SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File Number June 30, 1998 0-1173 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 25 Gatewater Road Charleston, West Virginia 25313 (Address of principal offices) Registrant's telephone number, including area code: (304) 769-1100. Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes xx No ------ ------ The number of shares outstanding of the issuer's common stock as of August 11, 1998. Common Stock, $2.50 Par Value - 6,707,276 shares
Index City Holding Company and Subsidiaries This form 10-Q may include forward-looking financial information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking information is identified by phrases such as the Company "expects" or "anticipates" and words of similar effect. The Company's actual results achieved may differ materially from those projected in the forward-looking information. Factors that could cause such a difference include, among others: changes in interest rates and economic and other market conditions generally and in the Company's principal markets; competition for origination and servicing of mortgage loans, particularly loans with high loan-to-value ratios or retail originations; disruption of retail originations; and changes in regulations and government policies affecting banks and their subsidiaries, including changes in monetary policies. The forward-looking financial information is provided to assist investors and Company stockholders in understanding anticipated future financial operations of the Company and are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Further, the Company disclaims any intent or obligation to update this forward-looking financial information. PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997 Consolidated Statements of Income (unaudited) -- Six months ended June 30, 1998 and 1997 and the three months ended June 30, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity (unaudited) -- Six months ended June 30, 1998 and 1997 Consolidated Statements of Cash Flows (unaudited) -- Six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements (unaudited) - June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Exhibit Index
PART I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands) Item I. <TABLE> <CAPTION> JUNE 30 DECEMBER 1998 1997 ----------- -------- (unaudited) <S> <C> ASSETS Cash and due from banks $ 62,111 $ 47,207 Federal funds sold 570 40,028 ------------ ------------- CASH AND CASH EQUIVALENTS 62,681 87,235 Securities available for sale, at fair value 166,994 162,912 Loans: Gross loans 936,161 787,716 Unearned income (6,889) (7,354) Allowance for possible loan losses (8,680) (7,673) ----------- ----------- NET LOANS 920,592 772,689 Loans held for sale 194,959 134,990 Bank premises and equipment 50,371 36,635 Accrued interest receivable 10,292 8,677 Other assets 95,611 63,005 ------------- ------------ TOTAL ASSETS $ 1,501,500 $ 1,266,143 =========== =========== LIABILITIES Deposits: Noninterest-bearing $ 174,707 $ 136,842 Interest-bearing 957,002 801,656 ------------- ------------- TOTAL DEPOSITS 1,131,709 938,498 Short-term borrowings 111,974 130,191 Long-term borrowings 81,295 68,400 Other liabilities 20,414 22,799 ------------- ------------- TOTAL LIABILITIES 1,345,392 1,159,888 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely subordinated debentures of City Holding Company ("Trust Preferred Securities") 30,000 0 STOCKHOLDERS' EQUITY Preferred stock, par value $25 a share: Authorized-500,000 shares; none issued Common stock, par value $2.50 a share: authorized 20,000,000 shares; issued 6,749,785 shares as of June 30, 1998 and 6,427,309 shares as of December 31, 1997, including 17,055 and 11,130 shares in treasury at June 30, 1998 and December 31, 1997, respectively. 16,874 16,067 Capital surplus 63,734 48,769 Retained earnings 44,280 40,374 Cost of common stock in treasury (591) (310) Accumulated other comprehensive income 1,811 1,355 ----------- --------- TOTAL STOCKHOLDERS' EQUITY 126,108 106,255 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,501,500 $ 1,266,143 =========== =========== </TABLE>
CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands, except per share data) <TABLE> <CAPTION> SIX MONTH PERIOD ENDED JUNE 30 1998 1997 ----------- ----------- (unaudited) (unaudited) <S> <C> INTEREST INCOME Interest and fees on loans $ 48,982 $ 40,563 Interest on investment securities: Taxable 4,133 4,456 Tax-exempt 828 974 Other interest income 783 59 -------- -------- TOTAL INTEREST INCOME 54,726 46,052 INTEREST EXPENSE Interest on deposits 19,374 15,851 Interest on short-term borrowings 3,475 3,479 Interest on long-term debt 3,409 1,252 ---------- -------- TOTAL INTEREST EXPENSE 26,258 20,582 NET INTEREST INCOME 28,468 25,470 PROVISION FOR POSSIBLE LOAN LOSSES 1,201 828 --------- ------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 27,267 24,642 OTHER INCOME Investment securities gains 16 11 Service charges 2,392 2,086 Mortgage loan servicing fees 8,009 5,352 Net origination fees on junior mortgages 6,217 0 Gain on sale of loans 7,333 993 Other 8,029 1,457 -------- --------- TOTAL OTHER INCOME 31,996 9,899 OTHER EXPENSES Salaries and employee benefits 19,402 13,991 Occupancy, excluding depreciation 2,644 1,753 Depreciation 3,661 2,253 Advertising 9,119 724 Other expenses 14,375 6,471 ---------- --------- TOTAL OTHER EXPENSES 49,201 25,192 INCOME BEFORE INCOME TAXES 10,062 9,349 INCOME TAXES 3,650 3,345 --------- --------- NET INCOME $ 6,412 $ 6,004 ===== ===== Basic earnings per common share $ 0.97 $ 0.99 ====== ===== Diluted earnings per common share $ 0.96 $ 0.99 ======= ===== Average common shares outstanding: Basic 6,589,368 6,069,192 ========== ========== Diluted 6,640,059 6,079,500 ========== ========== </TABLE>
CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTH PERIOD ENDED JUNE 30 1998 1997 ----------- ----------- (unaudited) (unaudited) <S> <C> INTEREST INCOME Interest and fees on loans $ 25,796 $ 21,907 Interest on investment securities: Taxable 2,033 2,289 Tax-exempt 416 488 Other interest income 572 3 -------- --------- TOTAL INTEREST INCOME 28,817 24,687 INTEREST EXPENSE Interest on deposits 10,516 8,147 Interest on short-term borrowings 1,500 2,217 Interest on long-term debt 1,934 660 ---------- -------- TOTAL INTEREST EXPENSE 13,950 11,024 NET INTEREST INCOME, 14,867 13,663 PROVISION FOR POSSIBLE LOAN LOSSES 681 440 --------- ------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 14,186 13,223 OTHER INCOME Investment securities gains (losses) 6 (17) Service charges 1,267 1,138 Mortgage loan servicing fees 4,126 2,570 Net origination fees on junior mortgages 4,071 0 Gain on sale of loans 4,775 183 Other 4,855 868 -------- ------- TOTAL OTHER INCOME 19,100 4,742 OTHER EXPENSES Salaries and employee benefits 10,394 7,324 Occupancy, excluding depreciation 1,475 900 Depreciation 1,979 1,138 Advertising 6,022 400 Other expenses 8,239 3,317 --------- --------- TOTAL OTHER EXPENSES 28,109 13,079 INCOME BEFORE INCOME TAXES 5,177 4,886 INCOME TAXES 1,878 1,711 --------- --------- NET INCOME $ 3,299 $ 3,175 ======= ====== Basic earnings per common share $ 0.49 $ 0.52 ======= ====== Diluted earnings per common share $ 0.48 $ 0.52 ======= ====== Average common shares outstanding: Basic 6,728,456 6,069,161 ========== ========== Diluted 6,833,634 6,080,173 ========== ========== </TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands) <TABLE> <CAPTION> ACCUMULATED OTHER TOTAL COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' STOCK SURPLUS EARNINGS STOCK INCOME EQUITY ------------------------------------------------------------------- <S> <C> Six Months Ended June 30, 1998 Balances at December 31, 1997 $ 16,067 $48,769 $ 40,374 ($310) $ 1,355 $106,255 Comprehensive Income: Net income 6,412 6,412 Other comprehensive income, net of tax: Unrealized holding gain on securities arising during the period 466 466 Less: reclassification adjustment for gains realized in net income (10) (10) Other comprehensive ------------ ------------- income 456 456 ------------- Comprehensive Income 6,868 Cash Dividends Declared ($.38/share) (2,506) (2,506) Purchase of 5,925 shares of treasury stock (281) (281) Common stock issued in acquisitions 807 14,965 15,772 ------------------------------------------------------------------- Balances at June 30, 1998 $ 16,874 $63,734 $ 44,280 ($591) $ 1,811 $ 126,108 ------------------------------------------------------------------- <CAPTION> ACCUMULATED OTHER TOTAL COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' STOCK SURPLUS EARNINGS STOCK INCOME EQUITY ------------------------------------------------------------------- <S> <C> Six Months Ended June 30, 1997 Balances at December 31, 1996 $13,998 $35,426 $ 30,246 ($300) $ 3 $79,373 Comprehensive Income: Net income 6,004 6,004 Other comprehensive income, net of tax: Unrealized gains on securities 555 555 ----------- Comprehensive Income 6,559 Cash Dividends (2,186) (2,186) Declared ($.36/share) Exercise of 2,627 stock options 7 58 65 Sale of 2,511 shares of treasury stock 13 67 80 Purchase of 2,300 shares of treasury stock (77) (77) Issuance of stock for Old National Bank of Huntington 1,202 298 2,150 19 3,669 ------------------------------------------------------------------- Balances at June 30, 1997 $15,207 $35,795 $36,214 ($310) $ 577 $ 87,483 ------------------------------------------------------------------- </TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands) <TABLE> <CAPTION> SIX MONTH PERIOD ENDED JUNE 30 1998 1997 ----------- ----------- (unaudited) (unaudited) <S> <C> OPERATING ACTIVITIES Net Income $ 6,412 $ 6,004 Adjustments to reconcile net income to net cash used in operating activities: Net amortization 885 493 Provision for depreciation 3,661 2,261 Provision for possible loan losses 1,201 828 Loans originated for sale (225,403) (58,357) Purchases of loans held for sale (408,047) (301,971) Proceeds from loans sold 580,814 343,561 Realized gains on loans sold (7,333) (993) Realized investment securities gains (16) (11) Increase in accrued interest receivable (1,023) (517) Increase in other assets (22,410) (2,011) Increase (decrease) in other liabilities (5,439) 1,424 ------- ----------- NET CASH USED IN OPERATING ACTIVITIES (76,698) (9,289) INVESTING ACTIVITIES Proceeds from sales of securities available for sale 9,196 17,134 Proceeds from maturities of securities available for sale 43,096 20,095 Purchases of securities available for sale (52,418) (44,425) Proceeds from maturities and calls of investment securities 0 1,863 Net increase in loans (40,503) (36,702) Net cash acquired in acquisitions 2,454 9,126 Purchases of premises and equipment (16,162) (1,940) -------- ------- NET CASH USED IN INVESTING ACTIVITIES (54,337) (34,849) FINANCING ACTIVITIES Net increase in noninterest-bearing deposits 37,661 4,349 Net increase in interest-bearing deposits 52,982 23,443 Net (decrease) increase in short-term borrowings (18,273) 11,093 Proceeds from long-term debt 34,750 5,150 Repayment of long-term debt (27,010) 0 Proceeds from issuance of Trust Preferred Securities 29,158 0 Exercise of stock options 0 65 Purchases of treasury stock (281) (77) Proceeds from sales of treasury stock 0 80 Cash dividends paid (2,506) (2,186) ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 106,481 41,917 ------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (24,554) (2,221) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,235 47,764 ----------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,681 $ 45,543 ========= ========= </TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements, include all the accounts of City Holding Company (the Parent Company) and its wholly owned subsidiaries (collectively, the Company). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 1998, are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 1998. The Company's accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management's estimates. Certain amounts in the unaudited consolidated financial statements have been reclassified. Such reclassifications had no impact on net income or stockholders' equity in any period presented. For further information, refer to the consolidated financial statements and footnotes thereto included in the City Holding Company annual report on Form 10-K for the year ended December 31, 1997.
NOTE B - MERGERS AND ACQUISITIONS On August 7, 1998, the Company announced that it had signed a definitive agreement to merge with Horizon Bancorp, Inc. Expected to be accounted for as a pooling of interests, the merger entails an exchange of $45.00 in City Holding common stock, subject to adjustment, for each share of Horizon common stock. If, based on trading prices near the closing of the transaction, the value of City Holding stock is between $40.50 and $44.40, Horizon shareholders will receive $45.00 in City Holding common stock. If the value of City Holding common stock is less than $40.50, Horizon shareholders will receive 1.111 shares of City Holding stock. If the value of City Holding common stock is greater than $44.50, Horizon shareholders will receive 1.011 shares of City Holding stock. The merger is subject to the approval of City Holding and Horizon shareholders and applicable regulatory authorities and is expected to close during the first quarter of 1999. Horizon has granted City Holding the option, exercisable under certain circumstances, to purchase up to 19.9% of Horizon shares of common stock outstanding and City Holding has granted Horizon a similar option on its own shares of common stock. Effective April 1, 1998, the Company consummated its acquisition of Del Amo Savings Bank, FSB (Del Amo). Del Amo is a federally chartered savings bank, headquartered in Torrance, California with total assets and total deposits of approximately $116 million and $102 million, respectively, at March 31, 1998. The merger involved the exchange of approximately 261,000 shares of the Company's common stock for all of the outstanding shares of Del Amo. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations have been included in the consolidated totals from the date of acquisition. Due to the immaterial impact on the Company's financial statements, no proforma information has been included for the information provided herein. In January 1998, City National Bank of West Virginia (City National), a wholly-owned subsidiary of the Company, acquired Jarrett/Aim Communications, Inc. (Jarrett/Aim). Jarrett/Aim is a printing and direct mail corporation. In March 1998, City National acquired Morton Specialty Insurance Partners, Inc. (Morton Insurance). Morton Insurance offers property and casualty insurance and bonding programs to established commercial and industrial clients, primarily in energy-related industries. In April 1998, City National acquired CityNet
Corporation (CityNet) and MarCom, Inc. (MarCom). Both companies provide internet access to business and individual subscribers. These transactions were accounted for under the purchase method of accounting. Accordingly, the results of operations attributable to these transactions have been included in the consolidated totals from the dates of the acquisitions. The assets of Jarrett/Aim, Morton Insurance, CityNet and MarCom represent less than 1% of the total assets of the Company. Accordingly, no proforma information has been included for the information provided herein. NOTE C - STRATEGIC INVESTMENT On June 29, 1998, the Company (through City National) completed its strategic investment in Mego Mortgage Corporation (Mego), a specialty financial services company that originates and purchases conventional home improvement, high loan-to-value debt consolidation, and other similar loans. As part of the overall recapitalization of Mego completed by several investors, the Company invested $10 million to acquire 10,000 shares of Mego's Series A Preferred Stock, which is convertible into 6.7 million shares of Mego common stock. The Company also acquired an option to purchase an additional 6.7 million shares of Mego common stock at a price of $1.50 per share. Concurrent with this investment, City National (through its loan servicing division, City Mortgage Services) acquired the right to service approximately $536 million of consumer mortgage loans previously serviced by Mego and the exclusive right to service up to an additional $ 1 billion of mortgage loans originated or acquired by Mego in the future. NOTE D - TRUST PREFERRED SECURITIES During March 1998, City Holding Capital Trust (the "Trust"), a special-purpose statutory trust subsidiary of the Company, issued $30 million of preferred capital securities (the "Capital Securities") to qualified institutional buyers and $928,000 of common securities (the "Common Securites") to the Company. Distributions on the Capital Securities will be payable at an annual rate of 9.15%, payable semi-annually, and each Capital Security has a stated liquidation amount of $1,000. To fund the Trust, the Company sold to the Trust Junior Subordinated Debentures (the "Debentures") with terms identical to the Capital Securities. Cash distributions on the Capital Securities are made to the extent interest on the Debentures is received by the Trust. The Company, through various agreements, has irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Capital Securities regarding the payment of distributions and payment on liquidation or redemption of the Capital Securities, but only to the extent of funds held by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the Capital Securities are redeemable in whole at par or, if greater, a make-whole amount. Otherwise, the Capital Securities are generally redeemable in whole or in part on or after April 1, 2008, at a declining redemption price ranging from 104.58% to 100% of the liquidation amount. On or after April 1, 2018, the Capital Securities may be redeemed at 100% of the liquidation amount. After deducting expenses incurred in the issuance, the Company received proceeds of $29.2 million from the Capital Securities offering. The offering of the Capital Securities is classified as and is similar to a minority interest and is presented as "Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding subordinated debentures of City Holding Company." The Company may include the proceeds from the Capital Securities offering in its Tier I capital, and the Company's payments on the Debentures are fully tax deductible. NOTE E - NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. For the six months in the periods ended June 30, 1998 and 1997, total comprehensive income approximated $6.9 million and $6.6 million, respectively. For the three months in the periods ended June 30, 1998 and 1997, comprehensive income approximated $3.6 million and $4.2 million, respectively.
As of January 1, 1998, the Company adopted the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," relating to repurchase agreements, securities lending and other similar transactions and pledged collateral, which had been delayed until after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement 125, an amendment of FASB Statement 125." The effect of adopting the additional provisions of Statement 125 as amended by Statement 127 had no material impact on the Company's financial position or results of operations. During 1997, the FASB issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. This statement requires public companies to disclose certain information about reportable operating segments in complete sets of financial statements of the company and in interim condensed financial statements. However, the provisions of this statement do not require the disclosure of segment information in interim financial statements in the initial year of application; therefore no such disclosures are included herein. These disclosure requirements will have no effect on the Company's financial position or results of operations. NOTE F - LONG-TERM BORROWINGS Long-term debt consists of a $35,000,000 revolving line of credit of the Parent Company with a variable rate based on the lesser of the adjusted LIBOR rate plus 1.50% per annum or the lender's base rate less .25% per annum (7.15625% at June 30, 1998) due on December 31, 1998. As of June 30, 1998, the outstanding balance was $11,150,000. Interest on this obligation is payable quarterly, and the Parent Company has pledged the common stock of City National as collateral for the revolving credit loan. Management intends to refinance this loan according to the provisions provided in the agreement. The Company paid $27 million on the line of credit in April 1998 with proceeds received from the issuance of the Trust Preferred Securities (See Note D). City National maintains long-term financing from the Federal Home Loan Bank (FHLB) in the form of Long-Term LIBOR Floaters as follows:
Amount Interest Maturity Outstanding Rate Date --------------------------------------------------- $ 10,000,000 5.60% July 2002 25,000,000 5.61 September 2002 25,000,000 4.89 January 2008 5,000,000 5.48 February 2008 Additionally, Del Amo maintains long-term, fixed-rate financing from the Federal Home Loan Bank (FHLB) as follows: Amount Interest Maturity Outstanding Rate Date --------------------------------------------------- $ 2,000,000 6.58% June 2000 1,500,000 6.94 June 2005 1,500,000 7.14 June 2015 As of June 30, 1998, City National has maximum available credit with the FHLB of approximately $269 million, which is collateralized by a blanket lien on all residential and multi-family mortgage loans, and eligible government and agency securities. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS FINANCIAL POSITION Total assets increased $235.4 million or approximately 18.59% during the first six months of 1998. The acquisition of Del Amo (Note B) represented approximately $116 million of the increase. Net loans increased $147.9 million or 19.14%, $112 million of which can be attributed to Del Amo. Loans held for sale, consisting primarily of loans purchased or originated with the intent to sell or securitize, increased $60 million or 44.42%. See LOAN PORTFOLIO and LOANS HELD FOR SALE for further discussion. The increase in net loans and loans held for sale was funded primarily by an increase in deposits and long-term borrowings of $193.2 million and $16.4 million, respectively. Other assets increased $32.6 million during the six months ended June 30, 1998 primarily due
to an additional $19.7 million in retained interest recorded as a result of two asset-backed securitization transactions recorded during the six month period. See LOANS HELD FOR SALE for further discussion. Total stockholders' equity increased $19.9 million during the first six months of 1998 primarily due to the net income recorded during the period of $6.4 million less dividends of $2.5 million and the $15.8 million increase due to common stock issued in acquisitions. QUARTER ENDED JUNE 30, 1998, COMPARED TO QUARTER ENDED JUNE 30, 1997. The Company reported net income of $3,299,000 for the three months ended June 30, 1998 compared to net income of $3,175,000 for the quarter ended June 30, 1997. This increase of $124,000, or 3.91%, was attributable to an increase in net interest income, after provision for possible loan losses, of $963,000 and an increase in other income (excluding securities transactions) of $14,335,000 which was offset with an increase in other expenses of $15,030,000. The increase in non-interest income is a result of the Company's $4.1 million increase in net origination fees on junior lien mortgages and an additional net increase of $4.6 million in gains on loans sold to third parties. A $1.6 million increase from the mortgage servicing division also contributed to the increase in non-interest income. In addition, the Company recognized $2.3 million in non-interest income from printing and insurance services combined, with no income recorded for these services in the second quarter of 1997. Non-interest expenses increased $15,030,000 or 115% during the second quarter of 1998 as compared to the same period of 1997. This increase is primarily associated with entities acquired by the Company during the fourth quarter of 1997 and the first six months of 1998, and also attributable to new divisions formed by the Company during that same time period. Non-interest expenses incurred by these divisions approximated $12.3 million during the three months in the period ended June 30, 1998. Of that total, approximately $5.3 million was incurred for advertising and nationwide direct mail solicitation of junior lien mortgage loans. Also, approximately $796,000 was charged to expense during the three month period related to expenses associated with the Company's loan securitization program. Additionally, approximately $2.4 million was attributable to personnel costs incurred by all of the new divisions within the Company.
Net income also benefited from an increase of $1,204,000 in the Company's net interest income during the second quarter of 1998 as compared to the same period of 1997. See NET INTEREST INCOME for further discussion. Basic earnings per share were $.49 and $.52 for the second quarter of 1998 and 1997, respectively. Diluted earnings per share were .48 and .52 for the second quarter of 1998 and 1997, respectively. SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997. The Company reported net income of $6,412,000 for the six months ended June 30, 1998 compared to net income of $6,004,000 for the six months ended June 30, 1997. This increase of $408,000 or 6.8%, was primarily due to an increase in net interest income, after provision for possible loan losses, of $2,625,000 and an increase in other income (excluding securities transactions) of $22,092,000 which was offset with an increase in other expenses of $24,009,000. The increase in non-interest income is a result of the Company's $6.2 million increase in net origination fees on junior lien mortgages, an additional net increase of $6.3 million in gains on loans sold to third parties and a $2.7 million increase from the mortgage servicing division. In addition, the Company recognized $3.6 million in non-interest income from printing and insurance services combined, with no income recorded for these services in the first six months of 1997. Non-interest expenses increased $24,009,000 or 95% during the first six months of 1998 as compared to the same period of 1997. This increase is primarily associated with entities acquired by the Company during the fourth quarter of 1997 and the first six months of 1998, and also attributable to new divisions formed by the Company during that same time period. Non-interest expenses incurred by these divisions approximated $19.4 million during the six months in the period ended June 30, 1998. Of that total, approximately $7.9 million was incurred for advertising and nationwide direct mail solicitation of junior lien mortgage loans. Also, approximately $1.4 million was charged to expense during the three month period related to expenses associated with the Company's loan securitization program. Additionally, approximately $4.3 million was attributable to personnel costs incurred by all of the new divisions within the Company.
Net income for the first six months also benefited from an increase of $2,998,000 in the Company's net interest income during the first six months of 1998 as compared to the same period of 1997. Basic earnings per share were $.97 and $.99 for the six months ended June 30, 1998 and 1997, respectively. Diluted earnings per share were $.96 and $.99 for the six months ended June 30, 1998 and 1997, respectively. SELECTED RATIOS The return on average assets (ROA) for the second quarter of 1998 was .92% compared to 1.07% in the second quarter of 1997. The return on average shareholder's equity (ROE) for the second quarter of 1998 was 10.86% compared to 14.79% ROE for the second quarter of 1997. For the six months of 1998, ROA was .94% compared to 1.05% for the six months ended 1997. ROE was 11.13% and 14.10% for the first six months of 1998 and 1997, respectively. The dividend payout ratio of 38.80% for the quarter ended June 30, 1998 represents an increase of 12.07% from the dividend payout ratio of 34.62% for the quarter ended June 30, 1997. The dividend payout ratio was 39.18% and 36.36% for the six months ended June 30, 1998 and 1997, respectively. Since 1988, the Company has paid dividends on a quarterly basis, and expects to continue to do so in the future. LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: LOAN PORTFOLIO BY TYPE (Dollars in Thousands) June 30 December 31 1998 1997 ------- ----------- Commercial, financial and Agricultural $ 249,681 $ 232,602 Real Estate-Mortgage 500,360 371,974 Real Estate-Construction 28,779 28,427 Installment and other 157,341 154,713 Unearned Income (6,889) (7,354) ------- ------- TOTAL $ 929,272 $ 780,362 ======== =======
Loans Held for Sale Program Loans $ 176,064 $ 114,462 Loans Originated for Sale 18,895 20,528 ------ ------ TOTAL $ 194,959 $ 134,990 ======= ======= LOANS HELD FOR SALE Loans held for sale generally represent mortgage loans the Company has either purchased, through its wholesale division, or originated with the intent to sell or securitize and are carried at the lower of aggregate cost or estimated market value. Through its three retail loan origination platforms, the Company originates high loan-to-value (LTV) debt consolidation and other junior lien mortgage loans on a nationwide level. These loans are expected to either be securitized by the Company or sold to independent third parties within 90-180 days. The Company announced on May 11, 1998, that it had discontinued its participation in a whole loan purchasing program with a non-affiliated seller. The Company had participated in this program since the first quarter of 1994. As a result of discontinuing this program, the Company's average balance of loans held for sale is expected to be less than originally forecasted, primarily in the third and fourth quarter, but also for the months of May and June. In addition, servicing volume increases will not be as great as was expected. The Company has estimated that the impact of these events on 1998 earnings per share will be a decrease of $0.30 per share to $0.40 per share, or 11-15% of its SNL I/B/E/S consensus estimate. The Company's origination and acquisition of loans to be securitized or sold is expected to continue to have a positive impact on the Company's operating results. However, this increased return is not achieved without a degree of risk of loss to the Company. Such risks include credit risk related to the quality of the underlying loan and the borrower's financial capability to repay the loan, market risk related to the continued attractiveness of the loan product to both borrowers and end-investors, and interest rate risk related to potential changes in interest rates and the resulting repricing of both financial assets and liabilities. The Company seeks to manage this risk by continuously improving policies and procedures designed to reduce the risk of loss to a level commensurate with the return being earned on the Company's investment.
In addition to continuously focusing on improving policies and procedures in this area, management also utilizes its asset-backed securitization program to mitigate the risk of loss. By securitizing originated and purchased junior lien mortgage loans, the Company effectively removes these loans from its balance sheet by creating an investment security or securities, supported by the cash flows generated by these loans, and selling the resulting security or securities to independent third parties. As part of this process, the Company provides credit enhancement, in the form of overcollateralization, with respect to the investment security or securities created. As a result, the Company does maintain a certain level of credit risk and interest rate risk related to these loans. During the first two quarters of 1998, the Company originated $225 million and purchased $408 million in loans held for sale and sold $581 million during the same period. This compares to originations of $58 million, purchases of $302 million, and sales of $344 million during the first two quarters of 1997. On June 12, 1998, the Company sold approximately $87.9 million of junior lien mortgage loans held for sale through an asset-backed securitization transaction. As a result, the Company recorded a retained interest of approximately $11.8 million. The amount recorded as retained interest is computed by estimating the future cash flows of the loans and giving consideration to certain assumptions regarding the performance of the underlying collateral loans. The three most significant assumptions used in this valuation process include: (1) prepayment rates, the rates at which borrowers will fully repay loan balances in advance of established amortization periods; (2) default rates, the rates at which collateral loans will become uncollectible; and (3) discount rates, the rates used by management to discount the estimated future cash flows such that the present value of those cash flows can be estimated. As of June 30, 1998, the Company has completed three asset-backed securitization transactions resulting in approximately $24.6 million, including accrued interest, being recorded in Other Assets representing the Company's retained interests in these securitized loan pools. Significant assumptions used to estimate the value of the retained interest include: Prepayment rates Between 17-21% CPR Default rates Approximating 10% cumulative losses Weighted average discount rates Between 12-14%
LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. They consist primarily of FHA Title I home improvement loans and debt consolidation loans secured by junior lien mortgages. The unpaid principal balances of mortgage loans serviced for others was $1.264 billion and $1.253 billion at June 30, 1998 and December 31, 1997, respectively. The unpaid principal balances of intercompany mortgage loans serviced was $150,023,000 at June 30, 1998. Mortgage loan servicing rights of $3,991,000 and $2,462,000 at June 30, 1998 and December 31, 1997, respectively, are included in other assets in the accompanying balance sheets. Amortization of mortgage loan servicing rights approximated $302,000 and $155,000 during the six months ended June 30, 1998 and June 30, 1997, respectively.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the Company's risk elements for the periods ending June 30, 1998 and December 31, 1997. The Company's coverage ratio of nonperforming assets and potential problem loans continues to be strong at 90% as of June 30, 1998. Management is of the opinion that the allowance for loan losses is adequate to provide for probable future losses inherent in the portfolio. RISK ELEMENTS (in thousands) Six Months Ended Year Ended June 30 December 31 1998 1997 ALLOWANCE FOR LOAN LOSSES ---- ---- Balance at beginning of period $7,673 $7,281 Charge-offs (1,193) (1,899) Recoveries 190 419 --- ------- Net charge-offs (1,003) (1,480) Provision for loan possible losses 1,201 1,662 Balance of acquired subsidiary 809 210 --- ---------- Balance at end of period $8,680 $7,673 ====== ======= AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs 0.12% .20% Provision for possible loan losses 0.14% .22% Allowance for loan losses 1.03% 1.01% June 30 December 31 1998 1997 NON-PERFORMING ASSETS ---- ---- Other real estate owned $1,930 $1,263 Non-accrual loans 5,041 3,758 Accruing loans past due 90 days or more 2,223 1,858 Restructured loans 104 331 -------- -------- Total Non-performing Assets $9,298 $7,210 POTENTIAL PROBLEM LOANS $381 $204 AS A PERCENT OF NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS Allowance for loan losses 89.68% 103.49% ACCRUING LOANS PAST DUE 90 DAYS OR MORE AS A PERCENT OF AVERAGE TOTAL LOANS 0.26% 0.25%
INTEREST RATE SENSITIVITY AND LIQUIDITY Interest Rate Sensitivity: The Company manages its liquidity position to reduce interest rate risk, which is the susceptibility of assets and liabilities to declines in value as a result of changes in general market interest rates. The Company seeks to reduce the risk through asset and liability management, where the goal is to optimize the balance between earnings and interest rate risk. The Company measures interest rate risk through interest sensitivity gap analysis as illustrated in the following table. At June 30, 1998, the one year period shows a negative gap (liability sensitive) of $356 million. This analysis is a "static gap" presentation and movements in deposit rates offered by City National and Del Amo lag behind movements in the prime rate. Such time lags affect the repricing frequency of many items on the Company's balance sheet. Accordingly, the sensitivity of deposits to changes in market rates may differ significantly from the related contractual terms. The table is first presented without adjustment for expected repricing behavior. Then, as presented in the "management adjustment" line, these balances have been notionally distributed over the first three periods to reflect those portions of such accounts that are expected to reprice fully with market rates over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of such allocations by each of the banking divisions, and is based upon historical experience with their individual markets and customers. Management expects to continue the same pricing methodology in response to market rate changes; however, management adjustments may change as customer preferences, competitive market conditions, liquidity, and loan growth change. Also presented in the management adjustment line are loan prepayment assumptions, which may differ from the related contractual terms of the loans. These balances have been distributed over the four periods to reflect those loans that are expected to be repaid in full prior to their maturity date. After management adjustments, the table shows a negative gap in the one-year period of $90 million. A negative gap position is advantageous when interest rates are falling because interest-bearing liabilities are being repriced at lower rates and in greater volume, which has a positive effect on net interest income. However, when interest rates are rising, this position produces the converse
effect. Consequently, the Company has experienced a slight decline in its net interest margin during the past two years and is somewhat vulnerable to a rapid rise in interest rates in 1998. These declines in net interest margin did not translate into declines in net interest income because of increases in the volume of interest-earning assets. INTEREST RATE SENSITIVITY GAPS (in thousands) 1 to 3 3 to 12 1 to 5 Over 5 MO. MO. YRS. YRS. Total ---------------------------------------------------- ASSETS Gross loans $ 227,195 $ 128,378 $443,930 $ 131,617 $ 931,120 Loans held for sale 194,959 0 0 0 194,959 Securities 23,672 24,370 93,120 25,832 166,994 Federal funds sold 570 0 0 0 570 Retained interest in securitized loans 24,053 0 0 0 24,053 ---------------------------------------------------- Total interest earning assets $ 470,449 $ 152,748 $537,050 $ 157,449 1,317,696 ---------------------------------------------------- LIABILITIES Savings and NOW Accounts $ 412,069 $ 0 $ 0 $ 0 $ 412,069 All other interest bearing deposits 128,841 245,120 152,776 18,196 544,933 Short term and other borrowings 108,474 0 0 0 108,474 Long term borrowings 84,795 0 0 0 84,795 Trust preferred securities 0 0 0 30,000 30,000 ---------------------------------------------------- Total interest bearing liabilities $ 734,179 $ 245,120 $152,776 $ 48,196 $1,180,271 ---------------------------------------------------- Interest sensitivity gap ($263,730) ($92,372) $384,274 $ 109,253 $ 137,425 ---------------------------------------------------- Cumulative sensitivity gap ($263,730) ($356,102) $ 28,172 $ 137,425 ==================================================== Management adjustments $ 336,534 ($70,455)($240,187) ($25,892) Cumulative management adjusted gap $ 72,804 ($90,023) $ 54,064 $ 137,425 ==================================================== The table above includes various assumptions and estimates by management as to maturity and repricing patterns. Future interest margins will be impacted by balances and rates which are subject to change periodically throughout the year.
In addition to the interest rate sensitivity gap analysis, the Company performs an earnings sensitivity analysis to identify the impact of changes in interest rates on its net interest income. Since the simulated gap analysis incorporates management assumptions as noted in the previous gap analysis discussion, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. The Company's policy objective is to avoid negative fluctuations in net interest income of 10% within a 12-month period. As of June 30, 1998, the Company had the following estimated earnings sensitivity profile: Immediate Change in Rates ------------------------- Pretax Earnings Changes + 200 bp - 200 bp ($41,000) $41,000 Based on the results of the simulation model as of June 30, 1998, the Company would expect a decrease in net interest income of $21,000 and an increase in net interest income of $21,000 if interest rates gradually increase or decrease, respectively, from current rates by 100 basis points over a 12-month period. Liquidity: Although management is comfortable with its liquidity position, it recognizes the need to pursue additional liquidity sources in an effort to reduce the Company's reliance on funding received from the Federal Home Loan Bank. In the fourth quarter of 1997, a New York investment bank committed to issue up to $100 million of the Company's certificates of deposit. The activation of this commitment is solely at the discretion of the Company. The certificates of deposit could be issued in maturities up to five years at a rate equal to a comparable treasury maturity plus a market based spread. At June 30, 1998, $2 million of the certificates of deposit had been sold under this commitment at an average rate and term of approximately 5.70% and two years, respectively. There can be no assurance that the Company will issue additional certificates of deposit pursuant to this arrangement.
Additionally, the Company has been successful in utilizing the capital markets as an additional source of liquidity. Through the Company's asset-backed securitization program and through the Company's issuance of Trust Preferred Securities, the Company has been able to diversify its available funding sources. Sales of the Company's junior lien mortgage loans to independent third parties have also provided the Company with an additional source of liquidity. Management seeks to maintain adequate liquidity to generate sufficient cash flow to fund the Company's operations on a timely basis, to continue its dividend distribution to shareholders, and to manage its liquidity position to provide for continued asset growth. The Company does not have a high concentration of volatile funds and all such funds are invested in assets of comparable maturity. Management is not aware of any trends, demands, commitments or uncertainties that have resulted or are reasonably likely to result in material changes in liquidity. The Company's cash and cash equivalents, represented by cash, due from banks and federal funds sold, are a product of its operating, investing and financing activities. These activities are set forth in the Company's Consolidated Statements of Cash Flows included elsewhere herein. Cash was used from operating activities in the first six months of 1998 and 1997 due to cash outlays for loans originated for sale and purchases of loans held for sale. Net cash was used in investing activities for both periods presented which is indicative of the Company's net increases in loan volume and purchases of securities available for sale. Cash was provided by financing activities during each period, as a result of net increases in deposits and long-term borrowings, and the issuance of Trust Preferred Securities in March 1998. CAPITAL RESOURCES As a bank holding company, City Holding Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In January 1989, the Federal Reserve published risk-based capital guidelines in
final form which are applicable to bank holding companies. Such guidelines define items in the calculation of risk-weighted assets. At June 30, 1998, the regulatory minimum ratio of qualified total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8 percent. At least half of the total capital is to be comprised of "Tier 1 capital", or the Company's common stockholders' equity, and minority interest in consolidated subsidiary, net of intangibles. The remainder ("Tier 2 capital") may consist of certain other prescribed instruments and a limited amount of loan loss reserves. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 capital to quarterly average tangible assets) guidelines for bank holding companies. These guidelines provide for a minimum ratio of 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies will be required to maintain a leverage ratio of 3 percent plus an additional cushion of a least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The following table presents comparative capital ratios and related dollar amounts of capital for the Company, including minimal amounts required by the Company's regulatory authorities: Dollars in Thousands June 30 December 31 1998 1997 ----- ---- Capital Components Tier 1 risk-based capital $ 119,094 $ 82,842 Total risk-based capital 127,774 90,515 Capital Ratios Tier 1 risk-based 9.37% 9.16% Total risk-based 10.05 10.00 Leverage 8.55 6.49 Regulatory Minimum Tier 1 risk-based (dollar/ratio) $50,863/4.00% $36,191/4.00% Total risk-based (dollar/ratio) 101,727/8.00 72,381/8.00 Leverage (dollar/ratio) 55,712/4.00 51,094/4.00
Actual capital ratios noted above reflect management's emphasis on strong asset quality and a history of retained net income. However, the asset-backed securitization program undertaken by the Company to generate future earnings does, in the short-term, negatively impact the aforementioned ratios. As of June 30, 1998, the Company is required to provide equity capital against approximately $180 million of off-balance sheet items. The unpaid principal balance of securitized loan pools approximated $180 million at June 30, 1998. Under the low-level recourse rules required by the Company's regulatory authorities, the Company, as a result of maintaining a retained interest in its securitized loan pools, is required to include the lesser of: (1) the product of the recorded balance of its retained interests multiplied by a factor of 12.5, or (2) the unpaid principal balance of the securitized loans in its risk-weighted assets when computing capital ratios. Thus, actual capital ratios are less than they would have been had the Company not maintained a retained interest in its securitization transactions or had the Company sold those loans to independent third parties separate from a securitization transaction. However, as evidenced above, the Company's actual capital ratios sufficiently exceed minimum levels of capital as required by the Company's regulatory authorities and management is committed to maintaining its capital ratios at such levels. Through continued improvement in operating results, in part from future earnings to be derived from completed securitization transactions, continued emphasis on high asset quality, and effective management of risk, management expects that the Company will continue to maintain its capital position. Doing so enables the Company to continue its pursuit of strategic acquisitions and other growth opportunities which, when transacted, further enhance the overall capital position of the Company. As more fully discussed in Note D to the financial statements, the Company, pursuant to rulings released by the Federal Reserve Board in October 1996, has included its Trust Preferred Securities in its Tier I capital calculations. IMPACT OF THE YEAR 2000 The Company's Year 2000 project plan was initiated throughout the Company in January 1997. The project is sponsored and closely monitored by both senior and executive level management. The Office of the Comptroller of the Currency (OCC) and the Federal Financial Institutions Examination Council recommends that all
systems reprogramming efforts be completed by December 31, 1998 to allow for sufficient testing and implementation. Management intends to meet or exceed this recommendation. Plan components are being executed in accordance with guidelines that have been mandated by the OCC. The Company's approach to Year 2000 compliance encompasses five industry standard phases: 1. Awareness Phase 2. Assessment Phase 3. Renovation Phase 4. Validation Phase 5. Implementation Phase The Company has completed the Awareness, Assessment, and Renovation phases of the project. Currently, the Company is approximately 70% complete in the validation phase and has recently begun the implementation phase in certain areas. Having begun the implementation phase, management believes that the risks affecting the Company associated with the Year 2000 issue should be minimal. The majority of the critical applications affecting the Company have been addressed and management believes that solid solutions have been implemented to address areas of concern. The sum of the costs incurred to-date and the estimated costs remaining to be incurred is not expected to be material to the consolidated financial statements. NET INTEREST INCOME Net interest income, on a fully federal tax-equivalent basis, improved from the second quarter of 1997 to the second quarter of 1998 by approximately $1,176,000 due to an increase in net earning assets. Net yield on earning assets decreased between the respective periods from 5.0% to 4.71%. Earning asset yields increased 10 basis points (100 basis points equal one percent) to 9.06%, and the cost of interest-bearing liabilities increased 45 basis points to 5.06%. The $2,039,000 decrease in net interest income due to a change in the rate, as shown in the following table, was coupled with a $3,215,000 increase in net interest income due to a change in the volume. The major component of this favorable volume change was increased average loans held for sale.
Net interest income, on a fully federal tax-equivalent basis, improved from the six months ended June 30, 1997 to the six months ended June 30, 1998 by approximately $2,942,000 due to an increase in net earning assets. Net yield on earning assets decreased between periods from 4.85% to 4.69%. Earning asset yields increased 25 basis points (100 basis points equal one percent) to 8.95%, and the cost of interest-bearing liabilities increased 42 basis points to 4.87%. The $1,283,000 decrease in net interest income due to a change in the rate, as shown in the following table, was coupled with a $4,225,000 increase in net interest income due to a change in the volume. The major component of this favorable volume change was the increased average balance of loans held for sale.
EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands) <TABLE> <CAPTION> Quarter Ended June 30 1998 1997 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ------------------------------------------------------- <S> <C> EARNING ASSETS: Loans (1) Commercial and industrial $243,965 $5,651 9.27% $235,324 $5,337 9.07% Real estate 495,925 10,622 8.57% 365,717 7,833 8.57% Consumer obligations 146,142 3,676 10.06% 147,059 3,663 9.96% ------------------------------------------------------- Total loans 886,032 19,949 9.01% 748,100 16,833 9.00% Loans held for sale 216,956 5,847 10.78% 183,026 5,074 11.09% Securities Taxable 129,170 2,033 6.30% 146,622 2,289 6.24% Tax-exempt (2) 31,778 640 8.06% 35,022 740 8.45% ------------------------------------------------------- Total securities 160,948 2,673 6.64% 181,644 3,029 6.67% Retained interest in securitized loans 12,644 493 15.60% 0 0 0.00% Federal funds sold 5,997 79 5.27% 189 3 6.35% ------------------------------------------------------- Total earning assets 1,282,577 29,041 9.06% 1,112,959 24,939 8.96% Cash and due from banks 31,830 33,461 Bank premises and equipment 47,276 31,304 Other assets 74,667 19,087 Less: allowance for possible loan losses (8,355) (7,665) ------------------------------------------------------- Total assets $1,427,995 $1,189,146 ======================================================= INTEREST-BEARING LIABILITIES: Demand deposits $162,804 $1,365 3.35% $123,982 $ 820 2.65% Savings deposits 234,009 1,799 3.08% 221,982 1,851 3.34% Time deposits 518,005 7,352 5.68% 410,218 5,476 5.34% Short-term borrowings 101,117 1,500 5.93% 163,039 2,217 5.44% Long-term debt 86,335 1,934 8.96% 36,927 660 7.15% ------------------------------------------------------- Total interest-bearing liabilities 1,102,207 13,950 5.06% 956,148 11,024 4.61% Demand deposits 151,698 135,484 Other liabilities 22,540 11,631 Trust preferred securities 30,000 0 Stockholders' equity 121,487 85,883 ------------------------------------------------------- Total liabilities and Stockholders' equity $1,427,995 $1,189,146 ======================================================= Net interest income $15,091 $13,915 ======================================================= Net yield on earning assets 4.71% 5.00% ======================================================= </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 1998 and 34% in 1997.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) <TABLE> <CAPTION> Quarter Ended June 30 1998 VS. 1997 Increase (Decrease) Due to Change In: Volume Rate Net ---------------------------------------- <S> <C> INTEREST INCOME FROM: Loans Commercial and Industrial $ 199 $ 115 $ 314 Real estate 2,789 0 2,789 Consumer obligations (107) 120 13 ---------------------------------------- Total loans 2,881 235 3,116 Loans held for sale 1,655 (882) 773 Investment securities Taxable (379) 123 (256) Tax-exempt (1) (66) (34) (100) ---------------------------------------- Total investment securities (445) 89 (356) Retained interest in securitized loans 493 0 493 Federal funds sold 80 (4) 76 ---------------------------------------- Total interest-earning assets $4,664 $(562) $ 4,102 INTEREST EXPENSE ON: Demand deposits 294 251 545 Savings deposits 452 (504) (52) Time deposits 1,512 364 1,876 Short-term borrowings (1,880) 1,163 (717) Long-term debt 1,071 203 1,274 ---------------------------------------- Total interest-bearing liabilities $ 1,449 $ 1,477 $ 2,926 ---------------------------------------- NET INTEREST INCOME $ 3,215 $ (2,039) $ 1,176 ======================================== </TABLE> (1) Fully federal taxable equivalent using a tax rate of 35% in 1998 and 34% in 1997. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
<TABLE> EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands) <CAPTION> <S> <C> Six Months Ended June 30 1998 1997 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ------------------------------------------------------- EARNING ASSETS: Loans (1) Commercial and industrial $240,960 $11,054 9.17% $233,078 $10,454 8.97% Real estate 455,309 19,013 8.35% 360,274 15,165 8.42% Consumer obligations 144,098 7,221 9.95% 146,010 7,199 9.86% ------------------------------------------------------- Total loans 841,367 37,288 8.86% 739,362 32,818 8.88% Loans held for sale 216,978 11,694 10.78% 148,707 7,745 10.42% Securities Taxable 130,390 4,133 6.34% 143,922 4,456 6.19% Tax-exempt (2) 31,684 1,274 8.04% 35,525 1,476 8.31% ------------------------------------------------------- Total securities 162,074 5,407 6.67% 179,447 5,932 6.61% Retained interest in securitized loans 8,593 67 15.66% 0 0 0.00% Federal funds sold 4,121 110 5.34% 2,969 59 3.97% ------------------------------------------------------- Total earning assets 1,233,133 55,172 8.95% 1,070,485 46,554 8.70% Cash and due from banks 31,297 35,699 Bank premises and equipment 44,232 30,880 Other assets 71,499 18,267 Less: allowance for possible loan losses (8,623) (7,619) ------------------------------------------------------- Total assets $1,371,538 $1,147,712 ======================================================= INTEREST-BEARING LIABILITIES: Demand deposits $156,659 $2,611 3.33% $120,983 $1,717 2.84% Savings deposits 225,992 3,390 3.00% 221,749 3,478 3.14% Time deposits 487,876 13,373 5.48% 407,715 10,656 5.23% Short-term borrowings 119,408 3,475 5.82% 137,448 3,479 5.06% Long-term debt 88,313 3,409 7.72% 37,504 1,252 6.68% ------------------------------------------------------- Total interest-bearing liabilities 1,078,248 26,258 4.87% 925,399 20,582 4.45% Demand deposits 140,027 126,440 Other liabilities 22,785 10,701 Trust preferred securities 15,249 0 Stockholders' equity 115,229 85,172 ------------------------------------------------------- Total liabilities and Stockholders' equity $1,371,538 $1,147,712 ======================================================= Net interest income $ 28,914 $ 25,972 ======================================================= Net yield on earning assets 4.69% 4.85% ======================================================= </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 1998 and 34% in 1997.
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) Six Months Ended June 30 1998 VS. 1997 Increase (Decrease) Due to Change In: Volume Rate Net ---------------------------------------- INTEREST INCOME FROM: Loans Commercial and Industrial $ 358 $ 242 $ 600 Real estate 4,203 (355) 3,848 Consumer obligations (99) 121 22 ---------------------------------------- Total loans 4,462 8 4,470 Loans held for sale 3,671 278 3,949 Investment securities Taxable (596) 273 (323) Tax-exempt (1) (156) (46) (202) ---------------------------------------- Total investment securities (752) 227 (525) Retained interest in securitized loans 673 0 673 Federal funds sold 27 24 51 ---------------------------------------- Total interest-earning assets $ 8,081 $ 537 $ 8,618 INTEREST EXPENSE ON: Demand deposits 562 332 894 Savings deposits 158 (246) (88) Time deposits 2,177 540 2,717 Short-term borrowings (975) 971 (4) Long-term debt 1,934 223 2,157 ---------------------------------------- Total interest-bearing liabilities $ 3,856 $ 1,820 $ 5,676 ---------------------------------------- NET INTEREST INCOME $ 4,225 $ (1,283) $ 2,942 ======================================== (2)Fully federal taxable equivalent using a tax rate of 35% in 1998 and 34% in 1997. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Item 3. Quantitative and Qualitative Disclosures and Market Risk Not Applicable PART II OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities- None Item 4. Submission of Matters to a Vote of Security Holders- On April 28, 1998, the Company held its Annual Meeting of Shareholders. Two matters were submitted to the shareholders for consideration: 1. Election of five Class III Directors to the Board of Directors. 2. Ratification of the Board of Directors' appointment of Ernst & Young LLP as auditors for the Company for 1998. The vote tabulation for each matter was as follows: 1. Election of five Class III Directors to the Board of Directors: Authority Director For With held Abstain -------- --- --------- ------- D. K. Cales 4,412,083 13,466 0 Robert D. Fisher 4,409,163 16,386 0 Jay Goldman 4,411,214 14,335 0 C. Dallas Kayser 4,406,458 19,091 0 William M. Frazier 4,412,133 13,416 0
Continuing directors whose terms did not expire at the annual meeting were: Samuel M. Bowling, Steven J. Day, Jack E. Fruth, Otis L. O'Conner, Bob F. Richmond, Leon K. Oxley, Carlin K. Harmon, Mark Schaul, Van R. Thorn, C. Scott Briers, Hugh R. Clonch, David E. Haden. 2. Ratification of appointment of Ernst & Young LLP: For Against Abstain --- ------- ------- 4,410,375 1,945 13,229 Item 5. Other Information- On June 1, 1998, the Company and SunTrust Bank, Atlanta ("SunTrust"), executed a second supplement (the "Supplement") to the Amended and Restated Rights Agreement, providing that SunTrust was to serve as the rights agent under the company's Amended and Restated Rights Agreement dated as of May 7, 1991. A copy of the Supplement is attached as an exhibit hereto. The Company and Horizon Bancorp, Inc. ("Horizon") signed a definitive Agreement and Plan of Reorganization (the "Agreement") to merge on August 7, 1998. Upon the completion of the merger, expected to occur during the first quarter of 1999, Horizon's five bank subsidiaries will be merged into City Holding's commercial banking subsidiary. A copy of the press release discussing the terms of the Agreement is attached as an exhibit hereto. Also attached are a copy of the Agreement and a copy of a Stock Option Agreement granting Horizon an option, exercisable under certain conditions, to purchase up to 19.9% of outstanding shares of common stock of the Company.
Item 6. Exhibits and Reports on 8-K Exhibit Number Exhibit ------- ------- 11 Computation of Earnings per Share 27 Financial Data Schedule for the six months ended June 30, 1998 99.1 Second Supplement to Amended and Restated Rights Agreement 99.2 Press Release issued August 7, 1998 99.3 Agreement and Plan of Reorganization between City Holding Company and Horizon Bancorp, Inc., dated August 7, 1998 99.4 Stock Option Agreement between City Holding Company and Horizon Bancorp, Inc., dated August 7, 1998 S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY August 11, 1998 By /s/ Michael D. Dean ----------------------- Michael D. Dean Senior Vice President - Finance Principal Accounting Officer and Duly Authorized Officer
EXHIBIT INDEX Exhibit Index - ------------- 11 Computation of Earnings per Share 27 Financial Data Schedule for the Six Months Ending June 30, 1998 99.1 Second Supplement to Amended and Restated Rights Agreement 99.2 Press Release issued August 7, 1998 99.3 Agreement and Plan of Reorganization between City Holding Company and Horizon Bancorp, Inc., dated August 7, 1998 99.4 Stock Option Agreement between City Holding Company and Horizon Bancorp, Inc., dated August 7, 1998