SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K405
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, 1996 0-11733
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia 55-0619957
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 MacCorkle Avenue, Southeast
Charleston, West Virginia 25304
(Address of principal offices)
Registrant's telephone number, including area code: (304) 925-6611
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 26, 1997 (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 -- $204,811,403
The number of shares outstanding of the issuer's common stock as of March 26,
1997:
Common Stock, $2.50 Par Value -- 6,068,486 shares
The total number of pages are 65 . Exhibit Index is located on page 19 .
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Page 1 of 65
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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, 1996.
Portions of City Holding Part III, Items 10,
Company's Proxy statement 11, 12 and 13.
for the 1997 Annual
Meeting of Shareholders.
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FORM 10-K INDEX
PART I Page
Item 1. Business................................................ 4
Item 2. Properties........................................... 11
Item 3. Legal Proceedings.......................................11
Item 4. Submission of Matters to a Vote of
Security Holders......................................11
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters...........................12
Item 6. Selected Financial Data.................................12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................12
Item 8. Financial Statements and Supplementary Data.............12
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure................12
PART III
Item 10. Directors and Executive Officers of
Registrant............................................13
Item 11. Executive Compensation..................................13
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................13
Item 13. Certain Relationships and Related
Transactions..........................................13
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................14
Signatures..............................................17
Exhibit Index.......................................... 19
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PART I
Item 1 Business
(a) History
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 nine banking subsidiaries and three
nonbanking subsidiaries (collectively, the "Subsidiaries"). All of the
subsidiaries are wholly-owned. The Company acquired First Merchants Bancorp,
Inc. and its subsidiary, Merchants National Bank, West Virginia in August 1995.
The Company continually seeks strategic aquisition 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. During 1996, the Company
created City Mortgage Services, a mortgage loan servicing division.
Headquartered in Charleston, West Virginia, this division was formed to
facilitate the Company's growth of its mortgage servicing portfolio. On December
31, 1996, the Company acquired certain assets and assumed certain liabilities of
Prime Financial Corporation, a mortgage loan servicing company located in Costa
Mesa, California, which increased the Company's mortgage loan servicing
portfolio by approximately $600 million. This West Coast operation was absorbed
into the mortgage loan servicing division headquartered in Charleston, West
Virginia. The nonbanking subsidiaries include a full service mortgage banking
company whose principal place of business is in Pittsburgh, Pennsylvania and a
full service securities brokerage and investment advisory company, whose
principal place of business is in City National's main location. 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.
(b) Business
The banking Subsidiaries are engaged in the business of
banking in West Virginia 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. In addition, the Company engages in servicing pools of
FHA Title I insured and other loans through its City Mortgage Services division,
a full service securities brokerage and investment advisory business through
City Financial Corporation, and a full service mortgage banking business through
City Mortgage Corporation.
City Holding Company's nine banking subsidiaries operate 37
banking offices in West Virginia. 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 eleven branches serving Kanawha
and Putnam counties. 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 and
Raleigh counties. First State Bank operates seven offices located in Rainelle
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(two offices), Rupert, Sophia, Beaver, and Beckley (two offices), 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. Blue
Ridge operates five offices located in Berkeley, Jefferson, and Morgan counties.
Peoples State Bank, a state bank, has locations in Clarksburg and Bridgeport,
West Virginia, serving Harrison County. The First National Bank of Hinton
(Hinton), operates a national bank in Summers County. Merchants National Bank
operates a national bank in Montgomery, West Virginia and two branches located
in Gauley and Glasgow, West Virginia. City Holding Company's nine banking
subsidiaries are consumer-oriented banks and it is anticipated they will
continue to be operated as such.
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.
City Holding Company operates as a multi-bank holding company
and has a loan servicing division which services pools of home improvement
loans. Consequently, it is generally dependent upon the Subsidiaries for cash
necessary to pay expenses, 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.
(c) Regulation and Supervision
Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulators. The
following description briefly discusses certain provisions of federal and state
laws and certain regulations and the potential impact of such provisions to
which the Company and its banking Subsidiaries are subject. These federal and
state laws and regulations have been enacted for the protection of depositors in
national and state banks and not for the protection of shareholders of bank
holding companies.
Bank Holding Companies
As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the Company is subject to
regulation by the Federal Reserve Board. The Federal Reserve Board has
jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger
or consolidation proposed by a bank holding company. The BHCA generally limits
the activities of a bank holding company and its subsidiaries to that of
banking, managing or controlling banks, or any other activity which is so
closely related to banking or to managing or controlling banks as to be a proper
incident thereto.
Federal law permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state. Effective
June 1, 1997, the law will allow interstate bank mergers, subject to earlier
"opt-in" or "opt-out" action by individual states. The law currently allows
interstate branch acquisitions and de novo branching if permitted by the host
state. West Virginia has adopted early "opt-in" legislation that allows
interstate bank mergers. These laws also permit interstate branch acquisitions
and de novo branching in
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West Virginia by out-of-state banks if reciprocal treatment is accorded West
Virginia banks in the state of the acquiror.
There are a number of obligations and restrictions imposed on
bank holding companies and their depository institution subsidiaries by federal
law and regulatory policy that are designed to reduce potential loss exposure to
the depositors of such depository institutions and to the FDIC insurance fund in
the event the depository institution becomes in danger of default or in default.
For example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-guarantee" provisions of federal
law require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund (SAIF) or the Bank Insurance Fund (BIF) as a result
of the default of a commonly controlled insured depository institution or for
any assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for reimbursement is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institution.
The Federal Deposit Insurance Act (FDIA) also provides that
amounts received from the liquidation or other resolution of any insured
depository institution by any receiver must be distributed (after payment of
secured claims) to pay the deposit liabilities of the institution prior to
payment of any other general or unsecured senior liability, subordinated
liability, general creditor or shareholder. This provision would give depositors
a preference over general and subordinated creditors and shareholders in the
event a receiver is appointed to distribute the assets of any of the banking
Subsidiaries.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking withing the meaning of the
BHCA. These activities include: operating a mortgage company, finance company,
credit card company or factoring company; performing certain data processing
operations; providing investment and financial advice; and acting as an
insurance agent for certain types of credit-related insurance.
The Company is registered under the bank holding company laws
of West Virginia. Accordingly, the Company and its banking Subsidiaries are
subject to further regulation and supervision by the WV Division of Banking.
Capital Requirements
The Federal Reserve Board and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States banking organizations. In addition, those regulatory agencies may
from time to time require that a banking organization maintain capital above the
minimum levels because of its financial condition or actual or anticipated
growth. Under the risk-based capital requirements of these federal bank
regulatory agencies, the Company and its banking Subsidiaries are required to
maintain a minimum ratio of total capital to risk-weighted assets of at least 8%
in order to remain categorized as well capitalized. At least half of the total
capital is required to be "Tier 1 capital", which consists principally of
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common and certain qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. The remainder "Tier 2 capital" consists of a
limited amount of subordinated and other qualifying debt (including certain
hybrid capital instruments) and a limited amount of the general loan loss
allowance. The Tier 1 and total capital to risk-weighted asset ratios of the
Company as of December 31, 1996 were 10.20% and 11.23%, respectively, exceeding
the minimums required.
In addition, each of the federal regulatory agencies has
established a minimum leverage capital ratio (Tier 1 capital to average tangible
assets). These guidelines provide for a minimum ratio of 4% for banks and bank
holding companies that meet certain specified criteria, including that they have
the highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The Tier 1 capital
leverage ratio of the Company as of December 31, 1996, was 6.58%. 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 Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) requires each federal banking agency to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. Rules have been promulgated with respect to
concentration of credit risk and the risks of non-traditional activities, and
also as to the risk of loss on multi-family mortgages. A proposed rule with
respect to interest rate risk is still under consideration. The proposal would
allow institutions to use internal risk models to measure interest rate risk (if
the models are acceptable to examiners) and would require additional capital of
institutions identified as having excess interest rate risk. The Company does
not expect any of these rules, either individually or in the aggregate, to have
a material impact on its capital requirements.
Limits on Dividends and Other Payments
The Company is a legal entity separate and distinct from its
Subsidiaries. Most of the Company's revenues result from the dividends paid to
the Company by those Subsidiaries. The right of the Company and shareholders of
the Company, to participate in any distribution of the assets or earnings of any
Subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of such Subsidiary, except to the
extent that claims of the Company in its capacity as a creditor may be
recognized. Moreover, there are various legal limitations applicable to the
payment of dividends to the Company as well as the payment of dividends by the
Company to its shareholders. Under federal law, the Company's Subsidiaries may
not, subject to certain limited expectations, make loans or extensions of credit
to, or investment in the securities of, or take securities of the Company as
collateral for loans to any borrower. The Company's Subsidiaries are also
subject to collateral security requirements for any loans or extensions of
credit permitted by such exceptions.
The banking Subsidiaries are subject to various statutory
restrictions on their ability to pay dividends to the Company. Under applicable
regulations, at December 31, 1996, the banking Subsidiaries could have paid
aggregate dividends to the Company of $15.9 million without obtaining prior
approval of their respective regulators. The payment of dividends by the Company
and the banking Subsidiaries may also be limited by other factors, such as
requirements to maintain adequate capital above regulatory guidelines. The
various regulators supervising the banking Subsidiaries have authority to
prohibit any subsidiary under their jurisdiction from engaging in an unsafe and
unsound practice in conducting its business. The payment of dividends, depending
upon the financial condition of the subsidiary in question, could be deemed to
constitute such an unsafe or unsound practice. The Federal Reserve Board and the
OCC have indicated their view that it generally
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would be an unsafe and unsound practice to pay dividends except out of current
operating earnings. The Federal Reserve Board has stated that, as a matter of
prudent banking, a bank or bank holding company should not maintain its existing
rate of cash dividends on common stock unless (1) the organization's net income
available to common shareholders over the past year has been sufficient to fund
fully the dividends and (2) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. Moreover, the Federal Reserve Board has indicated that bank
holding companies should serve as a source of managerial and financial strength
to their subsidiary banks. Accordingly, the Federal Reserve Board has stated
that a bank holding company should not maintain a level of cash dividends to its
shareholders that places undue pressure on the capital of bank subsidiaries, or
that can be funded only through additional borrowings or other arrangements that
may undermine the bank holding company's ability to serve as a source of
strength.
The ability of the Company's subsidiaries to pay dividends in
the future is, and is expected to continue to be, influenced by regulatory
policies and by capital guidelines. The bank regulatory agencies have broad
discretion in developing and applying policies and guidelines, in monitoring
compliance with existing policies and guidelines, and in determining whether to
modify such policies and guidelines.
FIRREA
Under the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) a depository institution insured by 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 a "default" is likely to occur
in the absence of regulatory assistance. Liability of any bank Subsidiary of the
Company under this cross-guarantee position could have a material adverse effect
on the financial condition of any other bank Subsidiary and the Company.
FDICIA
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) became effective. FDICIA substantially revised
the depository institution regulatory and funding provisions of the Federal
Deposit Insurance Act and revised several other federal banking statutes.
Banks
The City National Bank of Charleston, The Home National Bank
of Sutton, Merchants National Bank and The First National Bank of Hinton are
national banking associations, and are subject to supervision and regulation by
the OCC, the Federal Reserve Board and the FDIC. The Peoples Bank of Point
Pleasant, First State Bank & Trust and Blue Ridge Bank are supervised and
regulated by the West Virginia Board of Banking and Financial Institutions and
the FDIC. The Bank of Ripley and Peoples State Bank are supervised and regulated
by the West Virginia Board of Banking and Financial Institutions, the FDIC and
the Federal Reserve Board. To reduce the burden associated with multiple
regulators, Peoples Bank of Point Pleasant, First State Bank & Trust, Bank of
Ripley, Blue Ridge Bank, and Peoples State Bank, have filed applications with
the OCC to become national banks. These conversions are expected to be completed
by April 1997. The various laws and regulations administered by the regulatory
agencies affect corporate practices, such as payment of dividends, incurring
debt and acquisition of financial institutions and other companies, and affect
business practices, such as payment of interest on deposits, the charging of
interest on loans, types of business conducted and location of offices.
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Governmental Policies
The operations of the Company and its banking Subsidiaries are
affected not only by general economic conditions, but also by the policies of
various regulatory authorities. In particular, the Federal Reserve Board
regulates money and credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of bank loans, investments and deposits and affect
interest rates charged on loans or paid for time and savings deposits. Federal
Reserve monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future.
Among other things, FDICIA requires the federal banking
regulators to take prompt corrective action with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The Federal Reserve Board has adopted regulations establishing
relevant capital measures and relevant capital levels for banks. The relevant
capital measures are the total risk-adjusted capital ratio, Tier I risk-
adjusted capital ratio and the leverage ratio. Under the regulations, a bank is
considered (i) well capitalized if it has a total capital ratio of ten percent
or greater, a Tier 1 capital ratio of six percent or greater and a leverage
ratio of five percent or greater and is not subject to any order or written
directive by such regulator to meet and maintain a specific capital level for
any capital measure, (ii) adequately capitalized if it has a total capital ratio
of eight percent or greater, a Tier I capital ratio of four percent or greater
and a leverage ratio of four percent or greater (three percent in certain
circumstances) and is not well capitalized, (iii) undercapitalized if it has a
total capital ratio of less than eight percent, a Tier 1 capital ratio of less
than four percent or a leverage ratio of less than four percent (three percent
in certain circumstances), (iv) significantly undercapitalized if it has a total
capital ratio of less than six percent, a Tier 1 capital ratio of less than
three percent or a leverage ratio of less than three percent, and (v) critically
undercapitalized if its tangible equity is equal to or less than two percent of
average quarterly tangible assets. As of December 31, 1996, each of the banking
Subsidiaries had capital levels that qualify them as being well capitalized
under such regulations.
FDICIA generally prohibits a depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve Board. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. In order to
obtain acceptance of a capital restoration plan, a depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. Furthermore, in the event of a bankruptcy of the
parent holding company, such guarantee would take priority over the parent's
general unsecured creditors. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
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Under FDICIA, a depository institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market. In addition, pass-through insurance coverage may not be available for
certain employee benefit accounts.
Various other legislation, including proposals to overhaul the
banking regulatory system and to limit the investments that a depository
institution may make with insured funds are from time to time introduced in
Congress. The Company cannot determine the ultimate effect that FDICIA and the
implementing regulations adopted thereunder, or any other potential legislation,
if enacted, would have upon its financial condition or operations.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
(d) Employees
As of December 31, 1996, City Holding Company and Subsidiaries
employed 711 associates. Employee relations within the Subsidiaries are
considered to be satisfactory.
(e) 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, 1996 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 4
b. Analysis of Net Interest Earnings 5
c. Rate Volume Analysis of Changes in
Interest Income and Expense 5
2. Investment Portfolio
a. Book Value of Investments 7
b. Maturity Schedule of Investments 7
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c. Securities of Issuers Exceeding 10%
of Stockholders' Equity 7
3. Loan Portfolio
a. Types of Loans 8
b. Maturities and Sensitivity to Changes in Interest
Rates 8
c. Risk Elements 9, 10
d. Other Interest Bearing Assets N/A
4. Summary of Loan Loss Experience 10, 11
5. Deposits
a. Breakdown of Deposits by Categories,
Average Balance and Average Rate Paid 4
b. Maturity Schedule of Time Certificates of
Deposit and Other Time Deposits of
$100,000 or More 8
6. Return on Equity and Assets 1
Item 2 Properties
City Holding Company and its subsidiaries own the facilities
maintained as the Company's headquarters and generally own all of the facilities
maintained as operating facilities by the subsidiaries. Those facilities not
owned by the Company are maintained under long term lease agreements. The
properties owned or leased by the Company consist generally of the main offices,
twenty eight (28) branch locations and an operations center. All of the
properties 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.
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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, 1996, included in this report as Exhibit
13, 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, 1996,
included in this report as Exhibit 13, 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 13 of the Annual Report to
Shareholders of City Holding Company for the year ended December 31, 1996,
included in this report as Exhibit 13, is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial
statements, included on pages 14 through 34 of the Annual Report to Shareholders
of City Holding Company for the year ended December 31, 1996, included in this
report as Exhibit 13, are incorporated herein by reference.
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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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 1997 Proxy Statement to be filed within 120 days of fiscal year
end under the captions "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS".
Item 11 Executive Compensation
The information required by Item 11 of FORM 10-K appears in
the Company's 1997 Proxy Statement under the caption "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 1997 Proxy Statement under the caption "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 1997 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" and in NOTE FOURTEEN of Notes to Consolidated Financial
Statements appearing at page 28 of the Company's Annual Report to Shareholders
for the year ended December 31, 1996, included in this report as Exhibit 13, and
incorporated herein by reference.
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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, 1996, are incorporated by reference
in Item 8:
Exhibit 13
Page Number
Report of Independent Auditors 14
Consolidated Balance Sheets - December 31, 1996
and 1995 15
Consolidated Statements of Income - years
ended December 31, 1996, 1995 and 1994 16
Consolidated Statements of Changes in
Stockholders' Equity - years ended December 31,
1996, 1995 and 1994 17
Consolidated Statements of Cash Flows -
years ended December 31, 1996, 1995 and 1994 18
Notes to Consolidated Financial Statements -
December 31, 1996 19 - 34
On the following page appears the independent auditors report of Persinger &
Company, LLC on the Consolidated Financial Statements of Hinton Financial
Corporation and Subsidiary for the years ended December 31, 1994, 1993 and 1992.
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hinton Financial Corporation
Hinton, West Virginia
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Hinton Financial Corporation and
Subsidiary for the year 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Hinton Financial Corporation and Subsidiary for the year ended December
31, 1994, in conformity with generally accepted accounting principles.
/s/ Persinger & Company, LLC
Beckley, West Virginia
January 6, 1995
15
<PAGE>
Financial Schedules I and II under Article 9 of Regulation S-X are not
applicable.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in the Exhibit Index on pages 19 through
21 of this FORM 10-K are filed herewith or incorporated by reference from
previous filings.
16
<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,
Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on March 11, 1997. Each
of the directors and/or officers of City Holding Company whose signature appears
below hereby appoints Steven J. Day and Robert A. Henson and each of them
severally, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below and to file with the Commission, any and all
amendments to this report on Form 10-K, making such changes in this report on
Form 10-K as appropriate, and generally to do all such things in their behalf in
their capacities as officers and directors to enable City Holding Company to
comply with the provisions of the Securities Exchange Act of 1934, and all
requirements of the Securities and Exchange Commission.
- --------------------------- ------------------------------
Samuel M. Bowling, C. Scott Briers,
Director Director
/s/ /s/
- --------------------------- ------------------------------
Dr. D. K. Cales, Steven J. Day,
Director Director/President
/s/ /s/
- --------------------------- ------------------------------
Robert D. Fisher, Jack E. Fruth,
Director Director
/s/ /s/
- --------------------------- ------------------------------
Jay Goldman, Carlin K. Harmon,
Director Director/Executive Vice President
/s/ /s/
- --------------------------- ---------------------------------
C. Dallas Kayser, Dale Nibert,
Director Director
17
<PAGE>
/s/
- ------------------------ ----------------------------------
Otis L. O'Connor, Bob F. Richmond,
Director Director
/s/ /s/
- ------------------------ ----------------------------------
Mark H. Schaul, Van R. Thorn,
Director Director
/s/ /s/
- ------------------------ ----------------------------------
George F. Davis, Hugh R. Clonch,
Director/Executive Vice President Director
/s/ /s/
- ------------------------ ----------------------------------
William M. Frazier, Leon K. Oxley,
Director Director
18
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated
herein by reference.
Prior Filing
Exhibit Reference or Page
Number Description Number Herein
------ ----------- -----------------
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
19
<PAGE>
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 1, 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 22
13 City Holding Company Annual Report
to Shareholders for Year Ended
December 31, 1996 23
22 Subsidiaries of City Holding Company 62
24(a) Power of Attorney (included on the signature
page hereof) 17
24(b) Consent of Ernst & Young, LLP 63
24(c) Consent of Persinger & Company, LLC 64
27 Financial Data Schedule for the year ending
December 31, 1996 65
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.
20
<PAGE>
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, 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.
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.
21
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The following formula was used to calculate the earnings per
share in Exhibit 13, page 16, Consolidated Statements of Income of the Annual
Report to Shareholders of City Holding Company for the year ended December 31,
1996, 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
----------------------
1996 1995 1994
---- ---- ----
Weighted Average
Shares Outstanding 5,586,006 5,642,186 5,676,116
Net Income
(in thousands) $10,130 $ 8,718 $ 8,141
Per Share Amount $ 1.81 $ 1.55 $ 1.44
On December 19, 1996, the Board of Directors granted 36,000
stock options which have 10 year terms and vest and become fully exercisable
immediately. The effect of applying statement No. 123's fair value method to the
Company's stock based awards results in net income and earning per share that
are not materially different from amounts reported.
No other Common Stock equivalents exist and therefore primary
and fully-diluted earnings per share are the same.
22
<PAGE>
SELECTED FINANCIAL DATA
TABLE ONE
FINANCIAL SUMMARY
(in thousands, except per share data)
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY
1996 1995 1994 1993 1992
-------- ----------- ---------- ---------- ----------
<S> <C>
SUMMARY OF OPERATIONS
Total interest income $ 86,069 $ 75,125 $ 62,762 $ 55,301 $ 50,880
Total interest expense 39,064 33,580 25,168 22,425 22,184
Net interest income 47,005 41,545 37,594 32,876 28,696
Provision for loan losses 1,678 1,104 1,040 1,434 2,325
Total other income 11,123 6,346 5,249 3,862 2,328
Total other expenses 40,982 33,887 30,116 24,292 18,889
Income before income taxes 15,468 12,900 11,687 11,012 9,810
Net income 10,130 8,718 8,141 7,645 6,972
PER SHARE DATA (1)
Net income $ 1.81 $ 1.55 $ 1.44 $ 1.35 $ 1.23
Cash dividends declared (2) .63 .56 .49 .46 .41
Book value per share 14.21 13.09 11.66 11.56 10.73
AVERAGE BALANCE SHEET SUMMARY
Total loans $ 665,641 $ 608,551 $ 504,795 $ 413,645 $ 322,464
Securities 166,667 221,743 264,976 262,742 232,930
Deposits 812,655 771,303 736,115 639,480 523,488
Long-term debt 24,666 8,204 6,252 4,387 508
Stockholders' equity 76,130 69,463 67,652 63,511 58,606
Total assets 1,079,540 957,048 864,690 739,804 610,707
AT YEAR END
Net loans $ 690,701 $ 650,195 $ 547,809 $ 462,424 $ 376,206
Securities 163,922 194,368 239,882 283,833 248,740
Deposits 828,670 797,415 746,805 709,958 605,398
Long-term debt 34,250 20,000 6,875 5,875 4,000
Stockholders' equity 79,373 73,139 66,299 65,605 60,858
Total assets 1,048,810 1,040,969 895,785 816,225 701,862
SELECTED RATIOS
Return on average assets .94% .91% .94% 1.03% 1.14%
Return on average equity 13.31 12.55 12.03 12.04 11.90
Average equity to average assets 7.05 7.26 7.82 8.58 9.60
Dividend payout ratio (2) 34.81 36.47 33.91 34.36 33.11
</TABLE>
(1) All per share data have been restated to reflect 10% stock dividends
effective November, 1996, January and November, 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 the Company. 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. The acquisitions of Home
Bancorp, Inc. (1992), Hinton Financial Corporation and subsidiary (1994) and
First Merchants Bancorp, Inc. and subsidiary (1995) were accounted for as
poolings of interests and, accordingly, the financial data of these subsidiaries
are included in all five years presented above, as if the acquisitions had
occurred as of the beginning of the earliest period presented.
1
<PAGE>
TWO YEAR SUMMARY OF
COMMON STOCK PRICES AND DIVIDENDS
MARKET PRICE RANGE*
--------------------------
Cash
Dividends
Per Share* Low High
-------------------------------------
1996
Fourth Quarter $ .170 $ 21.00 $ 26.25
Third Quarter .155 19.77 22.95
Second Quarter .155 20.00 23.41
First Quarter .155 20.91 24.09
1995
Fourth Quarter $ .155 $ 20.45 $ 22.73
Third Quarter .141 20.66 23.14
Second Quarter .132 21.49 23.96
First Quarter .132 21.49 24.79
*All per share data have been restated to reflect 10% stock dividends effective
November, 1996 and January and November, 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 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. At December 31, 1996, there were 2,035
stockholders of record.
See NOTE ELEVEN 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
nine banking subsidiaries, and three non-banking subsidiaries. All of the
subsidiaries are wholly-owned. At December 31, 1996, the Company had total
assets of $1.049 billion, total deposits of $829 million and total stockholders'
equity of $79 million. The banking subsidiaries include The City National Bank
of Charleston (City National, principal subsidiary bank), The Peoples Bank of
Point Pleasant (Peoples Bank), First State Bank & Trust (First State), The Bank
of Ripley, Home National Bank of Sutton (Home National), Blue Ridge Bank,
Peoples State Bank, The First National Bank of Hinton (Hinton) and Merchants
National Bank (Merchants), which currently operate 37 banking offices in the
state of West Virginia. 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.
During 1996, the Company created City Mortgage Services, a mortgage loan
servicing division. Headquarted in Charleston, West Virginia, this division was
formed to facilitate the Company's growth of its mortgage servicing portfolio.
On December 31, 1996, the Company acquired certain assets and assumed certain
liabilities of Prime Financial Corporation, a mortgage loan servicing company
located in Costa Mesa, California, which increased the Company's mortgage loan
servicing portfolio by approximately $600 million. This West Coast operation was
absorbed into the mortgage loan servicing division headquartered in Charleston,
West Virginia.
During 1993, the Company formed two non-banking subsidiaries. City Mortgage
Corporation, a full service mortgage banking company headquartered in a suburb
of Pittsburgh, Pennsylvania, originates, services and sells long-term fixed-rate
mortgage and other loan products. City Financial Corporation, a full service
securities brokerage and investment advisory company, is headquartered in
Charleston, West Virginia with its office located in City National's main
location. Both of these companies were formed pursuant to a strategy to generate
fee income, lessen the Company's reliance on net interest margin and 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 aquisition opportunities for small to
medium-sized banks. The Company's latest bank acquisitions include Hinton
Financial Corporation and subsidiary, acquired in late 1994, followed by First
Merchants Bancorp, Inc. and subsidiary in mid 1995. 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.
2
<PAGE>
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 .94% in 1996. Return on average equity (ROE), which measures
the return on stockholders' investment, was 13.31% in 1996. The Company's ROA
and ROE were .91% and 12.55%, respectively, in 1995. Earnings per share for 1996
were $1.81, an increase of approximately 16.8% from the $1.55 per share in 1995.
The main reason for the increase in earnings per share is increased net interest
income and other income. Increases in net interest income are primarily
attributable to increased participation in the Title I loan program as discused
below. An expansion of the Company's mortgage servicing division produced an
additional $2.3 million in non-interest income.
The Company reported total assets of $1.049 billion at December 31, 1996 and
achieved $10.1 million in net income for the year then ended. Total assets
increased .8% over the 1995 total of $1.041 billion. Net income was up
significantly over the $8.7 million and $8.1 million reported for 1995 and 1994,
respectively.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average interest-earning assets increased $110.0 million from 1995 to 1996
and $87.5 million from 1994 to 1995. 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 1996 and 1995 is attributable to
the Company's participation in a whole loan purchasing program. Under the
program, the Company generally purchases HUD Title I home improvement loans
secured by second lien mortgages and partially insured by the Federal Housing
Administration. The loans typically have balances of less than $25,000 and are
generally sold within 30 to 90 days. Although loans are originated nationwide,
the two states which experienced the most volume of originations during 1996
were California and Texas. Although the loans usually are located outside the
Company's primary market areas, management believes that these loans pose no
greater risk than similar "in-market" loans because of the Company's review of
the loans, the credit support associated with the loans, the short duration of
the Company's investment and the other terms of the program. The loans are
generally serviced by the Company's mortgage servicing division. Effective
November 1996, the Company restructured its participation in the program so that
it would receive the full coupon rate on loans purchased. Previously, the
Company had received a fixed rate of 9% on outstanding balances. At December 31,
1996, the loans had a weighted average coupon of 13.46% and a weighted average
maturity of approximately 173 months. The Company earned approximately $12.6 and
$4.6 million during 1996 and 1995, on average balances of program loans of
approximately $136.4 and $49.1 million, respectively. These loans are being
funded through short-term borrowings which consist primarily of advances from
the Federal Home Loan Bank of Pittsburgh.
The Company's participation in the Title I loan program, through purchasing
Title I loans, holding the loans until they are securitized, and providing
servicing of the loans subsequent to securitization is expected to continue to
have a positive impact on the Company's operating results. However, this return
is not achieved without a degree of risk of loss to the Company. Such risks
include credit risk, related to the quality of the underlying loan and the
borrower's financial capability to repay the loan, market risk related to the
continued attractiveness of the Title I loan product to both borrowers and
end-investors, and interest rate risk related to potential changes in interest
rates and the resulting repricing of both financial assets and liabilities. The
Company manages this risk by continuously improving policies and procedures
designed to reduce the risk of loss to a level commensurate with the return
being earned on the Company's investment in this program.
Average short-term borrowings increased $55.8 million from 1995 to 1996 and
$52.2 million from 1994 to 1995. The average rate paid by the Company for
short-term borrowings decreased 47 basis points in 1996 due to general decreases
in market interest rates, which were led by the Federal funds rate. The average
rate paid for short-term borrowings increased 179 basis points in 1995 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. In 1996, the Company's subsidiaries had an aggregate
increase in loans of approximately $39.9 million or 6%.
In response to the significant growth in loans and loans held for sale,
average investment securities decreased $55.1 million from $222 million in 1995
to $167 million in 1996. The overall yield on investments has decreased from
1995 as a result of reinvestment of matured securities at slightly lower rates.
Average investment securities decreased $43.2 million from $265 million in 1994
to $222 million in 1995.
Long-term debt includes $24.3 million in obligations of the Parent Company
and $10 million in FHLB obligations of City National. For further details with
respect to long-term debt see NOTE TEN of the audited Consolidated Financial
Statements.
3
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE TWO
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------
<S> <C>
EARNING ASSETS:
Loans (1)
Commercial and
industrial $ 213,687 $19,631 9.19% $ 188,122 $18,014 9.58% $ 153,952 $12,829 8.33%
Real estate 317,204 27,455 8.66 283,752 24,149 8.51 231,755 19,178 8.28
Consumer obligations 134,750 13,408 9.95 136,677 13,270 9.71 119,088 11,685 9.81
- -------------------------------------------------------------------------------------------------------------------
Total loans 665,641 60,494 9.09 608,551 55,433 9.11 504,795 43,692 8.66
Loans held for sale 171,308 15,394 8.99 62,408 5,691 9.12 27,655 2,375 8.59
Securities
Taxable 130,600 8,139 6.23 181,140 11,612 6.41 222,304 13,897 6.25
Tax-exempt (2) 36,067 3,048 8.45 40,603 3,485 8.58 42,672 3,753 8.79
- -------------------------------------------------------------------------------------------------------------------
Total securities 166,667 11,187 6.71 221,743 15,097 6.81 264,976 17,650 6.66
Federal funds sold 564 30 5.32 1,473 89 6.04 9,253 321 3.47
- -------------------------------------------------------------------------------------------------------------------
Total earning assets 1,004,180 87,105 8.67 894,175 76,310 8.53 806,679 64,038 7.94
Cash and due from banks 31,057 25,392 25,063
Bank premises and equipment 27,357 22,178 19,807
Other assets 23,675 21,761 19,514
Less: allowance for
possible loan losses (6,729) (6,458) (6,373)
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,079,540 $957,048 $864,690
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Demand deposits $ 101,013 $ 3,028 3.00% $106,590 $ 3,059 2.87% $ 96,870 $ 3,006 3.10%
Savings deposits 228,286 7,017 3.07 227,217 6,990 3.08 255,634 7,890 3.09
Time deposits 366,650 19,193 5.23 335,011 17,100 5.10 284,807 11,981 4.21
Short-term borrowings 154,759 8,138 5.26 98,973 5,675 5.73 46,822 1,846 3.94
Long-term debt 24,666 1,688 6.84 8,204 756 9.22 6,252 445 7.12
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 875,374 39,064 4.46 775,995 33,580 4.33 690,385 25,168 3.65
Demand deposits 116,706 102,485 98,804
Other liabilities 11,330 9,105 7,849
Stockholders' equity 76,130 69,463 67,652
- -------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity $1,079,540 $957,048 $864,690
- -------------------------------------------------------------------------------------------------------------------
Net interest income $48,041 $ 42,730 $38,870
- -------------------------------------------------------------------------------------------------------------------
Net yield on earning
assets 4.78% 4.78% 4.82%
- -------------------------------------------------------------------------------------------------------------------
</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
approximately 34% in all years.
4
<PAGE>
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 $5.3
million during 1996. The average yield on earning assets increased from 8.53% in
1995 to 8.67% in 1996, and the average cost of interest-bearing liabilities
increased from 4.33% to 4.46% over this same period. This had no effect on the
net yield on earning assets of 4.78% in both 1995 and 1996.
The $301,000 decrease in net interest income due to rate, as shown in Table
Three which follows, was coupled with a $5.6 million increase in net interest
income due to volume. The major components of this favorable volume change were
increased average loans and loans held for sale 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 $3.9
million in 1995. The $4.6 million increase caused by changes in volume was
offset by a $724,000 decrease in net interest income due to rate.
TABLE THREE
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
- -------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
<S> <C>
INTEREST INCOME FROM:
Loans
Commercial and industrial $ 2,371 $ (754) $ 1,617 $ 3,101 $ 2,084 $ 5,185
Real estate 2,889 417 3,306 4,411 560 4,971
Consumer obligations (189) 327 138 1,709 (124) 1,585
- -------------------------------------------------------------------------------------------------------------------
Total 5,071 (10) 5,061 9,221 2,520 11,741
Loans held for sale 9,787 (84) 9,703 3,160 156 3,316
Investment securities
Taxable (3,158) (315) (3,473) (2,631) 346 (2,285)
Tax-exempt (1) (384) (53) (437) (179) (89) (268)
- -------------------------------------------------------------------------------------------------------------------
Total (3,542) (368) (3,910) (2,810) 257 (2,553)
Federal funds sold (49) (10) (59) (376) 144 (232)
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 11,267 $ (472) $ 10,795 $ 9,195 $ 3,077 $12,272
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON:
Demand deposits $ (164) $ 133 $ (31) $ 289 $ (236) $ 53
Savings deposits 33 (6) 27 (874) (26) (900)
Time deposits 1,647 446 2,093 2,316 2,803 5,119
Short-term borrowings 2,968 (505) 2,463 2,720 1,109 3,829
Long-term debt 1,171 (239) 932 160 151 311
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 5,655 $ (171) $ 5,484 $ 4,611 $ 3,801 $ 8,412
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 5,612 $ (301) $ 5,311 $ 4,584 $ (724) $ 3,860
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fully federal taxable equivalent using a tax rate of approximately 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.
5
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company is satisfied with its liquidity position and there are no known
trends, demands, commitments or uncertainties that have resulted or are
reasonably likely to result in material changes in liquidity.
Interest Rate Sensitivity: The Company manages its liquidity position to reduce
interest rate risk, which is the susceptibility of assets and liabilities to
declines in value as a result of changes in general market interest rates. The
Company seeks to reduce this risk through asset and liability management, where
the goal is to optimize the balance between earnings and interest rate risk. The
Company measures this interest rate risk through interest sensitivity gap
analysis as illustrated in Table Four. At December 31, 1996, the one year period
shows a negative gap (liability sensitive) of $332 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 market rate changes; however, management adjustments may change as
customer preferences, competitive market conditions, liquidity, and loan growth
change. Also presented in the management adjustment line are loan prepayment
assumptions which may differ from the related contractual terms of the loans.
These balances have been distributed over the four periods to reflect those
loans that are expected to be repaid in full prior to their maturity date. After
management adjustments, Table Four shows a negative gap in the one year period
of $124 million. A negative gap position is advantageous when interest rates are
falling because interest-bearing liabilities are being repriced at lower rates
and in greater volume, which has a positive effect on net interest income.
However, when interest rates are rising, this position produces the converse
effect. Consequently, the Company has experienced a slight decline in its net
interest margin during the past two years and is somewhat vulnerable to a rapid
rise in interest rates in 1997. 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.
Liquidity: 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, 1996, the Parent Company had $24,250,000 in long-term debt
outstanding against a $28,000,000 revolving loan agreement. These funds were
used to provide subsidiaries with additional capital, to fund certain
acquisitions in 1993 and 1994 and to provide funding for expansion of the
Company's data processing operations and mortgage servicing divisions. Total
debt service for the Parent Company in 1997 will approximate $1.8 million 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 $15.9 million available for transfer
from its subsidiary banks as of January 1, 1997. Subsidiary bank earnings in
1997 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
ELEVEN to the audited Consolidated Financial Statements.
The Company's cash and cash equivalents, represented by cash, due from banks
and federal funds sold, are a product of its operating, investing and financing
activities. These activities are set forth in the Company's Consolidated
Statements of Cash Flows included elsewhere herein. Cash was generated from
operating activities in 1996 due to proceeds from loans sold. Net cash was used
in operating activities during 1995 and 1994 due to the purchases of loans held
for sale. Net cash was used in investing activities for each year presented
which is indicative of the Company's net increases in loan volume. Cash was used
in financing activities during 1996, which is attributable to decreases in
short-term borrowings. Net cash was provided by financing activities,
principally in the form of increased short-term borrowings and deposit growth,
during 1995 and 1994.
6
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE FOUR
INTEREST RATE SENSITIVITY GAPS
(in thousands)
<TABLE>
<CAPTION>
1 TO 3 MO. 3 TO 12 MO. 1 TO 5 YRS. OVER 5 YRS. TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Gross loans $ 154,700 $ 106,222 $ 349,100 $ 93,019 $703,041
Loans held for sale 92,472 0 0 0 92,472
Securities 25,399 17,568 90,182 30,773 163,922
Federal funds sold 413 0 0 0 413
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 272,984 123,790 439,282 123,792 959,848
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Savings and NOW accounts 331,451 0 0 0 331,451
All other interest-bearing deposits 104,055 168,323 105,495 370 378,243
Short-term borrowings 90,298 0 0 0 90,298
Long-term borrowings 34,250 0 0 0 34,250
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 560,054 168,323 105,495 370 834,242
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(287,070) $ (44,533) $ 333,787 $123,422 $125,606
- -------------------------------------------------------------------------------------------------------------------
Cumulative sensitivity gap $(287,070) $(331,603) $ 2,184 $125,606
- -------------------------------------------------------------------------------------------------------------------
Management adjustments $ 285,426 $ (77,732) $(196,523) $(11,171)
- -------------------------------------------------------------------------------------------------------------------
Cumulative management adjusted gap $ (1,644) $(123,909) $ 13,355 $125,606
- -------------------------------------------------------------------------------------------------------------------
</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>
<CAPTION>
BOOK VALUES AS OF
December 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Treasury and other U.S. government corporations
and agencies $ 106,875 $ 132,007 $ 179,061
States and political subdivisions 36,290 40,635 45,041
Other 20,757 21,726 15,780
- -------------------------------------------------------------------------------------------------------------------
Total $163,922 $ 194,368 $ 239,882
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, there were no securities of any issuers whose aggregate
carrying or market value exceeded 10% of stockholders' equity.
<TABLE>
<CAPTION>
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>
U.S. Treasury and
other U.S. government
corporations and agencies $ 22,464 6.06% $ 71,568 6.12% $ 11,121 7.24% $ 1,722 6.27%
State and political subdivisions 3,472 8.93 16,370 8.19 14,555 8.45 1,893 9.01
Other 17,031 6.27 2,244 8.24 1,482 8.01 0 0.00
- -------------------------------------------------------------------------------------------------------------------
Total $ 42,967 6.37% $ 90,182 6.55% $ 27,158 7.93% $ 3,615 7.70%
- -------------------------------------------------------------------------------------------------------------------
</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 approximately 34%.
The Company had $7.3 million in structured notes as of December 31, 1996. All
structured notes are federal agency securities that are classified as
available-for-sale. They have a weighted average coupon of 4.31% and a weighted
average maturity of approximately two years. Approximately 67% of these
securities were obtained through the Company's acquisitions and management has
no plans to purchase any additional structured notes in the future. The impact
of holding these securities on the results of operations was immaterial for the
period ending December 31, 1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE SIX
LOAN PORTFOLIO
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Commercial, financial
and agricultural $ 224,267 $ 214,304 $164,366 $ 149,112 $ 108,127
Real estate-mortgage 338,385 304,848 258,910 205,745 157,562
Installment loans to individuals 142,123 145,734 140,695 124,490 129,017
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 704,775 $ 664,886 $563,971 $ 479,347 $ 394,706
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had $26.0 million and $27.2 million outstanding in real estate
construction loans at December 31, 1996 and 1995, 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,
1996.
<TABLE>
<CAPTION>
MATURING
- -------------------------------------------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Commercial, financial
and agricultural $ 68,852 $ 92,170 $ 63,245 $ 224,267
Real estate-mortgage 66,437 79,939 192,009 338,385
Installment loans to individuals 24,389 103,906 13,828 142,123
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 159,678 $276,015 $ 269,082 $ 704,775
- -------------------------------------------------------------------------------------------------------------------
Loans maturing after one year with:
Fixed interest rates $ 323,502
Variable interest rates 221,595
- -------------------------------------------------------------------------------------------------------------------
Total $ 545,097
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE SEVEN
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSITS IN AMOUNTS OF $100,000 OR MORE
(in thousands)
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
Amounts Percentage
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Three months or less $ 17,537 28%
Over three months through six months 10,965 18
Over six months through twelve months 15,037 24
Over twelve months 18,970 30
- -------------------------------------------------------------------------------------------------------------------
Total $ 62,509 100%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN LOSS ANALYSIS
During 1996, the Company charged-off $1,375,000 of loans that were doubtful
as to collection and had recoveries of $412,000. The resulting net charge-offs
of $963,000 represent a decrease of $52,000 or 5% from that reported in 1995.
Net charge-offs increased approximately 31%, or $243,000 in 1995 versus 1994.
Net charge-offs as a percent of average total loans decreased 17.6% or 3 basis
points when comparing 1996 to 1995. 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 $1,678,000 in 1996 represents .25% of
average loans as compared to a $1,104,000, or .18%, provision in 1995. As
discussed in NOTE FIVE to the audited Consolidated Financial Statements, during
1996, the Company restructured its participation in a loan purchasing program
such that the Company currently buys, directly from loan originators,
home-improvement loans that are subsequently sold by the Company to an
independent third party institution for securitization. The modification of the
Company's participation in this program resulted in an increased return on the
Company's investment in these loans and an increase in the risk of loss to the
Company due to delinquencies or uncollectibility. As a result, management
increased, compared to 1995, its 1996 provision for possible loan losses to
provide for potentially uncollectible loans inherent in the pools of loans
acquired in this program. As further discussed below, management believes that
the consolidated allowance for loan losses is adequate to provide for any
potential losses on loans currently reported in the consolidated balance sheets.
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. Loans held
for sale volume has increased due primarily to the expansion and growth of the
mortgage banking area.
The allowance for loan losses was $7,281,000 or 1.05% of net loans, as of
December 31, 1996, compared to $6,566,000 or 1.01% of net loans in 1995. As
detailed in Table Ten, as of December 31, 1996, the allowance for loan losses is
allocated 27% to commercial, financial and agricultural loans, 54% to real
estate-mortgage loans and 19% to installment loans to individuals. These amounts
reflect management's assessment of the risk in each specific portfolio in
relation to the total. These percentages compare to 31%, 48% and 21%,
respectively, as of December 31, 1995. The portion of the allowance related to
commercial credits is based primarily upon specific credit review with minor
weighting being given to past charge-off history. Conversely, due to the
homogenous nature of the portfolios and consistency in underwriting standards,
the portions of the allowance allocated to the real estate-mortgages and
installment loans to individuals are based primarily upon prior charge-off
history with minor weighting being given to specific credit reviews. Management
has, however, increased the portion of the allowance allocated to real
estate-mortgages above the trend in net charge-off history for that portfolio.
This increase is primarily due to management's concern that rapid increases in
real estate lending within the Company over the past several years have led to a
portfolio that may not be seasoned enough for past net charge-offs to represent
current risk. In addition, the Company's adjustable rate mortgages have grown
from $93.9 million at December 31, 1994 to $139.4 million at December 31, 1996,
an increase of 48% in three years. In management's opinion, the consolidated
allowance for loan losses is adequate to provide for any potential losses on
existing loans. See NOTE FIVE to the audited Consolidated Financial Statements
for a discussion of concentrations of credit risks.
Nonperforming loans, consisting of nonaccrual, past-due and restructured
credits, increased approximately $556,000 in 1996. 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, 1996, loans aggregating $235,000 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 149%
at December 31, 1996, as compared to 151% and 134% at December 31, 1995 and
1994.
Tables Eight, Nine and Ten detail loan performance and analyze the allowance
for loan losses.
9
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE EIGHT
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at beginning of period $ 6,566 $ 6,477 $ 6,209 $ 5,730 $ 2,761
Charge-offs:
Commercial, financial and agricultural (193) (174) (327) (693) (255)
Real estate-mortgage (262) (278) (160) (258) (325)
Installment loans to individuals (920) (879) (693) (664) (711)
- -------------------------------------------------------------------------------------------------------------------
Totals (1,375) (1,331) (1,180) (1,615) (1,291)
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 19 56 111 58 22
Real estate-mortgage 166 22 11 220 65
Installment loans to individuals 227 238 286 217 168
- -------------------------------------------------------------------------------------------------------------------
Totals 412 316 408 495 255
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs (963) (1,015) (772) (1,120) (1,036)
Provision for possible loan losses 1,678 1,104 1,040 1,434 2,325
Balance of acquired subsidiary 165 1,680
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 7,281 $ 6,566 $ 6,477 $ 6,209 $ 5,730
- -------------------------------------------------------------------------------------------------------------------
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs .14% .17% .15% .27% .32%
Provision for possible loan losses .25 .18 .21 .35 .72
AS A PERCENT OF NONPERFORMING AND
POTENTIAL PROBLEM LOANS
Allowance for loan losses 149.26% 150.84% 134.24% 129.68% 102.71%
</TABLE>
TABLE NINE
NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Nonaccrual loans $ 1,734 $ 2,525 $ 2,614 $ 1,559 $ 1,517
Accruing loans past due 90 days or more 2,674 1,421 1,420 708 1,487
Restructured loans 235 141 262 1,078 1,559
- -------------------------------------------------------------------------------------------------------------------
$ 4,643 $ 4,087 $ 4,296 $ 3,345 $ 4,563
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, the Company recognized approximately $219,000 of interest income
received in cash on nonaccrual and restructured loans. Approximately $332,000 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, 1996.
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.
10
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE TEN
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
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>
Commercial, financial
and agricultural $1,939 32% $2,053 32% $1,919 29% $ 2,100 31% $2,107 27%
Real estate-mortgage 3,964 48 3,125 46 2,848 46 2,325 43 1,804 40
Installment loans
to individuals 1,378 20 1,388 22 1,710 25 1,784 26 1,819 33
- -------------------------------------------------------------------------------------------------------------------
$7,281 100% $6,566 100% $6,477 100% $ 6,209 100% $5,730 100%
- -------------------------------------------------------------------------------------------------------------------
</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
During 1996, the Company continued its pursuit of new products and services
that generate additional fee-based income, reducing the Company's reliance on
interest-based revenues. Over the past three years, the Company has begun
offering new products to its existing customers and attracting new customers by
expanding its focus from traditional banking operations to include trust,
brokerage, mortgage banking and other related services. During 1996, the Company
made a significant investment in loan servicing operations by assuming the
responsibility to service pools of FHA Title I home improvement loans. At
December 31, 1996, the Company serviced approximately $939 million of these and
similar loans, generating $2.2 million of additional income during the year
(compared to a $168 million portfolio serviced at December 31, 1995, which
generated $350,000 of income in 1995). Additionally, the Company increased its
volume of secondary-market mortgage loan originations, which resulted in an
increase in fee income from $922,000 in 1995 to $1,462,000 in 1996. These
activities resulted in other income of $4,019,000 in 1996 compared to $1,272,000
and $317,000 in 1995 and 1994, respectively. Also during 1996, the Company
realized a one-time gain approximating $437,000 on the termination of the
defined benefit plan of First Merchants Bancorp, Inc., which was acquired by the
Company in 1995.
Revenues generated by the Company's loan servicing operation are dependent on
a variety of factors, including the continued market for Title I loans and an
interest rate environment conducive to the general terms of these types of
loans. Although management believes that the servicing operation will continue
to have a positive impact on the Company, fee income could be reduced if a
substantial number of serviced loans are prepaid by the borrowers more quickly
than expected or if substantially more loans default than currently anticipated.
Total other expenses increased $7.1 million, or 20.9%, during 1996 due
primarily to $1.6 million in expenses incurred by City Mortgage Services, which
includes $967,000 in personnel costs and $72,000 in expenses related to
equipment. No expenses for this new division were included in the 1995 results.
In addition, the Parent Company had an increase of approximately $3.7 million in
non-interest expenses associated with growth, consisting of a $2.2 million
increase in personnel costs and a $970,000 increase in expenses related to
equipment. The additional increase of $2.6 million is attributable to higher
personnel costs throughout the organization due to the Company's overall growth
during 1996. Total other expenses increased $3.8 million, or 12.5%, during 1995
due primarily to the Company's overall growth during that year, which produced
higher personnel costs throughout the organization. Salaries and employee
benefits increased $2.9 million between 1995 and 1994.
11
<PAGE>
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, 1996, 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 4 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 4 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>
<CAPTION>
DOLLARS IN THOUSANDS
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
CAPITAL COMPONENTS
Tier 1 risk-based capital $ 72,157 $ 66,260
Total risk-based capital 79,439 72,826
CAPITAL RATIOS
Tier 1 risk-based 10.20% 8.87%
Total risk-based 11.23 9.75
Leverage 6.58 6.45
REGULATORY MINIMUM
Tier 1 risk-based (dollar/ratio) $ 28,290/4.00% $ 29,888/4.00%
Total risk-based (dollar/ratio) 56,579/8.00 59,776/8.00
Leverage (dollar/ratio) 43,872/4.00 41,068/4.00
</TABLE>
The strong capital position of the Company is indicative of management's
emphasis on asset quality and a history of retained net income. The ratios
enable the Company to continually pursue acquisitions and other growth
opportunities. Improvements in operating results and a consistent dividend
program, coupled with an effective management of credit risk, have been, and
will be, the key elements in maintaining the Company's present capital position.
The Company does not anticipate any material capital expenditures in 1997.
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense was $5,338,000 in 1996, resulting in an effective tax rate
of 34.51% for the year. Such rates were 32.42% and 30.34% in 1995 and 1994,
respectively. The effective tax rate from 1995 to 1996 and the effective tax
rate from 1994 to 1995 both increased due primarily to a decrease in tax-exempt
interest income.
At December 31, 1996, gross deferred tax assets total approximately $4.2
million. Such assets are primarily attributable to the allowance for loan losses
($2.8 million), acquired net operating loss (NOL) carryforwards ($741,000) and
certain nonqualified deferred compensation arrangements sponsored by subsidiary
banks ($391,000). Pursuant to management's evaluation for the quarter ended
December 31, 1996, 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, 1996, 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.
13
<PAGE>
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, 1996 and 1995, 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, 1996. 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 consolidated financial statements of
Hinton Financial Corporation and subsidiary which statements reflect total
revenues constituting 7% of the 1994 consolidated totals. 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, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
January 27, 1997
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and due from banks $ 47,764,000 $ 28,460,000
Securities available for sale, at fair value 122,944,000 143,649,000
Investment securities (approximate market values:
1996-$41,826,000; 1995-$52,183,000) 40,978,000 50,719,000
Loans:
Gross loans 704,775,000 664,886,000
Unearned income (6,793,000) (8,125,000)
Allowance for possible loan losses (7,281,000) (6,566,000)
- ------------------------------------------------------------------------------------------------------------------
NET LOANS 690,701,000 650,195,000
Loans held for sale 92,472,000 122,222,000
Bank premises and equipment 30,025,000 23,651,000
Accrued interest receivable 7,510,000 8,031,000
Other assets 16,416,000 14,042,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,048,810,000 $1,040,969,000
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 118,976,000 $ 116,992,000
Interest-bearing 709,694,000 680,423,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 828,670,000 797,415,000
Short-term borrowings 90,298,000 141,309,000
Long-term debt 34,250,000 20,000,000
Other liabilities 16,219,000 9,106,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 969,437,000 967,830,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $25 per share: authorized -
500,000 shares; none issued
Common stock, par value $2.50 per share: authorized -
20,000,000 shares; issued and outstanding: 1996 -
5,598,912 shares; 1995 - 5,092,046 shares including
11,341 and 13,640 shares in treasury at December 31, 1996
and 1995 13,998,000 12,730,000
Capital surplus 35,426,000 25,942,000
Retained earnings 30,246,000 34,432,000
Net unrealized gain on securities available for sale,
net of deferred income taxes 3,000 395,000
- ------------------------------------------------------------------------------------------------------------------
79,673,000 73,499,000
Cost of common stock in treasury (300,000) (360,000)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 79,373,000 73,139,000
COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,048,810,000 $1,040,969,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $ 75,888,000 $ 61,124,000 $ 46,067,000
Interest on investment securities:
Taxable 8,139,000 11,612,000 13,897,000
Tax-exempt 2,012,000 2,300,000 2,477,000
Other interest income 30,000 89,000 321,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 86,069,000 75,125,000 62,762,000
INTEREST EXPENSE
Interest on deposits 29,238,000 27,149,000 22,877,000
Interest on short-term borrowings 8,138,000 5,675,000 1,846,000
Interest on long-term debt 1,688,000 756,000 445,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 39,064,000 33,580,000 25,168,000
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 47,005,000 41,545,000 37,594,000
PROVISION FOR POSSIBLE LOAN LOSSES 1,678,000 1,104,000 1,040,000
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 45,327,000 40,441,000 36,554,000
OTHER INCOME
Investment securities gains (losses) 87,000 2,000 (729,000)
Service charges 3,700,000 3,347,000 2,723,000
Other income 7,336,000 2,997,000 3,255,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 11,123,000 6,346,000 5,249,000
OTHER EXPENSES
Salaries and employee benefits 21,593,000 17,815,000 14,874,000
Occupancy, excluding depreciation 2,736,000 2,555,000 2,838,000
Depreciation 3,466,000 2,534,000 2,033,000
Other expenses 13,187,000 10,983,000 10,371,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 40,982,000 33,887,000 30,116,000
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,468,000 12,900,000 11,687,000
INCOME TAXES 5,338,000 4,182,000 3,546,000
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 10,130,000 $ 8,718,000 $ 8,141,000
- -------------------------------------------------------------------------------------------------------------------
Net income per common share $ 1.81 $ 1.55 $ 1.44
- -------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 5,586,006 5,642,186 5,676,116
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unrealized Gain/(Loss)
Common on Securities Total
Stock Capital Retained Available Treasury Stockholders'
(Par Value) Surplus Earnings for Sale Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances at January 1, 1994 $ 11,148,000 $ 13,478,000 $ 42,907,000 $ 282,000 $(2,242,000) $ 65,573,000
Net income 8,141,000 8,141,000
Cash dividends declared--$.49 a share (1,930,000) (1,930,000)
Cash dividends of acquired subsidiary (763,000) (763,000)
Adjustments 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 ($2,790,000) (4,200,000) (4,200,000)
Redemption of fractional and dissenter
shares (1,843,000) (1,843,000)
Cost of 7,002 shares of common
stock acquired for treasury (193,000) (193,000)
Sale of 14,898 shares of treasury stock 131,000 328,000 459,000
Retirement of 101,865 shares of common
stock held in treasury (255,000) (1,820,000) 2,075,000
Issuance of 10% stock dividend 860,000 8,420,000 (9,280,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 11,753,000 18,366,000 39,075,000 (2,863,000) (32,000) 66,299,000
Net income 8,718,000 8,718,000
Cash dividends declared--$.56 a share (2,852,000) (2,852,000)
Cash dividends of acquired
subsidiary (150,000) (150,000)
Change in unrealized gain/(loss)
net of income taxes of $2,154,000 3,258,000 3,258,000
Cost of 86,665 shares of common stock
acquired for treasury (2,286,000) (2,286,000)
Sale of 6,486 shares of
treasury stock (20,000) 172,000 152,000
Retirement of 69,739 shares
of common stock held in
treasury (174,000) (1,612,000) 1,786,000
Issuance of 10% stock dividend 1,151,000 9,208,000 (10,359,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 12,730,000 25,942,000 34,432,000 395,000 (360,000) 73,139,000
Net income 10,130,000 10,130,000
Cash dividends
declared-- $.63 a share (3,540,000) (3,540,000)
Change in unrealized gain/(loss)
net of income taxes of ($261,000) (392,000) (392,000)
Sale of 2,299 shares of
treasury stock (2,000) 60,000 58,000
Redemption of fractional shares (22,000) (22,000)
Issuance of 10% stock dividend 1,268,000 9,508,000 (10,776,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 13,998,000 $35,426,000 $ 30,246,000 $ 3,000 $ (300,000) $79,373,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 10,130,000 $ 8,718,000 $ 8,141,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization 943,000 1,003,000 951,000
Provision for depreciation 3,466,000 2,534,000 2,033,000
Provision for possible loan losses 1,678,000 1,104,000 1,040,000
Deferred income tax benefit (582,000) (439,000) (309,000)
Loans originated for sale (118,287,000) (74,242,000) (24,729,000)
Purchases of loans held for sale (1,029,098,000) (639,331,000) (189,719,000)
Proceeds from loans sold 1,177,135,000 621,578,000 184,221,000
Realized investment securities (gains) losses (87,000) (2,000) 729,000
Decrease (increase) in accrued interest receivable 521,000 (1,128,000) (630,000)
Increase in other assets (2,356,000) (1,027,000) (2,800,000)
Increase (decrease) in other liabilities 7,113,000 (73,000) 2,110,000
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 50,576,000 (81,305,000) (18,962,000)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 134,539,000 40,084,000 79,281,000
Purchases of investment securities (124,979,000) (3,238,000) (64,346,000)
Proceeds from sales of securities available for sale 33,865,000 55,185,000 40,307,000
Proceeds from maturities and calls of securities
available for sale 47,275,000 11,331,000 13,093,000
Purchases of securities available for sale (60,938,000) (52,617,000) (30,747,000)
Net increase in loans (42,184,000) (103,490,000) (86,499,000)
Net cash paid in acquisitions (504,000)
Purchases of premises and equipment (9,840,000) (5,055,000) (4,129,000)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (22,262,000) (57,800,000) (53,544,000)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 1,984,000 22,624,000 15,853,000
Net increase in interest-bearing deposits 29,271,000 27,986,000 20,994,000
Net (decrease) increase in short-term borrowings (51,011,000) 74,682,000 39,415,000
Proceeds from long-term debt 14,250,000 17,525,000 6,875,000
Repayment of long-term debt (4,400,000) (5,875,000)
Purchases of treasury stock (2,286,000) (193,000)
Proceeds from sales of treasury stock 58,000 152,000 459,000
Redemption of dissenter and fractional shares (22,000) (1,843,000)
Cash dividends paid (3,540,000) (3,002,000) (2,693,000)
- -------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,010,000) 133,281,000 72,992,000
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,304,000 (5,824,000) 486,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,460,000 34,284,000 33,798,000
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 47,764,000 $ 28,460,000 $34,284,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996
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 and require management to
make estimates and develop assumptions that affect the amounts reported in the
financial statements and related footnotes. Actual results could differ from
management's estimates. 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.
Description of Principal Markets and Services: The Company is a multi-bank
holding company headquartered in Charleston, West Virginia. The Company's
banking subsidiaries are comprised of retail and consumer oriented community
banks with offices throughout West Virginia. The non-banking subsidiaries are
comprised of a full service mortgage banking company located in Pittsburgh,
Pennsylvania, and a full service securities brokerage and investment advisory
company located in Charleston.
During 1996, the Parent Company created a mortgage loan servicing division to
facilitate the Company's continued expansion into the mortgage banking industry.
With the acquisition discussed in Note Three, the mortgage servicing division
has loan servicing facilities located in West Virginia and California.
Cash and Due from Banks: 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, 1996 and 1995, 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 purchase. 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 investment securities and are stated at amortized cost,
adjusted for amortization of premiums and accretion of discounts. 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.
The specific identification method is used to determine the cost basis of
securities sold.
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.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued)
Generally, loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
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 aggregate cost or estimated fair value.
Loan Servicing: On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights". Statement No. 122 requires the cost of mortgage servicing rights,
regardless of how obtained, be capitalized and amortized in proportion to
and over the period of estimated net servicing revenues. The adoption of
Statement No. 122 did not have a material impact on the Company's operating
results. Statement No. 122 has been superseded by Statement No. 125, discussed
below.
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. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
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. Generally,
estimated useful lives of bank premises and furniture, fixtures, and equipment
do not exceed 30 and 7 years, respectively.
Intangibles: Intangible assets, other than rights to service mortgage loans,
are comprised of goodwill and core deposits and are included in other assets in
the consolidated balance sheets. Goodwill is being amortized on a straight-line
basis over a 15 year period and core deposits are being amortized using
accelerated methods over 10 year estimated useful lives.
The carrying amount of goodwill is reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the estimated undiscounted cash flows of
the entity acquired over the remaining amortization period, the carrying amount
of the goodwill is reduced by the estimated shortfall of cash flows.
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 October 21,
1996, a 10% stock dividend was declared by the Board of Directors for
shareholders of record on November 1, 1996. The stock dividend was paid on
November 30, 1996, and all stock related data in the consolidated financial
statements reflects the stock dividend. Similar 10% stock dividends were paid on
November 30, 1995, and on January 15, 1995. 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.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued)
New Accounting Pronouncement: The Financial Accounting Standards Board (FASB)
issued Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", which will require the Company to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, management believes the
application of the new rules will not have a material impact on the Company's
financial statements.
Statements of Cash Flows: Cash paid for interest, including long-term debt,
was $39,008,000, $32,755,000 and $24,886,000 in 1996, 1995, and 1994,
respectively. Cash paid for income taxes was $5,399,000, $4,055,000 and
$3,567,000 in 1996, 1995, and 1994, 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, 1996, was approximately $9,241,000. Included in cash
and due from banks at December 31, 1996, is $2.7 million of cash restricted for
mortgage banking activities.
NOTE THREE
ACQUISITIONS
On December 31, 1996, the Company acquired certain assets and assumed certain
liabilities of Prime Financial Corporation, a mortgage loan servicing company
located in Costa Mesa, California. This transaction, accounted for under the
purchase method of accounting, increased the Company's mortgage loan servicing
portfolio by approximately $600 million. As a result of a servicing arrangement
entered into by the Company, the loan servicing income and expenses of the
acquiree have been included in the Company's financial statements since
November, 1996.
In August, 1995, the Company acquired 100% of the common stock of First
Merchants Bancorp, Inc. and subsidiary (Merchants) in exchange for 921,600
shares of the Company's common stock. In December, 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. Both of these
transactions were accounted for as a pooling of interests. Accordingly, the
consolidated financial statements for all periods presented were restated to
reflect the accounts of Merchants and Hinton.
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. This transaction was accounted for under the purchase
method of accounting. Accordingly, the results of operations attributable to the
acquisition have been included in the consolidated totals from the date of
acquisition.
Intangible assets arising from purchase business combinations consist
primarily of goodwill and core deposits which have an aggregate unamortized
balance at December 31, 1996 and 1995, of $5,781,000 and $5,154,000,
respectively. Amortization of goodwill and core deposits approximated $619,000,
$623,000, and $562,000 during the years ended December 31, 1996, 1995, and 1994,
respectively.
21
<PAGE>
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. The adoption of SFAS No. 115 resulted in an increase
in stockholders' equity of $1,055,000 in 1994 and a transfer of approximately
$15 million from investment securities to securities available for sale.
In November, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities". In accordance
with provisions in that Special Report, the Company chose to reclassify
securities from held to maturity to available for sale. At the date of transfer,
the amortized cost of those securities was $69,389,000 and the unrealized gain
on those securities was $242,000, which was included in stockholders' equity.
Included in the Company's investment portfolio are structured notes with an
estimated fair value of $7.3 million and $11.8 million at December 31, 1996 and
1995, respectively. Such investments are used by management to enhance yields,
diversify the investment portfolio, and manage the Company's exposure to
interest rate fluctuations. These securities consist of federal agency
securities with an average maturity of less than two years. Management,
periodically, performs sensitivity analyses to determine the Company's exposure
to fluctuation in interest rates of 3% and has determined that the structured
notes meet regulatory price sensitivity guidelines.
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>
<CAPTION>
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31, 1996
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $79,311,000 $ 198,000 $ 588,000 $ 78,921,000
Obligations of states and political subdivisions 11,033,000 246,000 4,000 11,275,000
Mortgage-backed securities 12,347,000 282,000 92,000 12,537,000
Other debt securities 3,332,000 130,000 3,462,000
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 106,023,000 856,000 684,000 106,195,000
Equity securities 16,918,000 244,000 413,000 16,749,000
- -------------------------------------------------------------------------------------------------------------------
$ 122,941,000 $ 1,100,000 $ 1,097,000 $122,944,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31, 1996
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $14,974,000 $ 54,000 $ 133,000 $ 14,895,000
Obligations of states and political subdivisions 25,015,000 973,000 31,000 25,957,000
Mortgage-backed securities 443,000 15,000 428,000
Other debt securities 546,000 546,000
- -----------------------------------------------------------------------------------------------------------------
$40,978,000 $ 1,027,000 $ 179,000 $ 41,826,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE FOUR
INVESTMENTS (continued)
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31, 1995
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $ 92,793,000 $ 469,000 $ 562,000 $ 92,700,000
Obligations of states and
political subdivisions 12,885,000 474,000 10,000 13,349,000
Mortgage-backed securities 15,486,000 455,000 67,000 15,874,000
Other debt securities 4,347,000 63,000 19,000 4,391,000
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 125,511,000 1,461,000 658,000 126,314,000
Equity securities 17,479,000 162,000 306,000 17,335,000
- -------------------------------------------------------------------------------------------------------------------
$ 142,990,000 $1,623,000 $ 964,000 $143,649,000
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Held-to-Maturity Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31, 1995
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 22,971,000 $ 167,000 $ 64,000 $23,074,000
Obligations of states and political subdivisions 27,286,000 1,419,000 46,000 28,659,000
Mortgage-backed securities 462,000 12,000 450,000
- -------------------------------------------------------------------------------------------------------------------
$ 50,719,000 $1,586,000 $ 122,000 $52,183,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1996, 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>
<CAPTION>
Estimated
Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Available-for-sale
Due in one year or less $ 20,347,000 $ 20,366,000
Due after one year through five years 62,125,000 61,934,000
Due after five years through ten years 9,961,000 10,056,000
Due after ten years 1,243,000 1,302,000
- -------------------------------------------------------------------------------------------------------------------
93,676,000 93,658,000
Mortgage-backed securities 12,347,000 12,537,000
- -------------------------------------------------------------------------------------------------------------------
$ 106,023,000 $ 106,195,000
- -------------------------------------------------------------------------------------------------------------------
Held-to-maturity
Due in one year or less $ 3,510,000 $ 3,544,000
Due after one year through five years 21,267,000 21,478,000
Due after five years through ten years 15,168,000 15,742,000
Due after ten years 590,000 634,000
- -------------------------------------------------------------------------------------------------------------------
40,535,000 41,398,000
Mortgage-backed securities 443,000 428,000
- -------------------------------------------------------------------------------------------------------------------
$ 40,978,000 $ 41,826,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $89,000, $103,000, and $234,000, and gross losses of $2,000,
$101,000, and $999,000, were realized on sales and calls of securities during
1996, 1995, and 1994, respectively.
The book value of securities pledged to secure public deposits and for other
purposes as required or permitted by law approximated $112,849,000 and
$104,289,000 at December 31, 1996 and 1995, respectively.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE FIVE
LOANS
The loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Commercial, financial and agricultural $ 224,267,000 $214,304,000
Residential real estate 338,385,000 304,848,000
Installment loans to individuals 142,123,000 145,734,000
- -------------------------------------------------------------------------------------------------------------------
$ 704,775,000 $664,886,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Company originates and sells fixed rate mortgage loans on a servicing
released basis. At December 31, 1996, the Company originated loans held for sale
of approximately $18 million.
In 1994, the Company began participation in a whole loan purchasing program
whereby the Company purchased FHA Title I home improvement loans, secured by
second lien mortgages, from an independent third party. In November 1996, the
Company restructured this program and began purchasing the loans directly from
loan originators. As a result of this restructuring, the Company currently earns
the stated note rate of the loans during the period the loans are held by the
Company. Prior to restructuring, the Company received interest income on the
loans pursuant to established loan purchasing agreements with rate sharing
provisions. As a result, the interest income earned on the loans increased from
9% in 1995 to 9.23% in 1996, on an annualized basis. The weighted average coupon
rate of loans held at December 31, 1996 was 13.46%. Aggregate income earned from
the loans approximated $12.6 million, $4.6 million, and $1.9 million during
1996, 1995, and 1994. The average aggregate balance of the loans approximated
$136.4 million, $49.1 million, and $21.2 million during 1996, 1995, and 1994.
The loans are generally held by the Company for approximately 90 days before
being sold to an independent third party for securitization. Due to the
short-term holding period of the loans, the recorded balance approximates the
fair value of the loans.
A summary of changes in the allowance for possible loan losses follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at beginning of year $ 6,566,000 $ 6,477,000 $ 6,209,000
Provision for possible loan losses 1,678,000 1,104,000 1,040,000
Charge-offs (1,375,000) (1,331,000) (1,180,000)
Recoveries 412,000 316,000 408,000
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 7,281,000 $ 6,566,000 $ 6,477,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Beginning in 1995, the Company adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan". Under the new standard, the 1996 and 1995
allowance for loan losses related to loans that are identified for evaluation in
accordance with Statement 114 are based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. The 1994 allowance for loan losses related
to these loans was based on undiscounted cash flows or the fair value of the
collateral for collateral dependent loans.
The recorded investment in loans that were considered impaired was $4,643,000
and $4,087,000 at December 31, 1996 and 1995, respectively. Included in these
amounts are $1,891,000 and $1,630,000, respectively, of impaired loans for which
the related allowance for loan losses is $408,000 and $404,000, respectively. .
The average recorded investments in impaired loans during the years ended
December 31, 1996 and 1995, were approximately $4,528,000 and $3,423,000. During
the years ended December 31, 1996 and 1995, $332,000 and $328,000, respectively,
was recognized as interest income on impaired loans and $219,000 and $258,000,
respectively, was recognized as interest income using a cash basis method of
accounting.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE SIX
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $911,775,000 and $168,241,000 at December 31, 1996 and
1995, respectively. The unpaid principal balances of intercompany mortgage loans
serviced was $28,290,000 at December 31, 1996.
Mortgage loan servicing rights of $1,019,000 and $1,023,000 at December 31,
1996 and 1995, respectively, are included in other assets in the accompanying
balance sheets. Amortization of mortgage loan servicing rights approximated
$225,000, $128,000, and $49,000 during the years ended December 31, 1996, 1995,
and 1994, respectively.
NOTE SEVEN
BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment follows:
<TABLE>
<CAPTION>
December 31
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Bank premises $ 28,141,000 $ 24,477,000
Furniture, fixtures, and equipment 19,856,000 15,470,000
- -------------------------------------------------------------------------------------------------------------------
47,997,000 39,947,000
Less allowance for depreciation 17,972,000 16,296,000
- -------------------------------------------------------------------------------------------------------------------
$ 30,025,000 $ 23,651,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE EIGHT
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. The underlying securities included in repurchase agreements remain
under the Company's control during the effective period of the agreements. A
summary of the Company's short-term borrowings is set forth below:
<TABLE>
<S> <C>
1996:
Average amount outstanding during the year $ 154,301,000
Maximum amount outstanding at any month end 207,790,000
Weighted average interest rate:
During the year 5.27%
End of the year 5.01%
1995:
Average amount outstanding during the year $ 97,357,000
Maximum amount outstanding at any month end 190,862,000
Weighted average interest rate:
During the year 5.23%
End of the year 5.51%
1994:
Average amount outstanding during the year $ 46,484,000
Maximum amount outstanding at any month end 86,897,000
Weighted average interest rate:
During the year 3.95%
End of the year 5.43%
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE NINE
SCHEDULED MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
(in thousands)
Scheduled maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1996, are summarized as follows:
Within one year $ 43,539
Over one through two years 8,311
Over two through three years 4,372
Over three through four years 3,277
Over four through five years 3,010
Over five years 0
- ------------------------------------------------------------------------
Total $ 62,509
- ------------------------------------------------------------------------
NOTE TEN
LONG-TERM DEBT AND UNUSED LINES OF CREDIT
Long-term debt includes an obligation of the Parent Company consisting of a
$28,000,000 revolving credit loan facility with an unrelated party. At December
31, 1996, $24,250,000 was outstanding. The loan has a variable rate (7.4375% at
December 31, 1996) with interest payments due quarterly and principal due at
maturity in July 1997. 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 each of its wholly-owned banking
subsidiaries as collateral for the revolving credit loan.
City National Bank, a wholly-owned subsidiary, has obtained long-term
financing from the Federal Home Loan Bank (FHLB) in the form of Long-Term LIBOR
Floaters as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Amount
Amount Available Outstanding Interest Rate Maturity Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
$5,000,000 $5,000,000 5.64% December 1998
$5,000,000 5,000,000 4.97% December 2001
</TABLE>
The Company has purchased, through its subsidiaries, 101,000 shares of 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. Additionally, at December 31, 1996, the
subsidiaries have been issued one year flexline commitments of $18,165,000, at
prevailing interest rates, from the FHLB with maturities ranging from January to
May 1997. Such commitments are subject to satisfying the Capital Stock
Requirement provisions, as defined, in the agreement with the FHLB. As of
December 31, 1996, there were no amounts outstanding pursuant to the agreements.
Financing obtained from the FHLB, including the LIBOR Floaters, is based in
part on the amount of qualifying collateral available, specifically U.S.
Treasury and agency securities, mortgage-backed securities and residential real
estate loans. At December 31, 1996, collateral pledged to the FHLB included
approximately $10.1 million in FHLB capital stock.
NOTE ELEVEN
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 1997, the
subsidiary banks can without prior regulatory approval, declare dividends of
approximately $15,858,000 to the Parent Company, plus retained net profits for
the interim period through the date of such dividend declaration.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TWELVE
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:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Allowance for loan losses $ 2,827,000 $ 2,397,000
Acquired net operating loss carryforward 741,000 748,000
Deferred compensation payable 391,000 411,000
Other 279,000 346,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 4,238,000 3,902,000
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Federal income tax allowance for loan losses 148,000 546,000
Premises and equipment 886,000 785,000
Core deposit intangible 458,000 461,000
Investments 92,000 128,000
Loans 159,000 233,000
Securities available for sale 2,000 264,000
Other 314,000 150,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 2,059,000 2,567,000
- -------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 2,179,000 $ 1,335,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Federal:
Current $ 5,046,000 $ 3,930,000 $ 3,152,000
Deferred (582,000) (439,000) (309,000)
- -------------------------------------------------------------------------------------------------------------------
4,464,000 3,491,000 2,843,000
State 874,000 691,000 703,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,338,000 $ 4,182,000 $ 3,546,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Current income tax expense (benefit) attributable to investment securities
transactions approximated $ 35,000, $1,000, and $(292,000) in 1996, 1995, and
1994, respectively.
As of December 31, 1996, the Company has approximately $1.6 million and $1.9
million, respectively, of federal and state net operating loss carryforwards
which expire in 2006.
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>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Computed federal taxes and statutory rate $ 5,414,000 $ 4,515,000 $ 4,019,000
State income taxes, net of federal tax benefit 502,000 335,000 394,000
Tax effects of:
Nontaxable interest income (685,000) (805,000) (850,000)
Other items, net 107,000 137,000 (17,000)
- -------------------------------------------------------------------------------------------------------------------
$ 5,338,000 $ 4,182,000 $ 3,546,000
- -------------------------------------------------------------------------------------------------------------------
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE THIRTEEN
EMPLOYEE BENEFIT PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", (APB 25) and related Interpretations
in accounting for its employee stock options as permitted under FASB Statement
No. 123, "Accounting for Stock-Based Compensation". Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company's 1993 Stock Incentive Plan has authorized the grant of options
to key employees for up to 300,000 shares of the Company's common stock adjusted
for changes in the capital structure of the Company since the adoption of the
plan. On December 19, 1996, the Board of Directors granted 36,000 stock options
which have 10 year terms and vest and become fully exercisable immediately. The
effect of applying Statement No. 123's fair value method to the Company's stock
based awards results in net income and earnings per share that are not
materially different from amounts reported.
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 five
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. Although the
profit sharing features of this plan remain intact, future profit contributions,
if any, are expected to be made to the employee stock ownership plan discussed
below.
The City Holding Company Employees' Stock Ownership Plan (ESOP), covering all
employees who have completed one year of service and have attained the age of
21, was created January 1, 1996 and includes both Money Purchase and Stock Bonus
plan features. Annually, the Company will contribute to the Money Purchase
account an amount equal to 9% of eligible compensation. Contributions to the
Stock Bonus account are discretionary, as determined by the Company's Board of
Directors.
The Company's total expense associated with the Plan and the ESOP
(collectively, the benefit plans) approximated $2,126,000, $1,400,000, and
$854,000 in 1996, 1995, and 1994, respectively. The total number of shares of
the Company's common stock held by the benefit plans is 214,856. Other than the
benefit plans, the Company offers no postretirement benefits.
NOTE FOURTEEN
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, 1996 and 1995, atrributable directly and indirectly to these
parties, was approximately $34,167,000 and $27,950,000, respectively. During
1996, $17,626,000 of new loans were made and repayments totaled $11,409,000.
NOTE FIFTEEN
INCOME
The following items of other income exceeded one percent of total revenue for
the respective years:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Mortgage loan servicing fee income $ 2,557,000 $ 350,000 $ 91,000
Secondary market mortgage loan origination fees 1,462,000 922,000 226,000
Insurance recovery 0 0 1,400,000
</TABLE>
NOTE SIXTEEN
EXPENSES
The following items of other expenses exceeded one percent of total revenue
for the respective years:
1996 1995 1994
- ------------------------------------------------------------------------------
Insurance, including FDIC premiums $ 700,000 $ 1,139,000 $ 1,817,000
Advertising 914,000 889,000 964,000
Bank supplies 1,618,000 1,236,000 1,016,000
Legal and accounting fees 771,000 571,000 1,032,000
Telecommunications 1,082,000 740,000 519,000
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE SEVENTEEN
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, 1996 and 1995,
commitments outstanding to extend credit totaled approximately $64,379,000 and
$67,357,000, 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 $2,937,000 and $3,313,000 as of December 31, 1996
and 1995, 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 EIGHTEEN
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, 1996, 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.
NOTE NINETEEN
REGULATORY MATTERS
The Company, including its banking subsidiaries, is subject to various
regulatory capital requirements administered by the various banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary action by regulators, that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and its banking subsidiaries must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. The Company's and each of its banking
subsidiary's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined). Management believes, as
of December 31, 1996, that the Company and each of its banking subsidiaries met
all capital adequacy requirements to which they were subject.
As of December 31, 1996, the most recent notifications from banking
regulatory agencies categorized the Company and each of its banking subsidiaries
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized", the Company and each of its
banking subsidiaries must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since notifications that management believes have changed
the institutions' categories. The Company's and its significant banking
subsidiaries' (as defined) actual capital amounts and ratios are presented in
the following table.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE NINETEEN
REGULATORY MATTERS (continued)
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $ 79,439 11.23% $ 56,579 8.00% $ 70,724 10.00%
City National 34,753 11.34 24,524 8.00 30,655 10.00
Peoples Bank 10,755 12.23 7,038 8.00 8,798 10.00
Merchants National 10,558 12.94 6,527 8.00 8,159 10.00
Tier I Capital (to Risk Weighted Assets):
Consolidated 72,157 10.20 28,290 4.00 42,434 6.00
City National 31,721 10.35 12,262 4.00 18,393 6.00
Peoples Bank 9,833 11.18 3,519 4.00 5,279 6.00
Merchants National 10,035 12.30 3,264 4.00 4,896 6.00
Tier I Capital (to Average Assets):
Consolidated 72,157 6.58 43,872 4.00 54,840 5.00
City National 31,721 7.23 17,540 4.00 21,925 5.00
Peoples Bank 9,833 7.74 5,084 4.00 6,355 5.00
Merchants National 10,035 8.82 4,553 4.00 5,691 5.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $72,826 9.75% $59,776 8.00% $74,720 10.00%
City National 31,384 10.28 24,415 8.00 30,519 10.00
Peoples Bank 9,423 11.34 6,645 8.00 8,306 10.00
Merchants National 8,420 10.93 6,165 8.00 7,706 10.00
Tier I Capital (to Risk Weighted Assets):
Consolidated 66,260 8.87 29,888 4.00 44,832 6.00
City National 28,378 9.30 12,207 4.00 18,311 6.00
Peoples Bank 8,510 10.25 3,322 4.00 4,984 6.00
Merchants National 7,960 10.33 3,082 4.00 4,624 6.00
Tier I Capital (to Average Assets):
Consolidated 66,260 6.45 41,068 4.00 51,336 5.00
City National 28,378 6.74 16,844 4.00 21,055 5.00
Peoples Bank 8,510 7.41 4,597 4.00 5,746 5.00
Merchants National 7,960 7.43 4,287 4.00 5,358 5.00
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TWENTY
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. FASB 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>
<CAPTION>
FAIR VALUE OF FINANCIAL INSTRUMENTS
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 47,764,000 $ 47,764,000 $ 28,460,000 $ 28,460,000
Loans held for sale 92,472,000 92,472,000 122,222,000 122,222,000
Securities 163,922,000 164,770,000 194,368,000 195,832,000
Net loans 690,701,000 693,832,000 650,195,000 660,208,000
Liabilities
Demand deposits 440,917,000 440,917,000 425,050,000 425,050,000
Time deposits 387,753,000 387,808,000 372,365,000 371,439,000
Short-term borrowings 90,298,000 90,298,000 141,309,000 141,309,000
Long-term debt 34,250,000 34,245,000 20,000,000 19,593,000
</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 amount of advances from
the FHLB and borrowings under repurchase agreements 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. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The fair values approximated the
carrying values of these commitments and letters of credit as of December 31,
1996 and 1995.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TWENTY ONE
CITY HOLDING COMPANY (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash $ 4,243,000 $ 1,226,000
Securities available for sale 1,392,000 1,237,000
Investment in subsidiaries 93,041,000 83,380,000
Fixed assets 6,584,000 3,006,000
Other assets 5,079,000 2,192,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $110,339,000 $91,041,000
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Long-term debt $ 24,250,000 $ 15,000,000
Advances from affiliates 934,000 934,000
Other liabilities 5,782,000 1,968,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 30,966,000 17,902,000
STOCKHOLDERS' EQUITY 79,373,000 73,139,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $110,339,000 $91,041,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INCOME
Dividends from bank subsidiaries $ 4,180,000 $13,465,000 $5,626,000
Mortgage loan servicing fees 1,147,000
Administrative fees 2,828,000
Other income 1,017,000 640,000 1,715,000
- -------------------------------------------------------------------------------------------------------------------
9,172,000 14,105,000 7,341,000
EXPENSES
Interest expense 1,477,000 1,144,000 735,000
Other expenses 9,302,000 4,206,000 3,159,000
- -------------------------------------------------------------------------------------------------------------------
10,779,000 5,350,000 3,894,000
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX
BENEFIT AND EQUITY IN UNDISTRIBUTED NET INCOME
(EXCESS DIVIDENDS) OF SUBSIDIARIES (1,607,000) 8,755,000 3,447,000
Income tax benefit (2,261,000) (2,127,000) (1,344,000)
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY
IN UNDISTRIBUTED NET INCOME 654,000 10,882,000 4,791,000
(EXCESS DIVIDENDS) OF SUBSIDIARIES
EQUITY IN UNDISTRIBUTED NET INCOME
(EXCESS DIVIDENDS) OF SUBSIDIARIES 9,476,000 (2,164,000) 3,350,000
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $10,130,000 $ 8,718,000 $8,141,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TWENTY ONE
CITY HOLDING COMPANY (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $10,130,000 $ 8,718,000 $8,141,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation 1,077,000 272,000 149,000
(Increase) decrease in other assets (2,842,000) (882,000) 44,000
Increase (decrease) in other liabilities 3,807,000 (300,000) 1,532,000
(Equity in undistributed net income) excess dividends
of subsidiaries (9,476,000) 2,164,000 (3,350,000)
Other (10,000)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,686,000 9,972,000 6,516,000
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 836,000
Proceeds from sales of securities 43,000
Purchases of investment securities (107,000) (160,000) (148,000)
Purchases of mortgage loans (71,000) (808,000)
Cash paid for acquired subsidiary (532,000)
Cash invested in subsidiaries (625,000) (6,082,000) (5,318,000)
Purchases of premises and equipment (4,655,000) (1,533,000) (126,000)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,415,000) (6,939,000) (6,932,000)
FINANCING ACTIVITIES
Proceeds from long-term debt 9,250,000 12,525,000 6,875,000
Principal repayments on long-term debt (4,400,000) (5,875,000)
Repayments to bank subsidiaries, net (4,873,000) 3,573,000
Cash dividends paid (3,540,000) (3,002,000) (2,693,000)
Purchases of treasury stock (2,286,000) (193,000)
Proceeds from sales of treasury stock 58,000 152,000 461,000
Redemption of dissenter and fractional shares (22,000) (1,843,000)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,746,000 (1,884,000) 305,000
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,017,000 1,149,000 (111,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,226,000 77,000 188,000
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,243,000 $ 1,226,000 $ 77,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE TWENTY TWO
SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly financial information for 1996 and 1995
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
1996
Interest income $ 21,093,000 $ 21,503,000 $ 21,485,000 $ 21,988,000
Interest expense 9,683,000 9,435,000 9,923,000 10,023,000
Net interest income 11,410,000 12,068,000 11,562,000 11,965,000
Provision for possible loan losses 271,000 290,000 382,000 735,000
Investment securities gains 61,000 2,000 5,000 19,000
Net income 2,461,000 2,566,000 2,543,000 2,560,000
Net income per common share 0.44 0.46 0.45 0.46
1995
Interest income $ 16,787,000 $ 18,227,000 $ 19,256,000 $ 20,855,000
Interest expense 7,080,000 8,166,000 8,842,000 9,492,000
Net interest income 9,707,000 10,061,000 10,414,000 11,363,000
Provision for possible loan losses 201,000 208,000 302,000 393,000
Investment securities gains/(losses) 3,000 (1,000) 7,000 (7,000)
Net income 2,040,000 2,125,000 2,143,000 2,410,000
Net income per common share 0.36 0.37 0.38 0.44
</TABLE>
NOTE TWENTY THREE
SUBSEQUENT EVENT
On January 24, 1997, the Company consummated its acquisition of The Old
National Bank of Huntington in Huntington, West Virginia (Old National). The
merger, which will be accounted for under the pooling of interests method of
acounting, involved the exchange of approximately 481,000 shares of the
Company's common stock for all of the outstanding shares of Old National. The
acquisition of Old National will increase total assets of the Company by
approximately $49 million or 4.7% of total assets of the Company as of December
31, 1996. Accordingly, condensed proforma information has not been included for
the information provided herein.
On January 8, 1997, City National Bank signed a Letter of Intent to acquire
RMI, Ltd., an insurance agency designed to market insurance products and
services to select corporate and individual clients. It is anticipated that the
transaction will be accounted for under the purchase method of accounting. The
acquisition, subject to the negotiation of a defined acquisition agreement,
would have less than a 1% impact on total assets and net income reported in the
Company's 1996 financial statements. As a result, proforma information has not
been included for the information provided herein. A director of one of the
Company's subsidiaries is the President and current owner of RMI, Ltd.
33
<PAGE>
AFFILIATE BANKS
THE CITY NATIONAL
BANK OF CHARLESTON
3601 MacCorkle Avenue, S.E.
Charleston, West Virginia 25304
304/925-6611
Affiliated March 1984
Samuel M. Bowling, Chairman of the Board
Steven J. Day, President & CEO
Net Loans $343,700,000
Deposits 320,589,000
Total Assets 433,381,000
BANK OF RIPLEY
108 North Church Street
Ripley, West Virginia 25271
304/372-2281
Affiliated October 1988
James J. Robinson, Chairman of the Board
William E. Casto, President & CEO
Net Loans $43,797,000
Deposits 59,356,000
Total Assets 65,289,000
PEOPLES STATE BANK
300 West Main Street
Clarksburg, West Virginia 26301
304/624-0181
Affiliated December 1992
David E. Brock, Chairman of the Board,
President & CEO
Net Loans $18,960,000
Deposits 10,291,000
Total Assets 20,780,000
THE OLD NATIONAL
BANK OF HUNTINGTON
999 Fourth Avenue
Huntington, West Virginia 25701
304/525-7500
Affiliated January 1997
William M. Frazier, Chairman of the Board,
President & CEO
Net Loans $26,214,000
Deposits 44,715,000
Total Assets 49,087,000
THE PEOPLES
BANK OF POINT PLEASANT
2212 Jackson Avenue
Point Pleasant, West Virginia 25550
304/675-1121
Affiliated December 1986
Jack E. Fruth, Chairman of the Board
Joe L. Ellison, President & CEO
Net Loans $93,838,000
Deposits 106,286,000
Total Assets 121,901,000
THE HOME NATIONAL BANK
OF SUTTON
101 Second Street
Sutton, West Virginia 26601
304/765-7333
Affiliated May 1992
M. Scott Gibson, Chairman of the Board
Van R. Thorn, Chief Executive Officer
Net Loans $ 44,001,000
Deposits 56,480,000
Total Assets 63,732,000
THE FIRST NATIONAL BANK
OF HINTON
321 Temple Street
Hinton, West Virginia 25951
304/466-2311
Affiliated December 1994
C. Scott Briers, President of the Board
Bob F. Richmond, Executive Vice President & Cashier
Net Loans $41,645,000
Deposits 56,149,000
Total Assets 64,912,000
FIRST STATE
BANK & TRUST
1218 Main Street
Rainelle, West Virginia 25962
304/438-6144
Affiliated September 1988
Dr. D. K. Cales, Chairman of the Board
Carlin K. Harmon, President & CEO
Net Loans $62,852,000
Deposits 74,174,000
Total Assets 81,466,000
BLUE RIDGE BANK
420 South Raleigh Street
Martinsburg, West Virginia 25401
304/264-4500
Affiliated August 1992
Jack C. Allen, Chairman of the Board
M. Rebecca Linton, President
Net Loans $57,329,000
Deposits 67,201,000
Total Assets 84,830,000
MERCHANTS
NATIONAL BANK
4th Avenue & Washington Street
Montgomery, West Virginia 25136
304/442-2475
Affiliated August 1995
George F. Davis, Chairman of the Board,
President & CEO
Net Loans $75,736,000
Deposits 85,323,000
Total Assets 114,075,000
34
<PAGE>
BANK DIRECTORS
CITY HOLDING
COMPANY
Samuel M. Bowling
Chairman of the Board,
City Holding Company
President,
Dougherty Co., Inc.
C. Scott Briers
President,
Briers, Inc.
Dr. D. K. Cales
Dentist
Hugh R. Clonch
President,
Clonch Industries
George F. Davis
Chairman of the Board, President
and Chief Executive Officer,
Merchants National Bank
Steven J. Day
President and Chief Executive Officer,
City Holding Company
Robert D. Fisher
Partner,
Adams, Fisher & Evans
William M. Frazier
Chairman of the Board,
President and Chief Executive Officer,
The Old National Bank of Huntington
Jack E. Fruth
Principal Owner,
Fruth Pharmacies
Jay Goldman
President,
Goldman Associates
Carlin K. Harmon
President and Chief Executive Officer,
First State Bank & Trust
C. Dallas Kayser
Attorney
Dale Nibert
Dairy Farmer
Otis L. O'Connor
Partner,
Steptoe & Johnson
Leon K. Oxley
Secretary,
The Old National Bank of Huntington
Bob F. Richmond
Executive Vice President and Cashier,
The First National Bank of Hinton
Mark H. Schaul
President,
Charmar Realty Company
Van R. Thorn, II
Chief Executive Officer,
The Home National Bank of Sutton
DIRECTORS EMERITUS
Vitus Hartley, Jr.
James J. Robinson
IN MEMORY OF
J. Richard McCormick
for his 32 years of
service and dedication.
THE CITY NATIONAL
BANK OF CHARLESTON
Samuel M. Bowling
Chairman of the Board,
The City National Bank of Charleston
President, Dougherty Co., Inc.
Charles "Laddie" Burdette
Vice President,
Fruth Pharmacies, Inc.
Willie H. Childress
Optometrist
Oshel Craigo
President,
Better Foods, Inc.
George J. Davis
Public Accountant
Steven J. Day
President and Chief Executive Officer,
The City National Bank of Charleston
Jerry L. Goldberg
President,
Dunbar Building Products, Inc.
Jay Goldman
President,
Goldman Associates
Dickinson M. Gould, Jr.
President, Buzz Products, Inc.
and Haddy's Prime Beef
William T. Hackworth
President,
Dunbar Printing Company
David E. Haden
President, RMI Ltd.
J. C. Jefferds, III
Vice President and Treasurer,
Jefferds Corporation
Barry W. Kemerer
President,
Precision Pump & Valve
Otis L. O'Connor
Partner, Steptoe & Johnson
Harold R. Payne
Vice President,
Payne & Donahoe
Insurance Agency, Inc.
Mark H. Schaul
President, Charmar Realty Company
Frank Schirtzinger
Owner,
Charleston West 76 Truck Stop
Charles R. Sigman
Public Accountant
Jon W. Watkins
President, Natures Furniture, Inc.
Harlan Wilson, Jr.
President, Wilson Funeral Home, Inc.
DIRECTORS EMERITUS
W. S. Endres
Roger D. Griffith
Richard J. Hoylman
Robert L. Peden
THE PEOPLES BANK OF
POINT PLEASANT
Young I. Choi, M.D.
Physician
Joe L. Ellison
President and Chief Executive Officer,
The Peoples Bank of Point Pleasant
Cynthia S. Epling
Secretary/Treasurer,
Smith Buick, Inc.
John Felker, II
Owner, Point Distributing Company
Jack E. Fruth
Chairman of the Board,
The Peoples Bank of Point Pleasant
Principal Owner, Fruth Pharmacies
Vance Johnson
President, Johnson's Supermarket, Inc.
C. Dallas Kayser
Attorney
Michael R. Lieving
Executive Vice President,
The Peoples Bank of Point Pleasant
Samuel P. McNeill, M.D.
Physician
George E. Miller
Assistant Superintendent & Personnel,
Mason County School System
Dale Nibert
Dairy Farmer
Michael G. Sellards
Executive Director and
Chief Executive Officer,
Pleasant Valley Hospital
Mark E. Sheets
Partner,
Halliday, Sheets & Saunders
Cecil Williams
President,
Flair Furniture Company
Robert Wingett
Publisher, Point Pleasant Register,
Gallipolis Tribune and Daily Sentinel
DIRECTORS EMERITUS
Vitus Hartley, Jr.
James Lewis
Vaught Smith
FIRST STATE
BANK & TRUST
Dan Akers
President,
Appalachian Heating
K. O. Boley
Retired Businessman
John Buckland
Executive Vice President,
First State Bank & Trust
Dr. D. K. Cales
Chairman of the Board,
First State Bank & Trust
Dentist
J. H. Crookshanks
Owner,
Crookshanks Builders Supply
L. A. Gates
President & CEO,
L. A. Gates Company
Philip J. Gwinn
President,
P. J. Gwinn Construction Co., Inc.
Carlin K. Harmon
President and Chief Executive Officer,
First State Bank & Trust
Alan Larrick
Attorney at Law,
Larrick Law Offices
Curtis E. McCall
President,
Showcase Cinemas
F. Eugene Nelson
Independent Insurance Agent
Max Priddy
President,
Priddy's Lumber
Pat Reed
Broker/Owner,
Reed-Patton Assoc., Inc.
Better Homes and Gardens
Robert C. Ripley, Sr.
Retired Sales Manager,
Dodson-Hager Ford
Ralph D. Williams
Former State Senator and
Area Representative,
State Farm Insurance
DIRECTOR EMERITUS
Ryan Thompson
35
<PAGE>
BANK DIRECTORS
BANK OF RIPLEY
William E. Casto
President and Chief Executive Officer,
Bank of Ripley
R. Fred Clark
Executive Vice President,
Bank of Ripley
Robert D. Fisher
Partner,
Adams, Fisher & Evans
Robert C. Lester
Retired Pharmacist
Harry H. Parsons
Retired Merchant
Gary W. Roark
Owner,
G. W. Roark & Associates
James J. Robinson
Chairman of the Board,
Bank of Ripley
G. Lee Wilson
Owner, Ponderosa and
Char House Restaurants
THE HOME NATIONAL
BANK OF SUTTON
Roy W. Cutlip
President,
The Home National Bank of Sutton
M. Scott Gibson
Chairman of the Board,
The Home National Bank of Sutton
Director,
Stockert-Gibson Funeral Home
Loran Kniceley
Owner,
Kniceley Insurance Agency
Sue Nuzum
President,
Braxton Motor, Inc.
Van R. Thorn, II
Chief Executive Officer,
The Home National Bank of Sutton
IN MEMORY OF
Ralph J. Pletcher
for his 20 years of
service and dedication.
BLUE RIDGE
BANK
Jack C. Allen
Chairman of the Board,
Blue Ridge Bank
State Farm Insurance Agent (Retired)
Lewis O. Braithwaite
Director,
Rosedale Funeral Home
Carol F. Kable
Realtor
George Karos
President and Owner,
Patterson's Drug Store
M. Rebecca Linton
President,
Blue Ridge Bank
Peter L. Mulford
Administrator,
City Hospital
PEOPLES STATE BANK
John P. Aman
Vice President,
Peoples State Bank
David E. Brock
Chairman of the Board,
President and Chief Executive Officer,
Peoples State Bank
Timothy J. Manchin
Partner,
Manchin, Aloi & Carrick
Mark F. Oliverio
Vice President,
Oliverio Italian Style Peppers, Inc.
Mark B. Owen
President,
Tmaro Corporation
Robert W. Riggs
President,
Robard, Inc.
Frank E. Simmerman, Jr.
Partner,
Johnson, Simmerman & Broughton, L.C.
THE FIRST NATIONAL
BANK OF HINTON
C. Scott Briers
President of the Board,
The First National Bank of Hinton
President,
Briers, Inc.
James S. Kerr
Realtor
William G. Meador
Retired Insurance Agent
David L. Parmer
Attorney at Law
Bob F. Richmond
Executive Vice President and Cashier,
The First National Bank of Hinton
Dr. J. D. Woodrum
Physician
Paul L. Wykle
Retired Former Owner,
Twin State Barber and Beauty Supply
IN MEMORY OF
James V. Coste
for his 35 years of
service and dedication.
MERCHANTS
NATIONAL BANK
Linda G. Aguilar
Vice President,
Merchants National Bank
Thomas L. Carson
President (Retired),
College Drug Store, Inc.
Hugh Clonch
President,
Clonch Industries, Inc.
Ghassan Dagher, M.D.
Eye Physician & Surgeon
George F. Davis
Chairman of the Board,
President and Chief Executive Officer,
Merchants National Bank
Robert C. Gillespie
Regents Professor,
West Virginia Institute of Technology
Carl L. Harris
Attorney at Law
Thomas A. Jacobs
Tax Consultant
Carl L. Kennedy, D.D.S.
Kennedy Dental Office
Giles E. Musick
President,
Brown Chevrolet, Inc.
James F. Neil
Plant Manager (Retired),
Elkem Metals, Inc.
THE OLD NATIONAL BANK
OF HUNTINGTON
W. B. Andrews
President,
Dewco, Inc.
Lucian R. Carter
President,
Carter & Company
Robert M. Davidson
Certified Public Accountant,
Carter & Company
William M. Frazier
Chairman of the Board,
President and Chief Executive Officer,
The Old National Bank of Huntington
W. Michael Frazier
Attorney,
Frazier & Oxley
Frank Gaddy
President,
Gaddy Engineering
W. Kenneth Grant
President,
Gino's Pizza
John J. Klim, Jr.
President,
D & E Industries
Ezra Midkiff
President,
Wilson Welding
Leon K. Oxley
Secretary,
The Old National Bank of Huntington
36
<PAGE>
ADDITIONAL INFORMATION
STOCK INFORMATION
The Company's Common Stock is included on The Nasdaq National Market
under the symbol "CHCO". Nasdaq market makers in City Holding Company include:
Advest, Inc.
Ferris Baker Watts, Inc.
Herzog, Heine, Geduld, Inc.
Legg, Mason, Wood, Walker, Inc.
Robinson Humphrey Co., Inc.
Wheat, First Securities, Inc.
DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
City Holding Company offers to holders of its Common Stock the opportunity
to purchase, through reinvestment of dividends or by additional cash payments,
additional shares of its Common Stock. Please address inquiries regarding the
plan to:
City Holding Company
Dividend Reinvestment and Stock Purchase Plan
Post Office Box 4168
Charleston, WV 25364-4168
Attn: Stock Transfer Agen
ABOUT FORM 10-K
A copy of the Company's annual report on Form 10-K, as filed with the
Securities and Exchange Commission, will be forwarded without charge to any
stockholder upon written request to:
City Holding Company
Attention: Robert A. Henson, Chief Financial Officer
Post Office Box 4168
Charleston, West Virginia 25364-4168
37
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1996, City Holding Company had nine banking
and three nonbanking subsidiaries. The City National Bank of Charleston,
Charleston, West Virginia, Home National Bank of Sutton, Sutton, West Virginia,
and Merchants National Bank, Montgomery, 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 Peoples
State Bank, Clarksburg, 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 are 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.
61
Exhibit 24b
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 27, 1997, included in the
1996 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 27, 1997, 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, 1996.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 28, 1997
62
Exhibit 24(c)
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,
1996.
/s/ Persinger & Company, LLC
Beckley, West Virginia
March 27, 1997
63
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANTS AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 47,764
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 122,944
<INVESTMENTS-CARRYING> 40,978
<INVESTMENTS-MARKET> 41,826
<LOANS> 697,982
<ALLOWANCE> 7,281
<TOTAL-ASSETS> 1,048,810
<DEPOSITS> 828,670
<SHORT-TERM> 90,298
<LIABILITIES-OTHER> 16,219
<LONG-TERM> 34,250
0
0
<COMMON> 13,998
<OTHER-SE> 65,375
<TOTAL-LIABILITIES-AND-EQUITY> 1,048,810
<INTEREST-LOAN> 75,888
<INTEREST-INVEST> 10,151
<INTEREST-OTHER> 30
<INTEREST-TOTAL> 86,069
<INTEREST-DEPOSIT> 29,238
<INTEREST-EXPENSE> 39,064
<INTEREST-INCOME-NET> 47,005
<LOAN-LOSSES> 1,678
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 40,982
<INCOME-PRETAX> 15,468
<INCOME-PRE-EXTRAORDINARY> 10,130
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,130
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.81
<YIELD-ACTUAL> 4.78
<LOANS-NON> 1,734
<LOANS-PAST> 2,674
<LOANS-TROUBLED> 235
<LOANS-PROBLEM> 235
<ALLOWANCE-OPEN> 6,566
<CHARGE-OFFS> 1,375
<RECOVERIES> 412
<ALLOWANCE-CLOSE> 7,281
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
