans Commercial and industrial $ 890 $ 131 $ 1,021 Real estate 917 199 1,116 Consumer obligations 131 3 134 ------------------------------------------------- Total loans 1,938 333 2,271 Loans held for sale 3,041 9 3,050 Securities Taxable (780) (172) (952) Tax-exempt (1) (138) 52 (86) -------------------------------------------------- Total Securities (918) (120) (1,038) Federal funds sold (5) (1) (6) -------------------------------------------------- Total interest-earning assets $ 4,056 $ 221 $ 4,277 INTEREST EXPENSE ON: Demand deposits 194 (208) (14) Savings deposits (783) 684 (99) Time deposits 692 560 1,252 Short-term borrowings 1,403 (106) 1,297 Long-term debt 354 (187) 167 --------------------------------------------------- Total interest-bearing liabilities $ 1,860 $ 743 $ 2,603 -------------------------------------------------- NET INTEREST INCOME $ 2,196 $ (522) $ 1,674 ================================================== </TABLE> (1) Fully federal taxable equivalent using a tax rate of 34% in all years. PAGE 22 OF 111
<TABLE> <CAPTION> PART II OTHER INFORMATION <S> <C> 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 - On April 8, 1996, the Company adopted an Employee Stock Ownership Plan effective January 1, 1996. This plan modified the Company's Money Purchase Plan which was originally effective January 1, 1995. Item 6. Exhibits and Reports on 8-K - Not Applicable </TABLE> The Company did not file any reports on Form 8-K during the three months ended March 31, 1996. PAGE 23 OF 111
S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY May 7, 1996 By /s/ Dawn Woolsey Dawn Woolsey, Chief Accounting Officer (Principal Accounting Officer) PAGE 24 OF 111
EXHIBIT INDEX Exhibit Page Number Index 10 City Holding Company Employee's Stock Ownership Plan dated April 8, 1996 26 27 Financial Data Schedule for the quarter ending March 31, 1996 110 PAGE 25 OF 111