SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1994 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$2.50 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing price as of March 28, 1995 (Registrant has
assumed that all of its executive officers and directors are affiliates.
Such assumption shall not be deemed to be conclusive for any other
purpose):
Aggregate Market Value -- $103,887,795
The number of shares outstanding of the issuer's common stock as of
March 28, 1995:
Common Stock, $2.50 Par Value -- 3,777,738 shares
The total number of pages are 142. Exhibit Index is located on page 18 .
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of Form 10-K
into which Document
is incorporated
Portions of the Annual Part I, Item 1; Part
Report to Shareholders II, Items 5, 6, 7,
of City Holding Company and 8; Part III, Item
for the year ended 13; Part IV, Item 14.
December 31, 1994.
Portions of City Holding Part III, Items 10,
Company's Proxy statement 11, 12 and 13.
for the 1995 Annual
Meeting of Shareholders.
<PAGE>
FORM 10-K INDEX
PART I Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . .10
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . .11
Item 6. Selected Financial Data . . . . . . . . . . . . .11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . .. .. . .11
Item 8. Financial Statements and Supplementary Data . . .11
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . .11
PART III
Item 10. Directors and Executive Officers of
Registrant. . . . . . . . . . . . . . . . . . .12
Item 11. Executive Compensation . . . . . . . . . . . . .12
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . .12
Item 13. Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . .12
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . .13
Signatures. . . . . . . . . . . . . . . . . . . .17
Exhibit Index . . . . . . . . . . . . . . . . . .18
<PAGE>
PART I
Item 1 Business
(a) General Development of Business
The Registrant, City Holding Company, is a West Virginia
corporation chartered as of March 12, 1982. City Holding Company is a duly
qualified bank holding company under the Bank Holding Company Act of 1956,
as amended. City Holding Company currently has eight banking subsidiaries
and three nonbanking subsidiaries (collectively, the "Subsidiaries") All
of the subsidiaries are wholly-owned. The Company acquired Hinton
Financial Corporation and its subsidiary, The First National Bank of
Hinton, West Virginia in December 1994. In addition, the Company acquired
the remaining 33% of the First National Bank - Beckley which was
subsequently merged into First State Bank and Trust. City Mortgage
Corporation, a full service mortgage banking company whose principal place
of business is in Pittsburgh, Pennsylvania and City Financial Corporation,
a full service securities brokerage and investment advisory company, whose
principal place of business is in City National's main location are two
non-banking subsidiaries that were formed by City Holding Company during
1993. City Holding Company's third non-banking subsidiary is Hinton
Financial Corporation, which owns all of the capital stock of The First
National Bank of Hinton and does not conduct any additional business.
On March 14, 1995, the Company signed an Agreement and Plan
of Merger (included elsewhere within) with First Merchants Bancorp ("FMB")
and its wholly-owned subsidiary, Merchants National Bank ("Merchants")
pursuant to which the Company will merge FMB into itself and Merchants will
become a wholly owned subsidiary of the Company. The acquisition has been
approved by the board of directors of both institutions and awaits approval
by shareholders and regulatory authorities.
(b) General Description of Business
City Holding Company operates as a multi-bank holding
company and is dependent upon the Subsidiaries for cash necessary to pay
expenses, and dividends to its stockholders, and to meet debt service
requirements.
City Holding Company's business is not seasonal and has no
foreign sources or applications of funds. There are no anticipated
material capital expenditures, or any expected material effects on earnings
or the Company's competitive position as a result of compliance with
Federal, State and local provisions enacted or adopted relating to
environmental protection.
The Banking Subsidiaries are engaged in the business of
banking by receiving and paying deposits; by negotiating promissory notes,
drafts, bills of exchange and other evidence of debt; by buying and selling
exchange; by loaning money secured by personal or real property, or both;
by dealing in securities and stocks without recourse solely upon order, and
for the account of customers, except for purchases of investment securities
for its account under limitations and restrictions imposed by regulations
of the Comptroller of the Currency; by providing trust services; by
supplying credit card services as a licensee of Visa and MasterCard; by
providing safe deposit box facilities and miscellaneous other services
rendered by a full service bank.
The City National Bank of Charleston is a community bank
serving the Kanawha City section of Charleston and municipalities and rural
areas to the east. The Bank operates five branches serving all of Kanawha
County. The Peoples Bank of Point Pleasant, a state-chartered bank
located in Point Pleasant, West Virginia, serves the western portion of
Mason County. Point Pleasant's two branch banks located in Mason and New
Haven serve the northern portion of Mason County. First State Bank &
Trust, a state-chartered bank located in Rainelle, West Virginia, serves
Greenbrier County and Raleigh County. First State Bank operates branches
in Rainelle (Park Center Office), Rupert, Sophia, and Beckley, West
Virginia. Bank of Ripley, a state-chartered bank, has two locations in
Ripley, West Virginia, and serves Jackson County. Home National Bank of
Sutton, operates a national bank located in Sutton, West Virginia and a
branch located in Gassaway, West Virginia.
Blue Ridge Bank (Blue Ridge), a de novo institution
chartered as a state-nonmember bank in 1992 is located in Martinsburg, West
Virginia, and serves Berkeley County. In October 1993, Blue Ridge assumed
the insured deposits and purchased certain facilities and an insignificant
amount of performing loans of the former Shenandoah Federal Savings
Association in a cash transaction with the Resolution Trust Corporation.
This acquisition expanded Blue Ridge from two offices to seven, located in
Berkeley, Jefferson, Morgan and Grant counties. The Buffalo Bank of
Eleanor a state bank, has locations in Eleanor and Winfield, West
Virginia, serving Putnam County. In January, 1995, the Company renamed
Buffalo as Peoples State Bank (Peoples Bank) and a new location was opened
in Clarksburg, Harrison County, West Virginia. The Company anticipates
that Peoples State Bank will move its headquarters to Clarksburg and
transfer its Putnam County operations to City National Bank sometime in the
second quarter of 1995. The First National Bank of Hinton (Hinton),
operates a national bank in Summers County. City Holding Company's eight
subsidiaries are consumer-oriented banks and it is anticipated they will
continue to be operated as such.
As of June 30, 1994, (the latest date available) there were
four (4) banks operating in the City of Charleston. The total deposits of
the commercial banks in the City of Charleston, exclusive of branch offices
of banks located outside Charleston, as of June 30, 1994, were
$2,453,783,000 and The City National Bank ranked 4th with $206,815,000 or
8.43%, of the total deposits in the market area. The largest competitor
and smallest competitor had total deposits of $1,254,656,000 and
$43,357,000, respectively. As of June 30, 1994, City Holding Company
ranked 6th in total deposits of all bank holding companies in West
Virginia.
No material portion of the Subsidiaries' deposits are
derived from a single person or a few persons, the loss of any one or more
of which could have a material adverse effect on liquidity, capital, or
other elements of financial performance. No material portion of the
Subsidiaries' loans are concentrated within a single industry or group of
related industries.
(c) Supervision and Regulation
City Holding Company is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is supervised by the Board
of Governors of the Federal Reserve System (the "Federal Reserve"). In
general, the Act limits the business of bank holding companies to owning or
controlling banks and engaging in such other activity as the Federal
Reserve may determine to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Act requires
City Holding Company to secure prior approval of the Federal Reserve before
acquiring ownership or control of more than 5% of the voting shares or
substantially all of the assets of another bank. As a bank holding
company, City Holding Company is required to file with the Federal Reserve
an annual report and such additional information as the Federal Reserve may
require under the Act. The Federal Reserve also performs periodic
examinations of City Holding Company and certain of its subsidiaries. City
Holding Company is also subject to the supervision of the West Virginia
Board of Banking and Financial Institutions. City Holding Company is
required to register with the office of the Commissioner of Banking of West
Virginia and file reports as requested. The Commissioner has the power to
examine City Holding Company and its subsidiaries.
City Holding Company is an affiliate of the Subsidiaries
within the meaning of the Act, which imposes certain restrictions on loans
by the Subsidiaries to City Holding Company; on investments by the
Subsidiaries in City Holding Company's stock or securities; on the taking
by the Subsidiaries of such stock or securities as collateral for loans to
any borrower; on purchases by the Subsidiaries of certain assets from City
Holding Company; and the payment of dividends by the Subsidiaries to City
Holding Company.
The City National Bank of Charleston, Home National Bank of
Sutton and First National Bank of Hinton as national banking associations,
are subject to supervision and regulation by the Comptroller of the
Currency, the Federal Reserve and the Federal Deposit Insurance
Corporation. The Peoples Bank of Point Pleasant, First State Bank & Trust,
Bank of Ripley, Blue Ridge Bank and Peoples Bank are supervised and
regulated by the West Virginia Board of Banking and Financial Institutions,
the Federal Deposit Insurance Corporation and the Federal Reserve. City
Mortgage Corporation is subject to supervision and regulation by the
Department of Housing and Urban Development (HUD), the Federal National
Mortgage Association (FNMA), and indirectly through City Holding Company by
the Federal Reserve. City Financial Corporation is supervised and
regulated primarily by the National Association of Securities Dealers, Inc.
(NASD).
As a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act ("FIRREA") on August 9, 1989, a
depository institution insured by the Federal Deposit Insurance
Corporation, (the "FDIC") can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of
default. Default is defined generally as the appointment of a conservator
or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that default is likely to occur
in the absence of regulatory assistance.
Page 13 of the Annual Report to Shareholders of City Holding
Company for the year ended December 31, 1994, is incorporated herein by
reference.
The difficulties encountered nationwide by financial
institutions during 1990 and 1991 prompted federal legislation designed to
reform the banking industry and to promote the viability of the industry
and of the deposit insurance system. The Comprehensive Deposit Insurance
Reform and Taxpayer Protection Act of 1991, which became effective on
December 19, 1991, bolsters the deposit insurance fund, tightens bank
regulation and reduces the scope of federal deposit insurance as summarized
below.
FDIC Funding
The legislation bolsters the bank deposit insurance fund
with $70 billion in borrowing authority and increases to $30 billion from
$5 billion the amount the FDIC can borrow from the U.S. Treasury to cover
the costs of bank failures. The loans, plus interest, would be repaid by
premiums that banks pay on domestic deposits over the next 15 years.
Bank Regulation
Under the legislation, regulatory supervision is linked to
bank capital. Regulators established five capital levels for banks,
ranging from well capitalized to critically undercapitalized. Regulatory
oversight increases as capital position declines. In addition, regulators
are drafting a new set of non-capital measures of bank safety, relative to
underwriting standards, minimum earnings levels, and others. The
legislation also requires regulators to perform annual on-site bank
examinations, places limits on real estate lending by banks, and tightens
auditing requirements.
Deposit Insurance
The legislation reduces the scope of federal deposit
insurance. The most significant change would end the "too big to fail"
doctrine, under which the government protects all deposits in most banks,
including, those exceeding the $100,000 insurance limit. The FDIC's
current ability to reimburse uninsured deposits -- those over $100,000 and
foreign deposits -- will be sharply limited pursuant to the legislation.
The Federal Reserve Board's ability to finance banks with extended loans
from its discount window also will be restricted, starting two years from
enactment. In addition, only the best capitalized banks will be able to
offer insured brokered deposits -- large certificates of deposit sold
through brokerage firms -- or to insure accounts established under employee
pension plans. The legislation instructs the FDIC to change the way it
assesses banks for deposit insurance, moving from flat premiums to fees
that require banks engaging in risky practices to pay higher premiums than
conservatively managed banks.
Under regulations adopted by the FDIC in December, 1993,
banks are assigned to one of the following three capital groups based on
their capital levels: "well-capitalized", "adequately capitalized" and
"undercapitalized". Banks in each of these three groups are further
classified into three subgroups based upon the level of supervisory concern
with respect to each bank. The resulting matrix creates nine assessment
risk classifications to which are assigned deposit insurance premiums
ranging from .23% for the best capitalized, healthiest institutions, to
.31% for undercapitalized institutions with substantial supervisory
concern. The Subsidiary Banks of City Holding Company have been informed
that the premium for the first semiannual assessment period beginning
January 1, 1995 will be .23% of insured deposits. This assessment will not
materially affect the Subsidiary Bank's earnings.
Other legislative and regulatory proposals regarding changes
in banking, and the regulation of banks, thrifts and other financial
institutions, are being considered by the executive branch of the Federal
government and Congress. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted whether any of these proposals will be
adopted or, if adopted, how these proposals will affect the Company.
(d) Monetary Policies
City Holding Company and Subsidiaries are affected by the
monetary and fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of changing
conditions in the national economy and in the money markets, it is
impossible to accurately predict future changes in monetary policy or the
effect of such changes on the business or financial condition of City
Holding Company and its subsidiaries.
(e) Employees
As of December 31, 1994, City Holding Company and
Subsidiaries employed 500 associates. Employee relations within the
Subsidiaries are considered to be satisfactory. One officer-director and
one director of The City National Bank of Charleston serve as officers of
City Holding Company, but receive no remuneration therefor. One officer-
director of The Bank of Ripley, and four officers of The City National Bank
of Charleston serve as officers of City Holding Company, but receive no
remuneration therefor.
(f) Statewide Banking
Under present West Virginia law, West Virginia banking
institutions may establish branch banks either by the construction, lease
or acquisition of branch bank facilities anywhere in West Virginia. West
Virginia law permits any out-of-state institution to acquire a West
Virginia banking institution where the state of the acquiring institution
permits reciprocal acquisitions. West Virginia law also permits reciprocal
interstate acquisitions of thrift institutions.
Page 13 of the Annual Report to Shareholders of City Holding Company
for the year ended December 31, 1994, is incorporated herein by reference.
(g) Statistical Information
The information noted below is provided pursuant to Guide
3 -- Statistical Disclosure by Bank Holding Companies. Page references are
to the Annual Report to Shareholders for the year ended December 31, 1994
and such pages are incorporated herein by reference.
Page
Description of Information Reference
1. Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential
a. Average Balance Sheets 5
b. Analysis of Net Interest Earnings 5
c. Rate Volume Analysis of Changes in
Interest Income and Expense 6
2. Investment Portfolio
a. Book Value of Investments 8
b. Maturity Schedule of Investments 8
c. Securities of Issuers Exceeding 10%
of Stockholders' Equity 8
3. Loan Portfolio
a. Types of Loans 9
b. Maturities and Sensitivity to Changes in
Interest Rates 9
c. Risk Elements 10, 11
d. Other Interest Bearing Assets N/A
4. Summary of Loan Loss Experience 11, 12
5. Deposits
a. Breakdown of Deposits by Categories,
Average Balance and Average Rate Paid 5
b. Maturity Schedule of Time Certificates of
Deposit and Other Time Deposits of
$100,000 or More 9
6. Return on Equity and Assets 1
Item 2 Properties
The Subsidiaries owned and/or leased properties at December
31, 1994 as described below. The City National Bank of Charleston's
principal office has 35,000 square feet for banking operations. City
National has five branch facilities located in Kanawha County. The two
leased facilities are located in downtown Charleston and the South Hills
district and contain 500 and 1,000 square feet, respectively. The other
three branches located in Cross Lanes, St. Albans and Western Charleston
are owned and contain 6,270, 6,400 and 700 square feet, respectively.
The Peoples Bank of Point Pleasant's property consists of a
main banking facility located at 2212 Jackson Avenue, Point Pleasant, West
Virginia, and two branch banking locations at Mason and New Haven, West
Virginia. The main facility, consists of 13,000 square feet of office and
business space and 3,680 square feet of storage. The two branch banks
located at Mason and New Haven consist of 1,512 and 6,510 square feet,
respectively.
First State Bank & Trust's main facility is located at 1218
Main Street, Rainelle, West Virginia. The interior of the banking
facility consists of 5,500 square feet of office and business space and
2,000 square feet of second floor meeting facilities and storage. First
State Bank & Trust also operates full service branch facilities in
Rainelle, Rupert, Sophia, Beckley and Beaver, West Virginia. The branch in
Rainelle is located on 1.33 acres of property owned by the Bank. The
other three branches located in Rupert, Sophia, Beckley and Beaver consist
of 34,000, 6,200, 3,500, and 7,500 square feet, respectively.
Bank of Ripley's property is located at 108 N. Church
Street, Ripley, West Virginia. The building is a two-story structure with
approximately 4,000 square feet of floor space on each floor. The Bank of
Ripley also owns a 400 square foot drive-in facility.
Home National Bank's property consists of a main banking
facility located at 101 Second Street, Sutton, West Virginia, and one
branch banking location at Gassaway, West Virginia. The main facility,
consists of 10,725 square feet. Adjacent to the main facility is a drive
through banking facility consisting of 1,401 square feet. The branch bank
located at Gassaway consists of 2,408 square feet.
Peoples State Bank's property consists of a main banking
facility located at 946 Roosevelt Boulevard, Eleanor, West Virginia and one
branch banking location at Winfield, West Virginia. The main facility,
consists of 5,270 square feet and the branch has 4,000 square feet.
Peoples State opened another branch in Clarksburg, West Virginia consisting
of 1,200 square feet.
Blue Ridge Bank leases its main banking facility consisting
of 2,625 square feet. Blue Ridge also operates six branch facilities under
various lease agreements, located in Morgan, Grant, Jefferson and Berkeley
Counties.
First National Bank of Hinton owns and operates a 10,500
square foot building located in Summers County. The parent company, Hinton
Financial Corporation occupies office space within this building
City Mortgage Corporation operates in a 13,000 square foot
building located in Pittsburgh, Pennsylvania. This building is owned by
the parent company. City Financial Corporation operates in a 400 square
foot section of City National Bank's main location.
The properties owned or leased by the Subsidiaries consist
generally of nine main offices, related drive-in facilities, and 23 branch
offices. All of the properties of the Subsidiaries are suitable and
adequate for their current operations and are generally being fully
utilized.
Item 3 Legal Proceedings
There are various legal proceedings pending to which City
Holding Company and/or its subsidiaries are parties. These proceedings are
incidental to the business of City Holding Company and its subsidiaries
and, after reviewing the matters and consulting with counsel, management is
of the opinion that the ultimate resolution of such matters will not
materially affect the consolidated financial statements.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters
Page 2 of the Annual Report to Shareholders of City Holding
Company for the year ended December 31, 1994, included in this report as
Exhibit 13(a), is incorporated herein by reference.
Item 6 Selected Financial Data
Selected Financial Data on page 1 of the Annual Report to
Shareholders of City Holding Company for the year ended December 31, 1994,
included in this report as Exhibit 13(a), is incorporated herein by
reference.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 2 through 14 of the Annual Report to
Shareholders of City Holding Company for the year ended December 31, 1994,
included in this report as Exhibit 13(a), is incorporated herein by
reference.
Item 8 Financial Statements and Supplementary Data
The report of independent auditors and consolidated
financial statements, included on pages 15 through 33 of the Annual Report
to Shareholders of City Holding Company for the year ended December 31,
1994, included in this report as Exhibit 13(a), are incorporated herein by
reference.
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 Directors and Executive Officers of Registrant
The information required by Item 10 of FORM 10-K appears in
the Company's 1995 Proxy Statement under the captions "ELECTION OF CITY
HOLDING DIRECTORS" and "EXECUTIVE OFFICERS OF CITY HOLDING". The Company's
1995 Proxy statement is included in the Registration Statement on Form S-4
to be filed with the Securities and Exchange Commission within 120 days of
fiscal year end.
Item 11 Executive Compensation
The information required by Item 11 of FORM 10-K appears in
the Company's 1995 Proxy Statement under the caption "CITY HOLDING
EXECUTIVE COMPENSATION".
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of FORM 10-K appears in
the Company's 1995 Proxy Statement under the caption "CITY HOLDING
OWNERSHIP OF EQUITY SECURITIES".
Item 13 Certain Relationships and Related Transactions
The information required by Item 13 of FORM 10-K appears in
the Company's 1995 Proxy Statement under the caption "CITY HOLDING CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and in NOTE TWELVE of Notes to
Consolidated Financial Statements appearing at page 28 of the Company's
Annual Report to Shareholders for the year ended December 31, 1994,
included in this report as Exhibit 13(a), and incorporated herein by
reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements Filed; Financial Statement Schedules
The following consolidated financial statements of City
Holding Company and subsidiaries, included in the Company's Annual Report
to Shareholders for the year ended December 31, 1994, are incorporated by
reference in Item 8:
Exhibit 13(a)
Page Number
Report of Independent Auditors 15
Consolidated Balance Sheets - December 31, 1994
and 1993 16
Consolidated Statements of Income - years
ended December 31, 1994, 1993 and 1992 17
Consolidated Statements of Changes in
Stockholders' Equity - years ended December 31,
1994, 1993 and 1992 18
Consolidated Statements of Cash Flows -
years ended December 31, 1994, 1993 and 1992 19
Notes to Consolidated Financial Statements -
December 31, 1994 20-33
On page 15 appears the independent auditors report of Persinger & Company,
LLC on the Consolidated Financial Statements of Hinton Financial
Corporation, Inc. for the years December 31, 1994 and 1993 and 1992.
With the exception of the aforementioned information and the information
incorporated by reference in Items 1, 5, 6, 7, 8, 13, and 14, City Holding
Company's Annual Report to shareholders is not to be deemed filed as part
of this report.
Exhibit 13(b) Financial statements of business to be acquired:
The following consolidated financial statements of First Merchants Bancorp,
Inc. represent the separate financial statements of a business with whom
consummation of a business combination to be accounted for as a pooling of
interests is probable. As discussed in NOTE TWENTY to the audited
financial statements of City Holding Company, a definitive agreement was
signed in March 1995 whereby City Holding Company is expected to acquire
all of the outstanding common stock of First Merchants Bancorp in exchange
for approximately 920,000 shares of City Holding Company common stock.
Exhibit 13(b)
Page Number
Report of Independent Auditors 1
Consolidated Balance Sheets - December 31, 1994
and 1993 2
Consolidated Statements of Income - years
ended December 31, 1994, 1993 and 1992 3
Consolidated Statements of Changes in
Stockholders' Equity - years ended December 31,
1994, 1993 and 1992 4
Consolidated Statements of Cash Flows -
years ended December 31, 1994, 1993 and 1992 5
Notes to Consolidated Financial Statements -
December 31, 1994 6 - 15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hinton Financial Corporation
Hinton, West Virginia
We have audited the accompanying consolidated balance sheets of Hinton
Financial Corporation and Subsidiary as of December 31, 1994, and 1993,
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1994, (not presented separately, herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hinton Financial Corporation and Subsidiary as of December 31, 1994, and
1993, and the results of their operations and their cash flow for each of
the years in the three-year period ended December 31, 1994, in conformity
with generally accepted accounting principles.
/s/ Persinger & Company, LLC
Beckley, West Virginia
January 6, 1995
FINANCIAL SCHEDULES I AND II UNDER ARTICLE 9 OF REGULATION S-X ARE NOT
APPLICABLE.
(b) Reports on Form 8-K
On December 19, 1994, the Company filed a Report on Form 8-K,
Commission file No. 0-11733, regarding the acquisition of Hinton Financial
Corporation.
(c) Exhibits
The exhibits listed in the Exhibit Index on pages 18 and 19
of this FORM 10-K are filed herewith or incorporated by reference from
previous filings.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
/s/
Steven J. Day,
President/Director
(Principal Executive Officer)
/s/
Robert A. Henson,
Treasurer
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1934, this
registration statement has been signed by the following persons on behalf
of the Registrant and in the capacities on March 27, 1995.
/s/ /s/
Samuel M. Bowling, C. Scott Briers,
Director Director
/s/ /s/
Dr. D. K. Cales, Steven J. Day,
Director Director/President
/s/
Robert D. Fisher Jack E. Fruth,
Director Director
/s/ /s/
Jay Goldman, Carlin K. Harmon,
Director Director/Executive
Vice President
/s/ /s/
Dallas Kayser, Dale Nibert,
Director Director
/s/ /s/
Otis L. O'Connor, Bob F. Richmond
Director Director
/s/ /s/
Mark H. Schaul, Van R. Thorn,
Director Director
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated herein
by reference.
Prior Filing
Exhibit Reference or Page
Number Description Number Herein
2 Agreement and Plan of Reorganization dated
March 14, 1995 among City Holding Company,
First Merchants Bancorp, Inc. and Merchants National Bank 21
3(a) Articles of Incorporation of I
City Holding Company
3(b) Articles of Amendment to the II
Articles of Incorporation of
City Holding Company, dated
March 6, 1984
3(c) Articles of Amendment to the III
Articles of Incorporation of
City Holding Company, dated
March 4, 1986
3(d) Articles of Amendment to the IV
Articles of Incorporation of
City Holding Company, dated
September 29, 1987
3(e) Articles of Amendment to the
Articles of Incorporation of
City Holding Company, dated
May 6, 1991 V
3(f) Articles of Amendment to the
Articles of Incorporation of
City Holding Company, dated
May 7, 1991 V
3(g) By-laws of City Holding Company I
3(h) Amendment to the By-laws of III
City Holding Company, dated
February 14, 1985
3(i) Amendment to the By-laws of III
City Holding Company, dated
March 4, 1986
3(j) Amendment to the By-laws of III
City Holding Company, dated
May 1, 1986
3(k) Amendment to the By-laws of III
City Holding Company, dated
February 5, 1987
3(l) Amendment to the By-laws of VI
City Holding Company, dated
November 3, 1988
3(m) Articles of Amendment to the Articles of
Incorporation of City Holding Company,
dated August , 1994 VIII
4 Amendment and Restated Rights
Agreement, dated as of May 7, 1991,
between the Company and Sovran Bank,
N.A. (predecessor to Nations Bank,
N.A.), as Rights Agent VII
10 Agreement dated June 5, 1986, by III
and between Steven J. Day and
City Holding Company
11 Statement Re: Computation of Per
Share Earnings 90
13(a) City Holding Company Annual Report
to Shareholders for Year Ended
December 31, 1994 91
13(b) Financial statements of business to be acquired 124
22 Subsidiaries of City Holding Company 139
24(a) Consent of Ernst & Young, LLP 140
24(b) Consent of Persinger & Company, LLC 141
24(c) Consent of Ernst & Young, LLP 142
I Attached to, and incorporated by reference from Amendment No. 1 to
City Holding Company's Registration Statement on Form S-4,
Registration No. 2-86250, filed November 4, 1983, with the Securities
and Exchange Commission.
II Attached to, and incorporated by reference from City Holding Company's
Form 8-K Report dated March 7, 1984, and filed with the Securities and
Exchange Commission on March 22, 1984.
III Attached to, and incorporated by reference from City Holding Company's
Form 10-K Annual Report dated December 31, 1986, and filed March 31,
1987, with the Securities and Exchange Commission.
IV Attached to and incorporated by reference from City Holding Company's
Registration Statement on Form S-4, Registration No. 33-23295, filed
with the Securities and Exchange Commission on August 3, 1988.
Attached to, an incorporated by reference from City Holding Company's
Form 10-K Annual Report dated December 31, 1991, and filed March 17,
1992, with the Securities and Exchange Commission.
V Attached to, and incorporated by reference from City Holding Company's
Form 10-K Annual Report dated December 31, 1991, and filed March 17,
1992, with the Securities and Exchange Commission.
VI Attached to, and incorporated by reference from City Holding Company's
Form 10-K Annual Report dated December 31, 1988, and filed March 30,
1989, with the Securities and Exchange Commission.
VII Attached to, and incorporated by reference from City Holding Company's
Form 8-K Current Report dated May 7, 1991, and filed May 14, 1991,
with the Securities and Exchange Commission.
VIII Attached to, and incorporated by reference from City Holding Company's
Form 10-Q Quarterly Report dated September 30, 1994 and filed November
14, 1994, with the Securities and Exchange Commission.
AGREEMENT AND PLAN OF REORGANIZATION
among
CITY HOLDING COMPANY,
FIRST MERCHANTS BANCORP, INC.
and
MERCHANTS NATIONAL BANK
March 14, 1995
<PAGE>
ARTICLE I
General
1.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Issuance of City Holding Common Stock. . . . . . . . . . . . 3
1.3 Taking of Necessary Action . . . . . . . . . . . . . . . . . 3
1.4 Directors and Officers . . . . . . . . . . . . . . . . . . . 3
1.5 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
Effect of Merger on Common Stock of FMB
2.1 Conversion of Stock. . . . . . . . . . . . . . . . . . . . . 4
2.2 Manner of Exchange . . . . . . . . . . . . . . . . . . . . . 4
2.3 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . 6
2.4 No Fractional Shares . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of FMB and Merchants. . . . . 7
(a) Organization, Standing and Power . . . . . . . . . . . . 7
(b) Capital Structure. . . . . . . . . . . . . . . . . . . . 8
(c) Authority. . . . . . . . . . . . . . . . . . . . . . . . 8
(d) Investments. . . . . . . . . . . . . . . . . . . . . . . 9
(e) Financial Statements . . . . . . . . . . . . . . . . . . 10
(f) Absence of Undisclosed Liabilities . . . . . . . . . . . 11
(g) Tax Matters. . . . . . . . . . . . . . . . . . . . . . . 11
(h) Options, Warrants and Related Matters. . . . . . . . . . 13
(i) Property; Leases . . . . . . . . . . . . . . . . . . . . 13
(j) Additional Schedules Furnished to City Holding.. . . . . 14
(k) Agreements in Force and Effect . . . . . . . . . . . . . 15
(l) Legal Proceedings; Compliance with Laws. . . . . . . . . 15
(m) Employee Benefit Plans . . . . . . . . . . . . . . . . . 17
(n) Insurance. . . . . . . . . . . . . . . . . . . . . . . . 20
(o) Loan Portfolio . . . . . . . . . . . . . . . . . . . . . 21
(p) Absence of Changes . . . . . . . . . . . . . . . . . . . 22
(q) Brokers and Finders. . . . . . . . . . . . . . . . . . . 22
(r) Reports. . . . . . . . . . . . . . . . . . . . . . . . . 22
(s) Environmental Matters. . . . . . . . . . . . . . . . . . 22
(t) Community Reinvestment Act . . . . . . . . . . . . . . . 24
(u) Disclosure . . . . . . . . . . . . . . . . . . . . . . . 25
3.2 Representations and Warranties of City Holding . . . . . . . 25
(a) Organization, Standing and Power . . . . . . . . . . . . 25
(b) Capital Structure. . . . . . . . . . . . . . . . . . . . 25
(c) Authority. . . . . . . . . . . . . . . . . . . . . . . . 26
(d) Financial Statements . . . . . . . . . . . . . . . . . . 26
(e) Absence of Undisclosed Liabilities . . . . . . . . . . . 27
(f) Absence of Changes . . . . . . . . . . . . . . . . . . . 27
(g) Brokers and Finders. . . . . . . . . . . . . . . . . . . 28
(h) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 28
(i) Reports. . . . . . . . . . . . . . . . . . . . . . . . . 28
(j) Tax Matters. . . . . . . . . . . . . . . . . . . . . 29
(k) Options, Warrants and Related Matters. . . . . . . . 29
(l) Property; Leases . . . . . . . . . . . . . . . . . . 29
(m) Legal Proceedings; Compliance with Laws. . . . . . . 30
(n) Employee Benefit Plans . . . . . . . . . . . . . . . 31
(o) Loan Portfolio . . . . . . . . . . . . . . . . . . . 31
(p) Environmental Matters. . . . . . . . . . . . . . . . 32
(q) Community Reinvestment Act . . . . . . . . . . . . . 32
(r) Disclosure . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE IV
Conduct Prior to
Effective Time of the Merger
4.1 Access to Records and Properties of City Holding, FMB and
Merchants. . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2 Registration Statement; Proxy Statement; Shareholder
Approval . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.3 Operation of the Business of FMB and Merchants . . . . . . . 35
4.4 No Solicitation. . . . . . . . . . . . . . . . . . . . . . . 36
4.5 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.6 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . 37
4.7 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 38
4.8 Public Announcements . . . . . . . . . . . . . . . . . . . . 38
4.9 Transactions in City Holding Common Stock. . . . . . . . . . 38
4.10 City Holding Rights Agreement. . . . . . . . . . . . . . . . 38
4.11 Accounting Treatment.. . . . . . . . . . . . . . . . . . . . 38
4.12 Agreement as to Efforts to Consummate. . . . . . . . . . . . 38
4.13 Adverse Changes in Condition.. . . . . . . . . . . . . . . . 39
4.14 Updating of Schedules. . . . . . . . . . . . . . . . . . . . 39
ARTICLE V
Conditions of Merger
5.1 Conditions of Obligations of City Holding. . . . . . . . . . 40
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change . . . . . . . . . . . . 40
(b) Authorization of Merger. . . . . . . . . . . . . . . . . 40
(c) Opinion of Counsel . . . . . . . . . . . . . . . . . . . 40
(d) Registration Statement . . . . . . . . . . . . . . . . . 44
(e) Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . 44
(f) Regulatory Approvals . . . . . . . . . . . . . . . . . . 44
(g) Affiliate Letters. . . . . . . . . . . . . . . . . . . . 45
(h) Accounting Treatment . . . . . . . . . . . . . . . . . . 45
(i) Acceptance by City Holding Counsel . . . . . . . . . . . 45
5.2 Conditions of Obligations of FMB and Merchants . . . . . . . 45
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change . . . . . . . . . . . . 45
(b) Authorization of Merger. . . . . . . . . . . . . . . . . 46
(c) Opinion of Counsel . . . . . . . . . . . . . . . . . . . 46
(d) Registration Statement . . . . . . . . . . . . . . . . . 49
(e) Regulatory Approvals . . . . . . . . . . . . . . . . . . 50
(f) Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . 50
(g) Fairness Opinion . . . . . . . . . . . . . . . . . . . . 51
(h) Acceptance by FMB's and Merchants's Counsel. . . . . . . 51
ARTICLE VI
Closing Date; Effective Time of the
Merger
6.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . 51
6.2 Filings at Closing . . . . . . . . . . . . . . . . . . . . . 51
6.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . 52
7.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . 54
7.3 Survival of Representations, Warranties and Covenants. . . . 54
7.4 Waiver and Amendment . . . . . . . . . . . . . . . . . . . . 54
ARTICLE VIII
Additional Covenants
8.1 Registration Statement . . . . . . . . . . . . . . . . . . . 55
8.2 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . 55
8.3 Operations after Closing . . . . . . . . . . . . . . . . . . 56
8.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . 56
8.5 City Holding Agreement with George Davis.. . . . . . . . . . 57
ARTICLE IX
Miscellaneous
9.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . 58
9.3 Descriptive Headings . . . . . . . . . . . . . . . . . . . . 58
9.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 59
9.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 59
Exhibit A - Plan of Merger
<PAGE>
SCHEDULE DESCRIPTION SECTION IN AGREEMENT
A FMB Restated
Certificate of
Incorporation 3.1(a)(i)
B FMB Bylaws 3.1(a)(i)
C Merchants Articles of
Association 3.1(a)(ii)
D Merchants Bylaws 3.1(a)(ii)
E Securities Owned by
FMB and Merchants 3.1(b), 3.1(d)
F FMB/Merchants
Conflicts, Breaches
or Defaults 3.1(c)
G FMB Financial
Statements 3.1(e)
H FMB and Merchants Tax
Matters 3.1(g)
I Salary Rates and FMB
Common Stock Owned by
Employees and
Directors of Bank;
Owners of 5% of FMB
Common Stock;
Outstanding
Unexercised Options,
Warrants, Calls,
Commitments or
Agreements 3.1(j)(i)
J Notes, Bonds,
Mortgages, Indentures,
Licenses, Lease
Agreements and Other
Contracts of FMB 3.1(j)(ii), 5.1(c)(vi),
5.1(c)(viii)
K Employment Contracts
and Related Matters of
FMB and Merchants 3.1(j)(iii), 3.1(m)(i)
3.1(m)(vii), 3.1(m)(viii)
L Real Estate Owned or
Leased by FMB and
Merchants 3.1(j)(iv)
M FMB and Merchants
Legal Proceedings 3.1(l)
N FMB and Merchants
Insurance 3.1(n)
O Merchants Loans 3.1(o)
P Merchants Material
Adverse Changes 3.1(p)
Q Merchants
Environmental Matters 3.1(s)
R City Holding Tax
Matters ?
S City Holding
Regulation Matters 3.2(m)
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of the 14th day of March, 1995, by and among City Holding
Company, a West Virginia corporation ("City Holding"), First Merchants
Bancorp, Inc., a West Virginia corporation ("FMB") and Merchants National
Bank, a national banking association wholly-owned by FMB ("Merchants"),
recites and provides:
A. City Holding and FMB and City Holding and certain directors of FMB
have entered into Stock Option Agreements (the "Option Agreements"), dated
March 14, 1995, pursuant to which FMB and such directors have each granted an
option to City Holding to purchase a specified number of their respective
shares of FMB Common Stock in certain events. The Option Agreements shall
survive the execution of this Agreement for the term provided in each Option
Agreement.
B. The boards of directors of City Holding and FMB deem it advisable
to merge FMB into City Holding (the "Merger") pursuant to this Agreement and
the Plan of Merger attached as Exhibit A (the "Plan of Merger") whereby the
holders of shares of common stock of FMB ("FMB Common Stock") will receive
common stock of City Holding ("City Holding Common Stock") in exchange
therefor. It is the desire of both parties that, following the Merger,
Merchants will remain a separately incorporated bank which would be a
subsidiary of City Holding and operated under the name "Merchants National
Bank," and there will be no change in the Board of Directors, officers,
employees, compensation levels, fringe benefits or similar arrangements in
effect at Merchants immediately prior to the Effective Time of the Merger,
unless required by federal income tax laws or otherwise provided herein.
C. To effectuate the foregoing, the parties desire to adopt a plan of
reorganization in accordance with the provisions of Section 368(a) of the
United States Internal Revenue Code, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement, and of the representations, warranties, conditions and
promises herein contained, City Holding, FMB and Merchants adopt this
Agreement whereby at the "Effective Time of the Merger" (as defined in
Article VI hereof) FMB shall be merged into City Holding in accordance with
the Plan of Merger. The outstanding shares of FMB Common Stock shall be
converted into shares of City Holding Common Stock on the basis, terms and
conditions contained herein and in the Plan of Merger. In connection
therewith, the parties hereto agree as follows:
ARTICLE I
General
1.1 Merger. Subject to the provisions of this Agreement, at the
Effective Time of the Merger, FMB shall be merged with and into City Holding
and the separate existence of FMB shall cease. For at least five years after
the Effective Time of the Merger, unless otherwise approved by a majority of
continuing directors of Merchants, Merchants will remain a separately
incorporated bank operated under the name "Merchants National Bank".
"Continuing directors of Merchants" shall mean the directors of Merchants as
of the Effective Time of the Merger and any successors to such directors
approved by a majority of the continuing directors of Merchants.
1.2 Issuance of City Holding Common Stock. City Holding agrees that at
the Effective Time of the Merger it will issue City Holding Common Stock to
the extent set forth in, and in accordance with, the terms of this Agreement
and the Plan of Merger.
1.3 Taking of Necessary Action. Prior to and after the Effective Time
of the Merger (as defined in Article VI hereof), subject to the provisions of
this Agreement, City Holding, FMB and Merchants, respectively, each shall
take all such action as may be necessary or appropriate to effect the Merger.
1.4 Directors and Officers. Following the Effective Time of the
Merger, the Directors of City Holding shall continue as Directors and City
Holding agrees to increase the number of members of City Holding's Board of
Directors by two and to appoint two persons approved by the continuing
directors of Merchants to fill the resulting vacancies. Following the
Effective Time of the Merger, the Directors of Merchants shall continue as
Directors of Merchants for at least five years following the Effective Time
of the Merger unless removed for cause or in accordance with Merchants'
Bylaws and shall continue to receive Board fees at least equal to the Board
fees such persons received immediately prior to the Effective Time of the
Merger. As used in this Section, "cause" shall mean dishonesty, fraud or
gross abuse of authority in the performance of duty or breach of fiduciary
duty.
1.5 Employee Benefits. For at least five years following the Effective
Time of the Merger, except with the approval of the continuing directors of
Merchants, no employee of Merchants as of the date of this Agreement may be
terminated without cause and no change may be made in the compensation
levels, fringe benefits or similar arrangements of such employees. No
provision of this Agreement shall be deemed to limit the right of City
Holding to require the termination of any employee of Merchants for cause.
Following the Effective Time of the Merger, City Holding agrees to honor all
the terms and conditions of the change in control agreements of George F.
Davis, Robert P. McDowell, Linda G. Aguilar, Robert L. Neal and Steven D.
Nunley copies of which are attached hereto as Schedule K.
ARTICLE II
Effect of Merger on Common Stock of FMB
2.1 Conversion of Stock. At the Effective Time of the Merger:
(a) Each share of FMB Common Stock which is issued and outstanding
at the Effective Time of the Merger (other than shares held by City Holding
or in FMB's treasury and other than Dissenting Shares as defined in Section
2.3) shall, and without any action by the holder thereof, be converted into
1.60 shares of City Holding Common Stock (the "Exchange Ratio") which shall
be validly issued, fully paid and nonassessable.
(b) The Exchange Ratio at the Effective Time of the Merger shall
be adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of City Holding Common Stock, any dividend payable in City
Holding Common Stock, or any capital reorganization involving the
reclassification of City Holding Common Stock subsequent to the date of this
Agreement.
2.2 Manner of Exchange. (a) After the Effective Time of the Merger,
each holder of a certificate theretofore evidencing outstanding shares of FMB
Common Stock (other than shares held by City Holding and other than
Dissenting Shares), upon surrender of such certificate to City National Bank
of Charleston, which shall act as exchange agent, accompanied by a Letter of
Transmittal, shall be entitled to receive in exchange therefor a certificate
or certificates representing the number of full shares of City Holding Common
Stock for which shares of FMB Common Stock theretofore represented by the
certificate or certificates so surrendered shall have been exchanged as
provided in this Article II. Until so surrendered, each outstanding FMB
certificate which, prior to the Effective Time of the Merger, represented FMB
Common Stock will be deemed to evidence the right to receive the number of
shares of City Holding Common Stock into which the shares of FMB Common Stock
represented thereby have been converted.
(b) Until such outstanding certificates formerly representing FMB
Common Stock are surrendered, no dividend payable to holders of record of
City Holding Common Stock for any period as of any date subsequent to the
Effective Time of the Merger shall be paid to the holder of such outstanding
certificates in respect thereof. After the Effective Time of the Merger,
there shall be no further registry of transfers on the records of FMB of
shares of FMB Common Stock. Upon surrender of certificates of FMB Common
Stock in exchange for City Holding Common Stock, there shall be paid to the
record holder of the certificates of City Holding Common Stock issued in
exchange therefor (i) the amount of dividends theretofore paid with respect
to such full shares of City Holding Common Stock as of any date subsequent to
the Effective Time of the Merger which have not yet been paid to a public
official pursuant to abandoned property laws; and (ii) at the appropriate
payment date the amount of dividends with a record date after the Effective
Time of the Merger but prior to surrender and a payment date subsequent to
surrender. No interest shall be payable with respect to such dividends upon
surrender of outstanding certificates.
2.3 Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of FMB Common Stock which are issued and outstanding
immediately prior to the Effective Time of the Merger and which are held by
a shareholder who has the right (to the extent such right is available by
law) to demand and receive payment of the fair value of his shares of FMB
Common Stock (the "Dissenting Shares") pursuant to Sections 31-1-122 and 31-
1-123 of the West Virginia Corporation Act, shall not be converted into or be
exchangeable for the right to receive the consideration provided in Section
2.1 unless and until such holder shall fail to perfect his or her right to
dissent or shall have effectively withdrawn or lost such right under the West
Virginia Corporation Act, as the case may be. If such holder shall have so
failed to perfect his right to dissent or shall have effectively withdrawn or
lost such right, each of his shares of FMB Common Stock shall thereupon be
deemed to have been converted into, at the Effective Time of the Merger, the
right to receive shares of City Holding Common Stock at the Exchange Ratio.
2.4 No Fractional Shares. No certificates or scrip for fractional
shares of City Holding Common Stock will be issued. In lieu thereof, City
Holding will pay the value of such fractional shares in cash in an amount
equal to such fraction of a share multiplied by the City Holding Stock Price.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of FMB and Merchants. FMB and
Merchants represent and warrant to City Holding as follows:
(a) Organization, Standing and Power. (i) FMB is a corporation
duly organized, validly existing and in good standing under the laws of West
Virginia and has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted and,
subject to the approval of the Plan of Merger by the shareholders of FMB as
contemplated by Section 4.2, to perform this Agreement to effect the
transactions contemplated hereby. FMB has delivered to City Holding complete
and correct copies of (A) the Amended Articles of Incorporation of FMB and
all amendments thereto to the date hereof; and (B) the Bylaws of FMB as
amended to the date hereof, which are attached hereto as Schedule A and
Schedule B, respectively.
(ii) Merchants is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States and has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted and to
perform this Agreement to effect the transactions contemplated hereby. FMB
has delivered to City Holding complete and correct copies of (A) the Articles
of Association of Merchants and all amendments thereto to the date hereof;
and (B) the Bylaws of Merchants as amended to the date hereof, which are
attached hereto as Schedule C and Schedule D, respectively. Merchants's
deposits are insured by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation to the maximum extent permitted by law.
(b) Capital Structure. The authorized capital stock of FMB
consists of 1,000,000 shares of common stock, par value $2.00 per share of
which 576,000 shares are issued and outstanding. As of the Effective Time of
the Merger, the issued and outstanding shares of FMB Common Stock will be
validly issued, fully paid and nonassessable.
The authorized capital stock of Merchants consists of 144,000 shares of
common stock, par value $2.00 per share. FMB owns all of the issued and
outstanding common stock of Merchants free and clear of any liens, claims,
encumbrances, charges or rights of third parties of any kind whatsoever and
all of such shares are validly issued, fully paid and nonassessable.
Merchants is the sole subsidiary of FMB and Merchants has no subsidiaries.
All outstanding shares of FMB Common Stock have been issued in all
material respects in compliance with the applicable requirements of the
Securities Act of 1933 (the "1933 Act"). Except as disclosed on Schedule I,
FMB knows of no person who beneficially owns 5% or more of the outstanding
FMB Common Stock.
(c) Authority. Subject to the approval of the Plan of Merger by
the shareholders of FMB as contemplated by Section 4.2 hereof, the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby and by the Plan of Merger have been duly and validly
authorized by all necessary action on the part of FMB and Merchants, and this
Agreement is a valid and binding obligation of FMB and Merchants, enforceable
in accordance with its terms. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby and by the Plan of
Merger and compliance by FMB and Merchants with any of the provisions hereof
will not, except as noted on Schedule F, (i) conflict with or result in a
breach of any provision of their respective Amended Articles of
Incorporation, Articles of Association or Bylaws or a default (or give rise
to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, debenture, mortgage,
indenture, license, material agreement or other material instrument or
obligation to which FMB or Merchants is a party, by which either of them or
any of their properties or assets may be bound (except for such conflict,
breach or default, as to which requisite waivers or consents shall have been
obtained by FMB or Merchants prior to the Effective Time of the Merger or the
obtaining of which shall have been waived by City Holding); or (ii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable
to FMB or Merchants or any of their properties or assets. No consent or
approval by any governmental authority, other than compliance with applicable
federal and state corporate, securities and banking laws, and regulations of
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), and the West Virginia Board of Banking and Financial Institutions
(the "West Virginia Board") is required to be obtained by FMB or Merchants in
connection with the execution and delivery by FMB and Merchants of this
Agreement or the consummation by FMB and Merchants of the transactions
contemplated hereby or by the Plan of Merger.
(d) Investments. All securities owned by FMB and Merchants of
record and beneficially are free and clear of all mortgages, liens, pledges,
encumbrances or any other restriction, whether contractual or statutory,
which would materially impair the ability of FMB or Merchants freely to
dispose of any such security at any time, except as noted on Schedule E. Any
securities owned of record by FMB or Merchants in an amount equal to 5% or
more of the issued and outstanding voting securities of the issuer thereof
have been noted on Schedule E. To the knowledge of FMB and Merchants, there
are no voting trusts or other agreements or undertakings with respect to the
voting of such securities. With respect to all repurchase agreements to
which FMB or Merchants is a party, FMB or Merchants has a valid, perfected
first lien or security interest in the government securities or other
collateral securing the repurchase agreement, and the value of the collateral
securing each such repurchase agreement equaled or exceeded the amount of the
debt secured by such collateral under such agreement as of the date of this
Agreement, except as noted on Schedule E.
(e) Financial Statements. Schedule G contains copies of the
following consolidated financial statements of FMB and Merchants (the "FMB
Financial Statements"):
(i) Consolidated Balance Sheets as of December 31, 1994,
1993 and 1992;
(ii) Consolidated Statements of Income for each of the
three years ended December 31, 1994, 1993 and 1992;
(iii) Consolidated Statements of Changes in
Stockholders' Equity for each of the three years ended December 31, 1994,
1993 and 1992; and
(iv) Consolidated Statements of Cash Flows for each of
the three years ended December 31, 1994, 1993 and 1992.
Such financial statements and the notes thereto have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated. Each of such statements
of financial condition, together with the notes thereto, presents fairly as
of its date the financial condition and assets and liabilities of FMB or
Merchants. Such statements of operations, statements of stockholders' equity
and statements of cash flows, together with the notes thereto, present fairly
the results of operations of Merchants for the periods indicated.
Subject to the limitations imposed by federal and state laws, and except
as disclosed in the FMB Financial Statements, there are no restrictions
precluding FMB or Merchants from paying dividends when, as, and if declared
by their respective boards of directors.
(f) Absence of Undisclosed Liabilities. At December 31, 1994,
Merchants and FMB had no obligations or liabilities (contingent or otherwise)
of any nature which were not reflected in the FMB Financial Statements as of
such date, or disclosed in the notes thereto, except for those which in the
aggregate are immaterial or disclosed in Schedules specifically referred to
herein.
(g) Tax Matters. Merchants and FMB are members of the same
"affiliated group," as defined in Section 1504(a)(1) of the Code
(collectively, the "FMB Group"). Each member of the FMB Group has filed or
caused to be filed or (in the case of returns or reports not yet due) will
file all tax returns and reports required to have been filed by or for it
before the Effective Time of the Merger, and all information set forth in
such returns or reports is or (in the case of such returns or reports not yet
due) will be accurate and complete in all material respects. Each member of
the FMB Group has paid or made adequate provision in all material respects
for or (with respect to returns or reports not yet filed) before the
Effective Time of the Merger will pay or make adequate provision for all
taxes, additions to tax, penalties, and interest for all periods covered by
those returns or reports. Except as disclosed on Schedule H, there are, and
at the Effective Time of the Merger will be, no unpaid taxes, additions to
tax, penalties, or interest due and payable by any member of the FMB Group or
by any other person that are or could become a lien on any asset or otherwise
materially adversely affect the business, property or financial condition of
any member of the FMB Group. Each member of the FMB Group has collected or
withheld, or will collect or withhold before the Effective Time of the
Merger, all amounts required to be collected or withheld by it for any taxes,
and all such amounts have been, or before the Effective Time of the Merger
will have been, paid to the appropriate governmental agencies or set aside in
appropriate accounts for future payment when due. Each member of the FMB
Group is in material compliance with, and its records contain all applicable
information and documents (including, without limitation, properly completed
IRS Forms W-9) necessary to comply in all material respects with, all
information reporting and tax withholding requirements under federal, state,
and local laws, rules, and regulations, and such records identify with
specificity all accounts subject to backup withholding under Section 3406 of
the Code. The consolidated balance sheets contained in the FMB Financial
Statements fully and properly reflect, as of the dates thereof, the aggregate
liabilities of the members of the FMB Group for all accrued taxes, additions
to tax, penalties and interest in all material respects. For periods ending
after December 31, 1994, the books and records of each member of the FMB
Group fully and properly reflect its liability for all accrued taxes,
additions to tax, penalties and interest. Except as disclosed in Schedule H,
no member of the FMB Group has granted (nor is it subject to) any waiver of
the period of limitations for the assessment of tax for any currently open
taxable period, no tax return or report of any member of the FMB Group is
under examination by any taxing authority or the subject of any
administrative or judicial proceeding, and no unpaid tax deficiency has been
asserted against or with respect to any member of the FMB Group by any taxing
authority. No member of the FMB Group has made or entered into, or holds any
asset subject to, a consent filed pursuant to Section 341(f) of the Code and
the regulations thereunder or a "safe harbor lease" subject to former Section
168(f)(8) of the Code and the regulations thereunder. Schedule H describes
all tax elections, consents and agreements affecting any member of the FMB
Group. To the knowledge of FMB, no FMB shareholder is a "foreign person" for
purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, commitments or agreements
of any character to which FMB or Merchants is a party or by which either of
them is bound, calling for the issuance of securities of FMB or Merchants or
any security representing the right to purchase or otherwise receive any such
security other than the Option Agreements.
(i) Property; Leases. FMB and Merchants own (or enjoy use of
under capital leases) all property reflected on the FMB Financial Statements
as of December 31, 1994 (except personal property sold or otherwise disposed
of in the ordinary course of business). All property shown as being owned is
owned free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except those referred to in the notes
to the FMB Financial Statements, liens for current taxes not yet due and
payable, any unfiled mechanics' liens and such encumbrances and imperfections
of title, if any, as are not substantial in character or amount or otherwise
materially impair business operations.
The leases relating to leased property are valid and subsisting and
there does not exist with respect to FMB's or Merchants's obligations
thereunder any material default or event or condition which, after notice or
lapse of time or both, would constitute a material default thereunder. There
is no condemnation proceeding pending or, to the knowledge of FMB or
Merchants, threatened which would preclude or impair the use of any property
as presently being used in the conduct of the business of FMB or Merchants.
The leases are reflected in the FMB Financial Statements.
All property and assets material to the business or operations of FMB
and Merchants are in an operating condition and state of repair that is fit
for their current intended purpose and such property and assets are adequate
for the business and operations of FMB and Merchants as currently conducted.
No notice of violation of zoning laws, building or fire codes or other
statutes, ordinances or regulations relating to the operations of FMB or
Merchants has been received by FMB or Merchants.
(j) Additional Schedules Furnished to City Holding. In addition
to any Schedules furnished to City Holding pursuant to other provisions of
this Agreement, FMB and Merchants have previously furnished to City Holding
the following Schedules which are correct and complete as of the date hereof:
(i) Employees and Affiliates. Schedule I lists (A) name
of, current annual salary rates for, and the number of shares of FMB Common
Stock owned beneficially by, all present employees of FMB and Merchants who
each are presently scheduled to receive a salary in excess of $60,000 during
the year ending December 31, 1995; (B) the number of shares of FMB Common
Stock owned beneficially by each director of FMB and Merchants; and (C) the
names of and the number of shares of FMB Common Stock owned by each person
who beneficially owns 5% or more of the outstanding FMB Common Stock.
(ii) Certain Contracts. Schedule J lists all notes,
bonds, mortgages, indentures, licenses, lease agreements and other contracts
and obligations to which FMB or Merchants is a party, except for those
entered into by FMB and Merchants in the ordinary course of their respective
businesses consistent with their prior practices and that do not involve an
amount greater than $100,000.
(iii) Employment Contracts and Related Matters.
Except in all cases as set forth on Schedule K, neither FMB nor Merchants is
a party to (A) any employment contract not terminable at the option of FMB or
Merchants without liability; (B) any retirement, stock option, profit sharing
or pension plan or thrift plan or agreement or employee benefit plan (as
defined in Section 3 of the Employee Retirement Income Security Act of 1974);
(C) any management or consulting agreement not terminable at the option of
FMB or Merchants without liability; or (D) any union or labor agreement.
(iv) Real Estate. Schedule L describes all interests in
real property owned, leased or otherwise claimed by FMB or Merchants,
including "other real estate owned."
(k) Agreements in Force and Effect. All material contracts,
agreements, plans, leases, policies and licenses referred to in any Schedule
of FMB or Merchants referred to herein are valid and in full force and
effect, and neither FMB nor Merchants have breached any material provision
of, nor are in default in any material respect under the terms of, any such
contract, agreement, lease, policy or license.
(l) Legal Proceedings; Compliance with Laws. Except as set forth
in Schedule M, there is no legal, administrative, arbitration or other
proceeding or governmental investigation pending (including any legal,
administrative, arbitration or other proceeding or governmental investigation
pending involving a violation of the federal antitrust laws), or, to the
knowledge of FMB's or Merchants's management, threatened or probable of
assertion, which might result in money damages payable by FMB or Merchants in
excess of insurance coverage, which might result in a permanent injunction
against FMB or Merchants, which might result in a change in the zoning or
building ordinances materially affecting the property or leasehold interests
of FMB or Merchants, or which otherwise, either individually or in the
aggregate, is likely to have a material adverse affect on the financial
condition of FMB or Merchants. Except as set forth in Schedule M, FMB and
Merchants have complied in all material respects with any laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or
orders). FMB and Merchants have all licenses, permits, orders or approvals
of any federal, state, local or foreign governmental or regulatory body
(collectively, "Permits") that are material to or necessary for the conduct
of the respective businesses of FMB or Merchants; the Permits are in full
force and effect; no violations are or have been recorded in respect of any
Permits, nor has either FMB or Merchants received notice of any such
violation; and no proceeding is pending or, to the knowledge of FMB or
Merchants, threatened or probable of assertion to revise, revoke or limit any
Permit. Except as set forth in Schedule M, neither FMB nor Merchants is
party to any currently effective agreements or written understandings with
the Federal Reserve Board, the West Virginia Board or any other regulatory
authority. Neither FMB nor Merchants are subject to any judgment, order,
writ, injunction or decree which materially adversely affects, or might
reasonably be expected to materially adversely affect, the condition
(financial or otherwise) or business of FMB or Merchants or their ability to
fulfill their respective obligations pursuant to this Agreement.
(m) Employee Benefit Plans.
(i) Schedule K includes a correct and complete list of,
and City Holding has been furnished a true and correct copy of, (A) all
qualified pension and profit-sharing plans, all deferred compensation,
consultant, severance, thrift, option, bonus and group insurance contracts
and all other incentive, welfare and employee benefit plans, trust, annuity
or other funding agreements, and all other agreements that are presently in
effect, or have been approved prior to the date hereof, for the benefit of
employees or former employees of FMB, Merchants or the dependents or
beneficiaries of any employee or former employee of FMB or Merchants, whether
or not subject to ERISA (the "Employee Plans"); (B) the most recent actuarial
and financial reports prepared or required to be prepared with respect to any
Employee Plan; and (C) the most recent annual reports filed with any
governmental agency, the most recent favorable determination letter issued by
the Internal Revenue Service, and any open requests for rulings or
determination letters, that pertain to any such qualified Employee Plan.
Schedule K identifies each Employee Plan that is intended to be qualified
under Section 401(a) of the Code. With respect to each Employee Plan so
identified and except as set forth on Schedule K, the IRS has issued
favorable determination letters to such plans to the effect that the forms of
such plans (or predecessor plans) satisfy the requirements of Code Section
401(a) and for all years subsequent to the establishment of the plans and up
to the Effective Time of the Merger, and with respect to which the FMB's and
Merchants's tax returns and the plans' returns on Form 5500 are open to
audit, to FMB's and Merchants's knowledge the plans have satisfied, in form
and operation, the qualification requirements of Section 401(a) of the Code,
and no action that has been taken or not taken with respect to the plans
subsequent to such date has had or is reasonably expected to have any adverse
impact on the continued qualification of the plans through the Effective Time
of the Merger. The IRS has not revoked any letter of determination or
opinion letter to which reference is made above, nor has the IRS threatened
any such revocation.
(ii) Neither FMB, Merchants nor any employee pension
benefit plan (as defined in Section 3(2) of ERISA (a "Pension Plan"))
maintained or previously maintained by it, has incurred any material
liability to the Pension Benefit Guaranty Corporation ("PBGC") or to the
Internal Revenue Service with respect to any Pension Plan. There is not
currently pending with the PBGC any filing with respect to any reportable
event under Section 4043 of ERISA nor has any reportable event occurred as to
which a filing is required and has not been made.
(iii) Full payment has been made (or proper accruals
have been established) of all contributions which are required for periods
prior to the Closing Date under the terms of each Employee Plan, ERISA, or a
collective bargaining agreement. No accumulated funding deficiency (as
defined in Section 302 of ERISA or Section 412 of the Code) whether or not
waived, exists with respect to any Pension Plan (including any Pension Plan
previously maintained by FMB or Merchants). There is no "unfunded current
liability" (as defined in Section 412 of the Code) with respect to any
Pension Plan.
(iv) No Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). Neither FMB nor Merchants has incurred
any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multiemployer plan (as defined in Section 3(37) of ERISA).
Neither FMB nor Merchants has participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of ERISA).
(v) All Employee Plans that are "employee benefit
plans", as defined in Section 3(3) of ERISA, that are maintained by or were
previously maintained by FMB or Merchants comply and have been administered
in compliance in all material respects with ERISA and all other legal
requirements, including the terms of such plans, collective bargaining
agreements and securities laws. Neither FMB nor Merchants have any material
liability under any such plan that is not reflected in the FMB Financial
Statements.
(vi) No prohibited transaction has occurred with respect
to any Employee Plan that is an "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained by FMB or Merchants or any "employee
benefit plan" previously maintained by FMB or Merchants that would result,
directly or indirectly, in material liability under ERISA or in the
imposition of a material excise tax under Section 4975 of the Code.
(vii) Schedule K identifies each Employee Plan that
is an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA)
and which is funded. The funding under each such plan does not exceed the
limitations under Section 419A(b) or 419A(c) of the Code. Neither FMB nor
Merchants are subject to taxation on the income of any such plan or any such
plan previously maintained by FMB or Merchants.
(viii) Schedule K identifies the method of funding
(including any individual accounting) for all post-retirement medical or life
insurance benefits for the employees of FMB and Merchants. Schedule K also
discloses the funded status of these Employee Plans.
(ix) FMB and Merchants are the only trades or
businesses which are, or have ever been, treated as a single employer
for employee benefit purposes under ERISA and the Code.
(n) Insurance. All policies or binders of fire, liability,
product liability, workmen's compensation, vehicular and other insurance held
by or on behalf of FMB or Merchants are described on Schedule N and are valid
and enforceable in accordance with their terms, are in full force and effect,
and insure against risks and liabilities to the extent and in the manner
customary for the industry and are deemed appropriate and sufficient by FMB
and Merchants. Neither FMB nor Merchants is in default with respect to any
provision contained in any such policy or binder and has not failed to give
any notice or present any claim under any such policy or binder in due and
timely fashion. Neither FMB nor Merchants has received notice of
cancellation or non-renewal of any such policy or binder. Neither FMB nor
Merchants has knowledge of any inaccuracy in any application for such
policies or binders, any failure to pay premiums when due or any similar
state of facts that might form the basis for termination of any such
insurance. Neither FMB nor Merchants has knowledge of any state of facts or
of the occurrence of any event that is reasonably likely to form the basis
for any material claim against it not fully covered (except to the extent of
any applicable deductible) by the policies or binders referred to above.
Neither FMB nor Merchants has received notice from any of their respective
insurance carriers that any insurance premiums will be materially increased
in the future or that any such insurance coverage will not be available in
the future on substantially the same terms as now in effect.
(o) Loan Portfolio. FMB has no loans outstanding. Each loan
outstanding on the books of Merchants is reflected correctly in all material
respects by the loan documentation, was made in the ordinary course of
business, was not known to be uncollectible at the time it was made, and was
made in accordance with Merchants's standard loan policies in effect at the
time the loans were made. The records of Merchants regarding all loans
outstanding on its books are accurate in all material respects. The reserves
for possible loan losses on the outstanding loans of Merchants and the
reserves for other real estate owned by Merchants as reflected in the FMB
Financial Statements, have been established in accordance with generally
accepted accounting principles and with the requirements of the Office of the
Comptroller of the Currency, and in the best judgment of the management of
Merchants, are adequate to absorb all material known and anticipated loan
losses in the loan portfolio of Merchants, and any losses associated with
other real estate owned or held by Merchants. Except as identified on
Schedule O, no loan in excess of $200,000 has been classified as of the date
hereof by Merchants or regulatory examiners as "Other Loans Specifically
Mentioned", "Substandard", "Doubtful" or "Loss". Except as identified on
Schedule O, each loan reflected as an asset on the FMB balance sheets is, to
the knowledge of FMB and Merchants, the legal, valid and binding obligation
of the obligor and any guarantor, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditor's rights and to general equity principles, and no defense,
offset or counterclaim has been asserted with respect to any such loan which
if successful would have a material adverse effect on the financial
condition, results of operations or business of FMB or Merchants.
(p) Absence of Changes. Except as set forth in Schedule P, since
December 31, 1994, there has not been any material adverse change in the
condition (financial or otherwise), aggregate assets or liabilities, earnings
or business of FMB or Merchants. Since such date the business of FMB and
Merchants has been conducted only in the ordinary course.
(q) Brokers and Finders. Except for Merchants's engagement of
Baxter Fentriss and Company, neither FMB nor Merchants, nor any of their
respective officers, directors or employees have employed any broker or
finder or incurred any liability for any brokerage fees, commissions or
finders' fees in connection with the transaction contemplated herein.
(r) Reports. For the past five years, FMB and Merchants have
filed all reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with (i) the
Securities and Exchange Commission (the "SEC"); (ii) the Federal Reserve
Board; (iii) the West Virginia Board; and (iv) any other governmental or
regulatory authority or agency having jurisdiction over their operations.
Each of such reports and documents, including the financial statements,
exhibits and schedules thereto, which was filed with the SEC was in form and
substance in compliance with the 1933 Act or the Securities Exchange Act of
1934 (the "1934 Act"), as the case may be. None of such reports or
statements, or any amendments thereto, contains any statement which, at the
time and in the light of the circumstances under which it was made, was false
or misleading with respect to any material fact necessary in order to make
the statements contained therein not false or misleading.
(s) Environmental Matters. For purposes of this subsection, the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
"Environmental Law" includes without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section 9601, et seq; the Resource Conservation and Recovery Act, as amended,
42 U.S.C. Section 6901, et seq; the Clean Air Act, as amended, 42 U.S.C.
Section 7401, et seq; the Federal Water Pollution Control Act, as amended, 33
U.S.C. Section 1251, et seq; the Toxic Substances Control Act, as amended, 15
U.S.C. Section 9601, et seq; the Emergency Planning and Community Right to Know
Act, 42 U.S.C. Section 11001, et seq; the Safe Drinking Water Act, 42 U.S.C.
Section 300f, et seq; and all comparable state and local laws, and (ii) any
common law (including without limitation common law that may impose strict
liability) that may impose liability or obligations for injuries or damages due
to, or threatened as a result of, the presence of or exposure to any Hazardous
Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a
component. Hazardous Substances include without limitation petroleum or any
derivative or by-product thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by FMB or Merchants or any of their
subsidiaries, including those properties serving as collateral for any loans
made by FMB or Merchants.
To the knowledge of FMB and Merchants, except as set forth in Schedule
Q,
(i) neither FMB nor Merchants has been or is in violation of
or liable in any material respect under any Environmental Law;
(ii) none of the Loan Portfolio Properties and Other
Properties Owned has been or is in violation of or liable in any material
respect under any Environmental Law; and
(iii) there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the liability
of the Loan Portfolio Properties and Other Properties Owned under any
Environmental Law, including without limitation any notices, demand letters
or requests for information from any federal or state environmental agency
relating to any such liabilities under or violations of Environmental Law,
except for such violations and liabilities, and actions, suits, demands,
notices, claims, investigations or proceedings, which would not individually
or in the aggregate have a material adverse effect on the financial
condition, results of operations or business of FMB or Merchants.
(t) Community Reinvestment Act. FMB and Merchants have no reason
to believe that the transactions contemplated by this Agreement will not be
approved by all required regulatory authorities for reasons related to
compliance by FMB or Merchants with the Community Reinvestment Act of 1977
(12 U.S.C. 2901 et. seq.) ("CRA"). Merchants received at least a
"satisfactory" CRA rating as of its last CRA examination and has no reason to
believe that its CRA rating will be downgraded on or before the Closing Date.
(u) Disclosure. Except to the extent of any subsequent correction
or supplement with respect thereto furnished prior to the date hereof, all
written statements, certificates, schedules, lists and other written
information furnished by or on behalf of FMB or Merchants at any time to City
Holding in connection with this Agreement are true and correct in all
material respects. Each document delivered or to be delivered by FMB or
Merchants to City Holding is or will be a true and complete copy of such
document, unmodified except by another document delivered by FMB or
Merchants.
3.2 Representations and Warranties of City Holding. City Holding, to
the extent applicable, represent and warrant to FMB and Merchants as follows:
(a) Organization, Standing and Power. City Holding is a
corporation duly organized, validly existing and in good standing under the
laws of West Virginia and has all requisite corporate power and authority to
own, lease and operate its properties, to effect the Merger and to carry on
its business as now being conducted. City Holding has delivered to FMB
complete and correct copies of (i) the Articles of Incorporation of City
Holding and all amendments thereto to the date hereof, and (ii) the Bylaws of
City Holding as amended to the date hereof.
(b) Capital Structure. As of December 31, 1994, the authorized
capital stock of City Holding consisted of 500,000 shares of preferred stock,
par value $25.00 per share none of which were issued and outstanding, and
10,000,000 shares of common stock, par value $2.50 per share, of which
3,780,477 shares of common stock were issued and outstanding. All of such
issued and outstanding shares of common stock were validly issued, fully paid
and nonassessable at such date and all of such shares issued since
December 31, 1991, were issued in all material respects in compliance with
the Securities Act of 1933, as amended.
(c) Authority. Subject to the approval of the Plan of Merger by
the shareholders of City Holding, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary action on the part of City
Holding, and this Agreement is a valid and binding obligation of City
Holding, enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and compliance by City Holding with any of the provisions hereof will
not (i) conflict with or result in a breach of any provision of City
Holding's Articles of Incorporation or Bylaws or a default (or give rise to
any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
license, agreement or other instrument or to which City Holding is a party,
or by which either of them or any of their properties or assets may be bound;
or (ii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to City Holding or any of their properties or assets.
No consent or approval by any government authority, other than compliance
with applicable federal and state corporate, securities and banking laws, and
regulations of the Federal Reserve Board and the West Virginia Board is
required in connection with the execution and delivery by City Holding of
this Agreement or the consummation by City Holding of the Merger, or by the
Plan of Merger.
(d) Financial Statements. City Holding has delivered to FMB
copies of the following financial statements of City Holding (the "City
Holding Financial Statements"):
(i) Consolidated Balance Sheets as of December 31, 1994,
1993 and 1992;
(ii) Consolidated Statements of Income for each of the
three years ended December 31, 1994, 1993 and 1992;
(iii) Consolidated Statements of Changes in
Stockholders' Equity for each of the three years ended December 31, 1994,
1993 and 1992; and
(iv) Consolidated Statements of Cash Flows for each of
the three years ended December 31, 1994, 1993 and 1992.
Such consolidated financial statements and the notes thereto have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated. Each of such
consolidated balance sheets, together with the notes thereto, presents fairly
as of its date the financial condition and assets and liabilities of City
Holding. The consolidated statements of income, statements of changes in
shareholders' equity and statements of cash flows, together with the notes
thereto, present fairly the consolidated results of operations of City
Holding and its consolidated subsidiaries for the periods indicated.
(e) Absence of Undisclosed Liabilities. At December 31, 1994,
City Holding and its consolidated subsidiaries had no material liabilities of
any nature which were not reflected on the City Holding Financial Statements
or disclosed in the notes thereto at such date except for those which
individually or in the aggregate are immaterial.
(f) Absence of Changes. Since December 31, 1994, there has not
been any material adverse change in the condition (financial or otherwise),
aggregate assets or liabilities, earnings or business of City Holding as
reflected on its consolidated financial statements as of such date and for
the year then ended.
(g) Brokers and Finders. Neither City Holding nor any of its
officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the Merger.
(h) Subsidiaries; Ownership of FMB Common Stock. City Holding's
subsidiaries are The City National Bank of Charleston, First State Bank &
Trust, Bank of Ripley, Peoples Bank of Point Pleasant, Home National Bank of
Sutton, Blue Ridge Bank, Peoples State Bank, City Financial Corporation, City
Mortgage Corporation, Hinton Financial Corporation and the First Nation Bank
of Hinton. Such corporations are duly organized, validly existing and in
good standing under the laws of their jurisdiction of incorporation and have
all requisite corporate power and authority to own, lease and operate their
properties and to carry on their business as now being conducted. City
Holding currently owns 2,000 shares of FMB Common Stock.
(i) Reports. Since its date of organization, City Holding has
filed all reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with (i) the SEC;
(ii) the Federal Reserve Board; (iii) the West Virginia Board; and (iv) any
other governmental or regulatory authority or agency having jurisdiction over
their operations. Each of such reports and documents, including the
financial statements, exhibits and schedules thereto, which was filed with
the SEC was in form and substance in compliance with the 1933 Act or the 1934
Act, as the case may be. No such report or statement, or any amendments
thereto, contains any statement which, at the time and in the light of the
circumstances under which it was made, was false or misleading with respect
to any material fact necessary in order to make the statements contained
therein not false or misleading.
(j) Tax Matters. City Holding has filed or caused to be filed or
(in the case of returns or reports not yet due) will file all tax returns and
reports required to have been filed by or for it before the Effective Time of
the Merger, and all information set forth in such returns or reports is or
(in the case of such returns or reports not yet due) will be accurate and
complete in all material respects. City Holding has paid or made adequate
provision in all material respects for or (with respect to returns or reports
not yet filed) before the Effective Time of the Merger will pay or make
adequate provision for all taxes, additions to tax, penalties, and interest
for all periods covered by those returns or reports. The consolidated
balance sheets of City Holding fully and properly reflect, as of the dates
thereof, all liabilities aggregate liabilities for accrued taxes, additions
to tax, penalties and interest in all material respects. Except as disclosed
in Schedule R, no tax return or report of City Holding is under examination
by any taxing authority or subject of any administrative or judicial
proceeding, and no unpaid tax deficiency has been asserted against City
Holding by any taxing authority.
(k) Options, Warrants and Related Matters. As of the date of this
Agreement, there are no outstanding unexercised options, warrants, calls,
commitments or agreements of any character to which City Holding is a party
or by which it is bound, calling for the issuance of securities of City
Holding or any security representing the right to purchase or otherwise
receive such security, except for any rights pursuant to City Holding's
shareholder rights plan.
(l) Property; Leases. City Holding owns (or enjoys use of under
capital leases) all property reflected on its financial statements as of
December 31, 1994 (except property sold or otherwise disposed of in the
ordinary course of business). All property shown as being owned is owned
free and clear of all mortgages, liens, pledges, charges or encumbrances of
any nature whatsoever, except those referred to in the notes to the financial
statements, liens for current taxes not yet due and payable, any unfiled
mechanics' liens and such encumbrances and imperfections of title, if any, as
are not substantial in character or amount or otherwise materially impair
business operations.
(m) Legal Proceedings; Compliance with Laws. There is no legal,
administrative, arbitration or other proceeding or governmental investigation
pending (including any legal, administrative, arbitration or other proceeding
or governmental investigation pending involving a violation of the federal
antitrust laws), or, to the knowledge of City Holding, threatened or probably
of assertion, which might result in money damages payable by City Holding in
excess of insurance coverage, which might result in a permanent injunction
against City Holding, which might result in a change in the zoning or
building ordinances materially affecting the property or leasehold interests
of City Holding or which otherwise, either individually or in the aggregate,
is likely to have a material adverse affect on the financial condition of
City Holding. City Holding has complied in all material respects with any
laws, ordinances, requirements, regulations or orders applicable to their
respective businesses (including environmental laws, ordinances,
requirements, regulations or orders). Except as set forth in Schedule S,
City Holding has all licenses, permits, orders or approvals of any federal,
state, local or foreign governmental or regulatory body that are material to
or necessary for the conduct of its business. All of such permits are in
full force and effect; no violations are or have been recorded in respect of
any permits. City Holding has not entered into any agreements or written
understandings with the Federal Reserve Board, the West Virginia Board or any
other regulatory authority. City Holding is not subject to any judgment,
order, writ, injunction or decree which materially adversely affects, or
might reasonably be expected to materially adversely affect, the condition
(financial or otherwise) or business of City Holding or its ability to
fulfill its obligations pursuant to this Agreement.
(n) Employee Benefit Plans. Neither City Holding nor any employee
pension benefit plan (as defined in Section 3(2) of ERISA) maintained or
previously maintained by it, has incurred any material liability to the PBGC
or to the Internal Revenue Service. There is not currently pending with the
PBGC any filing with respect to any reportable event under Section 4043 of
ERISA nor has any reportable event occurred as to which a filing is required
and has not been made. Full payment has been made (or proper accruals have
been established) of all contributions which are required for periods prior
to the Closing Date under the terms of each employee plan, ERISA, or a
collective bargaining agreement of City Holding. No accumulated funding
deficiency (as defined in Section 302 of ERISA or Section 412 of the Code)
whether or not waived, exists with respect to any pension plan of City
Holding. There is no "unfunded current liability" (as defined in Section 412
of the Code) with respect to any pension plan of City Holding.
(o) Loan Portfolio. Each loan outstanding on the books of City
Holding or any City Holding subsidiary is reflected correctly in all material
respects by the loan documentation, was made in the ordinary course of
business, was not known to be uncollectible at the time it was made, and was
made in accordance with standard loan policies in effect at the time the
loans were made. The reserves for possible loan losses on such loans and the
reserves for other real estate owned by City Holding or any City Holding
subsidiary have been established in accordance with generally accepted
accounting principles and with the requirements of the West Virginia Board or
any other regulatory authority and, in the best judgment of management of
City Holding, are adequate to absorb all material known and anticipated loan
losses in the loan portfolios of City Holding and its subsidiaries, and any
losses associated with other real estate owned or held by City Holding and
its subsidiaries.
(p) Environmental Matters. There are no actions, suits, demands,
notices, claims, investigations or proceedings pending or threatened relating
to the liability under any Environmental Law (as defined in Section (t) of
Article III) including, without limitation, any notices, demand letters or
requests for information from any federal or state environmental agency
relating to any such liabilities under or violations of Environmental Law,
except for such violations and liabilities, and actions, suits, demands,
notices, claims, investigations or proceedings, which would not individually
or in the aggregate have a material adverse effect on the financial
condition, results of operations or business of City Holding.
(q) Community Reinvestment Act. City Holding has no reason to
believe that the transactions contemplated by this Agreement will not be
approved by all required regulatory authorities for reasons related to
compliance with the CRA. Each subsidiary of City Holding to which the CRA
applies received at least a "satisfactory" CRA rating as of its last CRA
examination and City Holding has no reason to believe that any such CRA
ratings will be downgraded on or before the Closing Date.
(r) Disclosure. Except to the extent of any subsequent correction
or supplement with respect thereto furnished prior to the date hereof, all
written statements, certificates, schedules, lists and other written
information furnished by or on behalf of City Holding at any time to FMB or
Merchants in connection with this Agreement are true and correct in all
material respects. Each document delivered or to be delivered by City
Holding to FMB or Merchants is or will be a true and complete copy of such
document, unmodified except by another document delivered by City Holding.
ARTICLE IV
Conduct Prior to
Effective Time of the Merger
4.1 Access to Records and Properties of City Holding, FMB and
Merchants. Between the date of this Agreement and the Effective Time of the
Merger, each of City Holding, on the one hand, and FMB and Merchants, on the
other, agree to give to the other reasonable access to all its premises and
books and records and to cause its officers to furnish the other with such
financial and operating data and other information with respect to the
business and properties as the other shall from time to time request for the
purposes of verifying the warranties and representations set forth herein,
preparing the Registration Statement (as defined in Section 4.2) and
applicable regulatory filings and preparing consolidated financial statements
of FMB as of a date prior to the Effective Time of the Merger in order to
facilitate City Holding in performance of its post-Closing Date financial
reporting requirements; provided, that any such investigation shall be
conducted in such manner as not to interfere unreasonably with the operation
of the respective business of the other. City Holding, FMB and Merchants
shall each maintain the confidentiality of all confidential information
furnished to them by the other parties hereto concerning the business,
operations, and financial condition of the party furnishing such information,
and shall not use any such information except in furtherance of the Merger.
If this Agreement is terminated, each party hereto shall promptly return all
documents and copies of, and all workpapers containing, confidential
information received from the other party hereto. The obligations of
confidentiality under this Section 4.1 shall survive any such termination of
this Agreement and shall remain in effect, except to the extent that (a) one
party shall have directly or indirectly acquired the assets and business of
the other party; (b) as to any particular confidential information with
respect to one party, such information (i) shall become generally available
to the public other than as a result of an unauthorized disclosure by the
other party or (ii) was available to the other party on a nonconfidential
basis prior to its disclosure by the first party; or (c) disclosure by any
party is required by subpoena or order of a court of competent jurisdiction
or by order of a regulatory authority of competent jurisdiction.
4.2 Registration Statement; Proxy Statement; Shareholder Approval.
Each of City Holding and FMB will duly call and will hold a meeting of
shareholders as soon as practicable for the purpose of approving the Merger,
and in connection therewith will recommend to and actively encourage
shareholders that they vote in favor of the Merger and will comply fully with
the provisions of the West Virginia Corporation Act, the 1933 Act and the
1934 Act and the rules and regulations of the SEC under such acts, and their
respective articles of incorporation and bylaws relating to the call and
holding of a meeting of shareholders for such purpose. City Holding and FMB
will jointly prepare the proxy statement-prospectus to be used in connection
with such meeting (the "Proxy Statement-Prospectus") and City Holding will
prepare and file with the SEC a Registration Statement on Form S-4 (the
"Registration Statement"), of which such Proxy Statement-Prospectus shall be
a part, and use its best efforts promptly to have the Registration Statement
declared effective. In connection with the foregoing, City Holding will
comply with the requirements of the 1933 Act and the 1934 Act and the rules
and regulations of the SEC under such Acts with respect to the offering and
sale of City Holding Common Stock in connection with the Merger and with all
applicable state Blue Sky and securities laws. The notices of such meetings
and the Proxy Statement-Prospectus shall not be mailed to FMB or City Holding
shareholders until the Registration Statement shall have become effective
under the 1933 Act. FMB covenants that none of the information supplied by
FMB, and City Holding covenants that none of the information supplied by City
Holding, for inclusion in the Proxy Statement-Prospectus will, at the time of
the mailing of the Proxy Statement-Prospectus to FMB and City Holding
shareholders, contain any untrue statement of a material fact nor will any
such information omit any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading; and at all times
subsequent to the time of the mailing of the Proxy Statement-Prospectus,
including the date of the meetings of FMB and City Holding shareholders to
which the statement relates and the Effective Time of the Merger, none of
such information in the Proxy Statement-Prospectus, as amended or
supplemented, will contain an untrue statement of a material fact or omit any
material fact required to be stated therein in order to make the statements
therein, in light of the circumstances in which they were made, not
misleading.
4.3 Operation of the Business of FMB and Merchants. FMB and Merchants
agree that from the date hereof to the Effective Time of the Merger, they
will operate their respective businesses substantially as presently operated
and only in the ordinary course, and, consistent with such operation, they
will use their best efforts to preserve intact its present business
organizations and relationships with persons having business dealings with
them. Without limiting the generality of the foregoing, FMB and Merchants
agree that they will not, without the prior written consent of City Holding,
unless consistent with past practices and in the ordinary course of business
(i) make any material change in the compensation or title of any executive
officer; (ii) make any material change in the compensation or title of any
other employee, other than those permitted by current employment policies in
the ordinary course of business, any of which changes shall be promptly
reported to City Holding; (iii) enter into any new bonus, incentive
compensation, deferred compensation, profit sharing, thrift, retirement,
pension, group insurance or other benefit plan or (except as otherwise
specifically contemplated in this Agreement) any employment or consulting
agreement or amend any such plan or agreement to increase the benefits
accruing or payable thereunder; (iv) create or otherwise become liable with
respect to any indebtedness for money borrowed or purchase money indebtedness
except in the ordinary course of business; (v) amend FMB's Amended Articles
of Incorporation, Merchants's Articles of Association, or their Bylaws except
as may be necessary to consummate the Merger or give effect to the Option
Agreement; (vi) issue or contract to issue any shares of FMB capital stock or
securities exchangeable for or convertible into capital stock other than
pursuant to the Option Agreement; (vii) purchase any shares of FMB capital
stock; (viii) enter into or assume any material contract or obligation,
except in the ordinary course of business; (ix) waive any right of
substantial value; (x) propose or take any other action which would make any
representation or warranty in Section 3.1 hereof untrue; (xi) change
securities portfolio policies; (xii) enter into any new agreement, amendment
or endorsement or make any changes relating to insurance coverage, including
coverage for its directors and officers, which would result in an additional
payment obligation of $200,000 or more; or (xiii) propose or take any action
with respect to the closing of any branches. FMB and Merchants further agree
that, between the date of this Agreement and the Effective Time of the
Merger, they will consult and cooperate with City Holding regarding (i) loan
portfolio management, including management and work-out of nonperforming
assets, and credit review and approval procedures, and (ii) securities
portfolio and funds management, including management of interest rate risk.
4.4 No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither FMB, Merchants nor any of their
respective officers, directors, representatives, agents or affiliates shall,
directly or indirectly, encourage, solicit or initiate discussions or
negotiations (with any person other than City Holding) concerning any merger,
sale of substantial assets, tender offer, sale of shares of stock or similar
transaction involving FMB or Merchants or disclose, directly or indirectly,
any information not customarily disclosed to the public concerning FMB or
Merchants, afford to any other person access to the properties, books or
records of FMB or Merchants or otherwise assist any person preparing to make
or who has made such an offer, or enter into any agreement with any third
party providing for a business combination transaction, equity investment or
sale of significant amount of assets. The foregoing shall not prevent FMB
from considering competing offers if, in the opinion of counsel to FMB, the
fiduciary duty FMB's directors owe to its shareholders requires them to do
so. FMB or Merchants will promptly communicate to City Holding the terms of
any proposal which either of them may receive in respect to any of the
foregoing transactions.
4.5 Dividends. FMB agrees that in 1995 it will declare and pay only
regular quarterly cash dividends at a rate no greater than the rate declared
and paid with respect to the corresponding quarter of 1994 and at the same
time dividends were declared and paid in 1994, provided that the quarter in
which the Merger is effective, shareholders of FMB will be paid either the
FMB or City Holding dividend.
4.6 Regulatory Filings. City Holding and FMB shall jointly prepare all
regulatory filings required to consummate the transactions contemplated by
the Agreement, and the Plan of Merger and submit the filings for approval
with the Federal Reserve Board and the West Virginia Board as soon as
practicable after the date hereof. City Holding and FMB shall use their best
efforts to obtain approvals of such filings.
4.7 Tax Opinion. City Holding and FMB shall each use their best
efforts to obtain the tax opinion referred to in paragraph (e) of Section 5.1
and paragraph (f) of Section 5.2 hereof.
4.8 Public Announcements. Each party will consult with the other
before issuing any press release or otherwise making any public statements
with respect to the Merger and shall not issue any press release or make any
such public statement prior to such consultations except as may be required
by law.
4.9 Transactions in City Holding Common Stock. Other than the issuance
of City Holding Common Stock upon the exercise of stock options granted
pursuant to employee benefit plans of City Holding or in connection with the
operation in the ordinary course of City Holding's dividend reinvestment plan
and 401(k) and Profit Sharing Plan, none of City Holding, FMB, Merchants or
the directors and executive officers of any of them will purchase, sell or
otherwise acquire or dispose of any shares of City Holding Common Stock
during the period of calculation of the City Holding Stock Price.
4.10 City Holding Rights Agreement. City Holding agrees that any rights
issued pursuant to the Rights Agreement adopted by it in 1991 shall be issued
with respect to each share of City Holding Common Stock issued pursuant to
the terms hereof and the Plan of Merger, regardless whether there has
occurred a Distribution Date under the terms of such Rights Agreement prior
to the occurrence of the Effective Time of the Merger.
4.11 Accounting Treatment. City Holding and FMB shall use their best
efforts to cause the Merger to be accounted for as a "pooling of interests."
4.12 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each of City Holding and FMB agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions contemplated by this
Agreement, including, without limitation, using reasonable effort to lift or
rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions
contemplated herein. Each of City Holding and FMB shall use its best efforts
to obtain consents of all third parties and governmental bodies necessary or
desirable for the consummation of the transactions contemplated by this
Agreement.
4.13 Adverse Changes in Condition. City Holding and FMB each agrees to
give written notice promptly to the other concerning any material adverse
change in its condition from the date of this Agreement until the Effective
Time that might adversely affect the consummation of the transactions
contemplated hereby or upon becoming aware of the occurrence or impending
occurrence of any event or circumstance which would cause or constitute a
material breach of any of the representations, warranties or covenants of
such party contained herein. Each of City Holding and FMB shall use its best
efforts to prevent or promptly to remedy the same.
4.14 Updating of Schedules. From the date of execution of this
Agreement until the consummation of the Merger, FMB agrees to keep up to date
all of the Schedules hereto and to provide notification to the other of any
changes or additions or events which have caused, or after the lapse of time
may cause, any such change or addition in any of the Schedules hereto.
ARTICLE V
Conditions of Merger
5.1 Conditions of Obligations of City Holding. The obligations of City
Holding to perform this Agreement are subject to the satisfaction of the
following conditions unless waived by City Holding.
(a) Representations and Warranties; Performance of Obligations; No
Adverse Change. The representations and warranties of FMB and Merchants set
forth in Section 3.1 hereof shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time of the
Merger as though made on and as of the Effective Time of the Merger; FMB and
Merchants shall have performed in all material respects all obligations
required to be performed by them under this Agreement prior to the Effective
Time of the Merger; there shall have occurred no material adverse change in
the condition (financial or otherwise), assets, liabilities, properties or
business of FMB or Merchants from December 31, 1994 to the Effective Time of
the Merger; and City Holding shall have received a certificate of authorized
officers of FMB to such effects.
(b) Authorization of Merger. All action necessary to authorize
the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein (including the
shareholder action referred to in Section 4.2) shall have been duly and
validly taken by the boards of directors of FMB and Merchants, and by the
shareholders of FMB and City Holding and FMB shall have full power and right
to merge on the terms provided herein.
(c) Opinion of Counsel. City Holding shall have received an
opinion or opinions of Bowles, Rice, McDavid, Graff and Love, special counsel
to FMB and Merchants, or other counsel reasonably satisfactory to City
Holding, dated the Closing Date and reasonably satisfactory to counsel to
City Holding to the effect that:
(i) FMB is a corporation organized and in good standing
under the laws of West Virginia and has all requisite corporate power to own,
lease and operate its properties and to carry on its business as now being
conducted as described in the Registration Statement and Proxy Statement-
Prospectus;
(ii) Merchants is a national banking association
organized and in good standing under the laws of the United States and has
all requisite corporate power to own, lease and operate its properties and to
carry on its business as now being conducted as described in the Registration
Statement and Proxy Statement Prospectus;
(iii) FMB and Merchants have full power to carry out
the transactions provided for in the Agreement; all corporate and other
proceedings required to be taken by or on the part of FMB and Merchants to
authorize them to execute and deliver the Agreement and to consummate the
transactions contemplated thereby and by the Plan of Merger have been duly
and validly taken; the Agreement has been duly and validly authorized,
executed and delivered by FMB and Merchants and constitutes a valid and
binding obligation of FMB and Merchants enforceable in accordance with its
terms except as same (A) may be limited by bankruptcy, insolvency,
reorganization or other similar laws relating to the rights of creditors, and
(B) is subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or law); and the Plan
of Merger has been approved by the Board of Directors and the shareholders of
FMB;
(iv) All outstanding shares of FMB Common Stock to be
exchanged for shares of City Holding Common Stock at the Effective Time of
the Merger have been duly authorized and are validly issued, fully paid and
nonassessable;
(v) To the knowledge of such counsel, except as
disclosed in Section 3.1(h) of the Agreement, FMB is not a party to or bound
by any outstanding option or agreement to sell, issue, buy or otherwise
dispose of or acquire any shares of FMB Common Stock or other security of FMB
or any shares of Merchants common stock or other security of Merchants other
than pursuant to the Option Agreement;
(vi) Execution and delivery by FMB and Merchants of the
Agreement, consummation by FMB and Merchants of the transactions contemplated
hereby, and compliance by FMB and Merchants with the provisions hereof will
not conflict with or result in a breach of any provision of the Amended
Articles of Incorporation, Articles of Association, or Bylaws of FMB or
Merchants, as applicable, or, a default (or give rise to rights of
termination, cancellation or acceleration) under the terms, conditions, or
provisions of any note, bond, mortgage, indenture, license, agreement or any
other instrument or listed in Schedule J (such counsel having no knowledge of
any item called for by such schedule which is not disclosed therein), or
violate any court order, writ, injunction or decree applicable to FMB or
Merchants or any of their properties or assets, of which such counsel has
knowledge after making inquiry with respect thereto;
(vii) Such counsel does not know of any litigation
that is pending or threatened which might result in money damages payable by
FMB or Merchants in excess of insurance coverage, which might result in a
permanent injunction against FMB or Merchants or which, individually or in
the aggregate, otherwise might have a material adverse effect on FMB or
Merchants or the transactions contemplated by this Agreement;
(viii) Such counsel does not know of any default
under, or the occurrence of any event which with the lapse of time, action or
inaction by a third party would result in a default under any outstanding
indenture, contract or agreement listed in Schedule J to the Agreement (such
counsel having no knowledge of any item called for by such Schedule which is
not disclosed therein) or under any governmental license or permit or a
breach of any provision of the Amended Articles of Incorporation, Articles of
Association, or Bylaws of FMB or Merchants, as applicable;
(ix) All legal obligations of FMB or Merchants
pertaining to consummation of the Merger under the laws of West Virginia
and the United States, including receipt of all regulatory approvals
required to be obtained by FMB or Merchants, other than the filing of
the Articles of Merger relating to the Merger with the Secretary of
State of West Virginia and the completion of all legal obligations not
the responsibility of FMB or Merchants pursuant to this Agreement, have
been completed to the satisfaction of such counsel in all material
respects;
(x) On the basis of facts within their knowledge, such
counsel have no reason to believe that (except as to financial statements and
other financial data, or as to material relating to, and supplied by, City
Holding for inclusion in the Proxy Statement-Prospectus as to which no belief
need be expressed) the Proxy Statement-Prospectus (as amended or
supplemented, if so amended or supplemented) contained any untrue statement
of a material fact or omitted any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading
as of (A) the time the Registration Statement became effective, (B) the time
of the meeting of FMB shareholders referred to in Section 4.2 of the
Agreement, (C) the time of the meeting of City Holding Shareholders referred
to in Section 4.2 of the Agreement, or (D) at the Closing Date (the matters
set forth in this subsection (xi) may be addressed in a separate letter of
such counsel addressed to City Holding).
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act and City Holding shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall
be exemptions from registration requirements necessary to offer and issue the
City Holding Common Stock in connection with the Merger, and neither the
Registration Statement nor any such permit, authorization or exemption shall
be subject to a stop order or threatened stop order by the SEC or any state
securities authority.
(e) Tax Opinion. City Holding shall have received, in form and
substance reasonably satisfactory to it, an opinion of Hunton & Williams,
dated as of the Closing Date, to the effect that, for federal income tax
purposes, consummation of the Merger will constitute a "reorganization" as
defined in Section 368(a) of the Code and no taxable gain will be recognized
by City Holding or FMB upon consummation of the Merger.
(f) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit City Holding to
consummate the Merger and to issue City Holding Common Stock to FMB
shareholders shall have been received and all related waiting periods shall
have expired, all applicable federal and state laws governing the Merger
shall have been complied with and there shall not be in any order or decree
of any regulatory authority any condition or requirement reasonably deemed
objectionable to City Holding.
(g) Affiliate Letters. Each person listed on Schedule M shall
have executed and delivered a commitment and undertaking to the effect that
such shareholder will dispose of the shares of City Holding Common Stock
received by him in connection with the Merger only in accordance with the
provisions of paragraph (d) of Rule 145; (ii) such shareholder will not
dispose of any of such shares until City Holding has received an opinion of
counsel acceptable to it that such proposed disposition will not violate the
provisions of any applicable securities laws; (iii) that they will not sell
or reduce their risk with respect to the City Holding shares acquired in the
Merger until after the publication of combined financial results covering 30
days of combined operations; and (iv) the certificates representing said
shares may bear a legend referring to the foregoing restrictions.
(h) Accounting Treatment. City Holding shall have received, in
form and substance satisfactory to it, a letter dated the Effective Date of
the Merger from Ernst & Young to the effect that the Merger will qualify for
pooling-of-interests accounting treatment.
(i) Acceptance by City Holding Counsel. The form and substance of
all legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for City Holding.
5.2 Conditions of Obligations of FMB and Merchants. The obligations of
FMB and Merchants to perform this Agreement are subject to the satisfaction
of the following conditions unless waived by FMB and Merchants:
(a) Representations and Warranties; Performance of Obligations; No
Adverse Change. The representations and warranties of City Holding set forth
in Section 3.2 hereof shall be true and correct in all material respects as
of the date of this Agreement and as of the Effective Time of the Merger as
though made on and as of the Effective Time of the Merger; City Holding shall
have performed all obligations required to be performed by them under this
Agreement prior to the Effective Time of the Merger; there shall have
occurred no material adverse change in the condition (financial or
otherwise), assets, liabilities, properties or business of City Holding from
December 31, 1994 to the Effective Time of the Merger; and FMB shall have
received a certificate of authorized officers of City Holding to such
effects.
(b) Authorization of Merger. All action necessary to authorize
the execution, delivery and performance of this Agreement by City Holding and
the consummation of the transactions contemplated herein (including the
shareholder action referred to in Section 4.2) shall have been duly and
validly taken by the boards of directors of City Holding and the shareholders
of City Holding and FMB, and City Holding shall have full power and right to
merge and to acquire and assume on the terms provided herein.
(c) Opinion of Counsel. (1) FMB and Merchants shall have received
an opinion of Hunton & Williams, special counsel to City Holding dated the
Closing Date and reasonably satisfactory to counsel to FMB and Merchants, to
the effect that:
(i) The shares of City Holding Common Stock to be issued
pursuant to the Agreement have been duly registered under the 1933 Act;
(ii) All legal obligations of City Holding pertaining to
consummation of the Merger under the laws of West Virginia and the United
States, including the receipt of all regulatory approvals required to be
obtained by City Holding, other than the filing of the Articles of Merger
relating to the Merger with the West Virginia Secretary of State and the
completion of other legal obligations that are the responsibility of City
Holding pursuant to this Agreement, have been completed to the satisfaction
of such counsel in all material respects; and
(iii) On the basis of facts within their knowledge,
such counsel have no reason to believe that (except as to financial
statements and other financial data, or as to material relating to, and
supplied by, FMB or Merchants for inclusion in the Proxy Statement-
Prospectus, as to which no belief need be expressed) the Proxy Statement-
Prospectus (as amended or supplemented, if so amended or supplemented)
contained any untrue statement of a material fact or omitted any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (A) as of the time the Registration Statement became
effective; (B) as of the time of the special meeting of shareholders of FMB
mentioned in Section 4.2 of the Agreement; (C) as of the time of the special
meeting of shareholders of City Holding mentioned in Section 4.2 of the
Agreement; or (D) as of the Closing Date.
(2) FMB and Merchants shall have received an opinion of Steptoe &
Johnson, general counsel to City Holding, dated the Closing Date and
satisfactory in form and substance to counsel to FMB and Merchants to the
effect that:
(i) City Holding is a corporation organized and in good
standing under the laws of West Virginia and have all requisite corporate
power to own, lease and operate their respective properties and to carry on
their respective business as now being conducted as described in the
Registration Statement and Proxy Statement-Prospectus;
(ii) City Holding has full power to carry out the
transactions provided for in the Agreement; all corporate and other
proceedings required to be taken by or on the part of City Holding to
authorize them to execute and deliver the Agreement and to consummate the
transactions contemplated thereby and by the Plan of Merger have been duly
and validly taken; the Agreement has been duly and validly authorized,
executed and delivered by City Holding and constitutes a valid and binding
obligation of City Holding enforceable in accordance with its terms except as
same (A) may be limited by bankruptcy, insolvency, reorganization or other
similar laws relating to the rights of creditors; and (B) is subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or law); the Plan of Merger has been
approved by the Board of Directors and shareholders of City Holding,
respectively; and the shares of City Holding Common Stock to be issued in the
Merger in exchange for shares of FMB Common Stock have been duly authorized
and when so issued will be validly issued, fully paid and nonassessable.
(iii) All outstanding shares of City Holding Common
Stock have been duly authorized and are validly issued, fully paid and
nonassessable; and
(iv) Execution and delivery by City Holding of the
Agreement, consummation by City Holding of the transactions contemplated
thereby, and compliance by City Holding with the provisions thereof will not
conflict with or result in a breach of any provisions of either City
Holding's Articles of Incorporation, or either of their Bylaws or a default
(or give rise to rights or termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or any other instrument or of City Holding or
Acquisition known to such counsel, or violate any court order, writ,
injunction or decree applicable to City Holding or any of their properties or
assets, of which such counsel has knowledge after making inquiry with respect
thereto.
(v) Such counsel does not know of any litigation
that is pending or threatened which might result in money damages
payable by City Holding in excess of insurance coverage, which might
result in a permanent injunction against City Holding or which,
individually or in the aggregate, otherwise might have a material
adverse effect on City Holding or the transactions contemplated by this
Agreement;
(vi) Such counsel does not know of any default
under, or the occurrence of any event which with the lapse of time,
action or inaction by a third party would result in a default under any
material outstanding indenture, contract or agreement or under any
governmental license or permit or a material breach of any provision of
the Articles of Incorporation, or Bylaws of City Holding;
(vii) On the basis of facts within their knowledge,
such counsel has no reason to believe that (except as to financial
statements and other financial data, or as to material relating to and
supplied by, FMB or Merchants for inclusion in the Proxy
Statement-Prospectus as to which no belief need be expressed) the Proxy
Statement-Prospectus (as amended or supplemented, if so amended or
supplemented) contained any untrue statement of a material fact or
omitted any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading as of (A) the time the
Registration Statement became effective, (B) the time of the meeting of
FMB shareholders referred to in Section 4.2 of the Agreement, (C) the
time of the meeting of City Holding shareholders referred to in Section
4.2 of the Agreement, or (D) at the Closing Date.
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act and City Holding shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall
be exemptions from registration requirements necessary to offer and issue the
City Holding Common Stock in connection with the Merger, and neither the
Registration Statement nor any such permit, authorization or exemption shall
be subject to a stop order or threatened stop order by the SEC or any state
securities authority.
(e) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit City Holding to
consummate the Merger and to permit City Holding to issue City Holding Common
Stock to FMB shareholders shall have been received and all related waiting
periods shall have expired.
(f) Tax Opinion. FMB shall have received, in form and substance
reasonably satisfactory to it, an opinion of Hunton & Williams to the effect,
for federal income tax purposes, that consummation of the Merger will
constitute a "reorganization" as defined in Section 368(a) of the Code; that
no taxable gain will be recognized by City Holding or FMB upon consummation
of the Merger; that no taxable gain will be recognized by a FMB shareholder
on the exchange by such shareholder of shares of FMB Common Stock solely for
shares of City Holding Common Stock (including any fractional share
interest); that the basis of City Holding Common Stock (including any
fractional share interest) received in the Merger will be the same as the
basis of the FMB Common Stock surrendered in exchange therefor; that the
holding period of such City Holding Common Stock (including any fractional
share interest) will include the holding period of the FMB Common Stock
surrendered in exchange therefor, if such FMB Common Stock is held as a
capital asset at the Effective Time of the Merger; and if the Exchange Ratio
results in the issuance of a fractional share interest, that a FMB
shareholder who receives cash in lieu of a fractional share of City Holding
Common Stock will recognize gain or loss equal to any difference between the
amount of cash received and the shareholder's basis in the fractional share
interest.
(g) Fairness Opinion. FMB shall have received the opinion of
Baxter Fentriss and Company that the consideration to be received pursuant to
the Agreement is fair from a financial point of view to the shareholders of
FMB.
(h) Acceptance by FMB's and Merchants's Counsel. The form and
substance of all legal matters contemplated hereby and of all papers
delivered hereunder shall be reasonably acceptable to counsel for FMB and
Merchants.
ARTICLE VI
Closing Date; Effective Time of the
Merger
6.1 Closing Date. Unless another date or place is agreed to in writing
by the parties, the closing of the transactions contemplated in this
Agreement shall take place at the offices of City Holding at 3601 MacCorkle
Avenue, S.E., Charleston, West Virginia, at 10:00 A.M., local time, on such
date as City Holding shall designate to FMB and is reasonably acceptable to
FMB; provided, that the date so designated shall not be earlier than 30 days
or later than 120 days following the date of the decision of the Federal
Reserve Board, whichever decision occurs later, approving the Merger (the
"Closing Date").
6.2 Filings at Closing. Subject to the provisions of Article V, at the
Closing Date, City Holding shall cause the Articles of Merger relating to the
Merger to be filed in accordance with the West Virginia Business Corporation
Act, and each of City Holding and FMB shall take any and all lawful actions
to cause the Merger to become effective.
6.3 Effective Time. Subject to the terms and conditions set forth
herein, including receipt of all required regulatory approvals, the Merger
shall become effective at the later of the time the Articles of Merger
relating to the Merger filed are made effective by the West Virginia
Secretary of State (the "Effective Time of the Merger").
ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination. This Agreement shall be terminated, and the Merger
abandoned, if (i) the shareholders of FMB shall not have given the approval
required by Section 5.1(b) or (ii) the shareholders of City Holding shall not
have given the approval required by Section 5.2(b). Notwithstanding such
approval by such shareholders, this Agreement may be terminated in writing at
any time prior to the Effective Time of the Merger by:
(a) The mutual consent of City Holding and FMB, as expressed by
their respective boards of directors;
(b) Either City Holding or FMB, as expressed by their respective
boards of directors, after December 31, 1995;
(c) By City Holding in writing authorized by its Board of
Directors if FMB or Merchants has, or by FMB in writing authorized by its
Board of Directors if City Holding has, in any material respect, breached
(i) any covenant or agreement contained herein, or (ii) any representation or
warranty contained herein, in any case if such breach has not been cured by
the earlier of 30 days after the date on which written notice of such breach
is given to the party committing such breach or the Closing Date; provided
that it is understood and agreed that either party may terminate this
Agreement on the basis of any such material breach of any representation or
warranty contained herein notwithstanding any qualification therein relating
to the knowledge of the other party;
(d) Either City Holding or FMB, as expressed by their respective
boards of directors, in the event that any of the conditions precedent to the
obligations of such party to consummate the Merger have not been satisfied or
fulfilled or waived by the party entitled to so waive on or before the
Closing Date, provided that neither party shall be entitled to terminate this
Agreement pursuant to this subparagraph (d) if the condition precedent or
conditions precedent which provide the basis for termination can reasonably
be and are satisfied within a reasonable period of time, in which case, the
Closing Date shall be appropriately postponed;
(e) City Holding or FMB, if the Board of Directors of either
Corporation shall have determined in their sole discretion, exercised in good
faith, that the Merger has become inadvisable or impracticable by reason of
the threat or the institution of any litigation, proceeding or investigation
to restrain or prohibit the consummation of the transactions contemplated by
this Agreement or to obtain other relief in connection with this Agreement;
(f) City Holding or FMB, if any of the Federal Reserve Board or
the West Virginia Board deny approval of the Merger and the time period for
all appeals or requests for reconsideration has run;
(g) City Holding, if holders of more than 10% of the outstanding
shares of FMB Common Stock exercise their rights to an appraisal of their
shares pursuant to Sections 31-1-122 and 31-1-123 of the West Virginia
Corporation Act in connection with the Merger;
(h) FMB, if (i) the average closing sales price of City Holding
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") for the 20 trading days following the
later of (a) the receipt of Federal Reserve Board approval of the Merger and
(b) the date on which the shareholders of FMB approve the merger, is less
than $22.80 per share, and (ii) City Holding and FMB cannot agree on an
amendment to the Exchange Ratio;
(i) City Holding, if (i) the average closing sales price of City
Holding Common Stock as reported by NASDAQ for the 20 trading days following
the later of (a) the receipt of Federal Reserve Board approval of the Merger
and (b) the date on which the shareholders of FMB approve the merger, is
greater than $34.20 per share, and (ii) City Holding and FMB cannot agree on
an amendment to the Exchange Ratio; and
7.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement and the Merger pursuant to Section 7.1, this
Agreement, other than the provisions of Sections 4.1 (last sentence) and
8.3, 9.1, shall become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders.
7.3 Survival of Representations, Warranties and Covenants. The
respective representations and warranties, covenants and agreements (except
for those contained in Sections 1.1, 1.2, 1.3, 1.4, 1.5, 2.1, 2.2, 2.3, 2.4,
4.1 (last sentence), 7.3, 8.2, 8.3, 8.4, 9.1, 9.2, 9.3, 9.4, 9.5 and 9.6,
which shall survive the effectiveness of the Merger) of City Holding,
Merchants and FMB contained herein shall expire with, and be terminated and
extinguished by, the effectiveness of the Merger and shall not survive the
Effective Time of the Merger.
7.4 Waiver and Amendment. Any term or provision of this Agreement may
be waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at
any time, whether before or after the meeting of FMB and City Holding
shareholders referred to in Section 4.2 hereof, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
ARTICLE VIII
Additional Covenants
8.1 Registration Statement. City Holding, FMB and Merchants
acknowledge and agree that the Merger is a transaction to which the 1933 Act
is applicable. Each of the parties agrees to comply with the provisions of
the 1933 Act and all rules and regulations of the SEC promulgated pursuant to
the 1933 Act and cooperate in connection with the preparation and filing by
City Holding of a Registration Statement under the 1933 Act relating to the
Merger. City Holding, FMB and Merchants agree (a) to give their respective
authorized representatives complete access to the books, records and files of
the other party at any reasonable time for the purpose of preparing such
Registration Statement and Proxy Statement; (b) to provide the other party
upon request such information relating to their businesses and financial
condition, as shall be appropriate in connection with the preparation of said
Registration Statement and Proxy Statement; and (c) to submit to the other
party for its prior approval all press releases or other oral or written
statements made or issued which relate to the Merger in any manner.
8.2 Employee Benefits. All employees of FMB and Merchants immediately
prior to the Effective Time of the Merger who are employed by FMB and
Merchants following the Effective Time of the Merger ("Transferred
Employees") will be covered by City Holding's employee benefit plans with
eligibility based on their length of service, compensation, job
classification, and position with FMB and Merchants. City Holding's benefits
plans will recognize for purposes of eligibility to participate and for
vesting, all Transferred Employees' service with FMB and Merchants, subject
to applicable break in service rules. Eligible employees of FMB and
Merchants shall be permitted to contribute funds distributed on any
termination of FMB or Merchants benefit plans to similar City Holding benefit
plans.
8.3 Operations after Closing. For at least five years after the
Effective Time of the Merger, unless otherwise approved by a majority of
continuing directors of Merchants, Merchants will remain a separately
incorporated bank operated under the name "Merchants National Bank". All
branches of Merchants will remain in operation following the Effective Time
of the Merger except the Kanawha City branch of Merchants located at 4315
MacCorkle Avenue, S.E. in Charleston, West Virginia and the Bradford Street
branch of Merchants located at 200 Bradford Street in Charleston, West
Virginia both of which shall be consolidated into City National Bank at the
Effective Time or as soon as practicable thereafter. Following the Effective
Time of the Merger, the Directors of Merchants shall continue as Directors
and Merchants for at least five years following the Effective Time of the
Merger unless removed for cause and shall continue to receive Board fees at
least equal to the Board fees such persons received immediately prior to the
Effective Time of the Merger. In addition, for at least five years following
the Effective Time of the Merger, except with the approval of the continuing
directors of Merchants, no employee of Merchants as of the date of this
Agreement may be terminated without cause and no change will be made in the
compensation levels, fringe benefits or similar arrangements of such
employees. As used in this Section, "cause" shall mean dishonesty, fraud or
gross abuse of authority in the performance of duty or breach of fiduciary
duty.
8.4 Indemnification. City Holding shall indemnify, and advance
expenses (including legal fees and expenses) in matters that may be subject
to indemnification to, persons who served as directors and officers of FMB
and Merchants on or before the Effective Time of the Merger with respect to
liabilities and claims (and related expenses) made against them resulting
from their service as such prior to the Effective Time of the Merger in
accordance with and subject to the requirements and other provisions of City
Holdings' Articles of Incorporation and Bylaws in effect on the date of this
Agreement and applicable provisions of law to the same extent as City Holding
is obliged thereunder to indemnify and advance expenses to its own directors
and officers with respect to liabilities and claims made against them
resulting from their service as such to City Holding.
8.5 City Holding Agreement with George Davis. From the Effective Date
of the Merger until his retirement, George F. Davis will serve as Executive
Vice President of City Holding at annual compensation and benefits not less
than his current compensation package with FMB and Merchants. City Holding
agrees that when Mr. Davis retires on his seventieth birthday, City Holding
will retain him in a consulting capacity for three years and will pay him an
annual consulting fee equal to 50% of his annual salary in effect at the time
of his retirement.
ARTICLE IX
Miscellaneous
9.1 Expenses. Each party hereto shall bear and pay the costs and
expenses incurred by it relating to the transactions contemplated hereby,
provided, however, that if either party hereto terminates this Agreement
pursuant to Sections 7.1(c) or 7.1(d) without the consent of the other party
hereto, such terminating party shall pay to the other party $50,000 cash
within 10 business days of such other party's receipt of the terminating
party's written notice of termination.
9.2 Entire Agreement. This Agreement contains the entire agreement
among City Holding, FMB and Merchants with respect to the Merger and the
related transactions and supersedes all prior arrangements or understandings
with respect thereto.
9.3 Descriptive Headings; Recitals. The descriptive headings and
recitals contained in this Agreement are for convenience only and shall not
control or affect the meaning or construction of any provisions of this
Agreement.
9.4 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally or sent by registered or certified mail, postage prepaid,
addressed as follows:
If to City Holding:
City Holding Company
3601 MacCorkle Avenue, S.E.
Charleston, West Virginia 25304
Attention: Mr. Steven J. Day
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219
If to FMB or Merchants:
First Merchants Bancorp, Inc.
Fourth Avenue and Washington Street
Montgomery, West Virginia 25136
Attention: George F. Davis, Chief Executive Officer
Copy to:
Deborah A. Sink
Bowles, Rice, McDavid, Graff & Love
16th Floor Commerce Square
P.O. Box 1386
Charleston, West Virginia 25325-1386
9.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute one
agreement.
9.6 Governing Law. Except as may otherwise be required by the laws of
the United States, this Agreement shall be governed by and construed in
accordance with the laws of West Virginia.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be executed on their behalf and their corporate seals affixed
and attested by their officers thereunto duly authorized, all as of the day
and year first above written.
CITY HOLDING COMPANY
By
Its President and Chief Executive Officer
FIRST MERCHANTS BANCORP, INC.
By
Its
MERCHANTS NATIONAL BANK
By
Its
<PAGE>
Exhibit A
PLAN OF MERGER
OF
FIRST MERCHANTS BANCORP, INC.
INTO
CITY HOLDING COMPANY
Section 1. First Merchants Bancorp, Inc., a West Virginia corporation
("FMB"), upon the time that the Articles of Merger are made effective by the
Secretary of State of West Virginia (the "Effective Time of the Merger"), be
merged (the "Merger") into City Holding Company, a West Virginia corporation
("City Holding"), with the result that City Holding shall be the surviving
corporation (the "Surviving Corporation").
Section 2. Conversion of Stock. At the Effective Time of the Merger:
(i) Each share of FMB Common Stock ("FMB Common Stock")
issued and outstanding immediately prior to the Effective Time of the
Merger, other than shares held by City Holding or in the treasury of FMB
and other than Dissenting Shares (as hereinafter defined), and which,
under the terms of Section 3 of this Plan of Merger, is to be converted
into and exchangeable for Common Stock of City Holding ("City Holding
Common Stock") shall be converted into 1.60 shares of City Holding
Common Stock.
(ii) Each share of FMB Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger and held by City
Holding or in the treasury of FMB shall be canceled.
Section 3. Manner of Conversion of FMB Common Stock. The manner in
which outstanding shares of FMB Common Stock shall be converted into City
Holding Common Stock, as specified in Section 2 hereof, after the Effective
Time of the Merger, shall be as follows:
(i) Each share of FMB Common Stock, other than shares held by
City Holding or in the treasury of FMB and other than Dissenting Shares,
shall be converted into 1.60 shares of City Holding Common Stock.
(ii) No fractional shares of City Holding Common Stock shall
be issued, but instead the value of fractional shares shall be paid in
cash (less all applicable withholding taxes), as determined in
accordance with Section 2.4 of the Agreement (defined below).
(iii) Certificates for shares of FMB Common Stock shall be
submitted for exchange for City Holding Common Stock accompanied by a
Letter of Transmittal to be furnished within five business days after the
Effective Time of the Merger to FMB's shareholders of record as of the
Effective Time of the Merger. Until so surrendered, each outstanding
certificate which, prior to the Effective Time of the Merger, represented
FMB Common Stock, shall be deemed to evidence only the right to receive
1.60 shares of City Holding Common Stock. Until such outstanding shares
formerly representing FMB Common Stock are so surrendered, no dividend
payable to holders of record of City Holding Common Stock as of any date
subsequent to the Effective Time of the Merger shall be paid to the holder
of such outstanding certificates in respect thereof. Upon such surrender,
dividends accrued or declared on City Holding Common Stock shall be paid in
accordance with Section 2.2 of the Agreement and Plan of Reorganization
dated as of March 14, 1995, among City Holding, FMB and Merchants National
Bank (the "Agreement").
Section 4. Dissenting Shares. Notwithstanding anything in this Plan of
Merger to the contrary, shares of FMB Common Stock which are issued and
outstanding immediately prior to the Effective Time of the Merger and which
are held by a shareholder who has the right (to the extent such right is
available by law) to demand and receive payment of the fair value of his
shares of FMB Common Stock pursuant to Sections 13-1-122 and 13-1-123 of the
West Virginia Corporation Act (the "Dissenting Shares") shall be canceled and
shall not be converted into or by exchangeable for the right to receive the
consideration provided in Section 2 of this Plan of Merger, unless and until
such holder shall fail to perfect his right to dissent or shall have
effectively withdrawn or lost such right under the West Virginia Corporation
Act, as the case may be. If such holder shall have so failed to perfect or
shall have effectively withdrawn or lost such right, his shares of FMB Common
Stock shall thereupon be deemed to have been converted into, at the Effective
Time of the Merger, the right to receive 1.60 shares of City Holding Common
Stock.
Section 5. Articles of Incorporation, Bylaws and Directors of the
Surviving Company. At and following the Effective Time of the Merger, there
shall be no change caused by the Merger in the Articles of Incorporation
(except any change caused by the filing of Articles of Merger relating to the
Merger), By-laws, or Board of Directors of the Surviving Company.
Section 6. Effect of the Merger. The Merger, upon the Effective Time
of the Merger, shall have the effect provided by Section 31-1-37 of the West
Virginia Corporation Act.
<PAGE>
SCHEDULE R
City Holding Tax Matters
None.
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The following formula was used to calculate the earnings per share in
Exhibit 13(a), page 17, Consolidated Statements of Income of the Annual
Report to Shareholders of City Holding Company for the year ended December
31, 1994, included in this report.
Ratio Calculation
Earnings Per Share Net Income
Weighted Average
Shares of Common
Stock Outstanding
for the period
YEAR ENDED DECEMBER 31
1994 1993 1992
Weighted Average
Shares Outstanding 3,772,638 3,762,783 3,779,502
Net Income
(in thousands) $ 6,959 $ 6,432 $ 5,904
Per Share Amount $ 1.85 $ 1.71 $ 1.56
No Common Stock equivalents exist and therefore primary and fully-
diluted earnings per share are the same.
FINANCIAL REPORT
7 SELECTED FINANCIAL DATA
8 TWO YEAR SUMMARY OF COMMON STOCK
PRICES AND DIVIDENDS
8-20 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
21 REPORT OF INDEPENDENT AUDITORS
22-25 CONSOLIDATED FINANCIAL STATEMENTS
26-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40 BANK DIRECTORS
41 HOLDING COMPANY DIRECTORS/
AFFILIATE PRESIDENTS &
HOLDING COMPANY MANAGEMENT
42 MAP OF SUBSIDIARY LOCATIONS
SELECTED FINANCIAL DATA
TABLE ONE
FINANCIAL SUMMARY
(in thousands, except per share data)
<TABLE>
FIVE YEAR SUMMARY
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
TOTAL INTEREST INCOME $ 55,148 $ 48,216 $ 43,527 $ 42,870 $ 41,110
TOTAL INTEREST EXPENSE 22,242 19,547 18,878 21,927 23,682
NET INTEREST INCOME 32,906 28,669 24,649 20,943 17,428
PROVISION FOR LOAN LOSSES 953 1,341 2,222 1,272 898
TOTAL OTHER INCOME 4,647 3,004 1,897 1,797 1,789
TOTAL OTHER EXPENSES 26,448 20,951 15,909 14,957 12,477
INCOME BEFORE INCOME TAXES 10,152 9,381 8,415 6,511 5,842
NET INCOME 6,959 6,432 5,904 4,373 4,173
PER SHARE DATA (1)
NET INCOME $ 1.85 $ 1.71 $ 1.56 $ 1.16 $ 1.11
CASH DIVIDENDS DECLARED (2) .59 .56 .49 .42 .35
BOOK VALUE PER SHARE 15.05 14.80 13.88 12.82 11.98
AVERAGE BALANCE SHEET SUMMARY
TOTAL LOANS $ 448,924 $ 362,313 $ 274,455 $ 239,305 $ 206,552
SECURITIES 222,466 221,463 193,626 181,415 186,488
DEPOSITS 640,900 554,035 446,429 406,055 377,012
LONG-TERM DEBT 6,252 4,387 508 373 1,817
STOCKHOLDERS' EQUITY 57,925 54,459 50,458 46,771 43,669
TOTAL ASSETS 754,409 636,842 514,206 467,242 444,735
AT YEAR END
NET LOANS $ 489,395 $ 407,990 $ 324,078 $ 252,072 $ 223,277
SECURITIES 196,377 241,637 208,075 189,508 184,137
DEPOSITS 651,264 617,333 526,315 418,888 395,340
LONG-TERM DEBT 6,875 5,875 4,000 NONE 1,725
STOCKHOLDERS' EQUITY 56,869 55,834 52,317 48,200 45,185
TOTAL ASSETS 780,526 707,078 597,370 480,921 462,613
SELECTED RATIOS
RETURN ON AVERAGE ASSETS .92% 1.01% 1.15% .94% .94%
RETURN ON AVERAGE EQUITY 12.01 11.81 11.70 9.35 9.56
AVERAGE EQUITY TO AVERAGE ASSETS 7.68 8.55 9.81 10.01 9.82
DIVIDEND PAYOUT RATIO (2) 27.06 33.33 31.97 33.37 30.15
</TABLE>
(1) ALL PER SHARE DATA HAVE BEEN RESTATED TO REFLECT A 10% STOCK
DIVIDEND EFFECTIVE JANUARY, 1995 AND AUGUST, 1992.
(2) CASH DIVIDENDS AND THE RELATED PAYOUT RATIO ARE BASED ON HISTORICAL
RESULTS OF THE COMPANY AND DO NOT INCLUDE CASH DIVIDENDS OF ACQUIRED
SUBSIDIARIES PRIOR TO THE DATES OF CONSUMMATION.
The company acquired 100% of the common stock of the Buffalo Bank of
Eleanor (Buffalo) in December 1992 for cash. In 1993, certain other
purchase acquisitions were consummated by City Holding. As more fully
discussed in NOTE THREE of the audited Consolidated Financial
Statements, these acquisitions were accounted for using the purchase
method of accounting. Accordingly, the results of operations of the
purchased subsidiaries are included in the information presented above
from the date of acquisition forward, and prior year balance sheets have
not been restated for such transactions.
7
TWO YEAR SUMMARY OF
COMMON STOCK PRICES AND DIVIDENDS
MARKET PRICE RANGE*
CASH
DIVIDENDS
PER SHARE* LOW HIGH
1994
FOURTH QUARTER $ .15 $ 27.00 $35.00
THIRD QUARTER .15 28.18 31.82
SECOND QUARTER .15 23.64 31.82
FIRST QUARTER .15 24.55 31.82
1993
FOURTH QUARTER $ .15 $ 25.91 $30.45
THIRD QUARTER .15 23.18 30.45
SECOND QUARTER .14 20.00 26.82
FIRST QUARTER .14 18.64 21.59
*ALL PER SHARE DATA HAVE BEEN RESTATED TO REFLECT A 10% STOCK DIVIDEND
EFFECTIVE JANUARY, 1995. CASH DIVIDENDS REPRESENT AMOUNTS DECLARED BY
THE COMPANY AND DO NOT INCLUDE CASH DIVIDENDS OF ACQUIRED SUBSIDIARIES
PRIOR TO THE DATES OF ACQUISITION.
THE COMPANY'S COMMON STOCK IS INCLUDED ON THE NASDAQ
NATIONAL MARKET SYSTEM UNDER THE SYMBOL CHCO. THE TABLE SETS
FORTH THE CASH DIVIDENDS PAID PER SHARE AND INFORMATION REGARDING THE
MARKET PRICES PER SHARE OF THE COMPANY'S COMMON STOCK FOR THE
PERIOD INDICATED.THE PRICE RANGES ARE BASED ON TRANSACTIONS AS
REPORTED ON THE NASDAQ NATIONAL MARKET SYSTEM. AT DECEMBER 31,
1994, THERE WERE 1,771 STOCKHOLDERS OF RECORD.
SEE NOTE NINE OF THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR A DISCUSSION OF RESTRICTIONS ON SUBSIDIARY DIVIDENDS.
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CITY HOLDING COMPANY
City Holding Company (the Company), a West Virginia corporation
headquartered in Charleston, commenced operations in November 1983. The
Company currently has eight banking subsidiaries, and three non-banking
subsidiaries. All of the subsidiaries are wholly-owned. In addition to
the Company's periodic filings with the SEC, each of its subsidiary
banks are subject to certain regulatory guidelines at the applicable
federal and state level. As such, the banks are routinely examined by
these regulatory bodies and certain information is required to be
submitted to them each quarter. The Company operates retail and
consumer-oriented community banks that emphasize personal service. At
December 31, 1994, the Company had total assets of $781 million, total
deposits of $651 million and total stockholders' equity of $57 million.
The Company's principal subsidiary bank is The City National Bank of
Charleston (City National), which was organized in 1957 and had $272
million in total assets at December 31, 1994. Through its main office,
City National serves the Kanawha City section of Charleston and
municipalities and rural areas east of the city. City National also
operates full service branch banks in downtown Charleston, western
Charleston, the South Hills district of Charleston, St. Albans and Cross
Lanes.
The Charleston metropolitan area served by City National is the
largest in West Virginia, with a population of approximately 270,000.
The state's capital city, Charleston, is served by three interstate
highways and the area's economy is diverse and strong in relation to the
economy of the state as a whole. A service center, Charleston provides
governmental, medical, financial and other services for the entire
state. Major chemical companies and educational institutions also
contribute to the local economy.
The Company completed its acquisition of The Peoples Bank of Point
Pleasant (Point Pleasant) in June 1987. Point Pleasant, a
state-chartered bank organized in 1965, conducts a general banking
business through its main office and two branch offices located in Mason
County, West Virginia, which has a population of approximately 27,000.
The Mason County economy primarily consists of dairy and crop farming
industries. Point Pleasant had total assets of $103 million at December
31, 1994.
In September 1988, the Company acquired First State Bank & Trust of
Rainelle, West Virginia (Rainelle). Rainelle, a state-chartered bank
incorporated in 1973, operates a full-service bank and two branch
offices in Greenbrier County, West Virginia. In 1994, the Company
acquired the remaining 33% of the First National Bank-Beckley which was
subsequently merged into Rainelle. This merger expanded Rainelle into
Beckley (Raleigh County), West Virginia by adding two additional
branches. The Greenbrier County economy is primarily supported by the
mining, timber and farming industries. Raleigh County is primarily
supported by the mining, retail and government industries. Rainelle had
total assets of $74 million at December 31, 1994.
8
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CITY HOLDING COMPANY (CONTINUED)
In October 1988, the Company acquired Bank of Ripley (Ripley). Ripley,
a state-chartered institution organized in 1891, is located in Jackson
County, West Virginia. Ripley operates a full-service bank with an
emphasis on retail or consumer banking. The Jackson County economy is
primarily supported by the farming and timber industries. Ripley had $64
million in total assets at December 31, 1994.
The Company acquired Home National Bank of Sutton, West Virginia (Home
National) in May 1992. Home National, organized in 1909, operates a
full service bank and one branch office in Braxton County, West
Virginia. The Braxton County economy is primarily supported by the
mining, timber, and farming industries. Home National had total assets
of $63 million at December 31, 1994.
In August 1992, the Company began operations of Blue Ridge Bank (Blue
Ridge), a de novo institution chartered as a state nonmember bank. Blue
Ridge, a full service bank, is located in Martinsburg, West Virginia.
In October 1993, Blue Ridge assumed the insured deposits and purchased
certain facilities and an insignificant amount of performing loans of
the former Shenandoah Federal Savings Association in a cash transaction
with the Resolution Trust Corporation. This acquisition, which added
approximately $40 million in deposits, expanded Blue Ridge from two
offices to seven, located in Berkeley, Jefferson, Morgan and Grant
counties. The economy of Martinsburg and surrounding communities is
primarily supported by the wholesale and retail trade, service and
government industries. Blue Ridge had total assets of $100 million at
December 31, 1994.
The Company acquired The Buffalo Bank of Eleanor (Buffalo) in December
1992. Buffalo, a state-chartered bank organized in 1919, operates a full
service bank and a branch office in Putnam County, West Virginia. The
Putnam County economy consists of agriculture, retail and governmental
industries. Buffalo had total assets of $59 million at December 31,
1994. In January, 1995, the Company renamed Buffalo as Peoples State
Bank (Peoples Bank) and a new location was opened in Clarksburg,
Harrison County, West Virginia.
The Company acquired Hinton Financial Corporation and its subsidiary,
The First National Bank of Hinton, West Virginia (Hinton) in December
1994. Hinton, organized in 1974, operates a full service bank in
Summers County, West Virginia. Summers County is primarily supported by
the railroad and government industries. Hinton had total assets of $67
million at December 31, 1994.
During 1993, the Company formed two non-banking subsidiaries. City
Mortgage Corporation was approved by the Federal Reserve Bank of
Richmond to operate as a full service mortgage banking company in
December 1993. Headquartered in a suburb of Pittsburgh, Pennsylvania,
this company originates, services and sells long-term fixed-rate
mortgage loans. City Financial Corporation was approved by the Federal
Reserve Bank of Richmond in November 1993 and by the National
Association of Securities Dealers in February 1994, to serve as a full
service securities brokerage and investment advisory company. City
Financial Corporation is headquartered in Charleston, West Virginia with
its primary office located in City National's main location. Both of
these companies were formed primarily to generate fee income in order to
lessen the Company's reliance on net interest margin and to enable the
Company to offer a full array of financial services to its customers.
Hinton Financial Corporation, the Company's third non-banking
subsidiary, owns all of the capital stock of Hinton and does not conduct
any other business activities.
The Company continually seeks strategic acquisition opportunities for
small to medium-sized banks. The Company's acquisition policy has
permitted subsidiary banks to operate as separate entities with their
historical names and boards of directors. The Company believes that
this policy maintains community loyalty to the subsidiary banks and
improves operating performance while providing the services and
efficiencies of a larger holding company.
9
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS AND SUMMARY
Return on average assets (ROA), a measure of the effectiveness of asset
utilization, was .92% in 1994. Return on average equity (ROE), which
measures the return on stockholders' investment, was 12.01% in 1994. The
Company's ROA and ROE were 1.01% and 11.81%, respectively, in 1993.
Earnings per share for 1994 were $1.85, an increase of approximately
8.2% from the $1.71 per share reported in 1993. The main reason for the
increase in earnings per share is increased net interest income, which
is principally the result of increased loan volume and continued growth
of the Company.
The Company reported total assets of $781 million at December 31,
1994 and achieved $7.0 million in net income for the year then ended.
Total assets increased 10.5% over the 1993 total of $707 million,
roughly half of which increase was the result of the Company's loan
growth, as more fully discussed in the Interest-Earning Assets and
Interest- Bearing Liabilities section. Net income was up significantly
over the $6.4 million and $5.9 million reported for 1993 and 1992,
respectively.
The acquisition of Hinton was accounted for using the pooling of
interests method of accounting. Accordingly, the Company's consolidated
financial statements and related notes, as well as the information
presented herein, have been restated to include Hinton as though it were
acquired at the beginning of the earliest period presented. For further
information concerning the 1994 acquisition, see NOTE THREE of the
audited Consolidated Financial Statements.
This section of the annual report to stockholders discusses and
analyzes the consolidated financial condition of the Company, the
related consolidated results of its operations, and its cash flows.
Table One is a five year summary of selected financial data of the
Company.
The following sections discuss in more detail information summarized in
Table One.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average interest-earning assets increased $108.6 million from 1993 to
1994 and $113.8 million from 1992 to 1993. These increases are
attributable to the loan volume generated by the Company's subsidiary
banks, which was accompanied by a comparable increase in deposits and
short-term borrowings. A significant part of the increase in net
earning assets for 1994 is attributable to the Company's participation
in a short-term, whole loan bulk purchasing program. Under the program,
the Company purchases from a third party whole loans secured by
residential mortgages and insured by an Agency of the United States
government. The loans typically have balances of less than $25,000 and
are not concentrated geographically. Additionally, the program permits
the Company to require the seller to repurchase or replace certain
non-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 serviced by third parties and the
Company earns a fixed rate of return on the loans. The Company earned
approximately $1.9 million during 1994 on an average balance of
approximately $21.2 million. These loans are being funded through
short-term borrowings which consist primarily of securities sold under
agreement to repurchase.
Average short-term borrowings increased $24.9 million from 1993 to
1994. The average rate paid by the Company for short-term borrowings
increased 156 basis points in 1994 due to general increases in market
interest rates.
Most of the internal growth in deposits has been in response to the
Company's service-oriented philosophy and its active involvement in the
local communities it serves. The Company also continues to establish
additional commercial relationships, with an emphasis on "in-market"
lending to businesses owned and operated by established customers. The
Company believes its decentralized management style appeals to retail
consumers and small businesses. These lending arrangements are in
furtherance of the Company's mission of being a high quality service
provider retaining strong ties to the local communities in which its
subsidiary banks operate. While all subsidiaries have experienced loan
growth, Rainelle and Blue Ridge have generated the most loan volume in
1994, with increases of 43% and 198%, respectively.
In response to the significant growth in loans, average investment
securities had a slight increase of $1.0 million during 1994. The
overall yield on investments has decreased from 1993 as a result of a
more liquid portfolio and the reinvestment in 1994 of proceeds from
matured or called securities during a period of declining market
interest rates.
Average investment securities increased $27.8 million during 1993
principally because of the increase in deposits and short-term
borrowings as well as a reduction in federal funds sold for the same
period.
Long-term debt, representing obligations of the Parent Company,
consists of amounts borrowed to fund the purchase of Buffalo common
stock and the related recapitalization of Buffalo, and to provide Blue
Ridge with additional capital in connection with its 1993 acquisition of
certain assets and deposits of the former Shenandoah Federal Savings
Association. For further details with respect to long-term debt, see
NOTE EIGHT of the audited Consolidated Financial Statements.
10
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE TWO
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
1994 1993 1992
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
LOANS (1)
COMMERCIAL AND
INDUSTRIAL $ 128,777 $ 10,912 8.47% $ 101,187 $ 8,687 8.59% $ 66,703 $ 5,972 8.95%
REAL ESTATE 211,463 17,301 8.18 158,554 14,183 8.95 108,343 11,067 10.21
CONSUMER
OBLIGATIONS 108,684 10,579 9.73 102,572 10,381 10.12 99,409 11,183 11.25
TOTAL LOANS 448,924 38,792 8.64 362,313 33,251 9.18 274,455 28,222 10.28
LOANS HELD
FOR SALE 27,655 2,375 8.59
SECURITIES
TAXABLE 192,288 12,071 6.28 192,143 12,650 6.58 166,451 12,895 7.75
TAX-EXEMPT (2) 30,178 2,600 8.62 29,320 2,786 9.50 27,175 2,848 10.48
TOTAL
SECURITIES 222,466 14,671 6.59 221,463 15,436 6.97 193,626 15,743 8.13
FEDERAL FUNDS SOLD 6,930 194 2.80 13,632 476 3.49 15,566 530 3.40
TOTAL EARNING
ASSETS 705,975 56,032 7.94 597,408 49,163 8.23 483,647 44,495 9.20
CASH AND DUE
FROM BANKS 21,397 19,292 14,047
BANK PREMISES
AND EQUIPMENT 16,323 13,140 9,403
OTHER ASSETS 16,630 12,366 10,089
LESS: ALLOWANCE
FOR POSSIBLE
LOAN LOSSES (5,916) (5,364) (2,980)
TOTAL ASSETS $ 754,409 $ 636,842 $ 514,206
INTEREST-BEARING
LIABILITIES:
DEMAND DEPOSITS $ 83,587 $ 2,641 3.16% $ 73,965 $ 2,293 3.10% $ 65,136 $ 2,666 4.09%
SAVINGS DEPOSITS 221,305 6,861 3.10 189,328 6,338 3.35 125,554 5,217 4.16
TIME DEPOSITS 250,090 10,608 4.24 227,342 10,218 4.49 204,158 10,631 5.21
SHORT-TERM BORROWINGS 42,559 1,687 3.96 17,641 424 2.40 10,605 329 3.10
LONG-TERM DEBT 6,252 445 7.12 4,387 274 6.25 508 35 6.89
TOTAL INTEREST-
BEARING
LIABILITIES 603,793 22,242 3.68 512,663 19,547 3.81 405,961 18,878 4.65
DEMAND DEPOSITS 85,918 63,400 51,581
OTHER LIABILITIES 6,773 6,320 6,206
STOCKHOLDERS' EQUITY 57,925 54,459 50,458
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY $ 754,409 $ 636,842 $ 514,206
NET INTEREST
INCOME $ 33,790 $ 29,616 $ 25,617
NET YIELD ON
EARNING ASSETS 4.79% 4.96% 5.30%
</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.
11
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, on a fully federal tax-equivalent basis,
increased $4.2 million during 1994. The average yield on earning assets
decreased from 8.23% in 1993 to 7.94% in 1994, while the average cost of
interest-bearing liabilities decreased from 3.81% to 3.68% over this
same period. This had the effect of decreasing the net yield on earning
assets from 4.96% in 1993 to 4.79% in 1994.
The $2.1 million decrease in net interest income due to rate, as shown
in Table Three which follows, was coupled with a $6.3 million increase
in net interest income due to volume. The major components of this
favorable volume change were increased average loans as more fully
discussed in the Interest-Earning Assets and Interest-Bearing
Liabilities section.
Net interest income, on a fully federal tax-equivalent basis,
increased $4.0 million in 1993. The $5.8 million increase caused by
changes in volume was offset by a $1.8 million decrease in net interest
income due to rate.
TABLE THREE
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
1994 VS. 1993 1993 VS. 1992
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
VOLUME RATE NET VOLUME RATE NET
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME FROM:
LOANS
COMMERCIAL AND INDUSTRIAL $ 2,339 $ (114) $ 2,225 $ 2,970 $ (255) $ 2,715
REAL ESTATE 4,411 (1,293) 3,118 4,626 (1,510) 3,116
CONSUMER OBLIGATIONS 604 (406) 198 347 (1,149) (802)
TOTAL 7,354 (1,813) 5,541 7,943 (2,914) 5,029
LOANS HELD FOR SALE 2,375 2,375
INVESTMENT SECURITIES
TAXABLE 10 (589) (579) 1,839 (2,084) (245)
TAX-EXEMPT (1) 80 (266) (186) 215 (277) (62)
TOTAL 90 (855) (765) 2,054 (2,361) (307)
FEDERAL FUNDS SOLD (201) (81) (282) (67) 13 (54)
TOTAL INTEREST-EARNING ASSETS $ 9,618 $ (2,749) $ 6,869 $ 9,930 $ (5,262) $ 4,668
INTEREST EXPENSE ON:
DEMAND DEPOSITS $ 303 $ 45 $ 348 $ 330 $ (703) $ (373)
SAVINGS DEPOSITS 1,015 (492) 523 2,277 (1,156) 1,121
TIME DEPOSITS 986 (596) 390 1,132 (1,545) (413)
SHORT-TERM BORROWINGS 865 398 1,263 182 (87) 95
LONG-TERM DEBT 129 42 171 243 (4) 239
TOTAL INTEREST-BEARING LIABILITIES $ 3,298 $ (603) $ 2,695 $ 4,164 $ (3,495) $ 669
NET INTEREST INCOME $ 6,320 $ (2,146) $ 4,174 $ 5,766 $ (1,767) $ 3,999
</TABLE>
(1) FULLY FEDERAL TAXABLE EQUIVALENT USING A TAX RATE OF 34% IN ALL YEARS.
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.
12
MANAGEMENT'S DISCUSSION &ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company has a strong liquidity position and does not anticipate any
material adverse changes in 1994. There are no known trends, demands,
commitments or uncertainties that have resulted or are reasonably likely
to result in material changes in liquidity.
The Company seeks to maintain a strong 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 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 Table
Four. At December 31, 1994, the one year period shows a negative gap
(liability sensitive) of $328 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. Table
Four is first presented without adjustment for expected repricing
behavior. Then, as presented in the "management adjustment" line, these
balances have been notionally distributed over the first three periods
to reflect those portions of such accounts that are expected to reprice
fully with market rates over the respective periods. The distribution
of the balances over the repricing periods represents an aggregation of
such allocations by each of the affiliate banks, and is based upon
historical experience with their individual markets and customers.
Management expects to continue the same pricing methodology in response
to the 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 period. After management adjustments, Table Four shows a
negative gap in the one year period of $137 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 affect on net interest income.
However, when interest rates are rising, this position produces the
converse effect. Consequently, the Company has experienced a decline in
its net interest margin during the past two years and is somewhat
vulnerable to a rapid rise in interest rates in 1995. These declines in
net interest margin did not translate into declines in net interest
income because of increases in the volume of interest-earning assets. In
any event, the Company intends to increase the repricing frequency of
interest-earning assets, particularly through variable-rate loan
products, to achieve a less volatile gap position.
The Company also seeks to maintain adequate liquidity in order to
generate sufficient cash flows to fund operations on a timely basis.
The Company manages its liquidity position to provide for asset growth
and to ensure that the funding needs of depositors and borrowers can be
met promptly. The Company does not have a high concentration of volatile
funds, and all such funds are invested in assets of comparable maturity
to mitigate liquidity concerns.
At December 31, 1994, the Parent Company had $6,875,000 in long-term
debt outstanding. These funds were used primarily to provide Blue Ridge
with additional capital in connection with its 1993 acquisition of the
former Shenandoah Federal. Total debt service for the Parent Company in
1995 will approximate $560,000 at current interest rates. Other than
long-term debt, the cash needs of the Parent Company consist of routine
payroll and benefit expenses of Parent Company personnel, expenses for
certain professional services, debt service on affiliate advances and
dividends to shareholders.
The Parent Company has approximately $6.2 million available for
transfer from its subsidiary banks as of January 1, 1995. Subsidiary
bank earnings in 1995 through the date of dividend declaration are also
available for transfer upstream. Such subsidiary bank dividends are the
Parent Company's primary source of cash. Management anticipates that the
cash flow requirements of the Parent Company will be adequately met in
the normal course of business. For more specific information regarding
restrictions on subsidiary dividends, see NOTE NINE to the audited
Consolidated Financial Statements.
The Company's cash and cash equivalents, represented by cash, due from
banks and federal funds sold, is 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 in operating activities during 1994 due to the
purchases of loans held for sale and was generated from operating
activities in 1993 and 1992. Net cash was used in investing activities
for each year presented which is indicative of the Company's loan volume
over this period and net increases in the investment portfolio. The
majority of this loan growth and investment activity was funded by the
net cash provided by financing activities, principally in the form of
increased interest-bearing deposits.
13
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE FOUR
INTEREST RATE SENSITIVITY GAPS
(in thousands)
<TABLE>
1 TO 3 MO. 3 TO 12 MO. 1 TO 5 YRS. OVER 5 YRS. TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
GROSS LOANS $ 105,619 $ 59,186 $ 249,727 $ 87,824 $ 502,356
LOANS HELD FOR SALE 30,227 0 0 0 30,227
SECURITIES 16,014 19,887 98,799 61,677 196,377
TOTAL INTEREST-EARNING ASSETS 151,860 79,073 348,526 149,501 728,960
LIABILITIES
SAVINGS AND NOW ACCOUNTS 308,100 0 0 0 308,100
ALL OTHER INTEREST-BEARING DEPOSITS 76,619 110,180 72,917 2,754 262,470
SHORT-TERM BORROWINGS 57,483 0 0 0 57,483
LONG-TERM BORROWINGS 6,875 0 0 0 6,875
TOTAL INTEREST-BEARING LIABILITIES 449,077 110,180 72,917 2,754 634,928
INTEREST SENSITIVITY GAP $ (297,217) $ (31,107) $ 275,609 $ 146,747 $ (94,032)
CUMULATIVE SENSITIVITY GAP $ (297,217) $ (328,324) $ (52,715) $ 94,032
MANAGEMENT ADJUSTMENTS $ 262,434 $ (71,241) $ (181,057) $ (10,136)
CUMULATIVE MANAGEMENT ADJUSTED GAP $ (34,783) $ (137,131) $ (42,579) $ 94,032
</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.
TABLE FIVE
INVESTMENT PORTFOLIO
(dollars in thousands)
<TABLE>
HELD TO AVAILABLE FOR BOOK VALUES AS OF
MATURITY SALE DECEMBER 31
1994 1994 1993 1992
<S> <C> <C> <C> <C>
U.S. TREASURY AND OTHER U .S. GOVERNMENT
CORPORATIONS AND AGENCIES $ 92,372 $ 56,751 $ 193,284 $ 168,821
STATES AND POLITICAL SUBDIVISIONS 32,056 790 33,984 31,769
OTHER 3,669 10,379 14,353 7,467
TOTAL $ 128,457 $ 67,920 $ 241,621 $ 208,057
</TABLE>
<TABLE>
MATURING
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY AND
OTHER U.S. GOVERNMENT
CORPORATIONS AND AGENCIES $ 24,744 6.83% $ 83,565 6.71% $ 39,119 6.47% $ 2,055 6.15%
STATE AND POLITICAL SUBDIVISIONS 2,422 11.19 11,586 8.93 16,018 8.10 2,820 8.86
OTHER 8,735 6.11 3,648 7.46 1,665 7.70 0 0.00
TOTAL $ 35,901 6.95% $ 98,799 6.98% $ 56,802 6.97% $ 4,875 7.72%
</TABLE>
WEIGHTED AVERAGE YIELDS ON TAX-EXEMPT OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS HAVE BEEN COMPUTED ON A FULLY FEDERAL
TAX-EQUIVALENT BASIS USING A TAX RATE OF 34%.
14
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE SIX
LOAN PORTFOLIO
(in thousands)
<TABLE>
DECEMBER 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL
AND AGRICULTURAL $ 137,425 $ 125,568 $ 80,806 $ 76,179 $ 58,180
REAL ESTATE-MORTGAGE 238,231 184,602 141,079 92,539 85,241
INSTALLMENT LOANS TO INDIVIDUALS 129,300 114,110 120,324 97,768 95,434
TOTAL LOANS $ 504,956 $ 424,280 $ 342,209 $ 266,486 $ 238,855
</TABLE>
THE COMPANY HAD $15.3 MILLION AND $15.1 MILLION OUTSTANDING IN REAL
ESTATE CONSTRUCTION LOANS AT DECEMBER 31, 1994 AND 1993, RESPECTIVELY,
THE MAJORITY OF WHICH RELATED TO ONE TO FOUR FAMILY RESIDENTIAL
PROPERTIES. REAL ESTATE CONSTRUCTION LOANS WERE NOT MATERIAL IN ALL
OTHER PERIODS PRESENTED.
THE FOLLOWING TABLE SHOWS THE MATURITY OF LOANS OUTSTANDING AS OF
DECEMBER 31, 1994.
<TABLE>
MATURING
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL
AND AGRICULTURAL $ 29,233 $ 59,614 $ 47,065 $ 135,912
REAL ESTATE-MORTGAGE 41,122 60,060 141,535 242,717
INSTALLMENT LOANS TO INDIVIDUALS 18,468 92,446 15,413 126,327
TOTAL LOANS $ 88,823 $ 212,120 $ 204,013 $ 504,956
</TABLE>
LOANS MATURING AFTER ONE YEAR WITH:
FIXED INTEREST RATES $ 273,961
VARIABLE INTEREST RATES 142,172
TOTAL $ 416,133
TABLE SEVEN
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSITS IN AMOUNTS OF
$100,000 OR MORE
(dollars in thousands)
MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
OUTSTANDING AT DECEMBER 31, 1994, ARE SUMMARIZED AS FOLLOWS:
AMOUNTS PERCENTAGE
THREE MONTHS OR LESS $ 11,195 32%
OVER THREE MONTHS THROUGH SIX MONTHS 5,727 16
OVER SIX MONTHS THROUGH TWELVE MONTHS 7,540 22
OVER TWELVE MONTHS 10,585 30
TOTAL $ 35,047 100%
15
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN LOSS ANALYSIS
During 1994, the Company charged-off $1,093,000 of loans that were
doubtful as to collection and had recoveries of $393,000. The resulting
net charge-offs of $700,000 decreased 34% from that reported in 1993.
Net charge- offs increased approximately 15%, or $138,000 in 1993 versus
1992. Approximately half of the 1993 net charge- offs was related to
pre-acquisition loans at Buffalo. Net charge-offs as a percent of
average total loans decreased 13 basis points when comparing 1994 to
1993. The Company's asset quality continues to compare favorably with
that of peer banks.
The provision for possible loan losses charged to operations each year
is dependent upon many factors, including loan growth, historical
charge-off experience, size and composition of the loan portfolio,
delinquencies and general economic trends. The provision of $953,000 in
1994 represents .21% of average loans as compared to a $1,341,000 or
.37% provision in 1993. The decreased provision for 1994 is primarily
due to lower net charge-offs as discussed above. Loan volume has
continued to increase in recent years as a result of the Company's more
active solicitation of commercial loan business as well as general
volume increases applicable to the traditional borrowing segment from
which the Company has generated loans in the past. The Company has
successfully attracted more commercial customers, while continuing to
obtain noncommercial, lower risk collateral such as residential
properties. The Company's collateral position with respect to real
estate loans has typically been less volatile than its peers,
particularly banks located outside of its region where dramatic
escalations in real estate values took place in certain prior years.
See NOTE FIVE to the audited Consolidated Financial Statements for a
discussion of concentrations of credit risk.
The allowance for loan losses was $6,017,000 or 1.23% of net loans, as
of December 31, 1994, compared to $5,764,000 or 1.41% of net loans in
1993. In management's opinion, the consolidated allowance for loan
losses is adequate to provide for any potential losses on existing
loans.
Nonperforming loans, consisting of nonaccrual, past-due and
restructured credits, increased approximately $914,000 in 1994. While
the general economy remains soft in certain of the subsidiary banks'
market areas, management does not anticipate material loan losses since
loan to collateral ratios remain favorable. At December 31, 1994, loans
aggregating $529,000 are considered by management to represent possible
future credit problems. These loans are generally contractually
current, but information is available to management which indicates that
serious doubt may exist as to the ability of such borrowers to comply
with the present loan repayment terms. The ratio of the allowance for
loan losses to nonperforming loans, including potential problem loans,
was 131% at December 31, 1994, as compared to 125% and 102% at December
31, 1993 and 1992.
Tables Eight, Nine and Ten detail loan performance and analyze the
allowance for loan losses.
16
MANAGEMENT'S DISCUSSION &ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE EIGHT
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
DECEMBER 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 5,764 $ 5,380 $ 2,401 $ 1,929 $ 1,721
CHARGE-OFFS:
COMMERCIAL, FINANCIAL AND AGRICULTURAL (300) (684) (244) (302) (270)
REAL ESTATE-MORTGAGE (151) (239) (292) (247) (186)
INSTALLMENTS LOANS TO INDIVIDUALS (642) (614) (627) (452) (463)
TOTALS (1,093) (1,537) (1,163) (1,001) (919)
RECOVERIES:
COMMERCIAL, FINANCIAL AND AGRICULTURAL 110 58 20 49 77
REAL ESTATE-MORTGAGE 11 218 65 26 50
INSTALLMENT LOANS TO INDIVIDUALS 272 200 155 126 102
TOTALS 393 476 240 201 229
NET CHARGE-OFFS (700) (1,061) (923) (800) (690)
PROVISION FOR POSSIBLE LOAN LOSSES 953 1,341 2,222 1,272 898
BALANCE OF ACQUIRED SUBSIDIARY 104 1,680
BALANCE AT END OF PERIOD $ 6,017 $ 5,764 $ 5,380 $ 2,401 $ 1,929
AS A PERCENT OF AVERAGE TOTAL LOANS
NET CHARGE-OFFS .16% .29% .34% .33% .33%
PROVISION FOR POSSIBLE LOAN LOSSES .21 .37 .81 .53 .43
AS A PERCENT OF NONPERFORMING AND
POTENTIAL PROBLEM LOANS
ALLOWANCE FOR LOAN LOSSES 130.55% 125.06% 102.34% 65.37% 70.89%
</TABLE>
TABLE NINE
NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS
(in thousands)
<TABLE>
DECEMBER 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS $ 2,600 $ 1,524 $ 1,473 $ 1,367 $ 874
ACCRUING LOANS PAST DUE 90 DAYS OR MORE 1,218 643 1,293 1,780 1,446
RESTRUCTURED LOANS 262 999 1,475 526 401
</TABLE>
DURING 1994, THE COMPANY RECOGNIZED APPROXIMATELY $119,000 OF INTEREST
INCOME RECEIVED IN CASH ON NONACCRUAL AND RESTRUCTURED LOANS.
APPROXIMATELY $229,000 OF INTEREST INCOME WOULD HAVE BEEN RECOGNIZED
DURING THE YEAR IF SUCH LOANS HAD BEEN CURRENT IN ACCORDANCE WITH THEIR
ORIGINAL TERMS.THERE WERE NO COMMITMENTS TO PROVIDE ADDITIONAL FUNDS ON
NONACCRUAL, RESTRUCTURED, OR OTHER POTENTIAL PROBLEM LOANS AT DECEMBER
31, 1994.
INTEREST ON LOANS IS ACCRUED AND CREDITED TO OPERATIONS BASED UPON THE
PRINCIPAL AMOUNT OUTSTANDING.THE ACCRUAL OF INTEREST INCOME IS GENERALLY
DISCONTINUED WHEN A LOAN BECOMES 90 DAYS PAST DUE AS TO PRINCIPAL OR
INTEREST UNLESS THE LOAN IS WELL COLLATERALIZED AND IN THE PROCESS OF
COLLECTION. WHEN INTEREST ACCRUALS ARE DISCONTINUED, INTEREST CREDITED
TO INCOME IN THE CURRENT YEAR THAT IS UNPAID AND DEEMED UNCOLLECTIBLE IS
CHARGED TO OPERATIONS. PRIOR YEAR INTEREST ACCRUALS THAT ARE UNPAID AND
DEEMED UNCOLLECTIBLE ARE CHARGED TO THE ALLOWANCE FOR LOAN LOSSES,
PROVIDED THAT SUCH AMOUNTS WERE SPECIFICALLY RESERVED.
17
<TABLE>
DECEMBER 31
1994 1993 1992 1991 1990
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL
AND AGRICULTURAL $1,816 27% $ 1,943 30% $ 1,959 24% $ 1,020 28% $ 709 24%
REAL ESTATE-MORTGAGE 2,600 47 2,131 43 1,745 41 494 35 457 36
INSTALLMENT LOANS
TO INDIVIDUALS 1,601 26 1,690 27 1,676 35 887 37 763 40
$6,017 100% $ 5,764 100% $ 5,380 100% $ 2,401 100% $1,929 100%
</TABLE>
THE PORTION OF THE ALLOWANCE FOR LOAN LOSSES THAT IS NOT SPECIFICALLY
ALLOCATED TO INDIVIDUAL CREDITS HAS BEEN APPORTIONED AMONG THE SEPARATE
LOAN PORTFOLIOS BASED ON THE RISK OF EACH PORTFOLIO. OTHER INCOME AND
EXPENSES
Other income continues to be an area of management emphasis.
Recognizing the importance of non-interest income to future operating
performance, the Company is aggressively pursuing additional service
opportunities by offering a variety of services and products to its
customers which include trust, brokerage, mortgage banking and related
services.
The loan and deposit growth at the Company's subsidiary banks, which
includes a greater mix of commercial relationships than certain prior
years, has positioned the Company to increase other income in areas such
as service charges. Service charge income increased approximately
$503,000 or 27% when comparing 1994 to 1993. Approximately half of this
increase is attributable to fees charged in the normal course of
business on the additional $40 million in deposits acquired by Blue
Ridge from the former Shenandoah Federal Savings Association in late
1993.
Other income increased $2.3 million during 1994. This increase was
related to an insurance recovery of $1.4 million at one of the Company's
subsidiary banks. An additional $280,000 in fees was generated from
services provided by City Financial and City Mortgage during their first
year of operations and approximately $360,000 in fees were generated
from overall loan growth during 1994.
During the fourth quarter of 1994, the Company took the opportunity to
restructure its available-for-sale investment portfolio that resulted in
an $885,000 securities loss. Gains /(losses) from securities
transactions were not significant in 1993 or 1992. As more fully
described in the Company's securities policy in NOTE ONE to the audited
Consolidated Financial Statements, management determines the appropriate
classification of securities at the time of purchase. Historically,
sales of investment securities have been infrequent. See NOTE FOUR to
the audited Consolidated Financial Statements for a discussion of
securities available-for-sale.
Total other expenses increased $5.5 million, or 26.2%, during 1994 due
primarily to $1.1 million in expenses incurred by City Financial and
City Mortgage with no expenses for these new subsidiaries included in
the 1993 results. In addition, Blue Ridge had an increase of
approximately $1.9 million in non-interest expense associated with
growth and the 1993 acquisition of Shenandoah Federal Savings
Association. The additional increase of $2.5 million is attributable to
the Company's overall growth during 1994, which produced higher
personnel costs throughout the organization. Total other expenses
increased $5.0 million, or 31.7%, during 1993 due primarily to $1.9
million in expenses incurred by Buffalo and Beckley with no expenses for
these purchased subsidiaries included in the 1992 results. In addition,
Blue Ridge had $157,000 in other expenses in 1992 for the first four
months of operation compared to $1.2 million in 1993 for a full year.
The additional increase of $2.1 million in 1993 is attributable to the
Company's overall growth during that year.
18
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. At December 31, 1994, the Federal Reserve Board's minimum
ratio of qualified total capital to risk-weighted assets is 8 percent.
At least half of the total capital is required to be comprised of Tier 1
capital, or the Company's common stockholders' equity less 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 are required to maintain a
leverage ratio of 3 percent plus an additional cushion of at least 100
to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible
assets. The following table presents comparative capital ratios and
related dollar amounts of capital for the Company:
<TABLE>
DOLLARS IN THOUSANDS
1994 1993
<S> <C> <C>
CAPITAL COMPONENTS
TIER 1 RISK-BASED CAPITAL $ 52,408 $ 50,821
TOTAL RISK-BASED CAPITAL 58,425 55,832
CAPITAL RATIOS
TIER 1 RISK-BASED 10.65% 12.70%
TOTAL RISK-BASED 11.88 13.95
LEVERAGE 6.65 7.31
REGULATORY MINIMUM
TIER 1 RISK-BASED (DOLLAR/RATIO) $ 19,677/4.00% $ 16,036/4.00%
TOTAL RISK-BASED (DOLLAR/RATIO) 39,354/8.00 32,072/8.00
LEVERAGE (DOLLAR/RATIO) 23,628/3.00 20,862/3.00
The strong capital position of the Company is indicative of
management's emphasis on asset quality and a history of retained net
income. The ratios enable the Company to continually pursue
acquisitions and other growth opportunities. Improvements in operating
results and a consistent dividend program, coupled with an effective
management of credit risk, have been, and will be, the key elements in
maintaining the Company's present capital position.
The Company does not anticipate any material capital expenditures in
1995. Earnings from subsidiary bank operations are expected to remain
adequate to fund payment of stockholders' dividends and internal growth.
In management's opinion, subsidiary banks have the capability to
upstream sufficient dividends to meet the cash requirements of the
Parent Company.
INFLATION
Since the assets and liabilities of the subsidiary banks are primarily
monetary in nature (payable in fixed, determinable amounts), the
performance of banks is affected more by changes in interest rates than
by inflation. Interest rates generally increase as the rate of inflation
increases, but the magnitude of the change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as its influence on those businesses which have large investments in
plant and inventories, it does have an effect. During periods of high
inflation, there are normally corresponding increases in the money
supply, and banks will normally experience above-average growth in
assets, loans and deposits. Also, general increases in the price of
goods and services will result in increased operating expenses.
19
MANAGEMENT'S DISCUSSION &ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAXES
Income tax expense was $3,193,000 in 1994, resulting in an effective
tax rate of 31.5% for the year. Such rates were 31.4% and 29.8% in 1993
and 1992, respectively. The effective tax rate from 1993 to 1994
remained relatively unchanged. The increase in the effective tax rate
from 1992 to 1993 is principally the result of a decreased mix of
tax-exempt income relative to total earnings.
As more fully discussed in NOTE TEN to the audited Consolidated
Financial Statements, the Company prospectively adopted the liability
method of accounting for income taxes during 1992, without material
effect. At December 31, 1994, gross deferred tax assets total
approximately $5.0 million. Such assets are primarily attributable to
the allowance for loan losses ($2 million), acquired (NOL) carryforwards
($777,000), certain nonqualified deferred compensation arrangements
sponsored by subsidiary banks ($436,000) and securities available for
sale ($1.4 million). Pursuant to management's evaluation for the
quarter ended December 31, 1994, no valuation allowance has been
allocated to the deferred tax assets. The quarterly evaluation process
employed by management is based upon the expected reversal period of the
assets, in consideration of taxes paid by the Company in the carryback
years, expected reversals of existing taxable temporary differences, and
historical trends in taxable income.
Those assets for which realization is expected to be dependent on
future events are subjected to further evaluation. Management's
analysis has shown that realization of certain deferred tax assets,
principally the acquired NOL, will be dependent on future events. After
considering such factors as the magnitude of the asset relative to
historical levels of financial reporting income and taxable income, the
period over which future taxable income would have to be earned to
realize the asset, and budgeted future results of operations, management
has concluded that it is more likely than not that all deferred tax
assets existing at December 31, 1994, will be realized. At present,
management does not expect that implementation of tax planning
strategies will be necessary to ensure realization. The need for a
valuation allowance will continue to be addressed by management each
quarter and any changes in the valuation allowance will be reported
contemporaneously therewith in the Company's quarterly results of
operations.
20
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
CITY HOLDING COMPANY
We have audited the accompanying consolidated balance sheets of City
Holding Company and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits. We did not audit the
1994, 1993 or 1992 consolidated financial statements of Hinton Financial
Corporation and subsidiary which statements reflect total revenues
constituting 8%, 10% and 12% of the 1994, 1993 and 1992 consolidated
totals, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Hinton Financial Corporation and
subsidiary, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of City Holding
Company and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in NOTE FOUR to the consolidated financial statements,
City Holding Company changed its method of accounting for certain debt
and equity securities as of January 1, 1994.
/s/ Ernst & Young, LLP
Charleston, West Virginia
January 20, 1995
</TABLE>
<TABLE>
21
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
DECEMBER 31
1994 1993
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 27,591,000 $ 23,966,000
FEDERAL FUNDS SOLD 3,470,000
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE 67,920,000
SECURITIES AVAILABLE FOR SALE (APPROXIMATE MARKET
VALUES AT DECEMBER 31, 1993, $77,286,000) 75,527,000
INVESTMENT SECURITIES (APPROXIMATE MARKET VALUES:
1994-$123,995,000; 1993-$170,745,000) 128,457,000 166,110,000
LOANS:
GROSS LOANS 504,956,000 424,280,000
UNEARNED INCOME (9,544,000) (10,526,000)
ALLOWANCE FOR POSSIBLE LOAN LOSSES (6,017,000) (5,764,000)
NET LOANS 489,395,000 407,990,000
LOANS HELD FOR SALE 30,227,000
BANK PREMISES AND EQUIPMENT 17,678,000 15,426,000
ACCRUED INTEREST RECEIVABLE 5,922,000 5,292,000
OTHER ASSETS 13,336,000 9,297,000
TOTAL ASSETS $ 780,526,000 $ 707,078,000
LIABILITIES
DEPOSITS:
NONINTEREST-BEARING $ 80,694,000 $ 67,633,000
INTEREST-BEARING 570,570,000 549,700,000
TOTAL DEPOSITS 651,264,000 617,333,000
SHORT-TERM BORROWINGS 57,483,000 21,669,000
LONG-TERM DEBT 6,875,000 5,875,000
OTHER LIABILITIES 8,035,000 5,863,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 504,000
TOTAL LIABILITIES 723,657,000 651,244,000
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: 1994 -
3,780,477 SHARES; 1993 - 3,538,671 SHARES
INCLUDING
109,761 SHARES IN TREASURY AT DECEMBER 31, 1993 9,451,000 8,846,000
CAPITAL SURPLUS 18,887,000 13,999,000
RETAINED EARNINGS 30,605,000 35,222,000
NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAXES (2,074,000) (23,000)
56,869,000 58,044,000
COST OF COMMON STOCK IN TREASURY (2,210,000)
TOTAL STOCKHOLDERS' EQUITY 56,869,000 55,834,000
COMMITMENTS AND CONTINGENT LIABILITIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 780,526,000 $ 707,078,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
22
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS $ 41,167,000 $ 33,251,000 $ 28,222,000
INTEREST ON INVESTMENT SECURITIES:
TAXABLE 12,071,000 12,650,000 12,895,000
TAX-EXEMPT 1,716,000 1,839,000 1,880,000
OTHER INTEREST INCOME 194,000 476,000 530,000
TOTAL INTEREST INCOME 55,148,000 48,216,000 43,527,000
INTEREST EXPENSE
INTEREST ON DEPOSITS 20,110,000 18,849,000 18,514,000
INTEREST ON SHORT-TERM BORROWINGS 1,687,000 424,000 329,000
INTEREST ON LONG-TERM DEBT 445,000 274,000 35,000
TOTAL INTEREST EXPENSE 22,242,000 19,547,000 18,878,000
NET INTEREST INCOME 32,906,000 28,669,000 24,649,000
PROVISION FOR POSSIBLE LOAN LOSSES 953,000 1,341,000 2,222,000
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN
LOSSES 31,953,000 27,328,000 22,427,000
OTHER INCOME
INVESTMENT SECURITIES (LOSSES) GAINS (803,000) 322,000 9,000
SERVICE CHARGES 2,396,000 1,893,000 1,362,000
OTHER INCOME 3,054,000 789,000 526,000
TOTAL OTHER INCOME 4,647,000 3,004,000 1,897,000
OTHER EXPENSES
SALARIES AND EMPLOYEE BENEFITS 13,122,000 10,172,000 7,695,000
OCCUPANCY, EXCLUDING DEPRECIATION 2,452,000 1,486,000 1,360,000
DEPRECIATION 1,829,000 1,386,000 988,000
OTHER EXPENSES 9,045,000 7,907,000 5,866,000
TOTAL OTHER EXPENSES 26,448,000 20,951,000 15,909,000
INCOME BEFORE INCOME TAXES 10,152,000 9,381,000 8,415,000
INCOME TAXES 3,193,000 2,949,000 2,511,000
NET INCOME $ 6,959,000 $ 6,432,000 $ 5,904,000
NET INCOME PER COMMON SHARE $ 1.85 $ 1.71 $ 1.56
A VERA G E COMMON SHARES OUTSTANDING 3,772,638 3,762,783 3,779,502
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
23
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
UNREALIZED LOSS
COMMON ON SECURITIES TOTAL
STOCK CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS'
(PAR VALUE) SURPLUS EARNINGS FOR SALE STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1992 $ 7,978,000 $ 8,913,000 $ 31,649,000 $ (25,000) $ (330,000) $ 48,185,000
NET INCOME 5,904,000 5,904,000
COST OF 31,422 SHARES OF
COMMON STOCK
ACQUIRED FOR TREASURY (548,000) (548,000)
SALE OF 38,107 SHARES
OF TREASURY STOCK 287,000 378,000 665,000
CHANGE IN NET UNREALIZED LOSS
ON MARKETABLE EQUITY
SECURITIES (70,000) (70,000)
ISSUANCE OF 10% STOCK DIVIDEND 681,000 4,098,000 (4,779,000)
CASH DIVIDENDS--$.49 A SHARE (1,522,000) (1,522,000)
CASH DIVIDENDS OF ACQUIRED
SUBSIDIARIES (299,000) (299,000)
BALANCES AT DECEMBER 31, 1992 8,659,000 13,298,000 30,953,000 (95,000) (500,000) 52,315,000
NET INCOME 6,432,000 6,432,000
CASH DIVIDENDS--$.56 A SHARE (1,833,000) (1,833,000)
CASH DIVIDENDS OF ACQUIRED
SUBSIDIARY (330,000) (330,000)
COMMON STOCK ISSUED IN
ACQUISITION 187,000 644,000 831,000
CHANGE IN NET UNREALIZED LOSS
ON MARKETABLE EQUITY SECURITIES 72,000 72,000
COST OF 96,072 SHARES OF
COMMON STOCK ACQUIRED FOR
TREASURY (2,218,000) (2,218,000)
SALE OF 22,801 SHARES OF
TREASURY STOCK 57,000 508,000 565,000
BALANCES AT DECEMBER 31, 1993 8,846,000 13,999,000 35,222,000 (23,000) (2,210,000) 55,834,000
NET INCOME 6,959,000 6,959,000
CASH DIVIDENDS
DECLARED-- $.59 A SHARE (1,930,000) (1,930,000)
CASH DIVIDENDS OF
ACQUIRED SUBSIDIARY (366,000) (366,000)
ADJUSTMENT TO BEGINNING BALANCE
FOR CHANGE IN ACCOUNTING
METHOD, NET OF INCOME
TAXES OF $704,000 1,055,000 1,055,000
CHANGE IN UNREALIZED GAIN/(LOSS)
NET OF INCOME TAXES OF $1,761,000 (3,106,000) (3,106,000)
REDEMPTION OF FRACTIONAL AND
DISSENTER SHARES (1,843,000) (1,843,000)
COST OF 7,002 SHARES OF
COMMON STOCK ACQUIRED FOR TREASURY (193,000) (193,000)
SALE OF 14,898 SHARES OF
TREASURY STOCK 131,000 328,000 459,000
RETIREMENT OF 101,865 SHARES
OF COMMON STOCK HELD IN TREASURY (255,000) (1,820,000) 2,075,000
ISSUANCE OF 10% STOCK DIVIDEND 860,000 8,420,000 (9,280,000)
BALANCES AT DECEMBER 31, 1994 $ 9,451,000 $ 18,887,000 $ 30,605,000 $ (2,074,000) $ 0 $ 56,869,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE> YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 6,959,000 $ 6,432,000 $ 5,904,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
NET AMORTIZATION 960,000 725,000 306,000
PROVISION FOR DEPRECIATION 1,829,000 1,386,000 988,000
PROVISION FOR POSSIBLE LOAN LOSSES 953,000 1,341,000 2,222,000
DEFERRED INCOME TAX BENEFIT (303,000) (153,000) (402,000)
MINORITY INTEREST IN INCOME OF SUBSIDIARY 10,000
LOANS ORIGINATED FOR SALE (24,729,000)
PURCHASES OF LOANS HELD FOR SALE (189,719,000)
PROCEEDS FROM LOANS SOLD 184,221,000
REALIZED INVESTMENT SECURITIES LOSSES (GAINS) 803,000 (322,000) (9,000)
LOSS ON SALE OF FORECLOSED PROPERTIES 22,000
(INCREASE) DECREASE IN ACCRUED INTEREST
RECEIVABLE (630,000) (132,000) 165,000
(INCREASE) DECREASE IN OTHER ASSETS (2,961,000) 721,000 (212,000)
INCREASE (DECREASE) IN OTHER LIABILITIES 2,172,000 157,000 (651,000)
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (20,445,000) 10,165,000 8,333,000
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF INVESTMENT SECURITIES 9,218,000 5,304,000
PROCEEDS FROM MATURITIES AND CALLS OF INVESTMENT
SECURITIES 75,181,000 142,801,000 119,936,000
PURCHASES OF INVESTMENT SECURITIES (52,758,000) (184,643,000) (131,466,000)
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 33,946,000
PROCEEDS FROM MATURITIES AND CALLS OF SECURITIES
AVAILABLE FOR SALE 13,093,000 5,539,000
PURCHASES OF SECURITIES AVAILABLE FOR SALE (28,791,000)
NET INCREASE IN LOANS (82,358,000) (77,007,000) (43,989,000)
NET CASH (PAID) ACQUIRED IN ACQUISITIONS (504,000) 41,454,000 2,564,000
SALE OF FORECLOSED PROPERTIES 10,000 125,000
PURCHASES OF PREMISES AND EQUIPMENT (4,081,000) (5,166,000) (2,299,000)
NET CASH USED IN INVESTING ACTIVITIES (46,272,000) (67,794,000) (49,825,000)
FINANCING ACTIVITIES
NET INCREASE IN NONINTEREST-BEARING DEPOSITS 13,061,000 2,456,000 18,509,000
NET INCREASE IN INTEREST-BEARING DEPOSITS 20,870,000 30,091,000 40,607,000
NET INCREASE IN SHORT-TERM BORROWINGS 35,814,000 12,175,000 1,110,000
PROCEEDS FROM LONG-TERM DEBT 6,875,000 5,225,000 4,000,000
REPAYMENT OF LONG-TERM DEBT (5,875,000) (3,350,000)
PURCHASES OF TREASURY STOCK (193,000) (2,218,000) (548,000)
PROCEEDS FROM SALES OF TREASURY STOCK 459,000 565,000 665,000
REDEMPTION OF DISSENTER AND FRACTIONAL SHARES (1,843,000)
CASH DIVIDENDS PAID (2,296,000) (2,163,000) (1,821,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 66,872,000 42,781,000 62,522,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 155,000 (14,848,000) 21,030,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,436,000 42,284,000 21,254,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,591,000 $ 27,436,000 $ 42,284,000
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
DECEMBER 31, 1994
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: The
accounting and reporting policies of City Holding Company and its
subsidiaries (the Company) conform with generally accepted accounting
principles. The following is a summary of the more significant
policies.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of City Holding Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS: The Company considers cash and due from
banks and federal funds sold as cash and cash equivalents. The carrying
amounts reported in the December 31, 1994 and 1993, consolidated balance
sheets for cash and cash equivalents approximate those assets' fair
values.
SECURITIES: Management determines the appropriate classification of
securities at the time of purchases. If management has the intent and
the Company has the ability at the time of purchase to hold debt
securities to maturity, they are classified as investments and are
stated at cost, adjusted for amortization of premiums and accretion of
discounts. At December 31, 1994, debt securities for which the Company
does not have the intent or ability to hold to maturity are classified
as available for sale along with the Company's investment in equity
securities. Securities available for sale are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. Securities classified as available
for sale include securities that management intends to use as part of
its asset/liability management strategy and that may be sold in response
to changes in interest rates, resultant prepayment risk, and other
factors.
At December 31, 1993, equity securities were stated at the lower of
cost or market value, while debt securities were carried at amortized
cost. Gains and losses on the sale of securities are computed by the
specific identification method and are reported separately in the
consolidated statements of income.
LOANS: Interest income on loans is accrued and credited to operations
based upon the principal amount outstanding, using methods which
generally result in level rates of return. The accrual of interest
income generally is discontinued when a loan becomes 90 days past due as
to principal or interest. When interest accruals are discontinued,
unpaid interest recognized in income in the current year is reversed,
and interest accrued in prior years is charged to the allowance for loan
losses. Management may elect to continue the accrual of interest when
the estimated net realizable value of collateral exceeds the principal
balance and related accrued interest, and the loan is in process of
collection.
LOANS HELD FOR SALE: Loans held for sale represent mortgage loans the
Company has either purchased or originated with the intent to sell on
the secondary market and are carried at the lower of cost or estimated
fair value.
ALLOWANCE FOR LOAN LOSSES: The provision for possible loan losses
included in the consolidated statements of income is based upon
management's evaluation of individual credits in the loan portfolio,
historical loan loss experience, current and expected future economic
conditions, and other relevant factors. These provisions, less net
charge-offs, comprise the allowance for loan losses. In management's
judgment, the allowance for loan losses is maintained at a level
adequate to provide for probable losses on existing loans.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated
at cost less accumulated depreciation. Depreciation is computed
primarily by the straight-line method over the estimated useful lives of
the assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
INTANGIBLES: Intangible assets, which are included in other assets in
the consolidated balance sheets, are comprised of goodwill and core
deposits which are amortized using straight-line (15 year life) and
accelerated methods (10 year life), respectively, over their estimated
useful lives.
During 1994, the Company purchased mortgage loan servicing rights
totaling $1,200,000 which are also included in other assets in the
consolidated balance sheets. The servicing rights are being amortized
using an accelerated method over the period of estimated net servicing
income.
INCOME TAXES: The consolidated provision for income taxes is based
upon reported income and expense. Deferred income taxes (included in
other assets) are provided for temporary differences between financial
reporting and tax bases of assets and liabilities. The Company files a
consolidated income tax return. The respective subsidiaries generally
provide for income taxes on a separate return basis and remit amounts
determined to be currently payable to the Parent Company.
NET INCOME PER COMMON SHARE: Net income per common share is based on
the weighted average common shares outstanding during each year. On
December 12, 1994, a 10% stock dividend was declared by the Board of
Directors for shareholders of record on January 2, 1995. The stock
dividend was paid on January 15, 1995, and all stock related data in the
consolidated financial statements reflects the stock dividend.A 10%
stock dividend was also declared in 1992. For each declaration an
amount equal to the fair value of the additional shares issued was
transferred from retained earnings to the common stock and capital
surplus accounts.
LOAN FEES AND COST: Loan origination and commitment fees and direct
loan origination costs are principally being recognized as collected and
incurred. The use of this method of recognition does not produce
results that are materially different from results which would have been
produced if such costs and fees were deferred and amortized as an
adjustment of loan yield over the life of the related loan.
STATEMENTS OF CASH FLOWS: Cash paid for interest, including long-term
debt, was $21,998,000, $19,693,000 and $19,996,000 in 1994, 1993, and
1992, respectively. Cash paid for income taxes was $3,219,000,
$2,877,000, and $2,957,000 in 1994, 1993, and 1992, respectively. NOTE
TWO RESTRICTIONS ON CASH AND DUE FROM BANKS
Certain of the subsidiary banks are required to maintain average
reserve balances with the Federal Reserve Bank. The average amount of
those balances for the year ended December 31, 1994, was approximately
$4,366,000.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE THREE
ACQUISITIONS
On December 5, 1994, the Company acquired 100% of the common stock of
Hinton Financial Corporation and subsidiary (Hinton) in exchange for
460,047 shares of the Company's common stock. The transaction has been
accounted for as a pooling of interests and, accordingly, the
consolidated financial statements for all periods presented have been
restated to include the accounts of Hinton. Previously reported results
of the Company have been restated as follows:
<TABLE>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
<S> <C> <C> <C>
NET INTEREST INCOME AS PREVIOUSLY
REPORTED BY THE COMPANY $ 22,235,000 $ 25,813,000 $ 21,761,000
HINTON'S PREVIOUSLY REPORTED RESULTS 2,048,000 2,856,000 2,888,000
RESTATED NET INTEREST INCOME $ 24,283,000 $ 28,669,000 $ 24,649,000
NET INCOME AS PREVIOUSLY REPORTED
BY THE COMPANY $ 4,431,000 $ 5,503,000 $ 5,039,000
HINTON'S PREVIOUSLY REPORTED RESULTS 596,000 929,000 865,000
RESTATED NET INCOME $ 5,027,000 $ 6,432,000 $ 5,904,000
NET INCOME PER COMMON SHARE AS
PREVIOUSLY REPORTED BY THE COMPANY
AS ADJUSTED FOR THE 10% STOCK
DIVIDEND IN 1995 $ 1.34 $ 1.69 $ 1.53
EFFECT OF HINTON RESTATEMENT (.01) .02 .03
RESTATED NET INCOME PER COMMON SHARE $ 1.33 $ 1.71 $ 1.56
</TABLE>
In June 1994, the Company acquired the remaining 33% interest in the
common stock of First National Bank-Beckley, West Virginia (FNB) for
which consideration included $530,000. As a result, FNB became a
wholly-owned subsidiary of the Company. Minority interest, representing
the equity interest in FNB owned by stockholders other than the Company,
appears in the 1993 balance sheet as a liability.
On October 15, 1993, Blue Ridge Bank, a wholly-owned subsidiary of the
Company, was declared the successful bidder for the purchase of certain
assets and the assumption of the insured deposits and certain other
liabilities of a failed thrift which had been in conservatorship with
the Resolution Trust Corporation (RTC). Blue Ridge Bank assumed insured
deposits of approximately $43 million in exchange for assets
(principally cash and cash equivalents) of approximately $40 million
from the RTC.
The FNB and RTC transactions were accounted for under the purchase
method of accounting. Accordingly, the results of operations
attributable to such acquisitions have been included in the consolidated
totals from the respective dates of acquisition. Due to the
immateriality of the transactions and the significant assets retained by
the RTC with respect to the failed thrift, proforma financial
information has not been presented herein.
Intangible assets arising from prior year purchase business
combinations consist of core deposits and goodwill which have an
aggregate unamortized balance at December 31, 1994 and 1993, of
$4,978,000 and $5,538,000, respectively.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE FOUR
INVESTMENTS
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. In accordance with SFAS No.
115, prior years' financial statements have not been restated to reflect
the change in accounting method and there was no cumulative effect of
adopting the Statement. Under SFAS No. 115, investment securities are
carried at amortized cost and securities available for sale are carried
at fair value with the after-tax net unrealized gain or loss recorded in
stockholders' equity. The adoption of SFAS No. 115 resulted in an
increase in stockholders' equity of $1,055,000.
The aggregate carrying and approximate market values of securities
follow. Fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
<TABLE>
AVAILABLE-FOR-SALE SECURITIES
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. TREASURY SECURITIES AND OBLIGATIONS
OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES $ 47,900,000 $ 9,000 $ 2,735,000 $ 45,174,000
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 790,000 1,000 1,000 790,000
MORTGAGE-BACKED SECURITIES 11,835,000 101,000 359,000 11,577,000
OTHER DEBT SECURITIES 1,003,000 39,000 964,000
TOTAL DEBT SECURITIES 61,528,000 111,000 3,134,000 58,505,000
EQUITY SECURITIES 9,828,000 18,000 431,000 9,415,000
$ 71,356,000 $ 129,000 $ 3,565,000 $ 67,920,000
HELD-TO-MATURITY SECURITIES
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. TREASURY SECURITIES AND OBLIGATIONS
OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES $ 87,836,000 $ 13,000 $ 3,461,000 $ 84,388,000
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 32,056,000 355,000 883,000 31,528,000
MORTGAGE-BACKED SECURITIES 4,896,000 414,000 4,482,000
OTHER DEBT SECURITIES 3,669,000 23,000 95,000 3,597,000
$ 128,457,000 $ 391,000 $ 4,853,000 $ 123,995,000
</TABLE>
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE FOUR
INVESTMENTS (CONTINUED)
<TABLE>
AVAILABLE-FOR-SALE SECURITIES
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U .S. TREASURY SECURITIES AND OBLIGATIONS
OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES $ 45,280,000 $ 859,000 $ 58,000 $ 46,081,000
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 95,000 1,000 94,000
MORTGAGE-BACKED SECURITIES 20,492,000 981,000 101,000 21,372,000
OTHER DEBT SECURITIES 1,809,000 50,000 1,859,000
TOTAL DEBT SECURITIES 67,676,000 1,890,000 160,000 69,406,000
EQUITY SECURITIES 7,851,000 29,000 0 7,880,000
$ 75,527,000 $ 1,919,000 $ 160,000 $ 77,286,000
</TABLE>
<TABLE>
HELD-TO-MATURITY SECURITIES
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT CORPORATIONS AND AGENCIES $ 127,512,000 $ 2,588,000 $ 158,000 $ 129,942,000
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS 33,889,000 1,969,000 26,000 35,832,000
OTHER DEBT SECURITIES 4,709,000 262,000 4,971,000
$ 166,110,000 $ 4,819,000 $ 184,000 $ 170,745,000
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without
prepayment penalties.
<TABLE>
ESTIMATED
COST FAIR VALUE
<S> <C> <C>
AVAILABLE-FOR-SALE
DUE IN ONE YEAR OR LESS $ 6,047,000 $ 5,851,000
DUE AFTER ONE YEAR THROUGH FIVE YEARS 22,093,000 21,056,000
DUE AFTER FIVE YEARS THROUGH TEN YEARS 20,848,000 19,404,000
DUE AFTER TEN YEARS 705,000 617,000
49,693,000 46,928,000
MORTGAGE-BACKED SECURITIES 11,835,000 11,577,000
$ 61,528,000 $ 58,505,000
HELD-TO-MATURITY
DUE IN ONE YEAR OR LESS $ 18,010,000 $ 17,813,000
DUE AFTER ONE YEAR THROUGH FIVE YEARS 69,920,000 67,668,000
DUE AFTER FIVE YEARS THROUGH TEN YEARS 32,993,000 31,521,000
DUE AFTER TEN YEARS 2,638,000 2,511,000
123,561,000 119,513,000
MORTGAGE-BACKED SECURITIES 4,896,000 4,482,000
$ 128,457,000 $ 123,995,000
</TABLE>
Gross gains of $100,000 and gross losses of $903,000 were realized on
sales and calls of securities during 1994. During 1993 and 1992,
respectively, gross gains of $390,000 and $72,000 and gross losses of
$68,000 and $63,000 were realized on sales of securities. The book value
of securities pledged to secure public deposits and for other purposes
as required or permitted by law approximated $70,318,000 and $51,146,000
at December 31, 1994 and 1993, respectively.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE FIVE
LOANS
DECEMBER 31
1994 1993
COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 137,425,000 $ 125,568,000
RESIDENTIAL REAL ESTATE 238,231,000 184,602,000
INSTALLMENT LOANS TO INDIVIDUALS 129,300,000 114,110,000
$ 504,956,000 $ 424,280,000
The Company grants loans to customers generally within the market
areas of its subsidiary banks. There is no significant concentration of
credit risk by industry or by related borrowers. There are no foreign
loans outstanding and highly leveraged loan transactions are
insignificant. The effects on income of nonaccrual loans, as well as
their outstanding balances, were not material.
During 1994, the Company began participation in a short-term,
whole-loan bulk purchasing program whereby the Company purchases from a
third party whole loans secured by residential mortgages. The loans,
generally, are repurchased from the Company within 90 days.
Additionally, the Company began originating residential mortgage loans
to be sold on the secondary market. Due to the short-term nature of
these loans, the recorded value approximates fair value. At December
31, 1994, the Company's investment in loans held for sale approximated
$30,227,000. A summary of changes in the allowance for possible loan
losses follows:
<TABLE>
1994 1993 1992
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 5,764,000 $ 5,380,000 $ 2,401,000
PROVISION FOR POSSIBLE LOAN LOSSES 953,000 1,341,000 2,222,000
CHARGE-OFFS (1,093,000) (1,537,000) (1,163,000)
RECOVERIES 393,000 476,000 240,000
ALLOWANCE OF PURCHASED SUBSIDIARY 0 104,000 1,680,000
BALANCE AT END OF YEAR $ 6,017,000 $ 5,764,000 $ 5,380,000
</TABLE>
The Financial Accounting Standards Board (FASB) has issued SFAS No.
114, "Accounting By Creditors for Impairment of a Loan," which was
amended by SFAS No. 118. The provisions of SFAS No. 114 and SFAS No. 118
are effective for fiscal years beginning after December 15, 1994. SFAS
No. 114 requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable
market price or fair value of the collateral if the loan is collateral
dependent. The Company will adopt this Statement on January 1, 1995 and
it will not have a material effect on the Company's financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE SIX
BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment follows:
DECEMBER 31
1994 1993
BANK PREMISES $ 17,865,000 $ 14,325,000
FURNITURE, FIXTURES, AND EQUIPMENT 11,009,000 9,806,000
28,874,000 24,131,000
LESS ALLOWANCE FOR DEPRECIATION 11,196,000 8,705,000
$ 17,678,000 $ 15,426,000
NOTE SEVEN
SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of advances from the Federal
Home Loan Bank of Pittsburgh (the FHLB) and securities sold under
agreement to repurchase. A summary of the Company's short-term
borrowings is set forth below:
<TABLE>
<S> <C> <C>
1994:
AVERAGE AMOUNT OUTSTANDING DURING THE YEAR $ 42,559,000
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH END 78,263,000
WEIGHTED AVERAGE INTEREST RATE:
DURING THE YEAR 3.96%
END OF THE YEAR 5.50%
1993:
A VERA G E AMOUNT OUTSTANDING DURING THE Y EAR $ 17,641,000
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH END 24,539,000
WEIGHTED A VERA G E INTEREST RATE:
DURING THE YEAR 2.40%
END OF THE YEAR 2.65%
1992:
A VERA G E AMOUNT OUTSTANDING DURING THE Y EAR $ 10,605,000
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH END 16,272,000
WEIGHTED A VERA G E INTEREST RATE:
DURING THE YEAR 3.10%
END OF THE YEAR 2.18%
</TABLE>
NOTE EIGHT
LONG-TERM DEBT AND UNUSED LINES OF CREDIT
Long-term debt, which represents an obligation of the Parent Company,
consists of a $10,000,000 revolving credit loan with an unrelated party.
The loan has a variable rate (7.9375% at December 31, 1994) with
interest payments due quarterly and principal due at maturity in June
1995. Management intends to refinance the loan according to provisions
provided in the agreement.
The loan agreement contains certain restrictive provisions applicable
to the Parent Company including limitations on additional long-term
debt. The parent company has pledged the common stock of its
wholly-owned subsidiaries, The City National Bank (City National) and
The Peoples Bank of Point Pleasant, as collateral for the revolving
credit loan.
During 1994, five of the Company's subsidiaries were approved for
membership, joining City National who was approved in 1993, in the FHLB.
On a consolidated basis, the Company has purchased 44,000 shares of the
FHLB stock at par value. Such purchases entitle the Company to
dividends declared by the FHLB and provide an additional source of
short-term and long-term funding, in the form of collateralized
advances. At December 31, 1994, the subsidiaries have been issued one
year flexline commitments of $61,725,000, at prevailing interest rates,
from the FHLB with maturities ranging from June to December 1995. Such
commitments are subject to satisfying the Capital Stock Requirement
provisions, as defined, in the agreement with the FHLB. As of December
31, 1994, amounts outstanding pursuant to the agreements totaled
$12,707,000.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE NINE
RESTRICTIONS ON SUBSIDIARY DIVIDENDS
Certain restrictions exist regarding the ability of the subsidiary
banks to transfer funds to the Parent Company in the form of cash
dividends. The approval of the bank's applicable primary regulator is
required prior to the payment of dividends by a subsidiary bank in
excess of its earnings retained in the current year plus retained net
profits for the preceding two years. During 1995, the subsidiary banks
can, without prior regulatory approval, declare dividends of
approximately $6,214,000 to the Parent Company, plus retained net
profits for the interim period through the date of such dividend
declaration.
NOTE TEN
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
DECEMBER 31
1994 1993
DEFERRED TAX ASSETS:
ALLOWANCE FOR LOAN LOSSES $ 2,208,000 $ 2,168,000
ACQUIRED NET OPERATING LOSS CARRY FORWARD 777,000 885,000
DEFERRED COMPENSATION PAYABLE 436,000 435,000
SECURITIES AVAILABLE FOR SALE 1,356,000 0
OTHER 200,000 155,000
TOTAL DEFERRED TAX ASSETS 4,977,000 3,643,000
DEFERRED TAX LIABILITIES:
FEDERAL INCOME TAX ALLOWANCE FOR LOAN LOSSES 630,000 861,000
PREMISES AND EQUIPMENT 746,000 734,000
CORE DEPOSIT INTANGIBLE 482,000 544,000
INVESTMENTS 139,000 172,000
LOANS 272,000 278,000
PREPAIDS 111,000 111,000
OTHER 8,000 13,000
TOTAL DEFERRED TAX LIABILITIES 2,388,000 2,713,000
NET DEFERRED TAX ASSETS $ 2,589,000 $ 930,000
SIGNIFICANT COMPONENTS OF THE PROVISION FOR INCOME TAXES ARE AS FOLLOWS:
LIABILITY METHOD
1994 1993 1992
FEDERAL:
CURRENT $ 2,876,000 $ 2,667,000 $ 2,469,000
DEFERRED (303,000) (153,000) (402,000)
2,573,000 2,514,000 2,067,000
STATE 620,000 435,000 444,000
TOTAL $ 3,193,000 $ 2,949,000 $ 2,511,000
Current income tax expense (benefit) attributable to investment
securities transactions approximated $(321,000), $129,000, and $4,000 in
1994, 1993, and 1992, respectively. As of December 31, 1994, the Company
has approximately $ 1.7 million and $2.3 million, respectively, of
federal and state income tax credit carryforwards which expire in 2006.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TEN
INCOME TAXES (CONTINUED)
A reconciliation between income taxes as reported and the amount
computed by applying the statutory federal income tax rate to income
before income taxes follows:
<TABLE>
LIABILITY METHOD
1994 1993 1992
<S> <C> <C> <C>
COMPUTED FEDERAL TAXES AND STATUTORY RATE $ 3,997,000 $ 2,764,000 $ 2,861,000
STATE INCOME TAXES, NET OF FEDERAL TAX BENEFIT 340,000 314,000 320,000
TAX EFFECTS OF:
NONTAXABLE INTEREST INCOME (611,000) (593,000) (606,000)
OTHER ITEMS, NET (33,000) 39,000 (64,000)
$ 3,193,000 $ 2,949,000 $ 2,511,000
</TABLE>
NOTE ELEVEN
RETIREMENT PLAN
The City Holding Company Profit Sharing and 401(k) Plan (the Plan) is
a deferred compensation plan under section 401(k) of the Internal
Revenue Code. All employees who complete one year of service are
eligible to participate in the Plan. Participants may contribute from
1% to 15% of pre-tax earnings to their respective accounts. These
contributions may be invested in any of four investment options selected
by the employee, one of which is City Holding Company common stock. The
Company matches 50% of the first 6% of compensation deferred by the
participant with City Holding Company common stock. Profit sharing
contributions are discretionary, as determined annually by the Company's
Board of Directors. The Company's total expense associated with the
Plan approximated $881,000, $562,000, and $403,000 in 1994, 1993, and
1992, respectively. The total number of shares of the Company's common
stock held by the Plan is 120,492. Other than the Plan, the Company
offers no postretirement benefits.
In May 1993, the Company formed the 1993 Stock Incentive Plan
(Incentive Plan) applicable to key employees. Under the Incentive Plan,
stock options are granted at an amount no less than the fair value of
the Company's common stock on the date of the grant. Participants in
the Incentive Plan may also be granted stock appreciation rights and
stock awards, at the discretion of the Company's Compensation Committee
of the Board of Directors. A maximum of 300,000 shares of the Company's
common stock may be issued pursuant to the provisions of the Incentive
Plan. Since its inception, no awards have been made under the Incentive
Plan.
NOTE TWELVE
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Subsidiaries of the Company have granted loans to the officers and
directors of the Company and its subsidiaries, and to their associates.
The loans were made in the ordinary course of business and on
substantially the same terms, including interest rates and collateral,
as those prevailing at the same time for comparable transactions with
unrelated persons and did not involve more than normal risk of
collectibility. The aggregate amount of loans outstanding as of
December 31, 1994 and 1993, attributable directly and indirectly to
these parties, was approximately $20,089,000 and $18,898,000,
respectively. During 1994, $6,693,000 of new loans were made and
repayments totaled $5,502,000.
A director of one of the Company's subsidiaries is the President of a
non-affiliated financial institution that participates in the whole-loan
bulk purchasing program (See NOTE FIVE).
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE THIRTEEN
INCOME
Included in other income in 1994 is $1,400,000 related to an insurance
recovery at one of the Company's subsidiary banks. Additionally, in
1994 the Company became involved in the secondary market for mortgage
loans which generated fee income of $317,000.
NOTE FOURTEEN
EXPENSES
The following items of other expenses exceeded one percent of total
revenue for the respective years:
1994 1993 1992
INSURANCE, INCLUDING FDIC PREMIUMS $ 1,545,000 $ 1,324,000 $ 1,068,000
ADVERTISING 868,000 606,000 419,000
BANK SUPPLIES 887,000 783,000 573,000
LEGAL AND ACCOUNTING FEES 952,000 475,000 335,000
NOTE FIFTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, certain financial products are
offered by the Company to accommodate the financial needs of its
customers. Loan commitments (lines of credit) represent the principal
off-balance-sheet financial product offered by the Company. At December
31, 1994 and 1993, commitments outstanding to extend credit totaled
approximately $45,776,000 and $25,252,000, respectively. To a much
lesser extent, the Company offers standby letters of credit which
require payments to be made on behalf of customers when certain
specified future events occur. Amounts outstanding pursuant to such
standby letters of credit were $3,161,000 and $780,000 as of December
31, 1994 and 1993, respectively. Historically, substantially all
standby letters of credit have expired unfunded.
Both of the above arrangements have credit risks essentially the same
as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Collateral is obtained based on
management's credit assessment of the customer. Management does not
anticipate any material losses as a result of these commitments.
NOTE SIXTEEN
PREFERRED STOCK AND SHAREHOLDER RIGHTS PLAN
The Company's Board of Directors has the authority to issue
preferred stock, and to fix the designation, preferences, rights,
dividends and all other attributes of such preferred stock, without any
vote or action by the shareholders. As of December 31, 1994, there are
no such shares outstanding, nor are any expected to be issued, except as
might occur pursuant to the Stock Rights Plan discussed below.
The Company's Stock Rights Plan provides that each share of common
stock carries with it one right. The rights would be exercisable only
if a person or group, as defined, acquired 10% or more of the Company's
common stock, or announces a tender offer for such stock. Under
conditions described in the Stock Rights Plan, holders of rights could
acquire shares of preferred stock or additional shares of the Company's
common stock, or in the event of a 50% or more change-in-control, shares
of common stock of the acquiror. The value of shares acquired under the
plan would equal twice the exercise price.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE SEVENTEEN
FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following table represents the estimates of fair value of financial
instruments:
<TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
1994 1993
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 27,591,000 $ 27,591,000 $ 27,436,000 $ 27,436,000
LOANS HELD FOR SALE 30,227,000 30,227,000
SECURITIES 199,813,000 191,915,000 241,637,000 248,031,000
NET LOANS 489,395,000 478,324,000 407,990,000 412,587,000
LIABILITIES
DEMAND DEPOSITS 388,794,000 388,794,000 400,099,000 400,099,000
TIME DEPOSITS 262,470,000 255,190,000 217,234,000 249,526,000
SHORT-TERM BORROWINGS 57,483,000 57,483,000 21,669,000 21,669,000
LONG-TERM DEBT 6,875,000 6,875,000 5,875,000 5,875,000
OFF-BALANCE SHEET
COMMITMENTS TO EXTEND CREDIT 45,776,000 45,776,000 25,252,000 25,252,000
LETTERS OF CREDIT 3,161,000 3,161,000 780,000 780,000
</TABLE>
The following methods and assumptions were used in estimating fair
value amounts for financial instruments:
The fair values for the loan portfolio are estimated using discounted
cash flow analyses at interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
values of accrued interest approximate fair value.
The fair values of demand deposits (i.e interest and
noninterest-bearing checking, regular savings, and other types of money
market demand accounts) are, by definition, equal to their carrying
amounts. Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregate expected
monthly maturities of time deposits.
Securities sold under agreements to repurchase represent borrowings
with original maturities of less than 90 days. The carrying amounts of
short-term borrowings approximate their fair values.
The fair values of long-term borrowings are estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The fair values of commitments are estimated based on fees currently
charged to enter into similar agreements, taking into consideration the
remaining terms of the agreements and the counterparties' credit
standing.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE EIGHTEEN
CITY HOLDING COMPANY (PARENT COMPANY ONLY)FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31
1994 1993
ASSETS
CASH $ 77,000 $ 188,000
SECURITIES AVAILABLE-FOR-SALE 1,726,000 1,603,000
INVESTMENT IN SUBSIDIARIES 67,009,000 60,630,000
FIXED ASSETS 1,745,000 1,768,000
OTHER ASSETS 1,262,000 490,000
TOTAL ASSETS $ 71,819,000 $ 64,679,000
LIABILITIES
LONG-TERM DEBT $ 6,875,000 $ 5,875,000
ADVANCES FROM AFFILIATES 5,807,000 2,234,000
OTHER LIABILITIES 2,268,000 736,000
TOTAL LIABILITIES 14,950,000 8,845,000
STOCKHOLDERS' EQUITY 56,869,000 55,834,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,819,000 $ 64,679,000
Advances from affiliates, which eliminate for purposes of the
Company's consolidated financial statements, represent amounts borrowed
from banking subsidiaries to fund the purchase of certain bank premises
and to meet other cash needs of the parent. Such debt is collateralized
by the securities and fixed assets of the Parent Company. Interest is
due quarterly at prime with principal due at maturity in 1997. The
maximum available credit under the advance is subject to the
subsidiaries' legal lending limit which approximated $6,356,000 at year
end.
CONDENSED STATEMENTS OF INCOME
<TABLE>
YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
INCOME
DIVIDENDS FROM BANK SUBSIDIARIES $ 5,231,000 $ 10,906,000 $ 4,476,000
INTEREST AND DIVIDENDS ON SECURITIES 111,000 117,000 12,000
OTHER INCOME 1,604,000 146,000 -
6,946,000 11,169,000 4,488,000
EXPENSES
INTEREST EXPENSE 735,000 349,000 5,000
OTHER EXPENSES 3,159,000 2,505,000 1,508,000
3,894,000 2,854,000 1,513,000
INCOME BEFORE INCOME TAX
BENEFIT AND EQUITY IN UNDISTRIBUTED NET INCOME
(EXCESS DIVIDENDS) OF SUBSIDIARIES 3,052,000 8,315,000 2,975,000
INCOME TAX BENEFIT (1,344,000) (991,000) (605,000)
INCOME BEFORE EQUITY
IN UNDISTRIBUTED NET INCOME (EXCESS DIVIDENDS)
OF SUBSIDIARIES 4,396,000 9,306,000 3,580,000
EQUITY IN UNDISTRIBUTED NET INCOME
(EXCESS DIVIDENDS) OF SUBSIDIARIES 2,563,000 (2,874,000) 2,324,000
NET INCOME $ 6,959,000 $ 6,432,000 $ 5,904,000
</TABLE>
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE EIGHTEEN
CITY HOLDING COMPANY (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE> YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 6,959,000 $ 6,432,000 $ 5,904,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR DEPRECIATION 149,000
DECREASE (INCREASE) IN OTHER ASSETS 44,000 (128,000) 190,000
INCREASE (DECREASE) IN OTHER LIABILITIES 1,532,000 430,000 (98,000)
(EQUITY IN UNDISTRIBUTED NET INCOME) EXCESS DIVIDENDS
OF SUBSIDIARIES (2,563,000) 2,874,000 (2,324,000)
OTHER 99,000 32,000
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,121,000 9,707,000 3,704,000
INVESTING ACTIVITIES
PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES 6,551,000 250,000
PROCEEDS FROM SALES OF SECURITIES 250,000
PURCHASES OF INVESTMENT SECURITIES (148,000) (6,407,000) (2,246,000)
PURCHASES OF MORTGAGE LOANS (808,000)
CASH PAID FOR ACQUIRED SUBSIDIARY (532,000) (193,000) (2,250,000)
CASH INVESTED IN SUBSIDIARIES (5,318,000) (8,767,000) (2,000,000)
PURCHASES OF PREMISES AND EQUIPMENT (126,000) (1,706,000)
NET CASH USED IN INVESTING ACTIVITIES (6,932,000) (10,272,000) (6,246,000)
FINANCING ACTIVITIES
PROCEEDS FROM LONG-TERM DEBT 6,875,000 5,225,000 4,000,000
PRINCIPAL REPAYMENTS ON LONG-TERM DEBT (5,875,000) (3,350,000)
ADVANCES FROM BANK SUBSIDIARIES, NET 3,573,000 2,234,000
CASH DIVIDENDS PAID (2,298,000) (1,833,000) (1,611,000)
PURCHASES OF TREASURY STOCK (193,000) (2,218,000) (548,000)
PROCEEDS FROM SALES OF TREASURY STOCK 461,000 565,000 665,000
REDEMPTION OF DISSENTER AND FRACTIONAL SHARES (1,843,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 700,000 623,000 2,506,000
(DECREASE) INCREASE IN CASH (111,000) 58,000 (36,000)
CASH AT BEGINNING OF YEAR 188,000 130,000 166,000
CASH AT END OF YEAR $ 77,000 $ 188,000 $ 130,000
</TABLE>
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE NINETEEN
SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly financial information for 1994 and
1993 follows:
<TABLE>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1994
INTEREST INCOME $ 12,665,000 $ 13,359,000 $ 14,295,000 $ 14,829,000
INTEREST EXPENSE 5,095,000 5,259,000 5,682,000 6,206,000
NET INTEREST INCOME 7,570,000 8,100,000 8,613,000 8,623,000
PROVISION FOR POSSIBLE LOAN LOSSES 201,000 215,000 215,000 322,000
INVESTMENT SECURITIES GAINS (LOSSES) 69,000 3,000 (20,000) (855,000)
NET INCOME 1,658,000 1,644,000 1,725,000 1,932,000
NET INCOME PER COMMON SHARE 0.44 0.44 0.45 0.52
1993
INTEREST INCOME $ 11,760,000 $ 11,877,000 $ 11,891,000 $ 12,688,000
INTEREST EXPENSE 4,774,000 4,781,000 4,761,000 5,231,000
NET INTEREST INCOME 6,986,000 7,096,000 7,130,000 7,457,000
PROVISION FOR POSSIBLE LOAN LOSSES 343,000 320,000 295,000 383,000
INVESTMENT SECURITIES GAINS 87,000 99,000 84,000 52,000
NET INCOME 1,661,000 1,646,000 1,678,000 1,447,000
NET INCOME PER COMMON SHARE 0.44 0.44 0.45 0.38
</TABLE>
NOTE TWENTY
PENDING MERGER
In March 1995, the Company signed a definitive agreement to acquire
First Merchants Bancorp in Montgomery, West Virginia (Merchants). At
December 31, 1994, Merchants reported total assets of approximately $115
million. The merger, which is expected to be consummated in the third
quarter of 1995, involves the exchange of approximately 920,000 shares
of Company common stock for all of Merchants' outstanding shares. It is
anticipated that the transaction will be accounted for under the pooling
of interests method of accounting. The following condensed unaudited
proforma financial information presents selected balance sheet amounts
and operating results of the Company and Merchants as though they had
been combined during all periods indicated below.
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993 1992
<S> <C> <C> <C>
AT YEAR END
NET LOANS $ 547,809 $ 462,424 $ 376,206
TOTAL DEPOSITS 746,805 709,958 605,398
TOTAL ASSETS 895,817 816,225 701,862
SUMMARY OF OPERATIONS
NET INTEREST INCOME $ 37,594 $ 32,876 $ 28,696
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 8,142 7,762 6,972
NET INCOME 8,142 7,645 6,972
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE PER SHARE 1.73 1.63 1.48
NET INCOME PER COMMON SHARE 1.73 1.63 1.48
</TABLE>
39
<PAGE>
Report of Ernst & Young LLP Independent
Auditors Board of Directors and Stockholders
First Merchants Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
First Merchants Bancorp, Inc. and subsidiary as of December 31, 1994 and
1993, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
First Merchants Bancorp, Inc. and subsidiary at December 31, 1994 and
1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As discussed in the footnotes to the consolidated financial
statements, in 1993 First Merchants Bancorp, Inc. changed its method of
accounting for securities (Note D), postretirement benefits other than
pensions (Note I), and income taxes (Note J).
Ernst & Young, LLP
Charleston, West Virginia
January 27, 1995, except as to
March 14, 1995,
Note O.
<PAGE>
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
DECEMBER 31
1994 1993
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,211,650 $ 4,436,864
Federal funds sold 810,000 710,000
Cash and Cash Equivalents 6,021,650 5,146,864
Interest-bearing deposits in other banks 670,734 1,215,307
Securities available for sale (cost: 1994 - $16,204,906;
1993 - $20,547,829) 14,888,731 21,056,123
Investment securities (approximate market value: 1994 -
$28,304,476; 1993 - $22,312,255) 28,648,209 21,139,938
Loans - gross 59,015,396 55,067,019
Less:
Unearned income (141,203) (188,366)
Allowance for loan losses (460,000) (445,000)
Loans - Net 58,414,193 54,433,653
Premises and equipment 3,452,390 3,551,457
Other assets 3,195,202 2,603,663
Total Assets $115,291,109 $109,147,005
LIABILITIES
Deposits:
Noninterest-bearing $ 13,674,107 $ 10,882,479
Interest-bearing 81,867,045 81,742,940
Total Deposits 95,541,152 92,625,419
Short-term borrowings:
Securities sold under agreements to repurchase 8,634,139 4,947,012
Other short-term borrowings 509,881 595,807
Total Short-Term Borrowings 9,144,020 5,542,819
Other liabilities 1,144,151 1,207,401
Total Liabilities 105,829,323 99,375,639
STOCKHOLDERS' EQUITY
Common stock, $2 par value - 1,000,000 shares authorized;
576,000 shares issued and outstanding at
December 31, 1994 and 1993 1,152,000 1,152,000
Surplus 649,343 649,343
Retained earnings 8,450,153 7,665,033
Net unrealized (loss) gain on securities available for
sale,
net of the related tax effect: 1994 - ($526,465);
1993 - $203,304 (789,710) 304,990
Total Stockholders' Equity 9,461,786 9,771,366
Total Liabilities and
Stockholders' Equity $115,291,109 $109,147,005
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
<TABLE>
YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,899,930 $4,349,508 $4,272,442
Interest and dividends on securities:
Taxable 1,825,918 1,842,861 2,245,531
Nontaxable 761,162 806,764 750,040
Interest on federal funds sold 47,284 48,616 61,228
Interest on deposits with other banks 79,781 38,050 23,604
Total Interest Income 7,614,075 7,085,799 7,352,845
INTEREST EXPENSE
Interest on deposits 2,767,583 2,664,333 2,964,063
Interest on short-term borrowings 158,949 213,973 341,558
Total Interest Expense 2,926,532 2,878,306 3,305,621
Net Interest Income 4,687,543 4,207,493 4,047,224
Provision for loan losses 86,699 93,193 103,155
Net Interest Income after
Provision for Loan Losses 4,600,844 4,114,300 3,944,069
OTHER INCOME
Service charges on deposit accounts 326,698 306,879 272,619
Other service charges and fees 50,509 48,746 41,210
Securities gains, net 73,829 351,522 6,122
Other 151,024 151,001 111,205
Total Other Income 602,060 858,148 431,156
OTHER EXPENSE
Salaries and employee benefits 1,752,089 1,573,371 1,444,818
Occupancy expense of premises 298,126 237,402 204,785
Furniture and equipment expense 291,738 283,545 303,201
Other expenses 1,325,789 1,130,605 1,027,317
Total Other Expense 3,667,742 3,224,923 2,980,121
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 1,535,162 1,747,525 1,395,104
Income taxes 352,602 417,918 327,392
Income Before Cumulative
Effect of Change in Accounting Principle 1,182,560 1,329,607 1,067,712
Cumulative Effect of Change in Accounting
Principle For Postretirement Benefits,
Net of Tax Benefit of $77,953 - (116,930)
Net Income $1,182,560 $1,212,677 $1,067,712
Earnings Per Common Share:
Income before cumulative effect of change in
accounting principle $ 2.05 $ 2.31 $ 1.85
Cumulative effect of change in accounting principle
- (.20) -
Net Income $ 2.05 $ 2.11 $ 1.85
Average common shares outstanding 576,000 576,000 576,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C>
NET UNREALIZED TOTAL
COMMON RETAINED GAIN (LOSS) ON STOCKHOLDERS'
STOCK SURPLUS EARNINGS SECURITIES EQUITY
Balance at January 1, 1992 $ 288,000 $649,343 $6,889,444 $(266,818) $7,559,969
Net income - - 1,067,712 - 1,067,712
Change in net unrealized loss
on marketable equity securities - - - 179,721 179,721
Cash dividends ($.46 per share) - - (266,400) - (266,400)
Balance at December 31, 1992 288,000 649,343 7,690,756 (87,097) 8,541,002
Net income - - 1,212,677 - 1,212,677
Change in net unrealized loss - - - (9,880) (9,880)
on marketable equity securities
Cash dividends ($.65 per share) - - (374,400) - (374,400)
Stock split effected in the 864,000 - (864,000) - -
form of a 3 for 1 stock dividend
Change in accounting method
for securities, net of taxes
of $203,304 - - - 401,967 401,967
Balance at December 31, 1993 1,152,000 649,343 7,665,033 304,990 9,771,366
Net income - - 1,182,560 - 1,182,560
Change in net unrealized loss
on securities - - - (1,094,700) (1,094,700)
Cash dividends ($.69 per share) - - (397,440) - (397,440)
Balance at December 31, 1994 $1,152,00 $649,343 $8,450,153 $ (789,710) $ 9,461,786
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE> YEAR ENDED DECEMBER 31
<S> <C> <C> <C>
OPERATING ACTIVITIES 1994 1993 1992
Net income $ 1,182,560 $ 1,212,677 $ 1,067,712
Adjustments to reconcile net income to
net cash provided by
operating activities:
Cumulative effect of change in accounting principle 116,930 -
Net (accretion) amortization (8,846) (2,589) 41,013
Provision for loan losses 86,699 93,193 103,155
Depreciation 204,392 220,057 222,056
Deferred income tax (benefit) expense (5,547) 13,257 (124,951)
Securities gains, net (73,829) (351,522) (6,122)
Purchases of trading account securities (2,880,211) (5,177,674)
Proceeds from sales of trading account securities 2,880,211 5,177,674
Decrease in other assets 160,973 2,158 63,613
Decrease in other liabilities (63,250) (212,551) (129,869)
Net Cash Provided by
Operating Activities 1,483,152 1,091,610 1,236,607
INVESTING ACTIVITIES
Purchases of investment securities (11,588,316) (14,976,841) (17,392,904)
Purchases of securities available for sale (1,955,534)
Proceeds from sales of securities available for sale 6,361,604 6,303,206 -
Proceeds from maturities of securities available for sale - 1,591,843 -
Proceeds from maturities of investment securities 3,610,085 2,763,236 6,760,446
Proceeds from calls of investment securities 1,034,050 3,736,543 8,945,230
Net decrease in short-term investments 1,295,068
Net (increase) decrease in loans (4,141,203) 3,478,477 (5,960,120)
Net cash received in acquisition 5,843,968 -
Purchases of premises and equipment (105,325) (209,854) (200,848)
Proceeds from sale of other real estate owned 56,779 40,919 9,500
Net Cash (Used in) Provided By Investing
Activities (6,727,860) 9,866,565 (7,838,696)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 2,791,628 655,298 1,332,764
Net increase (decrease) in interest-bearing deposits 124,105 (1,879,103) 2,701,535
Net increase (decrease) in repurchase agreements 3,687,128 (10,248,121) 4,738,724
Net (decrease) increase in other short-term borrowings (85,927) 12,111 198,045
Cash dividends paid (397,440) (420,479) (234,720)
Net Cash Provided by (Used in) Financing
Activities 6,119,494 (11,880,294) 8,736,348
Increase (Decrease) in Cash and Cash
Equivalents 874,786 (922,119) 2,134,259
Cash and cash equivalents at beginning of year 5,146,864 6,068,983 3,934,724
Cash and Cash Equivalents at End of Year 6,021,650 $ 5,146,864 $ 6,068,983
</TABLE>
First Merchants Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of First Merchants Bancorp,
Inc. and subsidiary (First Merchants) conform with generally accepted
accounting principles. The following is a summary of the more
significant policies:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of First Merchants Bancorp, Inc. and its
wholly- owned subsidiary, the Merchants National Bank (Merchants
National). All significant intercompany balances and transactions have
been eliminated.
STATEMENT OF CASH FLOWS: For purposes of the statement of cash
flows, First Merchants considers cash and due from banks and federal
funds sold as cash and cash equivalents. Income taxes paid approximated
$348,000 in 1994, $529,000 in 1993, and $453,000 in 1992. Interest paid
on deposits and short-term borrowings approximated $2,888,000 in 1994,
$2,886,000 in 1993, and $3,461,000 in 1992.
SECURITIES: Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Debt securities are classified as
held-to-maturity when First Merchants has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities
are stated at amortized cost. Trading account securities are held for
resale in anticipation of short-term market movements and are stated at
fair value. Gains and losses on trading securities, both realized and
unrealized, are included in other income. No securities were held in the
trading account at December 31, 1994 or 1993. Debt securities not
classified as held-to-maturity or trading and marketable equity
securities not classified as trading are classified as
available-for-sale. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. The amortized cost of debt
securities classified as held-to-maturity or available-for-sale is
adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Realized gains and losses, and declines
in value estimated to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the
specific identification method.
REVENUE RECOGNITION: Interest on loans is accrued and credited to
operations based upon the principal amount outstanding. The accrual of
interest generally is discontinued when a loan becomes 90 days past due
as to principal or interest. When interest accruals are discontinued,
unpaid interest recognized in income in the current year is reversed,
and interest accrued in prior years is charged to the allowance for loan
losses. Management may elect to continue the accrual of interest when
the estimated net realizable value of collateral is sufficient to cover
principal and accrued interest, and the loan is in the process of
collection.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is
established through a provision charged to operations. The allowance
represents an amount which, in management's judgment, will be adequate
to absorb potential losses on existing loans which may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on quarterly evaluations which take into
consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions which may affect the
borrower's ability to pay, overall portfolio quality, and review of
specific problem loans. Loans deemed to be uncollectible are charged
against the allowance for loan losses.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost
less accumulated depreciation. The provision for depreciation is
computed principally by the straight-line method over the estimated
useful lives of the assets.
INCOME TAXES: The consolidated provision for income taxes is based
upon reported income and expense. Deferred income taxes (included in
other assets or other liabilities, as applicable) are provided for
temporary differences between the financial reporting and tax bases of
assets and liabilities.
First Merchants and its subsidiary file a consolidated income tax
return. The subsidiary provides for income taxes on a separate return
basis and remits amounts determined to be currently payable to First
Merchants.
LOAN FEES AND COSTS: Loan origination fees and direct loan
origination costs are being recognized as collected and incurred. The
use of this method of recognition does not produce results that are
materially different from results which would have been produced if such
costs and fees were deferred and amortized as an adjustment of loan
yield over the life of the related loan.
NET INCOME PER COMMON SHARE: Net income per common share is based on
the weighted average common shares outstanding during each year. Net
income per share has been restated for all periods prior to 1993
presented to reflect a stock split, effected in the form of a 3 for 1
stock dividend, which occurred in 1993.
NOTE B - ACQUISITIONS
In March, 1987, First Merchants acquired Gauley National Bank
(Gauley National), which has subsequently been merged with and into
Merchants National. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the identifiable tangible and
intangible assets and liabilities of Gauley National were adjusted to
their estimated fair market values at the date the transaction was
consummated.
In September 1993, Merchants National was declared the successful
bidder for the purchase of certain assets and the assumption of the
insured deposits and certain other liabilities of Evergreen Federal
Savings and Loan (Evergreen) following its closure by the Office of
Thrift Supervision. Merchants National assumed deposits of approximately
$15 million in exchange for net loans of approximately $6 million, cash
and cash equivalents (net of the premium paid by Merchants National of
approximately $900,000) of approximately $6 million, and certain other
assets. This acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Evergreen have
been included in the related consolidated totals from the date of
acquisition.
Intangible assets representing the present value of future net
income to be earned from the acquired deposits of Gauley National and
Evergreen ($459,000) are being amortized on an accelerated basis over
ten and seven years, respectively. Accumulated amortization approximated
$221,000 and $149,000 at December 31, 1994 and 1993, respectively. The
excess of purchase price over the fair market value of the net assets
acquired in the Gauley National and Evergreen transactions ($1,008,000)
is being amortized on a straight-line basis over 15 years. Accumulated
amortization approximated $259,000 and $193,000 at December 31, 1994 and
1993, respectively.
NOTE C - RESTRICTIONS ON CASH AND DUE FROM BANKS
Merchants National is required to maintain balances in cash on hand
or on deposit with the Federal Reserve Bank. The average amount of
required reserve balances was approximately $737,000 for the year ended
December 31, 1994.
NOTE D - SECURITIES
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." First Merchants
elected to adopt the provisions of the new standard at the end of 1993.
The cumulative effect as of December 31, 1993 of adopting Statement 115
had no effect on the results of operations. The ending balance of
stockholders' equity was decreased as of December 31, 1994 by $789,710
(net of $526,465 in deferred income taxes) to reflect the net unrealized
holding loss and increased as of December 31, 1993 by $401,967 (net of
$203,304 in deferred income taxes) to reflect the net unrealized holding
gain on securities classified as available-for-sale.
The aggregate carrying and approximate market values of securities
follow. Fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
<TABLE>
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $15,059,378 $ 8,812 $ (332,508) $14,735,682
Obligations of states and political
subdivisions 10,928,045 262,041 (160,170) 11,029,916
Mortgage-backed securities 2,400,786 (112,788) 2,287,998
Other debt securities 260,000 (9,120) 250,880
Totals $28,648,209 $270,853 $ (614,586) $28,304,476
AVAILABLE-FOR-SALE
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $13,152,520 $ 7,278 $ (1,042,429) $12,117,369
Obligations of states and political
subdivisions 1,308,011 5,478 (45,579) 1,267,910
Total debt securities 14,460,531 12,756 (1,088,008) 13,385,279
Equity securities 1,744,375 (240,923) 1,503,452
Totals $16,204,906 $ 12,756 $ (1,328,931) 14,888,731
</TABLE>
<TABLE>
DECEMBER 31, 1993
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 6,497,581 $ 127,669 $ (20,207) $ 6,605,043
Obligations of states and political
subdivisions 11,904,049 985,913 (3,401) 12,886,561
Mortgage-backed securities 2,168,308 81,193 - 2,249,501
Other debt securities 570,000 3,550 (2,400) 571,150
Totals $21,139,938 $1,198,325 $ (26,008) $22,312,255
AVAILABLE-FOR-SALE
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $15,216,839 $ 419,682 $ (67,594) $15,568,927
Obligations of states and political
subdivisions 2,395,685 219,433 - 2,615,118
Total debt securities 17,612,524 639,115 (67,594) 18,184,045
Equity securities 2,935,305 33,750 (96,977) 2,872,078
Totals $20,547,829 $ 672,865 $(164,571) $21,056,123
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
HELD-TO-MATURITY
Due in one year or less $ 2,510,693 $ 2,503,105
Due after one year through five years 14,381,652 13,992,987
Due after five years through ten years 10,248,204 10,369,524
Due after ten years 1,507,660 1,438,860
$ 28,648,209 $28,304,476
AVAILABLE-FOR-SALE
Due in one year or less $ - $ -
Due after one year through five years 10,403,167 9,611,325
Due after five years through ten years 2,249,353 2,043,444
Due after ten years 1,808,011 1,730,510
$ 14,460,531 $13,385,279
During 1994, gross gains of approximately $134,000 and gross losses
of approximately $96,000 were realized on securities sales. During 1993
and 1992, respectively, gross gains of approximately $353,000 and
$209,000, and gross losses of $1,000 and $2,000 were realized on
securities sales.
Securities with a carrying value of approximately $11,086,030 and
$8,089,179, respectively, have been pledged to secure public deposits
and for other purposes as required or permitted by law as of December
31, 1994 and 1993, respectively.
NOTE E - LOANS
Major classifications of loans as of December 31 are summarized as
follows:
1994 1993
Commercial loans:
Commercial paper and loan participations $ 10,500,455 $ 9,318,614
Other commercial and industrial 16,440,210 14,225,357
26,940,665 23,543,971
Consumer loans:
Installment loans 10,615,351 9,851,982
Revolving credit 780,551 528,513
11,395,902 10,380,495
Residential real estate loans 20,678,829 21,142,553
Total Loans 59,015,396 55,067,019
Less unearned income on loans 141,203 188,366
58,874,193 54,878,653
Less allowance for loan losses 460,000 445,000
Net Loans $ 58,414,193 $54,433,653
Changes in the allowance for loan losses for each of the three years
ended December 31 were as follows:
1994 1993 1992
Balance, January 1 $445,000 $350,000 $ 360,000
Allowance on acquired loans 61,000
Provision for loan losses 86,699 93,193 103,155
Charge-offs (87,182) (77,852) (128,201)
Recoveries 15,483 18,659 15,046
Balance, December 31 $460,000 $445,000 $ 350,000
Certain directors and executive officers of First Merchants,
including their immediate families and companies in which they are
principal owners, are loan customers of Merchants National. Such loans
were made in the ordinary course of business on the Bank's normal credit
terms including interest rate and collateralization and did not
represent more than a normal risk of collection. The aggregate amount of
loans outstanding at December 31, 1994 and 1993, attributable directly
and indirectly to these parties was approximately $3,150,000 and
$3,090,000, respectively. During 1994, $733,000 of new loans were made
and repayments totaled $673,000.
The FASB has issued SFAS No. 114, "Accounting By Creditors for
Impairment of a Loan." The provisions of SFAS No. 114 are effective for
fiscal years beginning after December 15, 1994. SFAS No. 114 requires
that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or fair
value of the collateral if the loan is collateral dependent. First
Merchants has not yet completed the complex analysis required to
estimate the impact of these new rules and does not expect to implement
SFAS No. 114 prior to its first quarter 1995 effective date.
NOTE F - PREMISES AND EQUIPMENT
The major categories of premises and equipment are summarized as
follows:
DECEMBER 31
1994 1993
Land $ 913,561 $ 913,561
Buildings 3,171,351 3,126,560
Furniture and equipment 2,144,560 2,084,026
6,229,472 6,124,147
Less accumulated depreciation 2,777,082 2,572,690
Premises and Equipment - Net $3,452,390 $3,551,457
NOTE G - DEPOSITS The major categories of deposits are summarized as
follows:
DECEMBER 31
1994 1993
Demand deposits:
Non-interest-bearing $13,674,107 $10,882,479
Interest-bearing 13,942,620 13,176,640
Savings deposits 32,360,660 34,209,274
Certificates of deposits < $100,000 31,869,979 30,835,601
Certificates of deposits > $100,000 3,693,786 3,521,425
Total Deposits $95,541,152 $92,625,419
NOTE H - RESTRICTIONS ON SUBSIDIARY DIVIDENDS
First Merchants's primary source of funds for payment of dividends to
stockholders is dividends received from Merchants National. Certain
restrictions exist regarding the ability of Merchants National to
transfer funds to First Merchants in the form of cash dividends. Federal
banking regulations require regulatory approval prior to declaring
dividends in excess of the current year's net income, combined with
retained net income for the two preceding years. During 1995, Merchants
National can, without prior regulatory approval, declare dividends of
approximately $1,610,000 to First Merchants, plus retained net profits
for the interim period through the date of such dividend declaration.
NOTE I - EMPLOYEE BENEFITS
Merchants National participates in a noncontributory defined benefit
retirement plan which covers all full-time employees with one year of
service who have attained the age of 21. Employee benefits are based on
years of service and employee compensation earned during employment. The
Bank's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
The following table sets forth the Plan's funded status and the
amounts recognized in First Merchants's balance sheets at December 31,
based on actuarial valuations performed as of November 1:
<TABLE>
1994 1993
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations - (substantially vested in full) $1,143,000 $1,191,000
Projected benefit obligation for service rendered to date $1,341,000 $1,402,000
Plan assets at fair value, primarily listed common stocks
and investments in various mutual bond and stock
funds 1,702,000 1,777,000
Funded Status - Plan Assets in
Excess of
Projected
Benefit Obligation 361,000 375,000
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions (239,000) (263,000)
Unrecognized prior service cost (23,000) (25,000)
Unrecognized net asset (overfunding) at date of adoption
of FASB No. 87 (145,000) (95,000)
Net Accrued Pension Cost
Included in Other Liabilities $ (46,000) $ (8,000)
</TABLE>
Net periodic pension cost for each of the three years ended December
31 included the following components:
<TABLE>
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 42,000 $ 65,000 $ 76,000
Interest cost on projected benefit obligation 102,000 97,000 90,000
Actual return on plan assets 34,000 (207,000) (157,000)
Deferred gains (181,000) 68,000 20,000
Amortization of unrecognized net gains (6,000) (14,000) (14,000)
Amortization of unrecognized prior service cost
(2,000) (2,000) (2,000)
Amortization of plan overfunding at date of
adoption (16,000) (10,000) (10,000)
Net Periodic Pension (Benefit) Expense $ (27,000) $ (3,000) $ 3,000
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 8.5% and 6%, respectively, and
7.5% and 6%, respectively, at November 1, 1994 and 1993. The expected
long-term rate of return on plan assets was 8.5% in 1994, 1993, and
1992. The overfunding as of the date of adoption of FASB No. 87, the net
deferred gain from past experience different from that assumed, and the
effects of changes in assumptions are being amortized as a net credit
against pension cost over the average future working lifetime of the
participants expected to receive benefits under the Plan which
approximates 17 years.
In addition to the defined benefit pension plan, Merchants National
sponsors contributory defined benefit health care and life insurance
plans that provide postretirement medical and life insurance benefits to
qualifying retirees. Full-time employees who retire on or after age 62
with 15 years of service, or after age 65 with 10 years of service are
eligible for medical benefits. The postretirement medical plan covers a
stated percentage of eligible expenses, reduced by deductibles and other
coverages, as applicable. The cost- sharing provisions of the medical
plan require covered retirees to fund 50% of the total cost of employee
coverage and 100% of any dependent coverage. Life insurance coverage is
available only to employees who retired prior to January 1, 1993 and
otherwise met the service requirements indicated above for medical
benefits. The cost-sharing provisions of the postretirement life
insurance plan require covered retirees to fund 50% of the total cost.
Effective January 1, 1993, First Merchants adopted FASB Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The cumulative effect as of January 1, 1993 of adopting
Statement 106 decreased net income by $116,930 (net of $77,953 in
deferred income tax benefit), or $.20 per share. Adoption of the
Statement also increased 1993 net periodic postretirement benefit cost
by approximately $11,000. Postretirement benefit costs for 1992, which
was recorded on a cash basis, has not been restated.
The following table presents combined details of the amounts
recognized in First Merchants's statement of financial position relative
to the respective unfunded postretirement benefit plans:
DECEMBER 31
1994 1993
Accumulated postretirement benefit obligation:
Retirees $136,441 $128,789
Fully eligible active plan participants 17,657 16,665
Other active plan participants 63,894 60,321
Accrued Postretirement Benefit Cost $217,992 $205,775
Net periodic postretirement benefit cost for the years ended
December 31, included the following components:
1994 1993
Service cost $ 6,777 $ 6,477
Interest cost 15,291 14,616
Net Periodic Postretirement Benefit Cost $22,068 $21,093
The weighted-average annual assumed rates of increase in the per
capita cost of covered benefits are 11% (pre-age 65 benefits) and 9%
(post-age 65 benefits) for 1994 (the rates previously assumed for 1993
were 11.5% and 9.5%, respectively) and are assumed to decrease .5%
annually to an ultimate level of 5%. The annual assumed rate of increase
in per capita cost of life insurance benefits (i.e., salary increases)
is 5%. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1993 by approximately $30,000, and the aggregate of the
service and interest cost components of net periodic postretirement
benefit cost for 1993 by approximately $5,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% at December 31, 1994 and 1993.
NOTE J - INCOME TAXES Effective January 1, 1993, First Merchants
changed its method of accounting for income taxes from the deferred
method to the liability method required by FASB Statement No. 109,
"Accounting for Income Taxes." The cumulative effect of adopting
Statement 109 as of January 1, 1993, was not material to First
Merchants's consolidated financial statements.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of First Merchants's deferred tax
liabilities and assets as of December 31 are as follows:
Deferred tax liabilities: 1994 1993
Unrealized gains on securities for sale - $203,000
Premises and equipment $179,000 185,000
Federal income tax allowance for loan losses 166,000 167,000
Other 42,000 34,000
Total Deferred Liabilities 387,000 589,000
Deferred tax assets:
Unrealized losses on securities available for sale 526,000 -
Allowance for loan losses 180,000 176,000
OPEB liability 86,000 81,000
Accrued liabilities 10,000 31,000
Other 38,000 54,000
Total Deferred Tax Assets 840,000 342,000
Net Deferred Tax Assets $483,000 $247,000
Income taxes included in earnings for each of the three years ended
December 31 are composed of:
DEFERRED
LIABILITY METHOD METHOD
1994 1993 1992
Federal:
Current $275,564 $306,289 $ 340,343
Deferred expense (benefit) (5,547) 13,257 (124,951)
270,017 319,546 215,392
State 82,585 98,372 112,000
Total $352,602 $417,918 $ 327,392
Current income tax expense attributable to securities transactions
approximated $29,000, $141,000, and $2,000 in 1994, 1993, and 1992,
respectively.
The provision for income taxes differs from the federal statutory
rate for the following reasons:
<TABLE>
LIABILITY METHOD DEFERRED METHOD
1994 % 1993 % 1992 %
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory federal rate $ 521,955 34.00% $ 594,159 34.00% $ 474,335 34.00%
Add state income taxes net of federal tax
benefit 53,478 3.48 63,789 3.65 59,469 4.26
Increase (decrease) in taxes resulting from:
Tax-exempt interest (239,141) (15.58) (252,876) (14.47) (231,801) (16.62)
Amortization of purchase accounting
adjustments - - - - 20,003 1.43
Other 16,310 1.06 12,846 .73 5,386 .40
$ 352,602 22.96% $ 417,918 23.91% $ 327,392 23.47%
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, Merchants National offers a
variety of financial products to customers to aid them in meeting their
requirements for liquidity and credit enhancement. Generally accepted
accounting principles recognize these transactions as contingent
liabilities and, accordingly, they are not reflected in the accompanying
financial statements. Following is a discussion of these transactions.
STANDBY LETTERS OF CREDIT: These transactions are used by the Bank's
customers as a means of improving their credit standing in their
dealings with others. Under these agreements, the Bank agrees, in
exchange for a fee, to honor certain financial commitments in the event
that its customers are unable to do so. Amounts outstanding pursuant to
such standby letters of credit as of December 31, 1994 and 1993 were
$388,000 and $213,000, respectively. Management conducts regular reviews
of these instruments on an individual customer basis, and the results
are considered in assessing the adequacy of the allowance for loan
losses.
LOAN COMMITMENTS: As of December 31, 1994 and 1993, Merchants
National had commitments outstanding to extend credit totaling
approximately $2,633,000 and $682,000, respectively. These commitments
(lines of credit) generally require the customers to maintain certain
credit standards.
Both of the above arrangements have credit risk essentially the same
as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Collateral is obtained based on
management's credit assessment of the customer. Management does not
anticipate any material losses as a result of these commitments.
NOTE L - OTHER INCOME AND EXPENSE The following items of other
income and expense exceeded one percent of total revenue for the periods
indicated:
1994 1993 1992
Other expense:
FDIC assessment $213,000 $179,000 $170,000
Marketing 96,000 87,000 65,000
Directors and committee fees 94,000 88,000 63,000
Printing stationery and supplies 102,000 93,000 75,000
Other income:
Credit life insurance premiums 97,000 94,000 88,000
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued Statement No. 107, "Disclosures
about Fair Values of Financial Instruments." This statement requires the
disclosure of the fair value of substantially all financial instruments,
whether recognized or not recognized in the balance sheet. The statement
does not change any of the present requirements for recognition,
measurement, or classification of financial instruments in the financial
statements. Statement 107 is effective for financial statements issued
for fiscal years ending after December 15, 1995, for entities with less
than $150 million in total assets.
NOTE N - FIRST MERCHANTS BANCORP, INC. (PARENT ONLY) FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
DECEMBER 31
1994 1993
<S> <C> <C>
ASSETS
Cash $ 56,137 $ 51,297
Investment in bank subsidiary 9,518,838 9,830,978
Other assets 175,000 160,000
Total Assets $9,749,975 $10,042,275
LIABILITIES
Other liabilities $ 288,189 $ 270,909
Total Liabilities 288,189 270,909
Stockholders' equity 9,461,786 9,771,366
Total Liabilities and
Stockholders' Equity $9,749,975 $10,042,275
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 400,000 $ 385,000 $ 275,000
Equity in undistributed earnings of subsidiary bank 782,560 827,677 792,712
Net Income $1,182,560 $1,212,677 $1,067,712
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,182,560 $1,212,677 $1,067,712
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed earnings of subsidiary (782,560) (827,677) (792,713)
(Increase) decrease in other assets (15,000) 45,000 (205,000)
Cash Provided by Operating Activities 385,000 430,000 69,999
FINANCING ACTIVITIES
Cash dividends paid (380,160) (420,479) (234,720)
Cash Used in Financing Activities (380,160) (420,479) (234,720)
Increase (Decrease) in Cash 4,840 9,521 (164,721)
Cash at beginning of year 51,297 41,776 206,497
Cash at End of Year $ 56,137 $ 51,297 $ 41,776
</TABLE>
NOTE O - PENDING MERGER
On March 14, 1995, the Company's board of directors approved a plan
of merger whereunder the company will be acquired by City Holding
Company. The merger is subject to approval of shareholders and
regulators and is expected to be consummated in the summer of 1995.
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
The City National Bank of Charleston, Charleston, West Virginia, Home
National Bank of Sutton, Sutton, West Virginia, are national banking
associations conducting business in West Virginia and are 100% owned by
City Holding Company. The Peoples Bank of Point Pleasant, Point Pleasant,
West Virginia; First State Bank & Trust, Rainelle, West Virginia; Bank of
Ripley, Ripley, West Virginia; Blue Ridge Bank, Martinsburg, West Virginia;
and The Buffalo Bank of Eleanor, Eleanor, West Virginia; are state-
chartered banking institutions conducting business in West Virginia and are
100% owned by City Holding Company. Hinton Financial Corporation, a single
bank holding company, and its subsidiary The First National Bank of Hinton,
a national banking association, are located in Hinton, West Virginia and
100% owned by City Holding Company. City Mortgage Corporation, Pittsburgh,
Pennsylvania, is a full service mortgage banking company business in
Pennsylvania and City Financial Corporation, Charleston, West Virginia, is
a full service securities brokerage and investment advisory company
conducting business in West Virginia. Both are 100% owned by City Holding
Company.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of City Holding Company of our report dated January 20, 1995,
included in the 1994 Annual Report to Shareholders of City Holding Company.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3, Number 33-38391, Form S-8, Number 33-38269, and Form
S-8, Number 33-62738) pertaining to the Dividend Reinvestment and Stock
Purchase Plan, the Profit-Sharing and 401(k) Plan, and the 1993 Stock
Incentive Plan, respectively, of City Holding Company and in the related
Prospectuses of our report dated January 20, 1995, with respect to the
consolidated financial statements of City Holding Company incorporated by
reference in this Annual Report (Form 10-K) for the year ended December 31,
1994.
/s/ Ernst & Young, LLP
Charleston, West Virginia
March 29, 1995
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 6, 1995, with
respect to the consolidated financial statements of Hinton Financial
Corporation, included in this Annual Report (Form 10-K) of City Holding
Company.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3, Number 33-38391, Form S-8, Number 33-38269, and Form
S-8, Number 33-62738), pertaining to the Dividend Reinvestment and Stock
Purchase Plan, the Profit-Sharing and 401(k) Plan, and the 1993 Stock
Incentive Plan, respectively, of City Holding Company and in the related
Prospectus of our report dated January 6, 1995, with respect to the
consolidated financial statements of Hinton Financial Corporation, included
in this Annual Report (Form 10-K) for City Holding Company for the year
ended December 31, 1994.
/s/ Persinger & Company, LLC
Beckley, West Virginia
March 29, 1995
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 27, 1995, with respect to
the consolidated financial statements of First Merchants Bancorp, Inc.
included as Exhibit 13(b) in the Annual Report (Form 10K) of City Holding
Company for the year ended December 31, 1994.
/s/ Ernst & Young, LLP
Charleston, West Virginia
March 29, 1995
