SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1997 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.)
25 Gatewater Road
Cross Lanes, West Virginia 25313
(Address of principal offices)
Registrant's telephone number, including area code: (304) 769-1100
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 10, 1998 (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 -- $274,206,048
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The number of shares outstanding of the issuer's common stock as of March 10,
1998:
Common Stock, $2.50 Par Value -- 6,456,906 shares
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The total number of pages are 76 . Exhibit Index is located on page 17 .
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of Form 10-K
into which Document
is incorporated
-------------------
Portions of the Annual Part I,Item 1; Part
Report to Shareholders II, Items 5, 6, 7,
of City Holding Company and 8; Part III, Item
for the year ended 13; Part IV, Item 14.
December 31, 1997.
--------
Portions of City Holding Part III, Items 10,
Company's Proxy statement 11, 12 and 13.
for the 1998 Annual
Meeting of Shareholders.
--------
<PAGE>
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 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial
Owners and Management 12
Item 13. Certain Relationships and Related
Transactions 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 13, 14
Signatures 15
Exhibit Index 17
<PAGE>
PART I
Item 1 Business
(a) History
City Holding Company (the Company), a West Virginia corporation
headquartered in Cross Lanes, West Virginia, a suburb of Charleston, commenced
operations in November 1983. The Company currently owns The City National Bank
of Charleston (a wholly-owned subsidiary) (City National) and its banking
divisions, The Peoples National Bank, First State Bank & Trust, The Bank of
Ripley, Home National Bank of Sutton, Blue Ridge Bank, Peoples State Bank, The
First National Bank of Hinton (Hinton), Merchants National Bank, and The Old
National Bank of Huntington. City National and its banking divisions
(collectively, the Bank) are retail and consumer-oriented community banks that
emphasize personal service and currently operate 43 banking offices in 15
counties throughout the state of West Virginia.
Prior to December 1997, these banking divisions of City National
operated as separate affiliates. In December 1997, all banking affiliates'
charters were combined into one, City National. However, as these banks became
divisions of City National, they retained their historical names, management and
Boards of Directors consistent with the Company's historical acquisition policy.
The Company believes that retaining community loyalty is a prudent business
practice and is beneficial in seeking future strategic acquisition opportunities
for small to medium size banks, financial service companies and other entities.
The most recent bank acquisition by the Company was the acquisition of The Old
National Bank of Huntington (Old National) in January 1997, a $49 million bank
located in Huntington, West Virginia. In addition, the Company intends to
acquire Del Amo Savings Bank, FSB, a $115 million federally chartered savings
bank in Torrance, California. This acquisition has been approved by the
shareholders of Del Amo, but remains subject to regulatory approval. The Del Amo
acquisition is expected to be consummated by the end of the first quarter of
1998.
In addition to its banking divisions, as part of its strategy to
diversify and expand into new areas of the financial services area, City
National also operates seven non-banking divisions, City Mortgage Services,
First Allegiance Financial Corporation (First Allegiance), City Credit Services,
RMI, Ltd. (RMI), Jarrett-Aim Communications, Inc. (Jarrett-Aim), City Capital
Markets Corporation, and CNB East Retail.
City Mortgage Services, a mortgage loan servicing division
headquartered in Cross Lanes, West Virginia, 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 City
Mortgage Services. In December 1997, this division was transferred from the
Company to City National.
In October 1997, City National acquired First Allegiance and created
City Credit Services, both headquartered in Irvine, California, which are
originators of junior lien mortgages for sale to independent third parties.
On December 5, 1997, City National acquired RMI, an insurance agency
located in Winfield, West Virginia. RMI offers a full range of insurance
products and services, including employee benefit programs, key person programs,
benefits consulting services, property and casualty insurance, retirement plans
and deferred compensation plans, to select corporate associations and individual
clients. In January 1998, City National completed its acquisition of Jarrett-Aim
located in Charleston, West Virginia. Jarrett-Aim will print all of the Bank's
forms, manage its warehouse and distribution functions as well as provide
marketing and direct mail service.
City Capital Markets Corporation, a wholly owned subsidiary of City
National, was formed in December 1997 as a limited purpose finance company to
effect the securitization of various types of mortgage loans and financial
assets. CNB East Retail was created during the fourth quarter of 1997 as a
separate retail loan origination division of City National. CNB East Retail is
the east coast complement to the west coast retail originators, First Allegiance
and City Credit Services, previously discussed. The creation of CNB East Retail
gives the Company three separate retail origination platforms from which its
products and services can be marketed.
The Company, in addition to City National and its divisions, owns City
Financial Corporation, a full service securities brokerage and investment
advisory company, headquartered in Charleston, West Virginia with its office
located in City National's main location.
(b) Business
The banking divisions 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.
No material portion of the banking divisions' 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 banking divisions' loans are
concentrated within a single industry or group of related industries.
The Company is a bank holding company. Consequently, it is generally
dependent upon the Subsidiaries for cash necessary to pay expenses, dividends to
its stockholders, and to meet debt service requirements.
The 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 divisions 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.
Prior to June 1, 1997, federal law prohibited bank holding companies
from any one state to acquire banks and bank holding companies located in any
other state. Subsequent to this date, the law allows interstate bank mergers,
subject to earlier "opt-in" or "opt-out" action by individual states. West
Virginia adopted early "opt-in" legislation that allows interstate bank mergers.
These laws also permit interstate branch acquisitions and de novo branching in
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 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 BIF. 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 divisions.
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 within 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 divisions 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 City National are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 10% 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 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, 1997 were 9.2%
and 10.00%, respectively, meeting 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, 1997, was 6.5%. 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) required 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.
City National is subject to various statutory restrictions on its
ability to pay dividends to the Company. Under applicable regulations, at
December 31, 1997, City National could have paid aggregate dividends to the
Company of $25.7 million without obtaining prior approval of the Office of the
Comptroller of the Currency (the OCC). The payment of dividends by the Company
and the banking divisions may also be limited by other factors, such as
requirements to maintain adequate capital above regulatory guidelines. The OCC,
which supervises City National, has the authority to prohibit any bank 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 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 OCC has 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.
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
City National and its banking divisions are subject to supervision and
regulation by the OCC, the Federal Reserve Board and the FDIC. 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.
Governmental Policies
The operations of the Company and its banking divisions 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.
<PAGE>
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, 1997, City National had
capital levels that qualify it 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.
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 such 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.
<PAGE>
(d) Employees
As of December 31, 1997, City Holding Company and Subsidiaries employed
1,136 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, 1997 and such
pages are incorporated herein by reference.
Page
Description of Information Reference
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1. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential
a. Average Balance Sheets 8
b. Analysis of Net Interest Earnings 9
c. Rate Volume Analysis of Changes in
Interest Income and Expense 9
2. Investment Portfolio
a. Book Value of Investments 18
b. Maturity Schedule of Investments 18
c. Securities of Issuers Exceeding 10%
of Stockholders' Equity 18
3. Loan Portfolio
a. Types of Loans 19
b. Maturities and Sensitivity to Changes in Interest Rates 20
c. Risk Elements 25
d. Other Interest Bearing Assets N/A
4. Summary of Loan Loss Experience 25, 26
5. Deposits
a. Breakdown of Deposits by Categories,
Average Balance and Average Rate Paid 8
b. Maturity Schedule of Time Certificates of
Deposit and Other Time Deposits of
$100,000 or More 26
6. Return on Equity and Assets 1
<PAGE>
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
corporate office, the main banking office, forty-two (42) branch locations in
West Virginia, four loan production offices in California, two loan production
offices in West Virginia and one non-banking office in West Virginia. 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.
<PAGE>
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, 1997, included in this report as Exhibit 13, is
incorporated herein by reference.
During the fourth quarter of 1997, the Company issued 346,606 shares of
its common stock pursuant to two acquisition transactions. The shares were
issued in private transactions pursuant to the exemption from registration
provided under Section 4.(2) of the Securities Act of 1933.
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, 1997, 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 3 through 27 of the Annual Report to Shareholders of City
Holding Company for the year ended December 31, 1997, 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 28 through 52 of the Annual Report to Shareholders
of City Holding Company for the year ended December 31, 1997, 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
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 1998 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 1998 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 1998 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 1998 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" and in NOTE FIFTEEN of Notes to Consolidated Financial
Statements appearing at page 28 of the Company's Annual Report to Shareholders
for the year ended December 31, 1997, included in this report as Exhibit 13, and
incorporated herein by reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements Filed; Financial Statement Schedules
The following consolidated financial statements of City Holding Company
and subsidiaries, included in the Company's Annual Report to Shareholders for
the year ended December 31, 1997, are incorporated by reference in Item 8:
Exhibit 13
Page Number
Report of Independent Auditors 28
Consolidated Balance Sheets - December 31, 1997
and 1996 29
Consolidated Statements of Income - years
ended December 31, 1997, 1996, and 1995 30
Consolidated Statements of Changes in
Stockholders' Equity - years ended December 31,
1997, 1996, and 1995 31
Consolidated Statements of Cash Flows -
years ended December 31, 1997, 1996, and 1995 32
Notes to Consolidated Financial Statements -
December 31, 1997 33 - 52
<PAGE>
Financial Schedules I and II under Article 9 of Regulation S-X are not
applicable.
(b) Reports on Form 8-K
The Company filed Form 8-K on October 10, 1997, reporting the
acquisition of First Allegiance Financial Corporation.
(c) Exhibits
The exhibits listed in the Exhibit Index on pages 17
through 19 of this FORM 10-K are filed herewith or incorporated by reference
from previous filings.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
City Holding Company
--------------------------
(Registrant)
/s/_________________________
Steven J. Day,
President/Director
(Principal Executive Officer)
/s/_________________________
Robert A. Henson,
Chief Financial Officer
(Principal Financial 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 February 23, 1998.
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.
/s/__________________________ /s/__________________________
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
<PAGE>
/s/__________________________ /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
/s/__________________________
David E. Haden,
Director
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated
herein by reference.
Prior Filing
Exhibit Reference or Page
Number Description Number Herein
- ------- ----------- -----------------
3(a) Articles of Incorporation of I
City Holding Company
3(b) Articles of Amendment to the II
Articles of Incorporation of
City Holding Company, dated
March 6, 1984
3(c) Articles of Amendment to the III
Articles of Incorporation of
City Holding Company, dated
March 4, 1986
3(d) Articles of Amendment to the IV
Articles of Incorporation of
City Holding Company, dated
September 29, 1987
3(e) Articles of Amendment to the
Articles of Incorporation of
City Holding Company, dated
May 6, 1991 V
3(f) Articles of Amendment to the
Articles of Incorporation of
City Holding Company, dated
May 7, 1991 V
3(g) By-laws of City Holding Company I
3(h) Amendment to the By-laws of III
City Holding Company, dated
February 14, 1985
3(i) Amendment to the By-laws of III
City Holding Company, dated
March 4, 1986
3(j) Amendment to the By-laws of III
City Holding Company, dated
May 1, 1986
3(k) Amendment to the By-laws of III
City Holding Company, dated
February 5, 1987
3(l) Amendment to the By-laws of VI
City Holding Company, dated
November 3, 1988
3(m) Articles of Amendment to the Articles of
Incorporation of City Holding Company,
dated August 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 20
13 City Holding Company Annual Report
to Shareholders for Year Ended
December 31, 1997 21
22 Subsidiaries of City Holding Company 72
23 Consent of Ernst & Young LLP 73
24 Power of Attorney (included on the
signature page hereof) 15
27 Financial Data Schedule for the year ending
December 31, 1997 74
- --------------------
I Attached to, and incorporated by reference from Amendment No.
1 to City Holding Company's Registration Statement on Form
S-4, Registration No. 2-86250, filed November 4, 1983, with
the Securities and Exchange Commission.
II Attached to, and incorporated by reference from City Holding
Company's Form 8-K Report dated March 7, 1984, and filed with
the Securities and Exchange Commission on March 22, 1984.
III Attached to, and incorporated by reference from City Holding
Company's Form 10-K Annual Report dated December 31, 1986, and
filed March 31, 1987, with the Securities and Exchange
Commission.
IV Attached to and incorporated by reference from City Holding
Company's Registration Statement on Form S-4, Registration No.
33-23295, filed with the Securities and Exchange Commission on
August 3, 1988. Attached to, 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.
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share, effective December 31, 1997. Statement
No. 128 requires the restatement of all prior-period earnings per share amounts
to conform to the 1997 presentation. The effect of applying the provisions of
Statement No. 128 to periods prior to 1997 did not have a material impact on
previously reported amounts. For further discussion of earnings per share and
the impact of Statement No. 128, see the notes to the consolidated financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- ------------
<S> <C>
Numerator:
Net Income $ 12,464,000 $ 10,130,000 $ 8,718,000
========== ============= ============
Denominator:
Denominator for basic earnings per share --
Weighted average shares outstanding 6,146,528 5,586,006 5,642,186
Effect of dilutive securities:
Employee stock options 15,916 1,397 -
Contingent stock-acquisition 3,500 - -
----------- ------------- ------------
Dilutive potential common shares 19,416 1,397 0
----------- ------------- ------------
Denominator for diluted earnings
per share -
Weighted average shares and assumed
conversions 6,165,944 5,587,403 5,642,186
========== ============= ============
Basic earnings per share $ 2.03 $ 1.81 $ 1.55
========== ============= ============
Diluted earnings per share $ 2.02 $ 1.81 $ 1.55
========== ============= ============
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
TABLE ONE
FINANCIAL SUMMARY
(in thousands, except per share data)
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
SUMMARY OF OPERATIONS
Total interest income $ 96,796 $ 86,069 $ 75,125 $ 62,762 $ 55,301
Total interest expense 44,691 39,064 33,580 25,168 22,425
Net interest income 52,105 47,005 41,545 37,594 32,876
Provision for loan losses 1,662 1,678 1,104 1,040 1,434
Total other income 26,716 11,123 6,346 5,249 3,862
Total other expenses 57,670 40,982 33,887 30,116 24,292
Income before income taxes 19,489 15,468 12,900 11,687 11,012
Net income 12,464 10,130 8,718 8,141 7,645
PER SHARE DATA
Net income (basic) (1) $ 2.03 $ 1.81 $ 1.55 $ 1.44 $ 1.35
Net income (diluted) (1) 2.02 1.81 1.55 1.44 1.35
Cash dividends declared (2) .73 .63 .56 .49 .46
Book value per share 16.56 14.21 13.09 11.66 11.56
AVERAGE BALANCE SHEET SUMMARY
Total loans $ 757,803 $ 665,641 $ 608,551 $504,795 $413,645
Securities 179,590 166,667 221,743 264,976 262,742
Deposits 892,865 812,655 771,303 736,115 639,480
Long-term debt 46,129 24,666 8,204 6,252 4,387
Stockholders' equity 92,317 76,130 69,463 67,652 63,511
Total assets 1,213,261 1,079,540 957,048 864,690 739,804
AT YEAR END
Net loans $ 772,689 $ 690,701 $ 650,195 $547,809 $462,424
Securities 162,912 163,922 194,368 239,882 283,833
Deposits 938,498 828,670 797,415 746,805 709,958
Long-term debt 68,400 34,250 20,000 6,875 5,875
Stockholders' equity 106,255 79,373 73,139 66,299 65,605
Total assets 1,266,143 1,048,810 1,040,969 895,785 816,225
SELECTED RATIOS
Return on average assets 1.03% .94% .91% .94% 1.03%
Return on average equity 13.50 13.31 12.55 12.03 12.04
Average equity to average assets 7.61 7.05 7.26 7.82 8.58
Dividend payout ratio (2) 35.96 34.81 36.47 33.91 34.36
</TABLE>
(1) All earnings per share amounts for all periods have been presented to
conform to Statement of Financial Accounting Statement No. 128, Earnings Per
Share.
(2) Cash dividends and the related payout ratio are based on historical results
of the Company and do not include cash dividends of acquired companies prior
to the dates of consummation.
The Company's Common Stock is included on the Nasdaq National Market under the
symbol CHCO. The table below 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, 1997, there were 2,198
stockholders of record. See NOTE TWELVE of the audited Consolidated Financial
Statements for a discussion of restrictions on bank dividends.
TWO YEAR SUMMARY OF
COMMON STOCK PRICES AND DIVIDENDS
MARKET PRICE RANGE*
Cash
Dividends
Per Share* Low High
1997
Fourth Quarter $ .19 $ 39.875 $ 42.375
Third Quarter .18 32.250 43.250
Second Quarter .18 30.000 34.500
First Quarter .18 25.750 34.750
1996
Fourth Quarter $ .170 $ 21.000 $ 26.250
Third Quarter .155 19.773 22.955
Second Quarter .155 20.000 23.409
First Quarter .155 20.909 24.091
- -----------------------------------------------------------------------
*All per share data have been restated to reflect a 10% stock dividend effective
November, 1996. Cash dividends represent amounts declared by the Company and do
not include cash dividends of acquired companies prior to the dates of
acquisition.
<PAGE>
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 Cross Lanes, West Virginia, a suburb of Charleston, commenced
operations in November 1983. The Company currently owns The City National Bank
of Charleston (a wholly-owned subsidiary) (City National) and its banking
divisions, The Peoples National Bank, First State Bank & Trust, The Bank of
Ripley, Home National Bank of Sutton, Blue Ridge Bank, Peoples State Bank, The
First National Bank of Hinton (Hinton), Merchants National Bank, and The Old
National Bank of Huntington. City National and its banking divisions
(collectively, the Bank) are retail and consumer-oriented community banks that
emphasize personal service and currently operate 43 banking offices in 15
counties throughout the state of West Virginia.
Prior to December 1997, these banking divisions of City National
operated as separate affiliates. In December 1997, all banking affiliates'
charters were combined into one, City National. However, as these banks became
divisions of City National, they retained their historical names, management and
Boards of Directors consistent with the Company's historical acquisition policy.
The Company believes that retaining community loyalty is a prudent business
practice and is beneficial in seeking future strategic acquisition opportunities
for small to medium size banks, financial service companies and other entities.
The most recent bank acquisition by the Company was the acquisition of The Old
National Bank of Huntington (Old National) in January 1997, a $49 million bank
located in Huntington, West Virginia. In addition, the Company intends to
acquire Del Amo Savings Bank, FSB, a $115 million federally chartered savings
bank in Torrance, California. This acquisition has been approved by the
shareholders of Del Amo, but remains subject to regulatory approval. The Del Amo
acquisition is expected to be consummated by the end of the first quarter of
1998.
In addition to its banking divisions, as part of its strategy to
diversify and expand into new areas of the financial services area, City
National operates seven non-banking divisions, City Mortgage Services, First
Allegiance Financial Corporation (First Allegiance), City Credit Services, RMI,
Ltd. (RMI), Jarrett-Aim Communications, Inc. (Jarrett-Aim), City Capital
Markets Corporation, and CNB East Retail.
City Mortgage Services, a mortgage loan servicing division
headquartered in Cross Lanes, West Virginia, 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 City
Mortgage Services. In December 1997, this division was transferred from the
Company to City National.
In October 1997, City National acquired First Allegiance
and created City Credit Services, both headquartered in Irvine,
California, which are originators of junior lien mortgages for sale to
independent third parties.
On December 5, 1997, City National acquired RMI, an insurance agency
located in Winfield, West Virginia. RMI offers a full range of insurance
products and services, including employee benefit programs, key person programs,
benefits consulting services, property and casualty insurance, retirement plans
and deferred compensation plans, to select corporate associations and individual
clients. In January 1998, City National completed its acquisition of Jarrett-Aim
located in Charleston, West Virginia. Jarrett-Aim will print all of the Bank's
forms, manage its warehouse and distribution functions as well as provide
marketing and direct mail service.
City Capital Markets Corporation, a wholly owned subsidiary of City
National, was formed in December 1997 as a limited purpose finance company to
effect the securitization of various types of mortgage loans and financial
assets. CNB East Retail was created during the fourth quarter of 1997 as a
separate retail loan origination division of City National. CNB East Retail is
the east coast complement to the west coast retail originators, First Allegiance
and City Credit Services, previously discussed. The creation of CNB East Retail
gives the Company three separate retail origination platforms from which its
products and services can be marketed.
The Company, in addition to City National and its divisions, owns City
Financial Corporation, a full service securities brokerage and investment
advisory company, headquartered in Charleston, West Virginia with its office
located in City National's main location.
HIGHLIGHTS AND SUMMARY
Return on average assets (ROA), a measure of the effectiveness of asset
utilization, was 1.03% in 1997. Return on average equity (ROE), which measures
the return on stockholders' investment, was 13.50% in 1997. The Company's ROA
and ROE were .94% and 13.31%, respectively, in 1996. Basic and diluted earnings
per share for 1997 were $2.03 and $2.02, respectively, which represents an
increase of approximately 12.2% and 11.6% from the $1.81 (both basic and
diluted) per share in 1996. 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 the increased volume in the
Company's loan portfolio and the increased yield in the Company's loans held for
sale portfolio. The increase in other income is a result of the Company's
emphasis on diversifying its revenue sources through an expanded line of
financial services, primarily mortgage banking activities (see OTHER INCOME AND
EXPENSES for further discussion).
The Company reported total assets of $1.266 billion at December 31,
1997 and achieved $12.5 million in net income for the year then ended. Total
assets increased 20.7% over the 1996 total of $1.049 billion. Net income was up
significantly over the $10.1 million and $8.7 million reported for 1996 and
1995, respectively.
INCOME STATEMENT
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average interest-earning assets increased $115.4 million from 1996 to
1997 and $110.0 million from 1995 to 1996. A significant part of the increase in
1997 is attributable to real estate and commercial loan volume generated by the
Company's banking divisions. Most of the growth has been in response to the
Company's service-oriented philosophy and its active involvement in the local
communities it serves. 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
and retaining strong ties to the local communities in which its banking
divisions operate. In 1997, the Company's banking divisions had an aggregate
increase in average loans of approximately $92.2 million or 13.85%.
The 1997 and 1996 increases in average interest earning assets are also
attributable to greater average volumes in the whole loan purchasing program and
in the origination of debt consolidation loans and other junior lien mortgages
to be sold or securitized. At December 31, 1997, these loans had a weighted
average coupon of 13.14% and a weighted average maturity of approximately 201
months. The Company earned approximately $15.1 million and $12.6 million of
gross interest income during 1997 and 1996, on average balances of program loans
of approximately $146.2 million and $136.4 million, respectively. These loans
are being funded through short-term borrowings which consist primarily of
advances from the Federal Home Loan Bank of Pittsburgh (see LOANS HELD FOR SALE
for further discussion).
Average investment securities increased $12.9 million from $167 million
in 1996 to $180 million in 1997. This increase is primarily attributable to the
acquisition of Old National. The overall yield on investments has decreased 9
basis points from 1996 as a result of reinvestment of matured securities at
slightly lower rates. Average investment securities decreased $55.1 million from
$222 million in 1995 to $167 million in 1996.
In 1997, the Company's banking divisions had an aggregate increase in average
interest-bearing deposits of approximately $70.6 million or 10.15%. Most of the
internal growth in deposits has been in response to the Company's customer
service and expansion of banking offices. The 1997 average interest-bearing
deposit balances include the acquisition of Old National and the deposits of
four new West Virginia banking office locations.
Average short-term borrowings increased $3.7 million from 1996 to 1997
and $55.8 million from 1995 to 1996. The average rate paid by the Company for
short-term borrowings increased 13 basis points in 1997 and decreased 47 basis
points in 1996 due to general movements in market interest rates. For further
details see NOTE NINE to the audited Consolidated Financial Statements.
Average long-term debt includes $27.8 million in obligations of the
Parent Company and $18.3 million in FHLB obligations of City National. For
further details with respect to long-term debt, see NOTE ELEVEN of the audited
Consolidated Financial Statements.
<PAGE>
TABLE TWO
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S><C>
EARNING ASSETS:
Loans (1)
Commercial and industrial $ 246,172 $ 21,674 8.80% $ 213,687 $ 19,631 9.19% $188,122 $ 18,014 9.58%
Real estate 365,459 31,739 8.68 317,204 27,455 8.66 283,752 24,149 8.51
Consumer obligations 146,172 14,584 9.98 134,750 13,408 9.95 136,677 13,270 9.71
--------------------------------------------------------------------------------------------------
Total loans 757,803 67,997 8.97 665,641 60,494 9.09 608,551 55,433 9.11
Loans held for sale 180,543 17,847 9.89 171,308 15,394 8.99 62,408 5,691 9.12
Securities
Taxable 144,833 9,005 6.22 130,600 8,139 6.23 181,140 11,612 6.41
Tax-exempt (2) 34,757 2,888 8.31 36,067 3,048 8.45 40,603 3,485 8.58
--------------------------------------------------------------------------------------------------
Total securities 179,590 11,893 6.62 166,667 11,187 6.71 221,743 15,097 6.81
Federal funds sold 1,687 70 4.15 564 30 5.32 1,473 89 6.04
--------------------------------------------------------------------------------------------------
Total earning assets 1,119,623 97,807 8.74 1,004,180 87,105 8.67 894,175 76,310 8.53
Cash and due from banks 38,041 31,057 25,392
Bank premises and equipment 31,856 27,357 22,178
Other assets 31,665 23,675 21,761
Less: allowance for
possible loan losses (7,924) (6,729) (6,458)
----------------------------------------------------- --------- --------------- ---------- -------
Total assets $1,213,261 $1,079,540 $957,048
----------------------------------------------------- --------- --------------- ---------- -------
INTEREST-BEARING LIABILITIES:
Demand deposits $ 128,781 $ 3,972 3.08% $ 101,013 $ 3,028 3.00% $106,590 $ 3,059 2.87%
Savings deposits 221,460 6,799 3.07 228,286 7,017 3.07 227,217 6,990 3.08
Time deposits 416,331 22,346 5.37 366,650 19,193 5.23 335,011 17,100 5.10
Short-term borrowings 158,428 8,546 5.39 154,759 8,138 5.26 98,973 5,675 5.73
Long-term debt 46,129 3,028 6.56 24,666 1,688 6.84 8,204 756 9.22
---------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 971,129 44,691 4.60 875,374 39,064 4.46 775,995 33,580 4.33
Demand deposits 126,293 116,706 102,485
Other liabilities 23,522 11,330 9,105
Stockholders' equity 92,317 76,130 69,463
---------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,213,261 $1,079,540 $957,048
---------------------------------------------------------------------------------------------------
Net interest income $ 53,116 $ 48,041 $ 42,730
---------------------------------------------------------------------------------------------------
Net yield on earning assets 4.74% 4.78% s 4.78%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this table, non-accruing loans have been included in average
balances and loan fees, which are immaterial, have been included in interest
income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate
of approximately 35% in 1997 and 34% in 1996 and 1995.
NET INTEREST INCOME
Net interest income, on a fully federal tax-equivalent basis, increased
$5.1 million during 1997. The average yield on earning assets increased from
8.67% in 1996 to 8.74% in 1997, and the average cost of interest-bearing
liabilities increased from 4.46% to 4.60% over this same period. This had a
minimal effect on the net yield on earning assets, which decreased four basis
points from 4.78% in 1996 to 4.74% in 1997.
The $82,000 increase in net interest income due to the change in rate,
as shown in Table Three, which follows, was coupled with a $5.0 million increase
in net interest income due to the change in volume. The major component of this
favorable change in volume was additional loans outstanding 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
$5.3 million in 1996. The $5.6 million increase caused by changes in volume was
offset by a $301,000 decrease in net interest income due to rate.
TABLE THREE
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
<CAPTION>
1997 VS. 1996 1996 VS. 1995
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 $2,887 $ (844) $ 2,043 $ 2,371 $(754) $ 1,617
Real estate 4,190 94 4,284 2,889 417 3,306
Consumer obligations 1,140 36 1,176 (189) 327 138
----------------------------------------------- -------------- ---------------- --------------
Total loans 8,217 (714) 7,503 5,071 (10) 5,061
Loans held for sale 859 1,594 2,453 9,787 (84) 9,703
Securities
Taxable 885 (19) 866 (3,158) (315) (3,473)
Tax-exempt (1) (109) (51) (160) (384) (53) (437)
--------------- --------------- --------------- -------------- ---------------- --------------
Total securities 776 (70) 706 (3,542) (368) (3,910)
Federal funds sold 48 (8) 40 (49) (10) (59)
--------------- --------------- --------------- -------------- ---------------- --------------
Total interest-earning assets $9,900 $ 802 $10,702 $11,267 $(472) $10,795
--------------- --------------- --------------- -------------- ---------------- --------------
INTEREST EXPENSE ON:
Demand deposits $ 854 $ 90 $ 944 $ (164) $ 133 $ (31)
Savings deposits (210) (8) (218) 33 (6) 27
Time deposits 2,656 497 3,153 1,647 446 2,093
Short-term borrowings 195 213 408 2,968 (505) 2,463
Long-term debt 1,412 (72) 1,340 1,171 (239) 932
--------------- --------------- --------------- -------------- ---------------- -------------
Total interest-bearing liabilities $4,907 $ 720 $ 5,627 $ 5,655 $(171) $ 5,484
--------------- --------------- --------------- -------------- ---------------- --------------
NET INTEREST INCOME $4,993 $ 82 $ 5,075 $ 5,612 $(301) $ 5,311
----------------------------------------------------------------------------------------------
</TABLE>
(1) Fully federal taxable equivalent using a tax rate of approximately 35% in
1997 and 34% in 1996 and 1995.
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.
OTHER INCOME AND EXPENSES
Total other income increased $15.6 million, or 140%, during 1997 due
primarily to the Company's expanded line of financial services. During 1997, the
Company continued its pursuit of new products, services and business lines 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, insurance and other related services. During 1996,
the Company made a significant investment in loan servicing operations by
purchasing certain assets (including servicing) and assuming certain Title I
home improvement liabilities of Prime Financial Corporation, a large existing
FHA loan servicer. At December 31, 1997, the Company serviced approximately
$1.253 billion of these and similar loans, generating $11.9 million of gross
servicing fee income during the year (compared to a $912 million portfolio
serviced at December 31, 1996, which generated $3.0 million of income in 1996).
The Company recognized $1.8 million in net origination fees on junior lien
mortgages in 1997. In addition, gains on loans sold to third parties were $4.4
million in 1997 as compared to $1.3 million in 1996.
In 1996, the Company increased its volume of secondary-market mortgage
loan originations and thereby its sales of secondary market loans, which
resulted in an increase in fee income, including servicing released premiums and
loan sale premiums, from $982,000 in 1995 to $1,777,000 (includes $1.3 million
gain on loans sold to third parties) in 1996. This, coupled with the income
earned from loan servicing activities, resulted in other income related to
mortgage banking activities of $4,735,000 in 1996 compared to $1,332,000 in
1995. 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,
high LTV and other junior lien mortgages loans and an interest rate environment
conducive to the general terms of these types of loans. Although management
believes that the servicing operations 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. However, management
has recently begun to market its loan servicing capabilities to non-mortgage
lenders.
Total other expenses increased $16.7 million, or 40.7%, during 1997 due
primarily to $8.3 million increase in personnel and occupancy expenses incurred
by the Company due to the overall growth. The additional increase of $8.4
million is primarily attributable to a $3.5 million increase in advertising
expense due to the solicitation of junior lien mortgage customers and an
additional $2.6 million in other expenses due to the Company's expansion.
Other expenses also include the cost of projects underway to ensure
that the Company's computer systems possess accurate date recognition and data
processing functions to avoid any problems associated with the "Year 2000
Issue." The Company has made an assessment of its compliance with the Year 2000
Issue and expects to complete its Year 2000 conversion projects by the end of
1998. The Company expects to begin testing in the second quarter of 1998 and to
complete all required testing during 1999. These costs, which are expensed as
incurred, have been immaterial to date. Based on currently available
information, the remaining costs to address the Year 2000 Issue are not expected
to have a material impact on the Company's earnings in the future. The costs of
completing the Company's Year 2000 projects, and the date on which the Company
believes it will complete all modifications are based on management's best
estimate. These estimates were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other significant factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Such material differences may involve a
myriad of factors, including, but not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
programming code, and similar uncertainties.
During 1996, total other expenses increased $7.1 million, or 20.9%, due
primarily to an $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 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 was attributable to higher
personnel costs throughout the organization due to the Company's overall growth
during 1996.
INCOME TAXES
Income tax expense was $7,025,000 in 1997, resulting in an effective
tax rate of 36.05% for the year. Such rates were 34.51% and 32.42% in 1996 and
1995, respectively. The effective tax rate from 1996 to 1997 increased due to a
decrease in tax-exempt interest income and a higher statutory rate (35% compared
to 34% in the previous years). The effective tax rate from 1995 to 1996
increased due primarily to a decrease in tax-exempt interest income.
At December 31, 1997, gross deferred tax assets were approximately $5.1
million. Such assets are primarily attributable to the allowance for loan losses
($3 million), loans held for sale ($832,000), acquired net operating loss (NOL)
carryforwards ($741,000), and certain nonqualified deferred compensation
arrangements sponsored by City National ($374,000). Pursuant to management's
evaluation for the quarter ended December 31, 1997, 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, 1997, 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.
BALANCE SHEET
INTEREST RATE SENSITIVITY AND LIQUIDITY
Interest Rate Sensitivity: The Company manages its liquidity position to reduce
interest rate risk, which is the susceptibility of assets and liabilities to
declines in value as a result of changes in general market interest rates. The
Company seeks to reduce the risk through asset and liability management, where
the goal is to optimize the balance between earnings and interest rate risk. The
Company measures interest rate risk through interest sensitivity gap analysis as
illustrated in Table Four. At December 31, 1997, the one year period shows a
negative gap (liability sensitive) of $373 million. This analysis is a "static
gap" presentation and movements in deposit rates offered by the Bank 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 banking divisions, and is based upon historical experience with their
individual markets and customers. Management expects to continue the same
pricing methodology in response to market rate changes; however, management
adjustments may change as customer preferences, competitive market conditions,
liquidity, and loan growth change. Also presented in the management adjustment
line are loan prepayment assumptions, which may differ from the related
contractual terms of the loans. These balances have been distributed over the
four periods to reflect those loans that are expected to be repaid in full prior
to their maturity date. After management adjustments, Table Four shows a
negative gap in the one-year period of $141 million. A negative gap position is
advantageous when interest rates are falling because interest-bearing
liabilities are being repriced at lower rates and in greater volume, which has a
positive effect on net interest income. However, when interest rates are rising,
this position produces the converse effect. Consequently, the Company has
experienced a slight decline in its net interest margin during the past two
years and is somewhat vulnerable to a rapid rise in interest rates in 1998.
These declines in net interest margin did not translate into declines in net
interest income because of increases in the volume of interest-earning assets.
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 $ 168,259 $ 103,139 $411,013 $101,547 $ 783,958
Loans held for sale 134,990 0 0 0 134,990
Securities 16,618 20,718 97,495 28,081 162,912
Federal funds sold 40,028 0 0 0 40,028
---------------- ---------------- --------------- ----------------- -------------
Total interest-earning assets 359,895 123,857 508,508 129,628 1,121,888
LIABILITIES
Savings and NOW accounts 358,182 0 0 0 358,182
All other interest-bearing deposits 110,475 189,076 143,824 99 443,474
Short-term borrowings 130,191 0 0 0 130,191
Long-term debt 68,400 0 0 0 68,400
---------------- ---------------- --------------- ----------------- -------------
Total interest-bearing liabilities 667,248 189,076 143,824 99 1,000,247
---------------- ---------------- --------------- ----------------- -------------
Interest sensitivity gap $(307,353) $ (65,219) $ 364,684 $129,529 $ 121,641
---------------- ---------------- --------------- ----------------- -------------
Cumulative sensitivity gap $(307,353) $(372,572) $ (7,888) $121,641
---------------- ---------------- --------------- ----------------- -------------
Management adjustments $ 299,828 $ (68,246) $(212,058) $(19,524)
---------------- ---------------- --------------- ----------------- -------------
Cumulative management adjusted gap $ (7,525) $(140,990) $ 11,636 $121,641
---------------- ---------------- --------------- ----------------- -------------
</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.
In addition to the interest rate sensitivity gap analysis, the Company
performs an earnings sensitivity analysis to identify the impact of changes in
interest rates on its net interest income. Since the simulated gap analysis
incorporates management assumptions as noted in the previous gap analysis
discussion, actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
<PAGE>
The Company's policy objective is to avoid negative fluctuations in net
interest income of 10% within a 12-month period. As of December 31, 1997, the
Company had the following estimated earnings sensitivity profile:
Immediate Change in Rates
-------------------------
Pretax Earnings Changes +200 bp -200bp
$ (431,000) $ 431,000
Based on the results of the simulation model as of December 31, 1997,
the Company would expect a decrease in net interest income of $216,000 and an
increase in net interest income of $216,000 if interest rates gradually increase
or decrease, respectively, from current rates by 100 basis points over a
12-month period.
Liquidity: As further discussed under "Investments", during the second quarter
of 1997, management reclassified its entire held-to-maturity securities
portfolio to the available-for-sale classification. This action was taken to
provide management with additional liquidity alternatives and more flexibility
in managing its interest rate risk. Additionally, during 1997 and continuing
into 1998, the Company has sought additional sources of liquidity. These
additional sources were necessitated by management's desire to reduce the
reliance upon the Federal Home Loan Bank in funding the Company's loans held for
sale.
In the fourth quarter of 1997, a New York investment banking house
committed to issue up to $100 million of the Company's certificates of deposit.
The activation of this commitment is solely at the discretion of the Company.
The certificates of deposit could be issued in maturities up to five years at a
rate equal to a comparable treasury maturity plus a market based spread. At
December 31, 1997, $2 million of the certificates of deposit had been sold under
this commitment at an average rate and term of approximately 5.70% and two
years.
In addition, the Company is currently negotiating with a large regional
bank to enter into a committed $100 million warehouse line to fund loan
purchases and originations.
The Company is satisified with its liquidity position and its plans for
diversifying the Company's funding sources and there are no known trends,
demands, commitments or uncertainties that have resulted or are reasonably
likely to result in material changes in liquidity. The Company 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, 1997, the Company had $33,400,000 in long-term debt
outstanding against a $35,000,000 revolving loan agreement. These funds were
used to provide subsidiaries with additional capital, to fund certain
acquisitions in 1995 and 1996, and to provide funding for expansion of the
Company's data processing operations and mortgage servicing divisions. Total
debt service for the Company in 1998 will approximate $2.6 million at current
interest rates. In addition to the revolving loan agreement, the Company had $35
million of long-term financing outstanding with the Federal Home Loan Bank at
December 31, 1997. Other than long-term debt, the cash needs of the Company
consist of routine payroll and benefit expenses of Company personnel, expenses
for certain professional services, debt service on affiliate advances, and
dividends to shareholders.
The Company has approximately $25.7 million available for transfer from
City National as of January 1, 1998. City National's earnings in 1998 through
the date of dividend declaration are also available for transfer upstream. Such
bank dividends are the Company's primary source of cash. During 1998, the
Company expects to retire or term-out its long-term debt and also strengthen its
regulatory capital position through any of several different avenues. For more
specific information regarding restrictions on subsidiary dividends, see NOTE
TWELVE 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 used
from operating activities in 1997 due to cash outlays for loans originated for
sale and purchases of loans held for sale. Net cash was used in investing
activities for each year presented which is indicative of the Company's net
increases in loan volume and purchases of securities available for sale. Cash
was provided by financing activities during 1997, as a result of net increases
in deposits and short-term borrowings. Cash and cash equivalents increased due
to cash provided by operating activities, principally in the form of proceeds
from loans sold during 1996.
INVESTMENTS
The Company's investment portfolio is presented below in Table 5. In
June 1997, the Company reclassified its entire held-to-maturity securities
portfolio to the available-for-sale classification. The securities transferred
consisted of investment securities with approximate amortized cost and market
value of $46,520,000 and $46,781,000, respectively. This action was taken by the
Company to provide management more flexibility in managing the Company's
liquidity and interest rate risk.
The Company had $4.1 million in structured notes as of December 31,
1997. All structured notes are federal agency securities that are classified as
available for sale. They have a weighted average coupon of 3.65% and a weighted
average maturity of less than two years. Approximately 94% 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, 1997.
<PAGE>
TABLE FIVE
INVESTMENT PORTFOLIO
(in thousands)
<TABLE>
<CAPTION>
BOOK VALUES AS OF
December 31
1997 1996 1995
----------------------- ----------------------- -----------------------
<S><C>
U.S. Treasury and other U.S. government corporations and
agencies $ 116,712 $ 106,875 $ 132,007
States and political subdivisions 35,436 36,290 40,635
Other 10,764 20,757 21,726
----------------------- ----------------------- -----------------------
Total $ 162,912 $ 163,922 $ 194,368
----------------------- ----------------------- -----------------------
</TABLE>
At December 31, 1997, there were no securities of any non-governmental 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 $27,223 5.64% $77,043 6.48% $11,607 6.73% $ 839 6.78%
States and political subdivisions 3,351 8.27 17,444 8.25 12,928 8.44 1,713 9.14
Other 6,762 6.35 3,008 8.41 0.00 994 6.37
-------------------------------------------------------------------------------------------
Total $37,336 6.00% $97,495 6.86% $24,535 7.63% $3,546 7.81%
-------------------------------------------------------------------------------------------
</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 35%.
LOAN PORTFOLIO
The composition of the Company's loan portfolio is presented in the
following table:
TABLE SIX
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------- ---------------
<S><C>
Commercial, financial
and agricultural $232,602 $224,267 $214,304 $164,366 $149,112
Real estate-mortgage 400,401 338,385 304,848 258,910 205,745
Installment loans to individuals 154,713 142,123 145,734 140,695 124,490
---------------- ---------------- ---------------- ----------------- ----------------
Total loans $787,716 $704,775 $664,886 $563,971 $479,347
---------------- ---------------- ---------------- ----------------- ----------------
</TABLE>
The Company continues to grant portfolio loans to customers generally
within the market areas of City National and its divisions' portfolio. 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. The Company
had $28.4 million and $26.0 million outstanding in real estate construction
loans at December 31, 1997 and 1996, 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, 1997.
<TABLE>
<CAPTION>
MATURING
-----------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------------------- ---------------------- ---------------------- --------------
<S><C>
Commercial, financial
and agricultural $ 70,169 $102,538 $ 59,895 $232,602
Real estate-mortgage 79,758 96,204 224,439 400,401
Installment loans to individuals 24,378 116,097 14,238 154,713
---------------------- ---------------------- ---------------------- --------------
Total loans $174,305 $314,839 $298,572 $787,716
---------------------- ---------------------- ---------------------- --------------
Loans maturing after one year with:
Fixed interest rates $366,513
Variable interest rates 246,898
----------------------
Total $613,411
----------------------
</TABLE>
LOANS HELD FOR SALE
Loans held for sale represent mortgage loans the Company has either
purchased or originated with the intent to sell or securitize and are carried at
the lower of aggregate cost or market. With the acquisition of First Allegiance
and the creation of City Credit Services in the fourth quarter of 1997, the
Company began to originate high loan-to-value (LTV) debt consolidation loans and
other junior lien mortgage loans on a nationwide level. Currently, these
divisions are conducting business in 30 states across the country. These loans
are expected to either be securitized by the Company or sold within 90-180 days
to independent third parties.
In addition to the origination of junior lien mortgages, the Company
participates in a whole loan purchasing program. Under the program, the Company
generally purchases HUD Title I home improvement and high LTV loans secured by
junior lien mortgages. The purchased loans typically have balances of $25,000 to
$40,000 and are usually sold within 30 to 90 days. The Title I loans are
partially insured by the Federal Housing Administration. Although the purchased
loans are originated nationwide, the two states that experienced the most volume
of originations during 1997 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. In addition, 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 during the period the loans are held for sale. Previously,
the Company had received a fixed rate of 9% on outstanding balances.
The Company's continued origination and purchasing of loans to be sold
or securitized 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 loan
product to both borrowers and end-investors, and interest rate risk related to
potential changes in interest rates and the resulting repricing of both
financial assets and liabilities. The Company seeks to manage this risk by
continuously improving policies and procedures designed to reduce the risk of
loss to a level commensurate with the return being earned on the Company's
investment in this program.
During 1997, the Company originated $97 million and purchased $798
million in loans held for sale and sold $851 million during the same period.
This compares to originations of $118 million, purchases of $1.03 billion, and
sales of $1.2 billion during 1996.
LOAN SECURITIZATIONS
One of the methods utilized by management to mitigate the risk of loss
related to the origination and acquisition of junior lien mortgage loans is the
securitization of these loans. By securitizing originated and purchased junior
lien mortgage loans, the Company effectively removes these loans from its
balance sheet by creating an investment security, supported by the cash flows
generated by these loans, and selling the resulting investment security or
securities to independent third parties. As part of this process, the Company
provides credit enhancement, in the form of overcollateralization, with respect
to the investment security created. As a result, the Company does maintain a
certain level of credit risk and interest rate risk related to these loans. The
risk maintained by the Company, however, is less than that which would be
maintained had the Company held these loans on its balance sheet until the loans
matured.
In return for this risk exposure, the Company receives on-going income
from each securitization that is determined as a function of the "excess spread"
derived from the securitized loans. The "excess spread", generally, is
calculated as the difference between (A) the interest at the stated rate paid by
borrowers and (B) the sum of pass-through interest paid to third-party investors
and various fees, including trustee, insurance, servicing, and other similar
costs. The "excess spread" represents income to be recognized by the Company
over the life of the securitized loan pool.
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
balance sheets. They consist primarily of Title I loans and debt consolidation
loans secured by second lien mortgages. The unpaid principal balances of
mortgage loans serviced for others was $1.253 billion and $912 million at
December 31, 1997 and December 31, 1996, respectively. The unpaid principal
balances of intercompany mortgage loans serviced was $63.3 million at December
31, 1997.
LOAN LOSS ANALYSIS
During 1997, the Company charged-off $1,899,000 of loans that were
doubtful as to collection and had recoveries of $419,000. The resulting net
charge-offs of $1,480,000 represent an increase of $517,000 or 53.7% from that
reported in 1996. Net charge-offs decreased approximately 5%, or $52,000 in 1996
versus 1995. Net charge-offs as a percent of average total loans was .20% at
December 31, 1997. This represents an increase of 42.9% or 6 basis points from
December 31, 1997 to 1996. 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 $1,662,000 in 1997 represents .22% of
average loans as compared to a provision of $1,678,000, or .25%, in 1996 and a
provision of $1,104,000, or .18% in 1995. 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.
The allowance for loan losses was $7,673,000 or .98% of loans, as of
December 31, 1997, compared to $7,281,000 or 1.04% of loans in 1996. As detailed
in Table Nine, as of December 31, 1997, the allowance for loan losses is
allocated 25% to commercial, financial and agricultural loans, 56% 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 27%, 54% and 19%,
respectively, as of December 31, 1996. 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 $139.4 million at December 31, 1996 to $195.0 million at December 31, 1997,
an increase of 40%. 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.
Non-performing loans, consisting of non-accrual, past-due and
restructured credits, increased approximately $1,304,000 in 1997. While the
general economy remains soft in certain of the banking divisions' market areas,
management does not anticipate material loan losses since loan to collateral
ratios remain favorable. At December 31, 1997, loans aggregating $331,000 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 non-performing loans, including potential problem
loans, was 129% at December 31, 1997, as compared to 149% and 151% at December
31, 1996 and 1995.
Tables Seven, Eight and Nine detail loan performance and analyze the allowance
for loan losses.
<PAGE>
TABLE SEVEN
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995 1994 1993
------------------- ----------------- ------------------- ------------------ -------------
<S><C>
Balance at beginning of year
Charge-offs: $ 7,281 $ 6,566 $ 6,477 $ 6,209 $ 5,730
Commercial, financial and
agricultural (199) (193) (174) (327) (693)
Real estate-mortgage (130) (262) (278) (160) (258)
Installment loans to individuals (1,570) (920) (879) (693) (664)
------------------- ----------------- ------------------- ------------------ -------------
Totals (1,899) (1,375) (1,331) (1,180) (1,615)
------------------- ----------------- ------------------- ------------------ -------------
Recoveries:
Commercial, financial and
agricultural 6 19 56 111 58
Real estate-mortgage 86 166 22 11 220
Installment loans to individuals 327 227 238 286 217
------------------- ----------------- ------------------- ------------------ -------------
Totals 419 412 316 408 495
------------------- ----------------- ------------------- ------------------ -------------
Net charge-offs (1,480) (963) (1,015) (772) (1,120)
Provision for possible loan losses 1,662 1,678 1,104 1,040 1,434
Balance of acquired institution 210 165
------------------- ----------------- ------------------- ------------------ -------------
Balance at end of year $ 7,673 $ 7,281 $ 6,566 $ 6,477 $ 6,209
------------------- ----------------- ------------------- ------------------ -------------
AS A PERCENT OF AVERAGE TOTAL
LOANS
Net charge-offs .20% .14% .17% .15% .27%
Provision for possible loan losses .22 .25 .18 .21 .35
AS A PERCENT OF NONPERFORMING
AND POTENTIAL PROBLEM LOANS
Allowance for loan losses 129.02% 149.26% 150.84% 134.24% 129.68%
</TABLE>
TABLE EIGHT
NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995 1994 1993
----------------- ------------------ ------------------ ----------------- -----------------
<S><C>
Nonaccrual loans $ 3,758 $ 1,734 $ 2,525 $ 2,614 $ 1,559
Accruing loans past due 90 days or more 1,858 2,674 1,421 1,420 708
Restructured loans 331 235 141 262 1,078
----------------- ------------------ ------------------ ----------------- -----------------
$ 5,947 $ 4,643 $ 4,087 $ 4,296 $ 3,345
----------------- ------------------ ------------------ ----------------- -----------------
</TABLE>
During 1997, the Company recognized approximately $126,000 of interest income
received in cash on nonaccrual and restructured loans. Approximately $403,000 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, 1997.
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.
<PAGE>
TABLE NINE
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995 1994 1993
--------------------- --------------------- -------------------- --------------------- --------------------
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 $1,922 29% $1,939 32% $2,053 32% $1,919 29% $2,100 31%
Real estate-mortgage 4,312 51 3,964 48 3,125 46 2,848 46 2,325 43
Installment loans
to individuals 1,439 20 1,378 20 1,388 22 1,710 25 1,784 26
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
$7,673 100% $7,281 100% $6,566 100% $6,477 100% $6,209 100%
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
</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.
CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 1997, are summarized as follows:
TABLE TEN
(in thousands)
Amounts Percentage
---------------- ------------------
Three months or less $ 17,456 22%
Over three months through six months 11,887 16
Over six months through twelve months 19,526 26
Over twelve months 27,609 36
---------------- ------------------
Total $ 76,478 100%
---------------- ------------------
CAPITAL RESOURCES
As a bank holding company, the Company is subject to regulation by the
Federal Reserve Board under the Bank Holding Company Act of 1956. At December
31, 1997, 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 I 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 such as maintaining
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:
DOLLARS IN THOUSANDS
1997 1996
----------------- ------------------
CAPITAL COMPONENTS
Tier 1 risk-based $ 82,842 $ 72,157
Total risk-based 90,515 79,439
CAPITAL RATIOS
Tier 1 risk-based 9.16% 10.20%
Total risk-based 10.00 11.23
Leverage 6.49 6.58
REGULATORY MINIMUM
Tier 1 risk-based (dollar/ratio) $36,191/4.00% $28,290/4.00%
Total risk-based (dollar/ratio) 72,381/8.00% 56,579/8.00
Leverage (dollar/ratio) 51,094/4.00% 43,872/4.00
The strong capital position of the Company is indicative of
management's emphasis on asset quality and a history of retained net income. The
ratios enable the Company to continually pursue acquisitions and other growth
opportunities. Improvements in operating results and a consistent dividend
program, coupled with an effective management of credit risk, have been, and
will be, the key elements in maintaining the Company's present capital position.
The Company does not anticipate any material capital expenditures in
1998. Earnings from bank operations are expected to remain adequate to fund
payment of stockholders' dividends and internal growth. In management's opinion,
City National has the capability to upstream sufficient dividends to meet the
cash requirements of the Company.
INFLATION
Since the assets and liabilities of the Bank is 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.
FORWARD LOOKING STATEMENTS
Information contained in this 1997 Annual Report includes forward-looking
financial information relating to the Company's operations based on estimates
and assumptions made by management. Such forward-looking information involves
risks and uncertainties including those associated with the interest rate and
general economic environments, federal and state banking regulations,
competition, and other risks. The forward-looking financial information is
provided to assist investors and Company shareholders in understanding
anticipated future financial operations of the Company and are included pursuant
to the safe harbor provisions of the Private Litigation Reform Act of 1995. The
actual results achieved may differ materially from those projected in the
forward-looking information. Further, the Company disclaims any intent or
obligation to update this forward-looking information.
<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, 1997 and 1996, 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, 1997. 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 consolidated financial position of
City Holding Company and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
January 30, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------
(in thousands)
<S><C>
ASSETS
Cash and due from banks $ 47,207 $ 47,351
Federal funds sold 40,028 413
--------------------------------
CASH AND CASH EQUIVALENTS 87,235 47,764
Securities available for sale, at fair value 162,912 122,944
Investment securities (approximate market value at December 31, 1996-
$41,826,000) 40,978
Loans:
Gross loans 787,716 704,775
Unearned income (7,354) (6,793)
Allowance for possible loan losses (7,673) (7,281)
--------------------------------
NET LOANS 772,689 690,701
Loans held for sale 134,990 92,472
Bank premises and equipment 36,635 30,025
Accrued interest receivable 8,677 7,510
Other assets 63,005 16,416
--------------------------------
TOTAL ASSETS $ 1,266,143 $ 1,048,810
--------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 136,842 $ 118,976
Interest-bearing 801,656 709,694
--------------------------------
TOTAL DEPOSITS 938,498 828,670
Short-term borrowings 130,191 90,298
Long-term debt 68,400 34,250
Other liabilities 22,799 16,219
--------------------------------
TOTAL LIABILITIES 1,159,888 969,437
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: 1997 - 6,427,309 shares; 1996 - 5,598,912 shares
including 11,130 and 11,341 shares in treasury at December 3l, 1997 and 1996 16,067 13,998
Capital surplus 48,769 35,426
Retained earnings 40,374 30,246
Net unrealized gain on securities, net of deferred income taxes 1,355 3
--------------------------------
106,565 79,673
Cost of common stock in treasury (310) (300)
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 106,255 79,373
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,266,143 $ 1,048,810
--------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---------------------------------------------------
(in thousands, except per share data)
<S><C>
lNTEREST INCOME
Interest and fees on loans $ 85,844 $ 75,888 $ 61,124
Interest on investment securities:
Taxable 9,005 8,139 11,612
Tax-exempt 1,877 2,012 2,300
Other interest income 70 30 89
---------------------------------------------------
TOTAL INTEREST INCOME 96,796 86,069 75,125
INTEREST EXPENSE
Interest on deposits 33,117 29,238 27,149
Interest on short-term borrowings 8,546 8,138 5,675
Interest on long-term debt 3,028 1,688 756
---------------------------------------------------
TOTAL INTEREST EXPENSE 44,691 39,064 33,580
---------------------------------------------------
NET INTEREST INCOME 52,105 47,005 41,545
PROVISION FOR POSSIBLE LOAN LOSSES 1,662 1,678 1,104
---------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 50,443 45,327 40,441
OTHER INCOME
Investment securities gains 26 87 2
Service charges 4,307 3,700 3,347
Mortgage loan servicing fees 11,933 2,958 350
Gain on sale of loans 4,392 1,260 581
Other income 6,058 3,118 2,066
---------------------------------------------------
TOTAL OTHER INCOME 26,716 11,123 6,346
OTHER EXPENSES
Salaries and employee benefits 28,747 21,593 17,815
Occupancy, excluding depreciation 3,914 2,736 2,555
Depreciation 4,837 3,466 2,534
Other expenses 20,172 13,187 10,983
---------------------------------------------------
TOTAL OTHER EXPENSES 57,670 40,982 33,887
---------------------------------------------------
INCOME BEFORE INCOME TAXES 19,489 15,468 12,900
INCOME TAXES 7,025 5,338 4,182
---------------------------------------------------
NET INCOME $ 12,464 $ 10,130 $ 8,718
---------------------------------------------------
Basic earnings per common share $ 2.03 $ 1.81 $ 1.55
---------------------------------------------------
Diluted earnings per common share $ 2.02 $ 1.81 $ 1.55
---------------------------------------------------
Average common shares outstanding:
Basic 6,146,528 5,586,006 5,642,186
---------------------------------------------------
Diluted 6,165,944 5,587,403 5,642,186
---------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unrealized
Common Gain/(Loss) Total
Stock Capital Retained on Treasury Stockholders'
(Par Value) Surplus Earnings Securities Stock Equity
----------------------------------------------------------------------------
(in thousands)
<S><C>
Balances at January 1, 1995 $11,753 $18,366 $39,075 $(2,863) $ (32) $ 66,299
Net income 8,718 8,718
Cash dividends declared--$.56 a share (2,852) (2,852)
Cash dividends of acquired (150) (150)
subsidiary
Change in unrealized gain/(loss) 3,258 3,258
net of income taxes of $2,154,000
Purchase of 86,665 shares of (2,286) (2,286)
treasury stock
Sale of 6,486 shares of treasury (20) 172 152
stock
Retirement of 69,739 shares of (174) (1,612) 1,786
common stock held in treasury
Issuance of 10% stock dividend 1,151 9,208 (10,359)
----------------------------------------------------------------------------
Balances at December 31, 1995 12,730 25,942 34,432 395 (360) 73,139
Net income 10,130 10,130
Cash dividends declared--$.63 a share (3,540) (3,540)
Change in unrealized gain/(loss) (392) (392)
net of income taxes of $(261,000)
Sale of 2,299 shares of treasury (2) 60 58
stock
Redempton of fractional shares (22) (22)
Issuance of 10% stock dividend 1,268 9,508 (10,776)
----------------------------------------------------------------------------
Balances at December 31, 1996 13,998 35,426 30,246 3 (300) 79,373
Net income 12,464 12,464
Cash dividends declared--$.73 a share (4,486) (4,486)
Change in unrealized gain/(loss) 1,333 1,333
net of income taxes of $818,000
Exercise of 2,627 stock options 7 58 65
Sale of 2,511 shares of treasury 13 67 80
stock
Purchase of 2,300 shares of (77) (77)
treasury stock
Common stock issued in acquisitions 860 12,974 13,834
Issuance of stock for Old National 1,202 298 2,150 19 3,669
----------------------------------------------------------------------------
Balances at December 31, 1997 $16,067 $48,769 $40,374 $ 1,355 $ (310) $106,255
----------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---------------------------------------------------
(in thousands)
<S><C>
OPERATING ACTIVITIES
Net income $ 12,464 $ 10,130 $ 8,718
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Net amortization 1,470 943 1,003
Provision for depreciation 4,837 3,466 2,534
Provision for possible loan losses 1,662 1,678 1,104
Deferred income tax benefit (713) (582) (439)
Loans originated for sale (97,465) (118,287) (74,242)
Purchases of loans held for sale (797,537) (1,029,098) (639,331)
Proceeds from loans sold 850,742 1,178,395 622,159
Realized gains on loans sold (4,392) (1,260) (581)
Realized investment securities gains (26) (87) (2)
(Increase) decrease in accrued interest receivable (877) 521 (1,128)
Increase in other assets (31,890) (2,356) (1,027)
Increase (decrease) in other liabilities 6,341 7,113 (73)
---------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (55,384) 50,576 (81,305)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 3,085 134,539 40,084
Purchases of investment securities (124,979) (3,238)
Proceeds from sales of securities available for sale 38,246 33,865 55,185
Proceeds from maturities and calls of securities available for 52,947 47,275 11,331
sale
Purchases of securities available for sale (79,111) (60,938) (52,617)
Net increase in loans (53,522) (42,184) (103,490)
Net cash acquired in acquisitions 9,126
Purchases of premises and equipment (10,303) (9,840) (5,055)
---------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (39,532) (22,262) (57,800)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 3,154 1,984 22,624
Net increase in interest-bearing deposits 62,049 29,271 27,986
Net increase (decrease) in short-term borrowings 39,452 (51,011) 74,682
Proceeds from long-term debt 34,150 14,250 17,525
Repayment of long-term debt (4,400)
Purchases of treasury stock (77) (2,286)
Proceeds from sales of treasury stock 80 58 152
Redemption of dissenter and fractional shares (22)
Exercise of stock options 65
Cash dividends paid (4,486) (3,540) (3,002)
---------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 134,387 (9,010) 133,281
---------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 39,471 19,304 (5,824)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 47,764 28,460 34,284
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 87,235 $ 47,764 $ 28,460
---------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
DECEMBER 31, 1997
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 bank holding
company headquartered in Cross Lanes, West Virginia. In December 1997, the
Company restructured its banking subsidiaries into one banking charter, The City
National Bank of Charleston (City National Bank). City National Bank and its
banking divisions are retail and consumer oriented community banks with offices
throughout West Virginia. The nonbanking subsidiaries of the Company are
comprised of a full service securities brokerage and investment advisory company
located in Charleston and an inactive mortgage banking company.
In December 1997, the mortgage loan servicing division of the Parent Company
was transferred to City National Bank. 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, 1997 and 1996, 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.
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 or securitize in the
secondary market and are carried at the lower of aggregate cost or estimated
fair value.
Mortgage Servicing Rights: On January 1, 1997, the Company adopted
Financial Accounting Standards Board (FASB) Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
Statement No. 125 superseded FASB Statement No. 122, Accounting for Mortgage
Servicing Rights, however, the basic accounting principles of Statement No. 122
related to the servicing of financial assets are included in Statement No. 125.
Statement No. 125 requires 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 effect of adopting Statement No. 125 did
not have a material impact on the Company's financial statements.
The value of mortgage servicing rights, regardless of how obtained, are
capitalized and amortized in proportion to and over the period of estimated net
servicing revenues. Impairment of mortgage servicing rights is assessed based on
the fair value of those rights. To determine fair value, the Company estimates
the present value of future cash flows incorporating various assumptions
including servicing income, cost of servicing, discount rates, prepayment
speeds, and default rates. For purposes of measuring impairment, the mortgage
servicing rights are stratified based upon predominant risk characteristics of
the underlying loans.
Retained Interest: The Company retains a financial interest in its securitized
loan sales. This retained interest is generally comprised of two components:
excess spread receivable and overcollateralization. Excess spread receivable
represents the present value of the excess cash flows generated by the
securitized loans. The excess cash flows generally represent the difference
between interest at the stated rate paid by borrowers and the sum of (A)
pass-through interest paid to third-party investors and (B) on-going
securitization expenses, including servicing, insurance, and trustee costs. The
Company determines the present value of the excess cash flows at the time each
securitization closes, based on valuation assumptions, including default rates,
prepayment rates, and discount rates.
Additionally, the Company provides credit enhancement with respect to the
security issued, in the form of overcollateralization. The initial
overcollateralization will generally be required to increase to a pre-determined
amount, at which time the excess cash flows discussed above will be released,
monthly, to the Company. The initial overcollateralization amount will reach the
required overcollateralization level through the application of monthly excess
cash to accelerate payment of the note(s). Generally, the required
overcollateralization amount will decrease or increase, subject to
pre-established requirements based on the performance of the collateral loans.
The Company determines the present value of cash flows to be received by the
Company related to the overcollateralization feature at the time each
securitization closes, based on the same assumptions previously discussed for
the excess spread component.
The retained interest is accounted for similar to an available-for-sale
security, and as such, the recorded value is adjusted, quarterly, to its
estimated fair value with the related increase or decrease in fair value
recorded as a separate component of stockholders' equity, net of tax. If the
decrease in fair value is determined to be permanent, the impairment is charged
to operations. Because the retained interest is uncertificated, the Company has
included the recorded value of the retained interest in Other Assets in the
consolidated balance sheet.
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. The allowance for loan losses related
to loans considered to be impaired are generally evaluated based on the
discounted cash flows using the impaired loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
Bank Premises and Equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives of the assets. Generally,
estimated useful lives of bank premises and furniture, fixtures, and equipment
do not exceed 30 and 7 years, respectively.
Intangibles: Intangible assets 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 10 to 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 indicated 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 discounted over
the remaining amortization period.
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.
Stock-Based Compensation: In accordance with FASB Statement No. 123,
Accounting for Stock-Based Compensation, the Company has elected to follow
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its employee stock options. Because the exercise price of the
Company's employee stock options granted equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Basic and Diluted Earnings per Common Share: The Company adopted the
provisions of FASB Statement No. 128, Earnings per Share, effective December 31,
1997. Under Statement No. 128, basic earnings per share is computed by dividing
net income by the weighted-average number of shares of common stock outstanding,
while diluted earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding increased by the number of shares
of common stock which would be issued assuming the exercise of stock options and
other immaterial common stock equivalents. The incremental shares related to the
options were 15,916 and 1,397 in 1997 and 1996 and other common stock
equivalents were 3,500 in 1997. The impact of this change was not significant
and all per share amounts for all periods have been presented to conform to
Statement No. 128 requirements.
New Accounting Pronouncements: The effective date of certain provisions of
FASB Statement No. 125 related to repurchase agreements, dollar-roll, and
securities lending transactions was deferred until January 1, 1998. The adoption
of these provisions is not expected to have a significant impact on the
financial position or results of operations of the Company.
During 1997, the FASB issued several new statements which will also
become effective in 1998. These pronouncements include Statement No. 129,
Disclosure of Information about Capital Structure; Statement No. 130, Reporting
Comprehensive Income; and Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company is in the process of fully
evaluating these new pronouncements and will adopt them in 1998 in accordance
with the requirements. Such adoption is not expected to have a significant
impact on the financial position or results of operations of the Company.
Statements of Cash Flows: Cash paid for interest, including long-term debt,
was $44,342,000, $39,008,000, and $32,755,000 in 1997, 1996, and 1995,
respectively. Cash paid for income taxes was $7,663,000, $5,399,000 and
$4,055,000 in 1997, 1996, and 1995, respectively.
Reclassifications: Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation. Such
reclassifications had no impact on net income or stockholders' equity.
NOTE TWO
RESTRICTIONS ON CASH AND DUE FROM BANKS
City National Bank is required to maintain an average reserve balance with the
Federal Reserve Bank. The average amount of the balance for the year ended
December 31, 1997, was approximately $12,660,000. Included in cash and due from
banks at December 31, 1997, is $6,189,000 of cash restricted for mortgage
banking activities.
NOTE THREE
ACQUISITIONS
On November 21, 1997, the Company signed a definitive agreement to acquire Del
Amo Savings Bank, FSB (Del Amo). Del Amo is a federally chartered savings bank,
headquartered in Torrance, California, with total assets and total deposits of
approximately $115 million and $101 million, respectively, at December 31, 1997.
Under the terms of the agreement, the Company will acquire all of the
outstanding shares of Del Amo common stock in exchange for approximately 254,000
shares of the Company's common stock, valued at approximately $10.7 million. The
transaction will be accounted for under the purchase method of accounting.
In January 1998 and December 1997, City National Bank, a wholly-owned
subsidiary of the Company, acquired Jarrett-Aim Communications, Inc. and RMI,
Ltd. (RMI), respectively. Jarrett-Aim is a printer and direct mail corporation
and RMI is an insurance agency designed to market insurance products and
services to select corporate and individual clients. These transactions were
accounted for under the purchase method of accounting. Accordingly, the results
of operations attributable to the RMI acquisition have been included in the
consolidated totals from the date of its acquisition. The assets of Jarrett-Aim
and RMI represent less than 1% of total assets of the Company.
On October 9, 1997, City National Bank acquired First Allegiance Financial
Corporation (First Allegiance), a mortgage loan origination company
headquartered in Irvine, California. The acquisition involved an initial
purchase price of approximately $15 million, which was comprised of 300,000
shares of the Company's common stock valued at approximately $12 million
(286,000 issued at the acquisition date and the remaining 14,000 to be issued
over a three year period), and cash in exchange for substantially all of the
assets and liabilities of First Allegiance, which approximated $7.5 million and
$6.8 million, respectively, at September 30, 1997. Additional consideration was
contingent upon the First Allegiance division satisfying certain pre-established
loan production levels subsequent to the acquisition. As a result of certain
loan production levels achieved in the fourth quarter of 1997, the Company paid
$3.8 million of additional consideration in January 1998. 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.
On January 24, 1997, the Company consummated its acquisition of the Old
National Bank of Huntington (Old National). Under the terms of the agreement,
the Company acquired all the outstanding shares of Old National common stock for
480,917 shares of the Company's common stock valued at approximately $10.1
million. Old National's total assets at December 31, 1996, were approximately
$49 million or 4.7% of the Company's consolidated assets. This transaction was
accounted for under the pooling of interests method of accounting. However, due
to the immateriality of the transaction, prior period financial statements have
not been restated and the results of operations attributable to the acquisition
have been included in the consolidated totals from the date of acquisition.
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.
Pro forma results of operations of the 1997 and 1996 purchase acquisitions as
though each had been combined with the Company at the beginning of the periods
presented do not differ materially from the results presented herein.
Intangible assets arising from purchase business combinations consist
primarily of goodwill and core deposits which have an aggregate unamortized
balance at December 31, 1997 and 1996, of $21,812,000 and $5,781,000,
respectively. Amortization of goodwill and core deposits approximated
$1,074,000, $619,000, and $623,000 during the years ended December 31, 1997,
1996, and 1995, respectively.
NOTE FOUR
INVESTMENTS
In June 1997, the Company reclassified its entire held-to-maturity securities
portfolio to the available-for-sale classification. The securities transferred
consisted of investment securities with approximate amortized cost and market
value of $46.5 million and $46.8 million, respectively. This transfer was made
by the Company to provide management more flexibility in managing the Company's
liquidity and interest rate risk.
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 $4.1 million and $7.3 million at December 31, 1997 and
1996, 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
-------------------------------------------------------------
(in thousands)
<S> <C>
December 31, 1997
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 107,156 $ 455 $ 315 $ 107,296
Obligations of states and political subdivisions 34,195 1,244 3 35,436
Mortgage-backed securities 9,200 249 33 9,416
Other debt securities 3,203 275 3,478
-------------------------------------------------------------
TOTAL DEBT SECURITIES 153,754 2,223 351 155,626
Equity securities 7,095 281 90 7,286
-------------------------------------------------------------
$ 160,849 $ 2,504 $ 441 $ 162,912
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
(in thousands)
<S> <C>
December 31, 1996
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 79,311 $ 198 $ 588 $ 78,921
Obligations of states and political subdivisions 11,033 246 4 11,275
Mortgage-backed securities 12,347 282 92 12,537
Other debt securities 3,332 130 3,462
-------------------------------------------------------------
TOTAL DEBT SECURITIES 106,023 856 684 106,195
Equity securities 16,918 244 413 16,749
-------------------------------------------------------------
$ 122,941 $ 1,100 $ 1,097 $ 122,944
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
(in thousands)
<S> <C>
December 31, 1996
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 14,974 $ 54 $ 133 $ 14,895
Obligations of states and political subdivisions 25,015 973 31 25,957
Mortgage-backed securities 443 15 428
Other debt securities 546 546
-------------------------------------------------------------
$ 40,978 $ 1,027 $ 179 $ 41,826
-------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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
Fair
Cost Value
----------------------------------
(in thousands)
<S> <C>
Available-for-sale
Due in one year or less $ 28,243 $ 28,216
Due after one year through five years 90,604 91,542
Due after five years through ten years 24,071 24,727
Due after ten years 1,636 1,725
----------------------------------
144,554 146,210
Mortgage-backed securities 9,200 9,416
----------------------------------
$ 153,754 $ 155,626
----------------------------------
</TABLE>
Gross gains of $389,000, $89,000, and $103,000, and gross losses of
$363,000, $2,000, and $101,000, were realized on sales and calls of securities
during 1997, 1996, and 1995, respectively.
The book value of securities pledged to secure public deposits and for other
purposes as required or permitted by law approximated $107,147,000 and
$112,849,000 at December 31, 1997 and 1996, respectively.
NOTE FIVE
LOANS
The loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------------------
(in thousands)
<S> <C>
Commercial, financial and agricultural $ 232,602 $ 224,267
Residential real estate 400,401 338,385
Installment loans to individuals 154,713 142,123
----------------------------------
$ 787,716 $ 704,775
----------------------------------
</TABLE>
The Company grants loans to customers generally within the market areas of
City National Bank and its banking divisions. 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 or purchases FHA Title I home improvement loans, high
loan-to-value loans, and other types of second lien mortgages to be sold or
securitized. At December 31, 1997 and 1996, these loans held for sale were
approximately $114 million and $38 million, respectively. The Company also
originates and sells fixed rate mortgage loans on a servicing released basis. At
December 31, 1997 and 1996, these loans held for sale were approximately $21
million and $54 million, respectively.
On December 31, 1997, the Company sold approximately $35 million of second
lien mortgage loans held for sale through an asset-backed securitization
transaction. As a result, the Company recorded a retained interest of
approximately $4.4 million.
NOTE SIX
LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of loans serviced for others was
$1.253 billion and $912 million at December 31, 1997 and 1996, respectively. The
unpaid principal balances of intercompany loans serviced was $63,254,000 and
$28,290,000 at December 31, 1997 and 1996, respectively.
Mortgage loan servicing rights of $2,462,000 and $1,019,000 at December 31,
1997 and 1996, respectively, are included in other assets in the accompanying
balance sheets. The fair value of mortgage loan servicing rights at December 31,
1997 and 1996, was not materially different from the recorded value and since
the fair value exceeds the recorded value, no valuation allowance is necessary.
Amortization of mortgage loan servicing rights approximated $383,000, $225,000,
and $128,000 during the years ended December 31, 1997, 1996, and 1995,
respectively.
NOTE SEVEN
ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for possible loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
(in thousands)
<S> <C>
Balance at beginning of year $ 7,281 $ 6,566 $ 6,477
Provision for possible loan losses 1,662 1,678 1,104
Charge-offs (1,899) (1,375) (1,331)
Recoveries 419 412 316
Balance of acquired institution 210
--------------------------------------------
BALANCE AT END OF YEAR $ 7,673 $ 7,281 $ 6,566
--------------------------------------------
</TABLE>
The recorded investment in loans that were considered impaired was
$5,947,000 and $4,643,000 at December 31, 1997 and 1996, respectively. Included
in these amounts are $1,529,000 and $1,891,000, respectively, of impaired loans
for which the related allowance for loan losses is $366,000 and $408,000,
respectively. The average recorded investments in impaired loans during the
years ended December 31, 1997, 1996 and 1995, were approximately $5,041,000,
$4,528,000, and $3,423,000. During the years ended December 31, 1997, 1996, and
1995, $403,000, $332,000, and $328,000, respectively, was recognized as interest
income on impaired loans and $126,000, $219,000, and $258,000, respectively, was
recognized as interest income using a cash basis method of accounting.
NOTE EIGHT
BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment follows:
December 31
1997 1996
-------------------------
(in thousands)
Bank premises $ 31,635 $ 28,141
Furniture, fixtures, and equipment 27,992 19,856
-------------------------
59,627 47,997
Less allowance for depreciation 22,992 17,972
-------------------------
$ 36,635 $ 30,025
-------------------------
NOTE NINE
SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of advances from the Federal Home Loan
Bank of Pittsburgh (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:
(in thousands)
1997:
Average amount outstanding during the year $ 158,428
Maximum amount outstanding at any month end 281,504
Weighted average interest rate:
During the year 5.39%
End of the year 5.56%
1996:
Average amount outstanding during the year $ 154,759
Maximum amount outstanding at any month end 207,790
Weighted average interest rate:
During the year 5.26%
End of the year 5.01%
1995:
Average amount outstanding during the year $ 98,973
Maximum amount outstanding at any month end 190,862
Weighted average interest rate:
During the year 5.73%
End of the year 5.51%
NOTE TEN
SCHEDULED MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
Scheduled maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1997, are summarized as follows:
(in thousands)
Within one year $ 48,869
Over one through two years 19,227
Over two through three years 6,212
Over three through four years 825
Over four through five years 1,345
-----------------
TOTAL $ 76,478
-----------------
NOTE ELEVEN
LONG-TERM DEBT AND UNUSED LINES OF CREDIT
Long-term debt includes an obligation of the Parent Company consisting of a
$35,000,000 revolving credit loan facility with an unrelated party. At December
31, 1997, $33,400,000 was outstanding. The loan has a variable rate (7.8438% at
December 31, 1997) with interest payments due quarterly and principal due at
maturity in December 1998. 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 City National Bank as collateral for the
revolving credit loan.
City National Bank maintains long-term financing from the FHLB in the form of
Long-Term LIBOR Floaters as follows:
December 31, 1997
-----------------------------------
Amount
Amount Available Outstanding Interest Rate Maturity Date
-----------------------------------------------------------------------------
$10,000,000 $10,000,000 5.60% July 2002
25,000,000 25,000,000 5.61 September 2002
The Company has purchased, through its banking divisions, 50,100 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, 1997, City National Bank has been issued one year flexline
commitments of $15.5 million, at prevailing interest rates, from the FHLB with
maturities ranging from January to April 1998. Such commitments are subject to
satisfying the Capital Stock Requirement provisions, as defined, in the
agreement with the FHLB. As of December 31, 1997, 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, 1997, collateral pledged to the FHLB included
approximately $5 million in FHLB capital stock.
NOTE TWELVE
RESTRICTIONS ON SUBSIDIARY DIVIDENDS
Certain restrictions exist regarding the ability of the subsidiary bank 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 1998, the
subsidiary bank can, without prior regulatory approval, declare dividends of
approximately $25,678,000 to the Parent Company, plus retained net profits for
the interim period through the date of declaration.
NOTE THIRTEEN
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
1997 1996
----------------------------
(in thousands)
<S> <C>
Deferred tax assets:
Allowance for loan losses $ 2,966 $ 2,827
Loans held for sale 832
Acquired net operating loss carryforward 741 741
Deferred compensation payable 374 391
Other 198 279
----------------------------
TOTAL DEFERRED TAX ASSETS 5,111 4,238
Deferred tax liabilities:
Federal income tax allowance for loan losses 148 148
Premises and equipment 1,121 886
Core deposit intangible 358 458
Loans 187 159
Securities available for sale 820 2
Other 403 406
----------------------------
TOTAL DEFERRED TAX LIABILITIES 3,037 2,059
----------------------------
NET DEFERRED TAX ASSETS $ 2,074 $ 2,179
----------------------------
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
(in thousands)
<S> <C>
Federal:
Current $ 6,578 $ 5,046 $ 3,930
Deferred (713) (582) (439)
--------------------------------------------
5,865 4,464 3,491
State 1,160 874 691
--------------------------------------------
TOTAL $ 7,025 $ 5,338 $ 4,182
--------------------------------------------
</TABLE>
Current income tax expense attributable to investment securities
transactions approximated $10,000, $35,000, and $1,000 in 1997, 1996, and 1995,
respectively.
As of December 31, 1997, the Company has approximately $1.6 million and $1.8
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>
1997 1996 1995
--------------------------------------------
(in thousands)
<S> <C>
Computed federal taxes and statutory rate $ 6,626 $ 5,414 $ 4,515
State income taxes, net of federal tax benefit 709 502 335
Tax effects of:
Nontaxable interest income (621) (685) (805)
Other items, net 311 107 137
--------------------------------------------
$ 7,025 $ 5,338 $ 4,182
--------------------------------------------
</TABLE>
NOTE FOURTEEN
EMPLOYEE BENEFIT PLANS
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. As of December 31, 1997, 399,300 options are authorized for grant, of
which 77,011 have been awarded to date. The options granted have five year terms
and vest and become fully exercisable at the end of up to four years of
continued employment. Proforma information regarding net income and earnings per
share is required by Statement No. 123; however, such information has not been
presented herein because the effect of applying Statement 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 the amounts reported.
A summary of the Company's stock option activity and related information for
the years ended December 31 is presented below:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------
<S><C>
Outstanding at beginning of year 40,511 $ 24.50
Granted 36,500 32.53 40,511 $ 24.50
Exercised (2,627) 24.50
-------------- --------------
Outstanding at end of year 74,384 $ 26.89 40,511 $ 24.50
-------------- --------------
Exercisable at end of year 52,025 $ 27.63 22,994 $ 24.50
Weighted-average fair value of
options $ 7.55 $ 5.19
granted during the year
</TABLE>
Exercise prices for options outstanding at December 31, 1997, ranged from
$24.50 to $40. The weighted-average remaining contractual life of those options
at December 31, 1997, was four years.
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 six
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 $2,455,000, $2,126,000, and
$1,400,000 in 1997, 1996, and 1995, respectively. The total number of shares of
the Company's common stock held by the benefit plans is 274,557. Other than the
benefit plans, the Company offers no postretirement benefits.
NOTE FIFTEEN
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, 1997 and 1996, attributable directly and indirectly to these
parties, was approximately $34,333,000 and $34,167,000, respectively. During
1997, $16,086,000 of new loans were made and repayments totaled $15,920,000.
NOTE SIXTEEN
OTHER INCOME AND EXPENSES
The following items of other income and other expense exceeded one percent of
total revenue for the respective years:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
(in thousands)
<S> <C>
Other income:
Secondary market mortgage loan origination fees $ 2,458 $ 517 $ 400
Other expenses:
Insurance, including FDIC premiums 319 700 1,139
Advertising 4,402 914 889
Bank supplies 1,429 1,618 1,236
Telecommunications 1,695 1,082 740
</TABLE>
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, 1997 and 1996,
commitments outstanding to extend credit totaled approximately $98,138,000 and
$64,379,000, 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 $2,498,000 and $2,937,000 as of December 31, 1997
and 1996, 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, 1997, 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 assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. The Company's and its banking subsidiary's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiary 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, 1997, that the Company and its banking subsidiary met all
capital adequacy requirements to which they were subject.
As of December 31, 1997, the most recent notifications from banking regulatory
agencies categorized the Company and its banking subsidiary as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Company and its banking subsidiary must
maintain minimum total risk-based, Tier 1 risk-based, and Tier I leverage ratios
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 banking subsidiary's actual capital amounts
and ratios are presented in the following table.
<TABLE>
<CAPTION>
Well
1997 1996 Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
---------------------------------------------------------------------------
(in thousands)
<S> <C>
Total Capital (to Risk Weighted
Assets):
Consolidated $ 90,515 10.0% $ 79,439 11.2% 10% 8%
City National Bank 109,693 12.3 93,223 13.3 10 8
Tier I Capital (to Risk Weighted
Assets):
Consolidated 82,842 9.2 72,157 10.2 6 4
City National Bank 102,020 11.5 85,943 12.2 6 4
Tier I Capital (to Average Assets):
Consolidated 82,842 6.5 72,157 6.6 5 4
City National Bank 102,020 7.7 85,943 7.9 5 4
</TABLE>
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
1997 1996
-------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------
(in thousands)
<S> <C>
Assets:
Cash and due from banks $ 87,235 $ 87,235 $ 47,764 $ 47,764
Securities 162,912 162,912 163,922 164,770
Net loans 772,689 772,240 690,701 693,832
Loans held for sale 134,990 134,990 92,472 92,472
Liabilities:
Demand deposits 484,936 484,936 440,917 440,917
Time deposits 453,562 464,969 387,753 387,808
Short-term borrowings 130,191 130,191 90,298 90,298
Long-term debt 68,400 68,901 34,250 34,245
</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,
1997 and 1996.
NOTE TWENTY-ONE
CITY HOLDING COMPANY (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
1997 1996
----------------------------------
(in thousands)
<S> <C>
ASSETS
Cash $ 163 $ 4,243
Securities available for sale 1,140 1,392
Investment in subsidiaries 127,029 93,041
Fixed assets 6,729 6,584
Other assets 7,263 5,079
----------------------------------
TOTAL ASSETS $ 142,324 $ 110,339
----------------------------------
LIABILITIES
Long-term debt $ 33,400 $ 24,250
Advances from affiliates 934 934
Other liabilities 1,735 5,782
----------------------------------
TOTAL LIABILITIES 36,069 30,966
STOCKHOLDERS' EQUITY 106,255 79,373
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 142,324 $ 110,339
----------------------------------
</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 1998.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-----------------------------------------------
(in thousands)
<S> <C>
INCOME
Dividends from bank subsidiary $ 3,430 $ 4,180 $ 13,465
Mortgage loan servicing fees 1,147
Administrative fees 3,357 2,828
Other income 925 1,017 640
-----------------------------------------------
7,712 9,172 14,105
EXPENSES
Interest expense 2,215 1,477 1,144
Other expenses 10,898 9,302 4,206
-----------------------------------------------
13,113 10,779 5,350
-----------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT AND (EXCESS DIVIDENDS)
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES
(5,401) (1,607) 8,755
Income tax benefit (3,235) (2,261) (2,127)
-----------------------------------------------
INCOME BEFORE (EXCESS DIVIDENDS) EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES (2,166) 654 10,882
EQUITY IN UNDISTRIBUTED NET INCOME (EXCESS DIVIDENDS)
OF SUBSIDIARIES 14,630 9,476 (2,164)
-----------------------------------------------
NET INCOME $ 12,464 $ 10,130 $ 8,718
-----------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-----------------------------------------------
(in thousands)
<S> <C>
OPERATING ACTIVITIES
Net income $ 12,464 $ 10,130 $ 8,718
Adjustments to reconcile net income to net cash (used in)
provided by
operating activities:
Provision for depreciation 1,579 1,077 272
Increase in other assets (2,165) (2,842) (882)
(Decrease) increase in other liabilities (346) 3,807 (300)
(Equity in undistributed net income) excess dividends of (14,630) (9,476) 2,164
subsidiaries
Realized investment securities gain (308)
Other (10)
-----------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,406) 2,686 9,972
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 375 836
Proceeds from sales of securities 496 43
Purchases of investment securities (363) (107) (160)
Net change in loans 1,644 (71)
Cash invested in subsidiaries (4,495) (625) (6,082)
Purchases of premises and equipment (3,063) (4,655) (1,533)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,406) (5,415) (6,939)
FINANCING ACTIVITIES
Proceeds from long-term debt 9,150 9,250 12,525
Principal repayments on long-term debt (4,400)
Repayments to bank subsidiary, net (4,873)
Cash dividends paid (4,486) (3,540) (3,002)
Purchases of treasury stock (77) (2,286)
Proceeds from sales of treasury stock 80 58 152
Exercise of stock options 65
Redemption of dissenter and fractional shares (22)
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,732 5,746 (1,884)
-----------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,080) 3,017 1,149
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,243 1,226 77
-----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 163 $ 4,243 $ 1,226
-----------------------------------------------
</TABLE>
<PAGE>
NOTE TWENTY-TWO
SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly financial information for 1997 and 1996
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
(in thousands, except common share data)
<S> <C>
1997
Interest income $ 21,365 $ 24,687 $ 24,823 $ 25,921
Interest expense 9,558 11,024 11,502 12,607
Net interest income 11,807 13,663 13,321 13,314
Provision for possible loan losses 388 440 393 441
Investment securities gains (losses) 28 (17) 4 11
Net income 2,829 3,175 3,485 2,975
Basic earnings per common share 0.47 0.52 0.57 0.47
Diluted earnings per common share 0.47 0.52 0.57 0.46
Average common shares outstanding:
Basic 6,068 6,069 6,071 6,375
Diluted 6,079 6,080 6,089 6,402
1996
Interest income $ 21,093 $ 21,503 $ 21,485 $ 21,988
Interest expense 9,683 9,435 9,923 10,023
Net interest income 11,410 12,068 11,562 11,965
Provision for possible loan losses 271 290 382 735
Investment securities gains 61 2 5 19
Net income 2,461 2,566 2,543 2,560
Basic earnings per common share 0.44 0.46 0.45 0.46
Diluted earnings per common share 0.44 0.46 0.45 0.46
Average common shares outstanding:
Basic 5,586 5,586 5,586 5,586
Diluted 5,586 5,586 5,586 5,587
</TABLE>
Certain amounts previously reported during 1997 have been reclassified to
conform to the financial statement presentation. These reclassifications had no
impact on net income or stockholders' equity. The 1996 and first three quarters
of 1997 earnings per share amounts have been restated to comply with Statement
No. 128.
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1997, City Holding Company had one banking
and three non-banking subsidiaries. The City National Bank of Charleston,
Charleston, West Virginia, is a national banking association conducting business
in West Virginia and 100% owned by City Holding Company. Hinton Financial
Corporation, a single bank holding company, is located in Hinton, West Virginia,
and wholly owned by City Holding Company. City Mortgage Corporation, Pittsburgh,
Pennsylvania, is an inactive 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.
<PAGE>
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 30, 1998, included in the
1997 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 30, 1998, 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, 1997.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 11, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains Summary Financial Information extracted from registrants
Audited Financial Statements for the Year Ended December 31, 1997, and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 47,207
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 40,028
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,912
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 780,362
<ALLOWANCE> 7,673
<TOTAL-ASSETS> 1,266,143
<DEPOSITS> 938,498
<SHORT-TERM> 130,191
<LIABILITIES-OTHER> 22,799
<LONG-TERM> 68,400
0
0
<COMMON> 16,067
<OTHER-SE> 90,188
<TOTAL-LIABILITIES-AND-EQUITY> 1,266,143
<INTEREST-LOAN> 85,844
<INTEREST-INVEST> 10,882
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 96,796
<INTEREST-DEPOSIT> 33,117
<INTEREST-EXPENSE> 44,691
<INTEREST-INCOME-NET> 52,105
<LOAN-LOSSES> 1,662
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 57,670
<INCOME-PRETAX> 19,489
<INCOME-PRE-EXTRAORDINARY> 12,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,464
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.02
<YIELD-ACTUAL> 4.74
<LOANS-NON> 3,758
<LOANS-PAST> 1,858
<LOANS-TROUBLED> 331
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,281
<CHARGE-OFFS> 1,899
<RECOVERIES> 419
<ALLOWANCE-CLOSE> 7,673
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
