UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period __________ to __________.
Commission File Number 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
Charleston, 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:
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Title of Each Class Name of Each Exchange on Which Registered:
Common Stock, $2.50 par value The Nasdaq Stock Market
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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 29, 1999 (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 -- $ 384,562,285
The number of shares outstanding of the issuer's common stock as of March 29,
1999:
Common Stock, $2.50 Par Value -- 16,812,944 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of Form 10-K
into which Document
is incorporated
Portions of the Annual Part I, Item 1; Part
Report to Shareholders II, Items 5, 6, 7,
of City Holding Company and 8; Part III, Item
for the year ended 13; Part IV, Item 14.
December 31, 1998. _____________
Portions of City Holding Part III, Items 10,
Company's Proxy statement 11, 12 and 13.
for the 1999 Annual
Meeting of Shareholders. ______________
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FORM 10-K INDEX
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PART I Page
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Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of 12-13
Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes In and Disagreements with Accountants 14
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial 14
Owners and Management
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and 15-16
Reports on Form 8-K
Signatures 17-18
Exhibit Index
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PART I
ITEM 1 BUSINESS
City Holding Company (the Company), a West Virginia corporation
headquartered in Charleston, West Virginia, is a multi-bank holding company that
provides diversified financial products and services to consumers and local
businesses. Through its network of 63 banking offices in West Virginia (60
offices), Ohio (1 office) and California (2 offices), the Company provides
credit, deposit, investment advisory, insurance, and technology products and
services to its customers. In addition to its branch network, the Company's
delivery channels include ATMs, check cards, telemarketing, direct mail
solicitation, interactive voice response systems, and Internet technology.
Community banking is the core business segment of the Company. Since
1983, the Company has provided traditional banking products and services through
its lead bank, City National Bank of West Virginia (City National), and through
the various financial institutions the Company has acquired over the years. In
conjunction with the evolution of the financial services industry, the Company,
in recent years, has diversified its business to offer additional products and
services to existing and new customers. Mortgage banking, including the
origination, acquisition, servicing and sale of mortgage loans has developed
into a significant product line for the Company. Additionally, the Company
provides other financial services, including investment advisory, insurance, and
internet technology products. When combined, these business lines reflect the
diversification of the Company and depth and breadth of the products and
services the Company delivers to its customers.
In addition to the Company's community banking, mortgage banking, and
other financial services business segments, the Company has identified a fourth
segment, general corporate, which primarily includes the parent company and
other administrative areas which provide general corporate support. These
business segments are primarily identified by the products and services offered
and the delivery channels through which the product or service is offered. The
following tables summarize selected segment information for each of the last
three years:
Other
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Community Mortgage Financial General
(in thousands) Banking Banking Services Corporate Eliminations Consolidated
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1998
Net interest income (expense) $ 96,085 $ 8,906 $ 64 $ (1,712) - $ 103,343
Provision for loan losses (8,481) - - - - (8,481)
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Net interest income after provision for
loan losses 87,604 8,906 64 (1,712) 94,862
Other income 19,355 47,414 11,133 216 $ (5,695) 72,423
Other expenses 82,100 50,752 11,502 16,899 (5,695) 155,558
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Income before income taxes 24,859 5,568 (305) (18,395) - 11,727
Income tax expense (benefit) 9,816 1,798 (8) (5,113) - 6,493
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NET INCOME $ 15,043 $ 3,770 $ (297) $ (13,282) $ - 5,234
=======================================================================================
Average assets $ 2,202,104 $ 336,367 $ 14,660 $ 12,969 $ - $ 2,566,100
=======================================================================================
1997
Net interest income (expense) $ 90,769 $ 8,456 $ 3 $ (2,074) - $ 97,154
Provision for loan losses (4,064) - - - - (4,064)
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Net interest income after provision for
loan losses 86,705 8,456 3 (2,074) - 93,090
Other income 13,858 17,636 446 673 - 32,613
Other expenses 61,165 14,702 366 8,666 - 84,899
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Income before income taxes 39,399 11,389 83 (10,067) - 40,804
Income tax expense (benefit) 12,604 4,284 36 (2,411) - 14,513
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NET INCOME $ 26,795 $ 7,105 $ 47 $ (7,656) - $ 26,291
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Average assets $ 2,041,150 $ 133,792 $ 627 $ 4,892 - $ 2,180,461
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1996
Net interest income (expense) $ 86,496 $ 6,113 $ 1 $ (1,236) - $ 91,374
Provision for loan losses (5,012) - - - - (5,012)
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Net interest income after provision for
loan losses 81,484 6,113 1 (1,236) - 86,362
Other income 11,732 3,924 111 706 - 16,473
Other expenses 59,399 4,637 129 5,901 - 70,066
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33,817 5,400 (17) (6,431) - 32,769
Income tax expense (benefit) 11,830 2,032 - (2,374) - 11,488
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NET INCOME $ 21,987 $ 3,368 $ (17) $ (4,057) - $ 21,281
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Average assets $ 1,867,334 $ 149,075 $ 92 $ 5,487 - $ 2,021,988
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Services provided to the banking segments by the direct mail, insurance, and
internet service provider divisions are eliminated in the Consolidated
Statements of Income.
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MERGERS AND ACQUISITIONS
On December 31, 1998, the Company's merger with Horizon Bancorp, Inc.
(Horizon) became effective. The merger into the Company of Horizon, a $1.0
billion bank holding company headquartered in Beckley, West Virginia, increased
total assets by approximately 65% and increased deposit market share such that
the Company currently ranks third in West Virginia in that category. The
transaction was accounted for under the pooling-of-interests method of
accounting. As such, the Company's historical financial information has been
restated to include the operations of Horizon for all periods presented. With
the addition of the Horizon banks, the Company significantly strengthens its
presence in the Beckley and Huntington markets of West Virginia. Both areas are
considered growth locations and the Company expects to capitalize and expand on
its existing customer base in those cities. Additionally, the community banking
philosophy utilized by Horizon management was very similar to the Company's
management style. With minimal impact from overlapping markets and management's
identification of operational efficiencies to be achieved, Horizon was
identified as an ideal strategic partner that could significantly enhance the
Company's community banking franchise.
On April 1, 1998, the Company consummated its acquisition of Del Amo
Savings Bank (Del Amo), a federally-chartered savings bank headquartered in
Torrance, California. At the date of acquisition, Del Amo reported total assets
and deposits of approximately $116 million and $102 million, respectively. This
transaction was accounted for under the purchase method of accounting.
Accordingly, the operations of Del Amo have been included in the consolidated
financial statements from the date of acquisition. This acquisition represented
a strong addition to the Company's existing operations in the Southern
California area and the Company's continued commitment to grow its community
banking operating segment.
The other financial services business line also experienced growth
during 1998. In April 1998, City National acquired Citynet Corporation and
MarCom, Inc. The operations of these entities were consolidated into Citynet, a
division of City National. With the addition of these companies, City National
is expanding its Internet banking capabilities and introducing new Internet
technology products, including balance inquiry and funds transfer capabilities,
loan payment processing and web site development. In March 1998, City National
increased the size of its insurance brokerage division with the acquisition of
Morton Specialty Insurance Partners, Inc. (Morton). Morton was subsequently
consolidated into RMI, Ltd., a division of City National, and increased the
diversity of insurance products the Company offers. Also within the Other
Financial Services business segment, City National acquired Jarrett/Aim
Communications (Jarrett/Aim) in January 1998. Jarrett/Aim, a division of City
National, conducts printing and direct mail marketing for the Company and third
party customers.
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Within the community-banking segment, no portion of the Company's
deposits are derived from a single person or a few persons, the loss of which
could have a material adverse affect on liquidity capital, or other elements of
financial performance. No material portion of the Company's loans, within this
segment, are concentrated within a single industry or group of related
industries.
Within the mortgage banking segment, the Company has focused on the
origination, acquisition, servicing and sale of mortgage loans, primarily junior
lien mortgages and, to a lesser extent, traditional mortgage products. Junior
lien mortgage loans, which comprise approximately 82% of loans classified as
held for sale at December 31, 1998, are originated by the Company's four retail
origination platforms on a nationwide basis. These loan production offices,
located in West Virginia, California and Texas solicit potential borrowers
through direct mail and telemarketing delivery channels. Additionally, the
Company's correspondent lending division acquires loans either on a flow or bulk
basis from an approved network of unaffiliated lenders. Because the retail and
correspondent lending divisions originate and acquire these loans on a
nationwide basis, the Company's risk related to geographic concentration is
significantly reduced. These loans are generally expected to either be sold or
securitized within 90 to 180 days.
The other financial services business segment is not significant to
the Company's consolidated balance sheets or statements of income, representing
less than 1% of total assets and net income in 1998.
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.
REGULATION AND SUPERVISION
The Company, as a registered bank holding company and its banking
subsidiaries, as insured depository institutions, 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 subsidiaries are subject. These federal and state laws
and regulations have been enacted for the protection of depositors in national
and state banks and not for the protection of shareholders of bank holding
companies.
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.
<PAGE>
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 banking subsidiaries are subject to supervision and regulation by
the Office of the Comptroller of the Currency ("OCC"), West Virginia Division of
Banking, 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.
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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. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. 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 subsidiaries' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. FDICIA requires the federal banking regulators to
take prompt corrective action with respect to depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The Federal Reserve Board has adopted regulations establishing
relevant capital measures and relevant capital levels for banks. The relevant
capital measures are the total risk-adjusted capital ratio, Tier I risk-adjusted
capital ratio and the leverage ratio. Under the regulations, a bank is
considered (i) well capitalized if it has a total capital ratio of ten percent
or greater, a Tier 1 capital ratio of six percent or greater and a leverage
ratio of five percent or greater and is not subject to any order or written
directive by such regulator to meet and maintain a specific capital level for
any capital measure, (ii) adequately capitalized if it has a total capital ratio
of eight percent or greater, a Tier I capital ratio of four percent or greater
and a leverage ratio of four percent or greater (three percent in certain
circumstances) and is not well capitalized, (iii) undercapitalized if it has a
total capital ratio of less than eight percent, a Tier 1 capital ratio of less
than four percent or a leverage ratio of less than four percent (three percent
in certain circumstances), (iv) significantly undercapitalized if it has a total
capital ratio of less than six percent, a Tier 1 capital ratio of less than
three percent or a leverage ratio of less than three percent, and (v) critically
undercapitalized if its tangible equity is equal to or less than two percent of
average quarterly tangible assets. As of December 31, 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.
<PAGE>
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.
CAPITAL REQUIREMENTS
Under the risk-based capital requirements of these federal bank
regulatory agencies, the Company and its banking subsidiaries are required to
maintain a minimum ratio of total capital to risk-weighted assets of at least
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.
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 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.
During 1998, the Company created two separate special-purpose
statutory trust subsidiaries which sold trust preferred securities generating
gross proceeds of $87.50 million. Pursuant to rulings released in 1996 by the
Federal Reserve Board, the Company has included the trust preferred securities
in its regulatory capital ratio computations. At December 31, 1998, $72.02
million of trust preferred securities are included in the Company's Tier I
capital, with the remaining $15.48 million added to the Company's total
regulatory capital. Proceeds from the issuance of the trust preferred securities
were used for general corporate purposes, including, but not limited to,
repayment of long-term debt and infusion of capital into the Company's lead
bank, City National Bank of West Virginia.
The Tier 1 capital, total capital and leverage ratios of the Company
as of December 31, 1998 were 10.60%, 12.00%, and 9.99%, respectively, meeting
the minimums required to be considered well capitalized. As of December 31,
1998, the most recent notifications from banking regulatory agencies categorized
the Company and its banking subsidiaries as "well capitalized" under the
regulatory framework for prompt corrective action. There are no conditions or
events since notifications that management believes have changed the
institution's classifications.
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 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.
<PAGE>
The Company's banking subsidiaries are subject to various statutory
restrictions on their ability to pay dividends to the Company. Under applicable
regulations, at December 31, 1998, the banking subsidiaries have paid aggregate
dividends to the Company of $30.26 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 subsidiaries may also be limited by
other factors, such as requirements to maintain adequate capital above
regulatory guidelines. The OCC has the authority to prohibit any bank under its
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.
GOVERNMENTAL POLICIES
The operations of the Company and its banking subsidiaries are also
affected by the policies set forth by 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.
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, 1998, City Holding Company employed 1,869
associates. Employee relations within the Company 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, 1998 and such
pages are incorporated herein by reference.
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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 29
b. Analysis of Net Interest Earnings 29-30
c. Rate Volume Analysis of Changes in 30
Interest Income and Expense
2.
a. Book Value of Investments 35
b. Maturity Schedule of Investments 35
c. Securities of Issuers Exceeding 10% of 35
Stockholders' Equity
3. LOAN PORTFOLIO
a. Types of Loans 35
b. Maturities and Sensitivity to Changes in Interest Rates 36
c. Risk Elements 38
d. Other Interest Bearing Assets N/A
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4. SUMMARY OF LOAN LOSS EXPERIENCE 37
5. DEPOSITS
a. Breakdown of Deposits by Categories, Average Balance 29
and Average Rate Paid
b. Maturity Schedule of Time Certificates of Deposit 40
and Other Time Deposits of $100,000 or More
$100,000 or More
6. RETURN ON EQUITY AND ASSETS 25
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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, sixty (60) banking offices in West Virginia, one branch office
in Ohio, two banking and 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
On December 9, 1998, the Company held a special meeting of its
shareholders to vote on:
(1) A proposal to approve the Agreement and Plan of
Reorganization, dated August 7, 1998, between City Holding
Company and Horizon Bancorp, Inc. ("Horizon"), a related
Plan of Merger, and the transactions contemplated by those
documents. These transactions included the merger of
Horizon into City Holding Company. They also included the
issuance of City Holding Company common shares to Horizon
shareholders in connection with the merger of Horizon and
the Company.
<PAGE>
Results of shareholder votes cast were as follows:
NUMBER % OF SHARES
SHARES OUTSTANDING
------ -----------
Voting For 4,682,695 70.30%
Voting Against 28,097 0.43
Abstain From Voting 32.921 0.49
=========== ===========
Total 4,743,713 71.22%
=========== ===========
(2) A proposal to increase the authorized shares of common
stock of the Company to fifty million (50,000,000) shares.
Results of shareholder votes cast were as follows:
NUMBER % OF SHARES
SHARES OUTSTANDING
Voting For 4,892,062 73.45%
Voting Against 329,950 4.95
Abstain From Voting 24,347 0.37
------------ --------------
Total 5,246,359 78.77%
============ ==============
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Page 26 of the Annual Report to Shareholders of City Holding Company
for the year ended December 31, 1998, included in this report as Exhibit 13, is
incorporated herein by reference.
During 1998, the Company issued 74,401 shares of its common stock to
the owners and certain employees of acquired businesses in transactions exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6 SELECTED FINANCIAL DATA
Selected Financial Data on page 25 of the Annual Report to
Shareholders of City Holding Company for the year ended December 31, 1998,
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 26 through 42 of the Annual Report to
Shareholders of City Holding Company for the year ended December 31, 1998,
included in this report as Exhibit 13, is incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Market Risk Management"
appearing on pages 32 through 34 of the Annual Report to Shareholders of
City Holding Company for the year ended December 31, 1998, included in this
report as Exhibit 13, is incorporated herein by reference.
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial
statements, included on pages 43 through 62 of the Annual Report to Shareholders
of City Holding Company for the year ended December 31, 1998, 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 1999 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 1999 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 1999 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 1999 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" and in NOTE FIVE of Notes to Consolidated Financial
Statements appearing on pages 52 and 53 of the Company's Annual Report to
Shareholders for the year ended December 31, 1998, included in this report as
Exhibit 13, and incorporated herein by reference.
<PAGE>
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, 1998, are incorporated by reference
in Item 8:
Page Number
-----------
Report of Independent Auditors 43
Consolidated Balance Sheets - December 31, 1998 and 1997 44
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997, and 1996 45
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31,1998, 1997 and 1996 46
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996 47
Notes to Consolidated Financial Statements -
December 31, 1998 48-62
<PAGE>
FINANCIAL SCHEDULES I AND II UNDER ARTICLE 9 OF REGULATION S-X ARE NOT
APPLICABLE.
(b) Reports on Form 8-K: NONE.
(c) Exhibits
The exhibits listed in the EXHIBIT INDEX included herein 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
------------------------------
Steven Day,
President/Director
(Principal Executive Officer)
/s/ Robert A. Henson
-------------------------------
Robert A. Henson,
Chief Financial Officer
(Principal Financial Officer)
/s/ Michael D. Dean
-------------------------------
Michael D. Dean
Senior Vice President - Finance
(Principal Accounting Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on March 8, 1999. 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/ Samuel M. Bowling /s/ D. K. Cales
- ---------------------- -----------------------
Samuel M. Bowling Dr. D. K. Cales
Director Director
/s/ Hugh R. Clonch /s/ Robert D. Fisher
- ---------------------- ----------------------
Hugh R. Clonch Robert D. Fisher
Director Director
/s/ William M. Frazier /s/ Jay C. Goldman
- ---------------------- ----------------------
William M. Frazier Jay C. Goldman
Director Director
<PAGE>
/s/ David E. Haden /s/ Carlin K. Harmon
- ---------------------- ----------------------
David E. Haden Carlin K. Harmon
Director Director
/s/ C. Dallas Kayser
- ---------------------- ----------------------
C. Dallas Kayser Leon K. Oxley
Director Director
/s/ Mark H. Schaul /s/ Steven J. Day
- ---------------------- ----------------------
Mark H. Schaul Steven J. Day
Director Director/President
/s/ James E. Songer, Sr. /s/ Philip L. McLaughlin
- ---------------------- ----------------------
James E. Songer, Sr. Philip L. McLaughlin
Director Director
/s/ B. C. McGinnis III /s/Tracy W. Hylton II
- ---------------------- ----------------------
B. C. McGinnis III Tracy W. Hylton II
Director Director
/s/ Albert M. Tieche, Jr. /s/ Phillip W. Cain
- ---------------------- ----------------------
Albert M. Tieche, Jr. Phillip W. Cain
Director Director
/s/ William C. Dolin /s/ David W. Hambrick
- ---------------------- ----------------------
William C. Dolin David W. Hambrick
Director Director
/s/ Frank S. Harkins, Jr. /s/ Thomas L. McGinnis
- ---------------------- ----------------------
Frank S. Harkins, Jr. Thomas L. McGinnis
Director Director
/s/ R. T. Rogers /s/ E. M. Payne III
- ---------------------- ----------------------
R. T. Rogers E. M. Payne III
Director Director
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated herein
by reference.
<TABLE>
<CAPTION>
Prior Filing
Exhibit Reference
Number Description (if applicable)
- ------ ----------- -----------------
<S> <C> <C>
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 V
Articles of Incorporation of
City Holding Company, dated
May 6, 1991
3(f) Articles of Amendment to the V
Articles of Incorporation of
City Holding Company, dated
May 7, 1991
3(g) Articles of Amendment to the VIII
Articles of Incorporation of
City Holding Company, dated
August 1, 1994
3(h) Articles of Amendment to the
Articles of Incorporation of
City Holding Company, dated
December 9, 1998
3(i) Amended and Restated By laws
of City Holding Company
4(a) Amendment and Restated Rights VII
Agreement, dated as of May 7, 1991,
between the Company and Sovran Bank,
N.A. (predecessor to Nations Bank,
N.A.), as Rights Agent
4(b) Supplement, dated as of June 30, XIII
1998, between City Holding Company
and SunTrust Bank, Atlanta, as Rights
Agent, to Amended and Restated Rights
Agreement dated May 7, 1991
10(a) Agreement dated June 5, 1986, by III
and between Steven J. Day and
City Holding Company
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
10(b) Form of Employment Agreement, IX
dated as of December 31, 1998,
by and between City Holding Company
and Steven J. Day
10(c) Form of Employment Agreement, IX
dated as of December 31, 1998,
by and between City Holding Company
and Robert A. Henson
10(d) Form of Employment Agreement, IX
dated as of December 31, 1998,
by and between City Holding Company
and Matthew B. Call
10(e) Form of Employment Agreement, IX
dated as of December 31, 1998,
by and between City Holding Company
and Philip L. McLaughlin
10(f) Form of Employment Agreement, IX
dated as of December 31, 1998,
by and between City Holding Company
and Bernard C. McGinnis, III
10(g) Form of Employment and Consulting IX
Agreement, dated as of December 31, 1998
by and between City Holding Company
and Frank S. Harkins, Jr.
10(h) Junior Subordinated Indenture, X
dated as of March 31, 1998,
between City Holding Company
and The Chase Manhatten Bank,
as Trustee
10(i) Form of City Holding Company's X
9.15% Debenture due April 1, 2028
10(j) Form of City Holding Company's XI
9.125% Debenture due October 31, 2028
10(k) City Holding Company's 1993 XII
Stock Incentive Plan
11 Statement Re: Computation of Per
Share Earnings
13 City Holding Company Annual Report
to Shareholders for Year Ended
December 31, 1998
21 Subsidiaries of City Holding Company
23 Consent of Ernst & Young LLP
24 Power of Attorney (included on the signature page hereof)
27(a) Financial Data Schedule for the year ending
27(b) Restated Financial Data Schedule for the year ending
December 31, 1997
27(c) Restated Financial Data Schedule for the year ending
December 31, 1996
</TABLE>
- ----
I Attached to, and incorporated by reference from Amendment No. 1 to
City Holding Company's 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.
IX Attached to, and incorporated by reference from, City Holding
Company's Registration Statement on Form S-4, Registration No.
333-64205, filed with the Securities and Exchange Commission on
September 24, 1998.
X Attached to, and incorporated by reference from, City Holding
Company's Registration Statement on Form S-4, Registration No.
333-62419, filed with the Securities and Exchange Commission on
August 28, 1998.
XI Attached to, and incorporated by reference from, the Pre-Effective
Amendment No. 1 to City Holding Company's Registration Statement on
Form S-3, Registration No. 333-64809, filed with the Securities and
Exchange Commission on October 21, 1998.
XII Attached to, and incorporated by reference from, City Holding
Company's Registration Statement on Form S-8, Registration No.
033-62738, filed with the Securities and Exchange Commission on May
14, 1993.
XIII Attached to, and incorporated by reference from, City Holding
Company's Form 10-Q Quarterly Report dated June 30, 1998 and filed
August 14, 1998, with the Securities and Exchange Commission.
EXHIBIT 3(h)
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CITY HOLDING COMPANY
1. Name. The name of the corporation is City Holding Company.
2. Amendment Adopted. The text of the amendment adopted is as
follows:
The first paragraph of Article VI of the Articles
of Incorporation is deleted in its entirety and the
following is substituted in its place:
VI. The Corporation shall have the authority to
issue 500,000 shares of preferred stock of a par value of
$25 per share and 50,000,000 shares of common stock of a
par value of $2.50 per share.
The remainder of Article VI shall be unchanged.
3. Shareholder Vote. The amendment was adopted at a special
meeting of shareholders of the Corporation on December 9, 1998. As of the record
date for the special meeting, the Corporation had 6,660,717 shares of common
stock outstanding and entitled to vote, and no shares of preferred stock
outstanding. The number of shares of common stock voted for and against the
amendment was 4,892,062 shares and 329,950 shares, respectively. The holders of
24,347 shares abstained. As a result of the amendment, the stated capital of the
Corporation is increased to $137,500,000.
4. Document Preparation. These Articles of Amendment were prepared
by Hunton & Williams, Riverfront Plaza, East Tower, 951 East Byrd Street,
Richmond, Virginia 23219.
Dated: December 9, 1998
CITY HOLDING COMPANY
By: /s/ Steven J. Day
-------------------------------------
Steven J. Day
President and Chief Executive Officer
And /s/ Otis L. O'Connor
-------------------------------------
Otis L. O'Connor
Secretary
<PAGE>
ACKNOWLEDGEMENT
STATE OF WEST VIRGINIA
COUNTY OF KANAWHA
I, Drema T. Gibson, a Notary Public, do hereby certify that on this
21st day of December, 1998, personally appeared before me, Steven J. Day, who
being first duly sworn, declared himself to be President and Chief Executive
Officer of City Holding Company, a corporation, that he signed the foregoing
document as President and Chief Executive Officer of the Corporation, and that
the statements therein contained are true.
/s/ Drema T. Gibson
------------------------------
Notary Public
My commission expires September 11, 2001
(SEAL)
Exhibit 3(i)
CITY HOLDING COMPANY
AMENDED AND RESTATED BYLAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meetings. The annual meeting of the shareholders shall
be held at the principal office of the corporation at Charleston, Kanawha
County, West Virginia, on the 30th of March of each year, or at such other place
and on such other date as the Board of Directors may designate by resolution
from time to time.
For the purpose of determining shareholders entitled to vote at the annual
meeting of the shareholders or any adjournment thereof, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date to be not more than fifty days and not less than ten
days prior to the date of the annual meeting.
Section 2. Special Meetings. Special meetings of the shareholders may be
called at any time by the Board of Directors or by the President and Secretary,
or by any three or more shareholders holding together not less than ten
percentum (10%) of the capital stock of the corporation.
For the purpose of determining shareholders entitled to vote at the
special meeting of the shareholders or any adjournment thereof, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders, such date to be not more than fifty days and not
less than ten days prior to the date of the special meeting.
Section 3. Notice of Meetings. Notice of either annual or special meetings
of the shareholders shall be given by mailing to each shareholder of record at
his last know post office address, postage prepaid, at least ten (10) days prior
to the date of the meeting, a written notice thereof. Such notice shall state
the time and place of the meeting. The call for the meeting, if made by
shareholders, shall be signed by the shareholders making the call. If the call
should be made by the Board of Directors, it shall be signed by the President, a
Vice President or the Secretary of the corporation. If the call be made by the
President or the Secretary, it shall be signed by both of them. The notice of
special meetings of the shareholders shall state the business to be transacted,
and no business other than that included in the notice or incidental thereto
shall be transacted at any such meeting. Notice of the time, place or purpose of
any meeting of shareholders may be dispensed with if each shareholder shall
attend either in person or by proxy of if every absent shareholder shall, in
writing filed with the records of the meeting, either before or after the
holding thereof, waive such notice, any such meetings may be held at any time
and place that the shareholders agree upon.
Section 4. Quorum. The holders of a majority of all the shares of the
capital stock of the corporation entitled to vote shall constitute a quorum at
any meeting for all purposes, including the election of Directors. Any number
less than a quorum present may adjourn any shareholders' meeting until a quorum
is present.
Section 5. Voting. In all elections of Directors, each shareholder shall
have the right to cast one (1) vote for each share of stock owned by him and
entitled to a vote, and he may cast the same in person or by proxy, for as many
persons as there are Directors to be elected, or he may cumulate such votes and
give one candidate as many votes as the number of Directors to be elected
multiplied by the number of his shares of stock shall equal; or he may
distribute them on the same principle among as many candidates and in such
manner as he shall desire, and the Directors shall not be elected in any other
manner; and on any other question to be determined by a vote of shares at any
meeting of shareholders, each shareholder shall be entitled to one (1) vote for
each share of stock in person or by proxy.
<PAGE>
Section 6. Annual Report. The President shall annually prepare a full and
true statement of the affairs of the corporation, which shall be submitted at
the annual meeting of the shareholders and filed within twenty (20) days
thereafter in the principal office of the corporation at Charleston, West
Virginia, where it shall, during the usual business hours of each secular day be
open for inspection by any shareholder of the corporation.
ARTICLE II
DIRECTORS
Section 1. Number. The Board shall consist of not less than five nor more
than twenty-five shareholders, the exact number within such minimum and maximum
limits to be fixed and determined from time to time by resolution of a majority
of the full Board or by resolution of the shareholders at any meeting thereof;
provided, however, that a majority of the full Board of Directors may not
increase the number of directors to a number which: (i) exceeds by more than
three the number of directors last elected by shareholders where such number was
fifteen or less; and (ii) to a number which exceeds by more than four the number
of directors last elected by shareholders where such number was sixteen or more
except when directors are added as a result of a business combination accounted
for as a pooling-of-interests, but in no event shall the number of directors
exceed twenty-five, and provided, further, however, that no decrease shall have
the effect of shortening the term of any incumbent director.
Section 2. Director Emeritus. Any director between the ages of 65 and 70
shall have the right to become a director emeritus. If the right is not
exercised then when a director reaches 70 years of age, he shall automatically
become a director emeritus. A director emeritus shall have the privilege of
attending any meetings of the Board of Directors; to voice his opinion in
matters before the Board. He shall not have the right to vote on any matters or
to receive attendance fee for the meetings he attends. This provision shall not
apply to any director who was a member of the Board of Directors of The City
National Bank of Charleston on February 12, 1976, and who had attained the age
of 70 on or before February 12, 1976.
Section 3. Qualifications. The members of the Board of Directors need
not be residents of the State of West Virginia.
Any shareholder who intends to nominate or cause to have nominated any
candidate for election to the Board of Directors (other than any candidate
proposed by the corporation's management) shall notify the corporation. The
notification shall be made in writing and delivered or sent by first class
registered or certified mail to the President of the corporation not less than
14 days nor more than 50 days prior to any meeting of stockholders called for
the election of directors, provided, however, that if less than 21 days notice
of the meeting is given to shareholders, such nomination shall be delivered or
sent by first class registered or certified mail to the President of the
corporation not later than the close of the seventh day following the day on
which notice of the meeting was mailed. Such notification shall contain the
following information to the extent known to the notifying shareholders.
<PAGE>
(a) the names and addresses of the proposed nominees;
(b) the principal occupation of each proposed nominee;
(c) the total number of shares that to the knowledge of the notifying
shareholders will be voted for each of the proposed nominees;
(d) the name and residence address of the notifying shareholders; and
(e) the number of shares owned by the notifying shareholders.
Section 4. Time of Holding Office. Commencing with the 1986 annual meeting
of stockholder, the Board of Directors shall be divided into three classes,
Class I, Class II, and Class III, as nearly equal in number as possible. At the
1986 annual meeting of stockholders, directors of the first class (Class I)
shall be elected to hold office for a term expiring at the 1987 annual meeting
of stockholders; directors of the second class (Class II) shall be elected to
hold office for a term expiring at the 1988 annual meeting of stockholders; and
directors of the third class (Class III) shall be elected to hold office for a
term expiring at the 1989 annual meeting of stockholders. At each annual meeting
of stockholders after 1986, the successors to the class of directors whose term
shall then expire shall be identified as being of the same class of directors
they succeed and elected to hold office for a term expiring at the third
succeeding annual meeting of stockholders. When the number of directors is
changed, any newly-created directorships or any decrease in directorship shall
be so apportioned among the classes by the Board of Directors as to make all
classes as nearly equal as possible.
Section 5. Election of Officers. The Board of Directors shall elect from
within their number a President. The Board shall also elect from within or
without their number one or more Vice Presidents, a Secretary, a Treasurer, and
all such other officers and agents as they may deem proper. The Board shall have
the authority to fix the salaries of all officers and agents, whether such
officers and agents be Directors or not. All officers and agents elected by the
Board shall hold office during the pleasure of the Board.
Section 6. Quorum. A majority of the Board of Directors shall
constitute a quorum for the transaction of business. Any number less than a
quorum present may adjourn any Directors' meeting until a quorum is present.
Section 7. Regular Meetings. Regular meetings of the Board of
Directors shall be held as needed.
Section 8. Special Meetings. Special meetings of the Board of
Directors may be called by the President, or any three Directors to be held
at such time and place and for such purposes as shall be specified in the
notice.
Section 9. Notice of Special Meetings. Telephonic or written notice of
every special meeting of the Board of Directors shall be duly give to each
Director not less than one (1) day before such meeting. Such notice shall state
the time and place of the meeting and, if the meeting is being called for the
purpose of amending the bylaws or for the purpose of authorizing the sale of all
or substantially all of the assets of the corporation, such notice shall set
forth the nature of the business intended to be transacted. Notice of any
meeting of the Board may be dispensed with if every Director shall attend in
person, except where a director attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully
called or convened, or if every absent Director shall in writing filed with the
records of the meeting, either before or after the holding thereof, waive such
notice. Any provision of these bylaws to the contrary notwithstanding a meeting
of the Board of Directors may be held immediately following the adjournment of
any meeting of the shareholders, and no notice need be given for any such
meeting of the Board of Directors.
<PAGE>
Section 10. Chairman of the Board. The Board of Directors shall elect from
among its members a Chairman of the Board of Directors who shall preside at all
meetings of the Board of Directors and perform such other duties as may be
designated by the Board.
Section 11. Committees. The Board of Directors may, by resolution of
resolutions passed by a majority of the whole Board, designate one or more
committees, each to consist of two or more of the Directors, which, to the
extent provided in such resolution or resolutions, shall have and may exercise
the powers of the Board in the management of the business and affairs of the
corporation, and may have power to authorize the seal of the corporation to be
affixed to all papers which may require it. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board.
Section 12. Powers of Directors. The Board of Directors may exercise all
of the powers of the corporation except such as are by law or by the charter or
by the bylaws conferred upon or reserved to the shareholders. It shall also have
the power to fix the compensation of the officers elected or appointed by it,
and of all other officers and employees of the corporation; to purchase or
otherwise acquire for the corporation any property rights or privileges which
the corporation is authorized to acquire, at such price and on such terms and
conditions as the Board may think proper; to sell or otherwise dispose of any
property owned by the corporation and not necessary for carrying on the business
of the corporation and upon such terms and conditions and for such consideration
as the Board may deem proper. The Board may also confer on any officers of the
corporation the right to choose, remove or suspend any subordinate officer,
agent, or employee. The Directors shall further have the power to fix Directors'
fees form time to time in such amounts as the Directors shall deem proper.
Section 13. Newly-Created Directorships and Vacancies. Any vacancy
occurring in the Board of Directors may be filled by the affirmative vote of a
majority of the remaining directors though less than a quorum of the Board of
Directors, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 14. Voting. No member of the Board of Directors shall vote on a
question in which he is interested otherwise than as a shareholder, except the
election of a President or other officer or employee or be present at the Board
while the same is being considered; but if his retirement from the Board in such
case reduces the number present below a quorum, the question may nevertheless be
decided by those who remain. On any question the names of those voting each way
shall be entered on the record of their proceedings if any member at the time
requires it.
Section 15. Depositories. The Board of Directors shall have the power
to designate the bank in which corporate funds and securities shall be
deposited.
Section 16. Bonds for Officers. The Board of Directors may require any
officer of the corporation whose duties involve the handling of its funds, or a
part thereof, to furnish proper bond, such bond to be in a penalty to be
prescribed by the Board.
Section 17. Removal of Directors. Any director may be removed, with
or without cause, only by the affirmative vote of the holders of a majority
of the outstanding common stock.
<PAGE>
ARTICLE III
OFFICERS
Section 1. Executive Officers. The executive officers of the corporation
shall be a President, one or more Vice Presidents as the Board of Directors may
fix from time to time by proper resolutions, a Secretary and a Treasurer, all of
whom shall be chosen by the Board of Directors as provided for in Section 4 of
Article II of these bylaws. Any two of the above-named offices, except those of
President and Secretary, may be held by the same person, but no officer shall
execute an acknowledgement or verify any instrument in more than one capacity,
if such instrument is required by law or by these bylaws to be executed,
acknowledged, verified or countersigned by two or more officers. The Board may,
by resolution, provide for an Assistant Secretary and an Assistant Treasurer,
and may also elect or appoint such other officers, agents and employees as the
Board may deem proper.
Section 2. Powers and Duties. The officers of the corporation shall have
such powers and duties as are usually incident to their respective offices, as
well as such powers and duties as from time to time shall be assigned to them by
the Board of Directors.
Section 3. Checks, Notes, Etc. All checks and drafts of the corporation,
bank accounts, and all bills of exchange, promissory notes, and all acceptances,
obligations and other instruments for the payment of money shall be signed
and/or countersigned by such officers as the Board of Directors may designate.
Section 4. Corporate Acknowledgments. The corporation may acknowledge any
instrument required by law to be acknowledged by its attorney appointed to
serve, and such appointment may be embodied in the deed or instrument to be
acknowledged, or be made by a separate instrument, or such deed or other
instrument may be acknowledged by the President or a Vice President of the
corporation without such appointment, or in any manner provided by law.
<PAGE>
ARTICLE IV
CAPITAL STOCK
Section 1. Stock Certificates. The certificates of stock of this
corporation shall be in such form as shall be approved by the Board of
Directors, and shall be signed by the President or a Vice President and
countersigned by the Secretary or Assistant Secretary and evidenced by the seal
of the corporation. Each certificate shall recite on its face that the stock
represented thereby is transferable only upon the books of the corporation
properly endorsed.
Section 2. Issuing Stock and Fixing Value. The Board of Directors of this
corporation may issue the shares of its capital stock from time to time for such
considerations as the Board may deem advisable. If the stock is to be issued for
consideration other than cash, the Directors shall by resolution state their
opinion of the actual value of any consideration other than cash for which such
stock is issued.
Section 3. Title. Title to a certificate and to the shares represented
thereby may be transferred only (a) by delivery of the certificate endorsed,
either in blank or to a specific person, by the person appearing by the
certificate to be the owner of the shares represented thereby; or (b) by the
delivery of the certificate and a separate document containing a written
assignment of the certificate or a power of attorney to sell, assign, or
transfer the same or the shares represented thereby, to be signed by the person
appearing by the certificate to be the owner of the shares represented thereby.
Such assignment or power of attorney may be either in blank or to a specified
person.
Section 4. Lost Certificate. A new certificate may be issued in lieu of
one lost or destroyed without requiring publication of notice of loss and the
cost of said publication applied on a bond of proportionately increased penalty
in any case where such procedure is agreed to by said holder of record and
deemed adequate by the Board of Directors. A new certificate may also be issued
in the discretion of the Board without requiring either the publication of
notice of loss or the giving of a bond; and upon such other conditions as may be
agreed to by said holder of record and deemed adequate by the Board for the
protection of the corporation and its shareholders.
ARTICLE V
FISCAL YEAR AND CORPORATE SEAL
Section 1. Fiscal Year. The fiscal year of the corporation shall
begin on the first day of January and shall end on the 31st day of December
of each year.
Section 2. Corporate Seal. The Board of Directors shall provide a
suitable seal containing the name of the corporation, which seal shall be in
the charge and custody of the Secretary and Treasurer.
<PAGE>
ARTICLE VI
DIVIDENDS
Section 1. Dividends. The Board of Directors may from time to time declare
and pay dividends from the surplus or any profits of the corporation, whenever
they shall deem it expedient in the exercise of discretion and in conformity
with the provisions upon which the capital stock of the corporation has been
issued. If any shareholder shall be indebted to the corporation, his dividend,
or so much as is necessary thereof, may be applied to the payment of such
indebtedness, if then due and payable.
Section 2. Working Capital. The Board of Directors may fix a sum which may
be set aside or retained over and above the corporation's capital stock paid in
as working capital for the corporation, and from time to time as the Board may
increase, diminish and vary the same in its absolute judgment and discretion.
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Amendment. The Board of Directors shall have the power to
make, amend and repeal the bylaws of the corporation at any regular or
special meeting by a majority of the votes cast thereat.
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net Income $ 5,234,000 $ 26,291,000 $ 21,281,000
=============== =============== ==============
Denominator:
Denominator for basic earnings per share --
Weighted average shares outstanding 16,799,000 16,428,000 15,914,000
Effect of dilutive securities:
Employee stock options 77,000 42,000 14,000
Contingent stock-acquisition 9,000 4,000 -
--------------- --------------- --------------
Dilutive potential common shares 86,000 46,000 14,000
--------------- --------------- --------------
Denominator for diluted earnings
per share -
Weighted average shares and assumed
Conversions 16,885,000 16,474,000 15,928,000
=============== =============== ==============
Basic earnings per share $ 0.31 $ 1.60 $ 1.34
=============== =============== ==============
Diluted earnings per share $ 0.31 $ 1.60 $ 1.34
=============== =============== ==============
</TABLE>
Exhibit 13
SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------
TABLE ONE
FIVE-YEAR FINANCIAL SUMMARY
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Total interest income $196,680 $173,166 $159,708 $145,743 $124,993
Total interest expense 93,337 76,012 68,334 61,180 46,857
Net interest income 103,343 97,154 91,374 84,563 78,136
Provision for loan losses 8,481 4,064 5,012 3,609 3,304
Total other income 72,423 32,613 16,473 11,343 9,106
Total other expenses 155,558 84,899 70,066 61,908 57,277
Income before income taxes 11,727 40,804 32,769 30,389 26,661
Net income 5,234 26,291 21,281 20,200 18,266
Per Share Data
Net income (basic) $ 0.31 $ 1.60 $ 1.34 $ 1.26 $ 1.14
Net income (diluted) 0.31 1.60 1.34 1.26 1.14
Cash dividends declared (1) 0.77 .73 .63 .56 .49
Book value per share 13.08 13.13 11.86 11.52 9.66
Selected Average Balances
Total loans $1,676,828 $1,427,269 $1,286,868 $1,206,408 $1,056,997
Securities 377,834 409,713 419,974 464,024 516,999
Deposits 1,974,995 1,698,699 1,616,479 1,559,106 1,487,888
Long-term debt 95,926 46,129 24,666 8,204 6,252
Trust preferred 32,452 - - - -
securities
Stockholders' equity 235,616 204,114 181,923 168,353 158,525
Total assets 2,566,099 2,180,460 2,021,988 1,874,056 1,735,469
Selected Year End Balances
Net loans $1,698,319 $1,490,411 $1,315,078 $1,262,243 $1,121,862
Securities 395,722 378,330 412,586 450,570 477,148
Deposits 2,064,415 1,779,805 1,626,666 1,602,996 1,509,424
Long-term debt 102,719 75,502 34,250 20,000 6,875
Trust preferred 87,500 - - - -
securities
Stockholders' equity 220,059 220,277 188,784 177,522 159,191
Total assets 2,706,004 2,286,424 1,995,878 1,983,871 1,778,391
Selected Ratios
Return on average assets 0.20% 1.21% 1.05% 1.08% 1.05%
Return on average equity 2.22 12.88 11.70 12.00 11.52
Average equity to 9.18 9.36 9.00 8.98 9.13
average assets
Dividend payout ratio (1) 248.39 35.96 34.81 36.47 33.91
</TABLE>
(1) 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.
- ------------------------------------------------------------------------------
On December 31, 1998, the Company's merger with Horizon Bancorp, Inc. (Horizon)
became effective. The transaction was accounted for under the
pooling-of-interests method of accounting. As such, the Company's historical
financial information has been restated to include the operations of Horizon for
all periods presented.
<PAGE>
TWO YEAR SUMMARY OF
COMMON STOCK PRICES AND DIVIDENDS
Cash
Dividends Market Value
Per Share* Low High
-------------------------------------
1998
Fourth Quarter $ .20 $30.000 $37.125
Third Quarter .19 34.250 44.875
Second Quarter .19 41.000 48.000
First Quarter .19 41.500 51.000
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
City Holding Company's common stock trades on The Nasdaq Stock Market under
the symbol CHCO. This table sets forth the cash dividends paid per share and
information regarding the market prices per share of the Company's Common Stock
for the periods indicated. The price ranges are based on transactions as
reported on the The Nasdaq Stock Market. At December 31, 1998, there were 4,762
stockholders of record. See NOTE FOURTEEN of the Audited Consolidated Financial
Statements for a discussion of restrictions on bank dividends.
*Cash dividends represent amounts declared by the Company and do not include
cash dividends of acquired companies prior to the dates of acquisition.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CITY HOLDING COMPANY
City Holding Company (the Company), a West Virginia corporation headquartered
in Charleston, West Virginia, is a multi-bank holding company that provides
diversified financial products and services to consumers and local businesses.
Through its network of 63 banking offices in West Virginia, Ohio and California,
the Company provides credit, deposit, investment advisory, insurance and
technology products and services to its customers. In addition to its branch
network, the Company's delivery channels include ATMs, check cards,
telemarketing, direct mail solicitation, interactive voice response systems, and
Internet technology.
Community banking is the core business segment of the Company. Since 1983,
the Company has provided traditional banking products and services through its
lead bank, City National Bank of West Virginia (City National), and through the
various financial institutions the Company has acquired over the years. In
conjunction with the evolution of the financial services industry, the Company,
in recent years, has diversified its business to offer additional products and
services to existing and new customers. Mortgage banking, including the
origination, acquisition, servicing and sale of mortgage loans has developed
into a significant product line for the Company. Additionally, the Company
provides other financial services, including investment advisory, insurance, and
internet technology products. When combined, these business lines reflect the
diversification of the Company and depth and breadth of the products and
services the Company delivers to its customers.
MERGERS AND ACQUISITIONS
On December 31, 1998, the Company's merger with Horizon Bancorp, Inc.
(Horizon) became effective. The merger with Horizon, a $1.0 billion bank holding
company headquartered in Beckley, West Virginia, increased total assets by
approximately 65% and increased deposit market share such that the Company
currently ranks third in West Virginia. The transaction was accounted for under
the pooling-of-interests method of accounting. As such, the Company's historical
financial information contained in this discussion and analysis and in the
consolidated financial statements has been restated to include the operations of
Horizon for all periods presented. With the addition of the Horizon banks, the
Company significantly strengthens its presence in the Beckley and Huntington
markets of West Virginia. Both areas are considered growth locations and the
Company expects to capitalize and expand on its existing customer base in those
cities. Additionally, the community banking philosophy of Horizon's management
was very similar to the Company's management style. With minimal impact from
overlapping markets and management's identification of operational efficiencies
to be achieved, Horizon was identified as an ideal strategic partner that could
significantly enhance the Company's community banking franchise.
On April 1, 1998, the Company consummated its acquisition of Del Amo Savings
Bank (Del Amo), a federally-chartered savings bank headquartered in Torrance,
California. At the date of acquisition, Del Amo reported total assets and
deposits of approximately $116 million and $102 million, respectively. This
transaction was accounted for under the purchase method of accounting.
Accordingly, the operations of Del Amo have been included in the consolidated
financial statements from the date of acquisition. This acquisition represented
a strong addition to the Company's existing operations in the Southern
California area and the Company's continued commitment to grow its community
banking operating segment.
<PAGE>
The other financial services business line also experienced growth during
1998. In April 1998, City National acquired Citynet Corporation and MarCom, Inc.
The operations of these entities were consolidated into Citynet, a division of
City National. With the addition of these companies, City National is expanding
its Internet banking capabilities and introducing new Internet technology
products to its customers, including balance inquiry and funds transfer
capabilities, loan payment processing, bill payment processing, and web site
development. In March 1998, City National increased the size of its insurance
brokerage division with the acquisition of Morton Specialty Insurance Partners,
Inc. (Morton). Morton was subsequently consolidated into RMI, Ltd., a division
of City National, and increased the diversity of insurance products the Company
offers. Also within the other financial services business segment, City National
acquired Jarrett/Aim Communications (Jarrett/Aim) in January 1998. Jarrett/Aim,
a division of City National, conducts printing and direct mail marketing for the
Company and third party customers.
FINANCIAL SUMMARY
Consolidated net income for 1998 was $5.23 million or $0.31 per diluted
common share, compared to $26.29 million or $1.60 per diluted common share in
1997. These results include the operating results of Horizon and the $20.28
million charges to pre-tax earnings recorded during the fourth quarter of 1998.
Net income for 1996 was $21.28 million or $1.34 per diluted common share. Return
on average assets (ROA), a measure of the effectiveness of asset utilization,
for 1998, 1997, and 1996 was 0.20%, 1.21%, and 1.05%, respectively. Return on
average equity (ROE), a measure of the return on stockholders' investment for
1998, 1997, and 1996 was 2.22%, 12.88%, and 11.70%, respectively.
The decline in 1998 net income, ROA, and ROE was due primarily to the
one-time costs associated with the merger of Horizon. Merger-related charges of
$13.55 million, including fees of $4.8 million for advisory and other
professional services, data processing contract termination costs of $1.7
million, and employee severance costs of $3.2 million, were recorded during the
fourth quarter of 1998, after the merger of Horizon received necessary
shareholder and regulatory approvals. Also included in merger-related charges is
$2.5 million associated with the write down of goodwill, determined to be
impaired as a result of the merger, related to a branch previously acquired by
Horizon. The goodwill was determined to be impaired based on an undiscounted
cash flow analysis of the branch and the amount to be written-off was based on
the excess of the carrying value over the discounted net future revenue of the
branch.
In addition to merger-related charges, the Company recorded $2.93 million of
additional loan loss provision during the fourth quarter of 1998 as a result of
identifying credit quality deterioration within the indirect lending portfolio
and other credit quality issues identified in one of the Company's geographic
markets. Specifically, during the fourth quarter management identified
additional credit quality concerns associated with its indirect automobile
lending relationships that resulted in increases to the loan loss provision of
approximately $1.51 million. During the fourth quarter, management also
quantified certain credit quality exposures within one of its geographic markets
that resulted in an additional increase to the loan loss provision of
approximately $1.42 million.
Also associated with the merger, the Company recorded a $1.80 million charge
to earnings related to conforming operating and accounting policies and
procedures of the two companies. The Company also recorded a $2.00 million
charge to earnings in its mortgage banking segment, in part due to the changing
economic environment within the industry. As exit strategies for the Company's
junior lien mortgage loans became less profitable during the fourth quarter, the
Company initiated an overall restructuring of the retail and wholesale
divisions, which includes combining these separate entities into one division,
restructuring and diversifying the product lines and developing a comprehensive
marketing plan.
As more fully discussed in the Other Income and Expense section, total other
income increased $39.81 million or 122% during 1998 while total other expenses
increased $50.31 million, excluding fourth quarter charges, or 63%. While the
other financial services segment represented approximately $4.99 million and
$5.44 million of the increases in other income and expense, respectively, the
mortgage banking segment represented $29.78 million and $36.05 million of the
increases in those respective classifications. The increases in other income and
expense reflect the Company's emphasis on diversifying its operations into
revenue sources independent of the net interest margin.
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average interest-earning assets increased $332.82 million or 16.42% during
1998 from $2.03 billion in 1997 to $2.36 billion in 1998. Of this increase, the
acquisition of Del Amo represented approximately $85 million (primarily in the
real estate loan classification), increases in the average balance of loans held
for sale represented approximately $70 million, and increases in the average
balance of retained interests in securitized loan pools represented $24.35
million. The remaining $154 million increase, 7.60% of the 1997 average earning
assets balance, reflects the Company's continued growth in its existing
operating markets. This in-market growth, primarily in real estate and
commercial loan products, is attributable to the Company's community banking
philosophy of retaining local autonomy at its banking divisions and emphasis on
community-based banking relationships.
Of the $332.82 million increase in interest-earning assets, approximately
$239 million is attributable to the community banking segment. The acquisition
of Del Amo and in-market growth, as described above, represents the majority of
this growth. Increases in the average balances of loans held for sale and
retained interests in securitized loan pools are derived from the Company's
mortgage banking segment. These are the direct result of the Company's
investment in and creation of its retail origination and correspondent lending
divisions and its loan securitization program during the fourth quarter of 1997.
The increase in interest-earning assets resulting from retained interests in
securitized loan pools is the result of the Company's four loan securitizations
transacted during 1998, which yielded approximately 9.51% during 1998.
From 1996 to 1997, average interest-earning assets increased $134.63 million
or 7.11%, from $1.89 billion to $2.03 billion. The majority of this increase was
due to growth in the community banking segment resulting from a $140.40 million
or 10.91% increase in portfolio loans. Of this increase, growth within the
commercial and consumer loan classifications represented $63.25 million and
$55.84 million, respectively. Commercial loan growth was attributable to the
Company's more active solicitation of commercial loan volume, while increases in
the consumer loan portfolio were primarily related to certain loan products
previously offered by the Horizon-affiliated banks.
Average interest-bearing liabilities increased approximately $319.36 million
or 18.84% to $2.01 billion in 1998 from $1.69 billion in 1997. Of this increase,
the acquisition of Del Amo represented approximately $83 million or 4.90%.
Average interest-bearing deposit growth, excluding Del Amo, represented
approximately $157.44 million or 9.29% as the Company's banking subsidiaries
continued to experience increases in deposit market share within their existing
markets.
The average balance of long term debt increased approximately $49.80 million
during 1998 as the Company took advantage of declines in longer term interest
rates, utilizing long term borrowing facilities through the Federal Home Loan
Bank that are available to its subsidiary banks. This additional funding was
used to finance the growth experienced in the Company's loan portfolio and loans
held for sale balances.
Although a portion of the increase in long term debt is attributable to the
General Corporate operating segment, the majority of the increase in long term
debt and increases in the deposit base are associated with the Company's
community banking segment. Also during 1998, the Company, through its
wholly-owned trust subsidiaries, issued $87.50 million of trust preferred
securities, resulting in an average balance for 1998 of $32.45 million. While
portions of the proceeds received were used for general corporate purposes, the
majority of the proceeds were used to either provide necessary capital to the
mortgage banking segment or to repay long term debt that had originally been
obtained to provide such capital. Therefore, all of the interest expense
associated with the trust preferred securities is considered by management in
its evaluation of the profitability of the mortgage banking segment.
From 1996 to 1997, interest-bearing liabilities increased approximately
$109.50 million or 6.9%. Of this increase, $74.05 million was attributable to
increases in core deposits. This increase was primarily associated with, and
used to fund, increases in the loan portfolio of the community banking segment.
The remaining increase of $35.45 million was attributable to increases in the
average balances of short- and long-term borrowings primarily to fund loan
growth.
<PAGE>
- ------------------------------------------------------------------------------
TABLE TWO
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (1):
Commercial and $499,781 $44,745 8.95% $466,704 $42,025 9.00% $403,455 $38,457 9.53%
industrial
Real estate 805,380 64,285 7.98 623,456 53,242 8.54 602,144 48,155 8.00
Consumer obligations 371,667 38,506 10.36 337,109 34,967 10.37 281,269 31,597 11.23
-------------------------------------------------------------------------------------------------------
Total loans 1,676,828 147,536 8.80 1,427,269 130,234 9.12 1,286,868 118,209 9.19
Loans held for sale 250,968 23,013 9.17 180,543 17,847 9.89 171,308 15,394 8.99
Securities:
Taxable 279,086 17,189 6.16 311,560 19,840 6.37 331,184 20,718 6.26
Tax-exempt (2) 98,748 7,623 7.72 98,153 7,811 7.96 88,790 7,160 8.06
-------------------------------------------------------------------------------------------------------
Total securities 377,834 24,812 6.57 409,713 27,651 6.75 419,974 27,878 6.64
Retained interest in 24,346 2,315 9.51 - - - - - -
securitized loans
Federal funds sold 30,191 1,672 5.54 9,817 489 4.98 14,561 840 5.77
-------------------------------------------------------------------------------------------------------
Total earning assets 2,360,167 199,348 8.45 2,027,342 176,221 8.69 1,892,711 162,321 8.58
Cash and due from banks 58,750 71,311 59,429
Bank premises and 63,991 48,610 44,286
equipment
Other assets 101,858 51,467 41,407
Less: allowance for
possible (18,667) (18,270) (15,845)
loan losses
-----------------------------------------------------------------------------------------------------
Total assets $2,566,099 $2,180,460 $2,021,988
=====================================================================================================
INTEREST-BEARING
LIABILITIES
Demand deposits $299,543 $9,447 3.15% $262,036 $7,782 2.97% $238,240 $6,728 2.82%
Savings deposits 411,886 12,026 2.92 393,088 12,075 3.07 430,009 13,609 3.16
Time deposits 987,170 52,959 5.36 803,035 42,949 5.35 715,865 37,325 5.21
Short-term borrowings 187,140 9,677 5.17 190,467 9,945 5.22 176,480 8,984 5.09
Long-term debt 95,926 6,223 6.49 46,129 3,028 6.56 24,666 1,688 6.84
Trust preferred 32,452 3,005 9.26 - - - - - -
securities -----------------------------------------------------------------------------------------------------
Total 2,014,117 93,337 4.63 1,694,755 75,779 4.47 1,585,260 68,334 4.31
interest-bearing
liabilities
Demand deposits 276,396 240,540 232,365
Other liabilities 39,970 41,051 22,440
Stockholders' equity 235,616 204,114 181,923
-----------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,566,099 $2,180,460 $2,021,988
=====================================================================================================
Net interest income $106,011 $100,442 $93,987
=====================================================================================================
Net yield on earning 4.49% 4.95% 4.97%
assets =====================================================================================================
</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 1997 and 34% in 1996.
- ------------------------------------------------------------------------------
<PAGE>
NET INTEREST INCOME
Net interest income is generally most significantly impacted by activities
conducted within the community banking operation segment. However, the mortgage
banking segment also affected net interest income during 1998 through net
interest income earned on loans held for sale, retained interests in securitized
loan pools, and the cost of capital utilized by the Company to finance
mortgage-banking activities.
Although net interest income, on a tax equivalent basis, increased $5.57
million or 5.54% during 1998, the Company experienced an overall decline in its
net interest margin of 46 basis points from 4.95% in 1997 to 4.49%. Within the
community banking segment, the yield earned on real estate loans declined 59
basis points in 1998 as interest rates on residential real estate loans reached
record lows nationwide. Although yields on the commercial and consumer
obligation portfolios remained relatively stable, the rate decline in the real
estate portfolio resulted in an overall decline of 32 basis points for the total
loan portfolio. While the return on the loan portfolio decreased from 9.12% in
1997 to 8.80% in 1998, the average cost of total interest and
noninterest-bearing deposits increased 7 basis points from 3.70% in 1997 to
3.77% in 1998. This increase was partially offset by a 5 basis point decline in
short-term borrowing interest rates during 1998.
Within the mortgage banking segment, the yield earned on loans held for sale
declined 72 basis points during 1998 from 9.89% in 1997 to 9.17%. This decline
was also due to changes in the residential real estate interest rate
environment. Volume increases in loans held for sale resulted in $6.54 million
of additional interest income, partially offset by a $1.37 million decline due
to interest rate changes. During 1998, the Company earned $2.32 million interest
income resulting from its retained interest in its five securitized loan pools,
compared to no similar income in 1997. Partially offsetting increases in
interest income resulting from mortgage banking activities, the cost of trust
preferred securities, used primarily to capitalize mortgage banking operations,
represented $3.01 million in interest expense during 1998 with no similar cost
in 1997.
<PAGE>
- ------------------------------------------------------------------------------
TABLE THREE
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
Volume Rate Net Volume Rate Net
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME FROM
Loans:
Commercial and industrial $2,963 $ (243) $2,720 $5,790 $(2,222) $3,568
Real estate 14,707 (3,664) 11,043 2,120 2,967 5,087
Consumer obligations 3,580 (41) 3,539 6,126 (2,756) 3,370
-------------------------------------------------------
Total loans 21,250 (3,948) 17,302 14,036 (2,011) 12,025
Loans held for sale 6,537 (1,371) 5,166 859 1,594 2,453
Securities:
Taxable (2,016) (635) (2,651) (1,302) 424 (878)
Tax-exempt (1) 47 (235) (188) 720 (69) 651
-------------------------------------------------------
Total securities (1,969) (870) (2,839) (582) 355 (227)
Federal funds sold 1,122 61 1,183 (262) (89) (351)
Retained interest in securitized 2,315 - 2,315 - - -
loans
-------------------------------------------------------
Total interest-earning assets $29,255 $(6,128) $23,127 $14,051 $ (151) $13,900
=======================================================
INTEREST EXPENSE ON
Demand deposits $1,162 $ 503 $1,665 $ 745 $ 309 $1,054
Savings deposits 563 (612) (49) (1,152) (382) (1,534)
Time deposits 9,878 132 10,010 4,643 981 5,624
Short-term borrowings (173) (95) (268) 636 325 961
Long-term debt 3,231 (36) 3,195 1,412 (72) 1,340
Trust preferred securities 3,005 - 3,005 - - -
-------------------------------------------------------
Total interest-bearing liabilities $17,666 $ (108) $17,558 $6,284 $1,161 $7,445
=======================================================
NET INTEREST INCOME $11,589 $(6,020) $5,569 $7,767 $(1,312) $6,455
=======================================================
</TABLE>
(1)Fully federal taxable equivalent using a tax rate of approximately 35% in
1998 and 1997 and 34% in 1996.
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.
- ------------------------------------------------------------------------------
<PAGE>
OTHER INCOME AND EXPENSES
Total other income and total other expenses were significantly affected by
three separate series of events that occurred during 1998. First, the Company's
retail origination of junior lien mortgage loans became fully operational during
the first quarter of 1998, after the platforms for the originations were
established during the fourth quarter of 1997. The impact of this product line
is reflected within the Company's mortgage banking segment. Second, the
Company's acquisitions of insurance, direct mail, and internet service providers
resulted in increases in other income and expense, which are reflected within
the other financial services operating segment. Third, the Company's merger with
Horizon resulted in significant charges to earnings, impacting other expenses,
which are reflected within the community banking and general corporate operating
segments.
Within the community banking segment, other income increased approximately
$5.50 million or 39.67%, from $13.86 million in 1997 to $19.36 million in 1998.
Generally, this increase is associated with the overall volume growth of
products offered by the banking divisions and the related fee income generated
by these products. Other expenses increased approximately $20.94 million or
34.23% during 1998, from $61.17 million in 1997 to $82.10 million. Fourth
quarter charges to earnings of approximately $5.87 million, comprised primarily
of a $2.50 million write down in the recorded value of goodwill determined to be
impaired, and $1.58 million associated with employee severance costs,
represented 28% of the 1998 increase in other expenses within this segment.
Increases in occupancy, depreciation, maintenance and data processing
represented approximately $3.85 million or 18% of the increase during 1998.
Additionally, the acquisition of Del Amo in 1998 further increased total other
expenses by approximately $2.47 million or 12% of the 1998 increase.
Other income within the mortgage banking segment increased $29.78 million or
169% during 1998, from $17.64 million in 1997 to $47.41 million. Net origination
fees on junior lien mortgage loans increased $12.03 million in 1998,
representing 40% of the increase. Gains recognized from the sale or
securitization of mortgage loans increased approximately $9.85 million,
representing 33% of the increase. Additionally, mortgage loan servicing fees
increased $7.13 million during 1998, representing 24% of the increase in other
income within the mortgage banking segment. Each of these increases was
primarily the result of the Company's fourth quarter 1997 investment in its
network of retail origination platforms and the corresponding development of
exit strategies for junior lien mortgage loans, including third-party loan sales
and securitizations. Increases realized from mortgage loan servicing were
primarily the result of fees earned from servicing securitized loan pools.
Additionally, in September 1998, the servicing division completed the
acquisition of the right to service an additional $535 million of junior lien
mortgage loans from a third party, which resulted in increased servicing fees
recognized during the fourth quarter.
Other expenses within the mortgage banking segment also experienced
significant increases, from $14.70 million in 1997 to $50.75 million in 1998, an
increase of $36.05 million or 245%. Of this increase, approximately $25.04
million is associated with the advertising for and direct mail solicitation of
junior lien mortgage loans. Additionally, employee compensation and benefits
represented an increase of $3.77 million during the year. Costs associated with
the four loan securitizations completed during the year, primarily underwriting
and other professional fees, represented $2.80 million of the 1998 increase in
other expenses. Finally, the Company also recorded a $2.00 million charge to
earnings during the fourth quarter of 1998 involving the restructuring of its
retail origination and wholesale acquisition divisions.
With the December 1997 acquisition of RMI, Ltd. and the first and second
quarter acquisitions of Jarrett/Aim Communications, Morton Specialty Insurance
Partners, Inc., Citynet Corporation and MarCom, Inc., the other financial
services operating segment was essentially formed during 1998. As a result,
after minimal other income and expense in 1996 and 1997, this operating segment
realized $11.13 million of other income and $11.50 million of other expense
during 1998. Of these amounts, $5.70 million, representing services provided to
the banking segments, is eliminated in the Consolidated Statements of Income.
The general corporate segment, which generally includes the parent company,
recognized an increase in other expenses of approximately $8.23 million or 95%
during 1998. This increase was primarily due to merger-related charges
associated with the Company's merger of Horizon. Of the increase, $4.61 million
was the result of advisory and other professional fees, $1.70 million due to the
termination of data processing contracts previously entered into by Horizon, and
$1.60 million associated with employee severance costs.
From 1996 to 1997, total other income increased $16.14 million or 98%, from
$16.47 million in 1996 to $32.61 million in 1997. The majority of this increase,
$13.71 million, is attributable to growth within the mortgage banking segment,
while $2.13 million is associated with the community banking segment. Within the
mortgage banking segment, income derived from mortgage loan servicing increased
$8.98 million, from $2.96 million in 1996 to $11.93 million in 1997.
Additionally, gains generated from sales of mortgage loans increased $3.13
million in 1997, from $1.26 million in 1996 to $4.39 million in 1997. Other
expenses increased $14.83 million or 21% in 1997, from $70.07 million in 1996 to
$84.90 million. As with the increase in other income, the increase in other
expenses was primarily due to activities within the mortgage banking segment.
Within this segment, other expenses increased from $4.64 million in 1996 to
$14.70 million in 1997, an increase of $10.07 million or 217%. Of this increase,
$6.86 million was associated with costs incurred by the mortgage loan servicing
division, primarily attributed to salaries and employee benefits. The remaining
$3.21 million of increase in other expenses within the mortgage banking segment
was due to costs incurred by the retail origination platforms, established
during the fourth quarter of 1997.
<PAGE>
INCOME TAXES
Income tax expense for the year ended December 31, 1998 was $6.49 million,
compared to $14.51 million and $11.49 million for the years ended December 31,
1997 and 1996, respectively. The Company's effective tax rates for 1998, 1997,
and 1996 were 55.37%, 35.57%, and 35.06%, respectively. The significant increase
in the effective tax rate for 1998 was the result of certain non-deductible,
merger-related expenses incurred by the Company. Investment banker advisory
fees, regulatory filing fees, valuation adjustments related to impaired
intangible values, and certain other merger-related charges were non-deductible
for income tax purposes, but recognized as expense for financial reporting
purposes.
MARKET RISK MANAGEMENT
Market risk to the Company is the risk of loss arising from changes in
current and future cash flows, fair values, earnings, or capital due to adverse
movements in interest rates. The Company seeks to reduce interest rate risk
through asset and liability management, where the goal is to optimize the
balance between earnings and interest rate risk. The Company's asset and
liability management function is responsible for reviewing the interest rate
sensitivity position of the Company and establishing policies to monitor and
limit exposure to interest rate risk. Management measures interest rate risk
through an interest sensitivity gap analysis as illustrated in TABLE FOUR and
through performing an earnings sensitivity analysis which is further discussed
in this section.
At December 31, 1998, the one year period shows a negative gap (liability
sensitive) of $632 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 and is based upon historical
experience with 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 $604 million. Generally, 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.
<PAGE>
- ------------------------------------------------------------------------------
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> <C> <C> <C> <C>
ASSETS
Gross loans $393,009 $252,135 $851,285 $219,500 $1,715,929
Loans held for sale 246,287 - - - 246,287
Securities 33,844 111,625 209,211 41,042 395,722
Federal funds sold 31,911 - - - 31,911
Retained interest 65,623 - - - 65,623
-----------------------------------------------------------
Total interest-earning assets 770,674 363,760 1,060,496 260,542 2,455,472
LIABILITIES
Savings and NOW accounts 707,208 - - - 707,208
All other interest-bearing 283,928 508,792 260,987 79 1,053,786
deposits
Short-term borrowings 176,204 7,214 - - 183,418
Long-term debt 47,719 35,000 5,000 15,000 102,719
Trust preferred securities - - - 87,500 87,500
-----------------------------------------------------------
Total interest-bearing 1,215,059 551,006 265,987 102,579 2,134,631
liabilities
-----------------------------------------------------------
Interest sensitivity gap $(444,385) $(187,246) $794,509 $157,963 $320,841
-----------------------------------------------------------
Cumulative sensitivity gap $(444,385) $(631,631) $162,878 $320,841
===========================================================
Management adjustments $ 9,319 $27,957 $17,795 $(55,071)
===========================================================
Cumulative management
adjusted gap $(435,066) $(603,674) $180,673 $265,770
===========================================================
</TABLE>
The table above includes various assumptions and estimates by management as
to maturity and repricing patterns. Future interest margins will be impacted
by balances and rates which are subject to change periodically throughout the
year.
- ------------------------------------------------------------------------------
<PAGE>
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 twelve-month period. As of December 31, 1998,
the Company had the following estimated earnings sensitivity profile:
Basis Point Percentage Change
Change in
in Interest Rates Net Interest
Income
------------------------------------
200 point (9.79)%
increase
100 point (1.52)
increase
100 point 3.91
decrease
200 point 9.05
decrease
The results of the simulation model indicate that an immediate and sustained
200 basis point increase in interest rates would result in a corresponding
reduction in net interest income of 9.79% over a twelve-month period, while a
200 basis point decrease in interest rates would result in an increase of 9.05%
in net interest income within one year. Similarly, an immediate and sustained
100 basis point increase in interest rates would reduce net interest income by
1.52%, while a 100 basis point decrease in interest rates would result in a
3.91% increase in net interest income over a twelve-month period.
Liquidity: The Company manages its liquidity position to provide necessary
funding for asset growth and to ensure that the funding needs of its customers
can be satisfied promptly. Liquidity management is accomplished by maintaining a
significant portion of the Company's investment portfolio classified as
available-for-sale, maintaining sufficient borrowing capacity with the Company's
lenders and providing consistent growth in the core deposit base of its banking
subsidiaries. The Company also utilizes its access to the capital markets as a
tool for managing its liquidity position.
During 1998, through the issuances of asset-backed and trust preferred
securities, the Company successfully utilized the capital markets to diversify
its available funding sources. Additionally, the Company has entered into
agreements with three investment banking firms to issue over $100 million of the
Company's certificates of deposit. The certificates of deposit can be issued in
maturities of up to five years at rates equal to a comparable Treasury
instrument at the time of issuance plus a market-based spread. The Company is
not committed to issuing a pre-determined amount of its certificates of deposit
under these agreements, the use of which is at the sole discretion of the
Company. At December 31, 1998 and 1997, $22.0 million and $2.0 million,
respectively, of certificates of deposit had been sold under these agreements at
an average interest rate of 5.36% and 5.70%, respectively. The average term of
the issued certificates of deposit was 1.5 years and 2.0 years at December 31,
1998 and 1997, respectively.
<PAGE>
An additional source of liquidity includes the parent company's $35.0 million
revolving loan agreement. At December 31, 1998, $15.0 million was outstanding
pursuant to the terms of the agreement. As necessary, the parent company has
used funds available from this facility to provide additional capital to its
subsidiaries, to finance merger and acquisition activity, and to fund internal
growth and expansion.
As available, dividends from the Company's subsidiaries have been and will
continue to be used to satisfy the cash needs of the parent company. As more
fully discussed in NOTE FOURTEEN, during 1999, the subsidiary banks can, without
prior regulatory approval, declare dividends of approximately $30.26 million to
the parent company, plus net profits earned during the year.
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 as set forth in the Consolidated Statements of Cash Flows included
herein. The increase in cash used in the Company's operating activities during
1998 was generally associated with a $31.52 million increase in net fundings of
loans held for sale. Additionally, overcollateralization requirements associated
with loan securitizations transacted during 1998 represented an additional
$33.20 million use of cash during the year. This increase in cash uses is
reflected in the increase in other assets within the Consolidated Statements of
Cash Flows. Also impacting the increased use of cash in 1998, the change in net
income for the year, a decline of $21.06 million as compared to 1997, resulted
in less cash provided by operating activities for the Company.
Cash used in investing activities increased in 1998 from $75.43 million in
1997 to $162.01 million in 1998, primarily the result of activity within the
Company's investment portfolio.
To finance increases in the loans held for sale balance, the investment
portfolio and other growth experienced during 1998, the Company primarily
utilized cash provided by deposit growth and the issuance of trust preferred
securities, as set forth in the financing activities section of the Consolidated
Statements of Cash Flows. The net increase in deposits in 1998 was $182.04
million, compared to a net increase of $76.47 million during 1997, as the
Company continued to experience core deposit growth within the markets of its
subsidiary banks. Net increases in short term borrowings and long term debt
approximated $32.75 million during 1998, compared to a net increase of $11.69
million during 1997. Additionally, the net proceeds from the issuance of trust
preferred securities in 1998 were utilized to finance the overall growth of the
Company's consolidated balance sheet during the year, principally within the
mortgage banking business segment.
INVESTMENTS
As illustrated in TABLE FIVE, the Company's investment portfolio is comprised
primarily of U.S. Treasury and other U.S. government agency securities. As of
December 31, 1998, 1997, and 1996, investments in these securities represented
75%, 79%, and 67% of the total investment securities portfolio. The remaining
investments within the portfolio include securities of state and local
subdivisions and other debt and equity securities. The Company's investment
portfolio is structured to provide flexibility in managing liquidity and
interest rate risk, while providing acceptable rates of return. Although the
Company reclassified its entire held-to-maturity securities portfolio to the
available-for-sale classification in June 1997, Horizon maintained a portion of
its investment portfolio in the held-to-maturity category. Such amounts are
reflected in the 1998 and 1997 held-to-maturity classification in TABLE FIVE.
The Company had $1.4 million in structured notes as of December 31, 1998. All
structured notes are federal agency securities that are classified as available
for sale. They have a weighted average coupon of 4.43% and a weighted average
maturity of 2.7 years. The impact of holding these securities on the results of
operations was immaterial for the period ending December 31, 1998.
<PAGE>
- ------------------------------------------------------------------------------
TABLE FIVE
INVESTMENT PORTFOLIO
(in thousands)
<TABLE>
<CAPTION>
CARRYING VALUES AS OF
DECEMBER 31
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury and other U.S. government corporations $258,095 $258,936 $261,445
and agencies
States and political subdivisions 69,002 57,116 32,718
Other 29,562 20,724 34,705
Securities held to maturity:
U.S. Treasury and other U.S. government corporations - - 15,416
and agencies
States and political subdivisions 39,063 41,554 67,756
Other - - 546
----------------------------------
Total $395,722 $378,330 $412,586
==================================
</TABLE>
At December 31, 1998, 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 Within Ten Ten Years
Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government $42,460 6.22% $150,460 5.97% $60,710 6.54% $4,465 7.39%
corporations and
agencies
States and political 4,120 7.90 42,558 7.94 43,219 7.79 18,168 7.36
subdivisions
Other 22,537 4.43 6,748 6.98 - - 277 7.15
----------------------------------------------------------------------
Total $69,117 5.73% $199,766 6.42% $103,929 7.06% $22,910 7.36%
======================================================================
</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%.
<PAGE>
- ------------------------------------------------------------------------------
LOAN PORTFOLIO
The composition of the Company's loan portfolio is presented in the following
table:
- ------------------------------------------------------------------------------
TABLE SIX
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and $509,214 $464,678 $442,981 $417,828 $343,164
agricultural
Real estate-mortgage 842,727 676,828 574,897 537,097 492,490
Installment loans to individuals 363,988 367,095 327,222 337,786 315,225
------------------------------------------------------------
Total loans $1,715,929 $1,508,601 $1,345,100 $1,292,711 $1,150,879
============================================================
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
The loan portfolio increased 13.74% in 1998, from $1.51 billion at December
31, 1997, to $1.72 billion at December 31, 1998. Of this $207.33 million
increase, the acquisition of Del Amo represented $86.98 million or 5.72%. The
remaining $120.35 million or 7.98% increase is due to the Company's continued
growth in its existing markets. The Company grants portfolio loans to customers
generally within the market areas of its subsidiary banks. Although the Company
has, in recent years, more actively solicited commercial loan volume, the loan
portfolio remains relatively concentrated in residential real estate loans.
Approximately 49% of the total portfolio is comprised of residential real estate
loans at December 31, 1998, compared to 45% of the total portfolio at December
31, 1997. The increase in the percentage of the total portfolio comprised of
real estate loans is due to the acquisition of Del Amo, which is predominantly a
lender of mortgage loans.
The following table shows the maturity of loans outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------
Within After One After Total
One Year But Within Five Year
Five Years
--------------------------------------------------
<S> <C> <C> <C> <C>
Commercial,financial $298,004 $174,999 $36,211 $509,214
and agricultural
Real estate-mortgage 283,561 369,615 189,551 842,727
Installment loans to
individuals 66,154 276,677 21,157 363,988
--------------------------------------------------
Total loans $647,719 $821,291 $246,919 $1,715,929
==================================================
Loans maturing after one year with:
Fixed interest rates $789,910
Variable interest rates 278,300
----------
Total $1,068,210
==========
</TABLE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management systematically monitors the loan portfolio and the adequacy of the
allowance for loan losses on a monthly basis to provide for losses inherent in
the portfolio. Through the Company's internal loan review department, management
assesses the risk in each loan type based on historical trends, the general
economic environment of its local markets, individual loan performance and other
relevant factors. Individual credits are selected throughout the year for detail
loan reviews, which are utilized by management to assess the risk in the
portfolio and the adequacy of the allowance. Due to the nature of commercial
lending, evaluation of the adequacy of the allowance as it relates to these loan
types is often based more upon specific credit review, with consideration given
to historical charge-off percentages and general economic conditions.
Conversely, due to the homogeneous nature of the real estate and installment
portfolios, the portions of the allowance allocated to those portfolios are
primarily based on prior charge-off history and general economic conditions,
with less emphasis placed on specifically reviewing individual credits, unless
circumstances suggest that specific reviews are necessary. In these categories,
specific loan reviews would be conducted on higher balance and higher risk
loans. In evaluating the adequacy of the allowance, management considers both
quantitative and qualitative factors. Quantitative factors include actual
repayment characteristics and loan performance, cash flow analyses, and
estimated fair values of underlying collateral. Qualitative factors generally
include overall trends within the portfolio, composition of the portfolio,
changes in pricing or underwriting, seasoning of the portfolio, and general
economic conditions. Reserves not specifically allocated to individual credits
are generally determined by analyzing potential exposure and other qualitative
factors that could negatively impact the adequacy of the allowance.
Determination of such reserves is subjective in nature and requires management
to periodically reassess the validity of its assumptions. Differences between
net charge-offs and estimated losses are assessed such that management can
timely modify its evaluation model to ensure that adequate provision has been
made for risk in the total loan portfolio. As of December 31, 1998, management
is of the opinion that the consolidated allowance for loan losses is adequate to
provide for losses on existing loans within the portfolio.
At December 31, 1998, the allowance for loan losses was $17.61 million or
1.03% of total year-end loans compared to $18.19 million or 1.21% and $16.89
million or 1.26% as of December 31, 1997 and 1996, respectively. These numbers
reflect the historical trend of both the Company and Horizon as if the companies
had been combined. As management has worked aggressively to collect problem
credits and restructure its post-merger portfolio, charge-offs have reduced the
allowance. The 1998 decrease in the allowance and the related percentages of the
allowance to total year-end loans is primarily due to certain charge-offs
occurring in the fourth quarter of 1998 related to Horizon's indirect lending
portfolio, as more fully discussed below. In addition, the level of charge-off
activity throughout 1998 for the installment loan portfolio compared to the
previous years has increased due to the additional indirect lending business
that Horizon concentrated on in 1998 and 1997. However, indirect lending has not
been a significant product line of the Company nor does management expect it to
be in the future. As a result, Horizon began to curtail its indirect lending in
the fourth quarter of 1998 and, accordingly, increased the number of loans
charged-off. Going forward, management anticipates that as a result of the
curtailment of the indirect lending business and other restructuring of the
portfolio, the allowance will be adequate to absorb any remaining future
charge-offs in its portfolio.
During 1998, the Company recorded loan charge-offs of approximately $11.47
million and recorded recoveries of $1.62 million resulting in net charge-offs of
$9.85 million. This represents an increase of $6.57 million or 200% from 1997
net charge-offs of $3.28 million. Loans charged-off within the installment loan
portfolio represented approximately $2.94 million of this increase. Charge-offs
related to indirect automobile loans offered by certain Horizon banks,
represented approximately $2.4 million of this increase. As part of the
restructuring resulting from the merger of Horizon into the Company,
participation in indirect automobile lending was significantly reduced during
the fourth quarter of 1998. Commercial loan charge-offs represented $2.4 million
of the 1998 increase, while real estate loan charge-offs comprised the remaining
$1.23 million. The increase in commercial loan charge-offs can primarily be
attributed to credit exposure related to three significant credits associated
with the former Horizon banks. Included primarily in the real estate
charge-offs, and to a lesser extent the commercial and installment portfolios,
are charge-offs of $1.20 million associated with the Company's identification of
credit quality issues within one of its geographic markets.
<PAGE>
As these exposures were quantified, management increased the Company's
provision for loan losses accordingly. As a result, the provision for loan
losses increased $4.42 million or 109% during 1998. As previously indicated,
fourth quarter quantification of additional indirect lending portfolio expected
losses and management's restructuring of this program resulted in a $1.51
million charge to earnings, recorded through the loan loss provision.
Additionally, $1.42 million of additional loan loss provision associated with
the Company's quantification of loss exposure within one of its geographic
markets was charged to earnings during the fourth quarter.
Non-performing loans, consisting of non-accrual, past-due and restructured
credits, increased $1.57 million in 1998, of which $1.04 million was included in
the non-accrual category. This increase is due, in part, to the second quarter
acquisition of Del Amo, which reported $1.33 million of non-accrual loans at
December 31, 1998. As a general policy, Del Amo has historically reclassified
all loans greater than 90 days past due to non-accrual status and, therefore,
has a proportionately larger balance of non-accrual loans, but has no loans past
due 90 days and accruing interest.
Tables Seven, Eight and Nine detail loan performance and analyze the
allowance for loan losses.
- ------------------------------------------------------------------------------
TABLE SEVEN
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $18,190 $16,888 $15,088 $14,630 $13,510
Charge-offs:
Commercial, financial and agricultural (2,385) (906) (1,625) (1,213) (906)
Real estate-mortgage (1,375) (252) (323) (367) (351)
Installment loans to individuals (7,709) (4,594) (3,063) (2,540) (2,003)
-------------------------------------------------
Totals (11,469) (5,752) (5,011) (4,120) (3,260)
Recoveries:
Commercial, financial and agricultural 297 1,219 794 157 310
Real estate-mortgage 43 149 191 44 49
Installment loans to individuals 1,283 1,103 814 768 717
-------------------------------------------------
Totals 1,623 2,471 1,799 969 1,076
-------------------------------------------------
Net charge-offs (9,846) (3,281) (3,212) (3,151) (2,184)
Provision for loan losses 8,481 4,064 5,012 3,609 3,304
Balance of acquired institution 785 519 - - -
-------------------------------------------------
Balance at end of year $17,610 $18,190 $16,888 $15,088 $14,630
=================================================
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs .58% .23% .25% .26% .21%
Provision for loan losses .51 .28 .39 .30 .31
AS A PERCENT OF NONPERFORMING AND
POTENTIAL PROBLEM LOANS
Allowance for loan losses 118.59% 136.97% 142.67% 126.94% 143.83%
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TABLE EIGHT
NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $8,844 $7,801 $5,200 $7,081 $6,087
Accruing loans past due 90 days or more 5,126 5,149 6,402 4,664 3,823
Restructured loans 879 331 235 141 262
-------------------------------------------------
$14,849 $13,281 $11,837 $11,886 $10,172
=================================================
</TABLE>
During 1998, the Company recognized approximately $527,000 of interest income
received in cash on nonaccrual and restructured loans. Approximately $1.04
million 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, 1998.
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.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TABLE NINE
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and $6,270 29% $7,284 31% $6,549 33% $5,931 32% $5,151 30%
agricultural
Real estate-mortgage 6,227 49 5,575 45 5,604 43 4,930 42 4,867 43
Installment loans to 5,113 22 5,331 24 4,735 24 4,227 26 4,612 27
individuals
------------------------------------------------------------------------------------
$17,610 100% $18,190 100% $16,888 100% $15,088 100% $14,630 100%
====================================================================================
</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.
- ------------------------------------------------------------------------------
<PAGE>
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 includes traditional
fixed-rate and junior lien mortgage loans. Certain traditional fixed-rate
mortgages are originated by the Company, with the intent to sell, servicing
released, in the secondary market. This product line enables the Company to
provide conventional, fixed-rate mortgage products to its customers, but
minimize the interest-rate risk associated with fixed-rate loans. At December
31, 1998, conventional mortgage loans represented $45 million or 18.2% of the
reported balance of loans held for sale.
Through the Company's correspondent lending division and four separate loan
origination platforms, the Company purchases and originates junior lien and
similar mortgage loans for sale or securitization. Generally, these loans are
used by the borrower to finance property improvements or to consolidate personal
debt. The correspondent lending division acquires loans either on a flow or bulk
basis from an approved network of unaffiliated lenders. Additionally, through
its retail origination divisions, located in West Virginia, California and
Texas, the Company solicits loans directly from borrowers on a nationwide basis.
These loans are generally expected to either be sold or securitized within 90 to
180 days. From 1994 through the first quarter of 1998, the Company participated
in a whole loan purchasing program whereby the Company purchased HUD Title I
home improvement and other junior lien mortgage loans. In May 1998, the Company
terminated its participation in this program.
Although these loans are generally obtained from borrowers outside of the
Company's community banking market areas, management believes that the
geographic diversification of the loan pool reduces the risks associated with
downturns in specific local economies. Because the retail and correspondent
lending divisions originate and acquire these loans on a nationwide basis, the
Company's risk related to geographic concentration is significantly reduced. At
December 31, 1998, 11.89% of the loans held for sale were to borrowers located
in California and no other state had a concentration of loans greater than
6.50%.
In addition to concentration risk, as discussed above, there are other risks
associated with the junior lien mortgage pool. 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
manages this risk by continuously improving policies and procedures designed to
reduce the risk of loss to a level commensurate with the return being earned on
the Company's investment in this program.
The Company has established formal underwriting guidelines and quality
control procedures which emphasize the creditworthiness of the borrower, with
less focus placed on the value of the underlying collateral. Factors such as
credit scores, debt-to-income ratios, mortgage credit history and others are
factored into the lending decision for these loans. Additionally, property
appraisals, in varying degrees, are required for certain loans. Other
risk-reducing factors include the correspondent lending division's pre-approved
list of lenders from whom loans may be acquired. Approval of lenders is based on
due diligence procedures performed on each lender and continued evaluation of
the performance of loans purchased from each lender.
During 1998, the Company originated $696 million and purchased $755 million
in loans held for sale and sold $1.36 billion during the same period. This
compares to originations of $97 million, purchases of $798 million, and sales of
$851 million during 1997.
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 or securities, 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, prepayment 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.
During 1998, the Company completed four securitizations of junior lien
mortgage loans with total loan balances approximating $463.13 million. This
compares to one securitization of approximately $35 million of loans completed
in December 1997. As of December 31, 1998 and 1997, the Company reported
retained interests in these securitized loan pools of approximately $65.62
million and $4.36 million, respectively, including accrued interest. Assumptions
used to estimate the retained interest include default rates approximating 10%
cumulative losses, prepayment rates of 17-21% CPR, and a weighted-average
discount rate of 12.23%. Management monitors the actual default and prepayment
rates of each securitized pool on a monthly basis, in addition to the
outstanding pool balance, to ensure the rates used to estimate the retained
interest are still reasonable. Each of the securitized pools is serviced by the
Company's mortgage loan servicing division.
<PAGE>
LOAN SERVICING
City Mortgage Services, a division of City National Bank, was ranked as the
seventh largest servicer of non-conforming loans in the country, according to a
recently released national industry publication. This division has grown from a
de-novo operation in 1996 to a servicing portfolio of $1.98 billion and
approximately 81,000 accounts at December 31, 1998. Of the $1.98 billion
servicing portfolio, $1.77 billion of loans are serviced for others at December
31, 1998, compared to $1.25 billion at December 31, 1997. Loans serviced for
others are not included in the Consolidated Balance Sheets of the Company. The
servicing division, with operations in West Virginia, California, and Texas,
specializes in servicing sub-prime and other non-conforming loans, home
improvement and home equity loans and similar products.
The Company has recorded mortgage loan servicing rights of $8.87 million and
$2.46 million in Other Assets at December 31, 1998 and 1997, respectively,
associated with the right to service mortgage loans for others. The recorded
value of mortgage servicing rights is assessed quarterly to determine if the
value of those rights has become impaired during the period. In doing so,
management estimates the present value of future net cash flows to be derived
from its servicing activities. Factors included in the impairment analysis
include anticipated servicing income, costs associated with servicing the
portfolio, discount rates, and loan prepayment and default rates. As of December
31, 1998, management has determined, based on this analysis, that the recorded
value of its servicing rights is fairly stated and there is no impairment in
that value.
<PAGE>
CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998, are summarized as follows:
- --------------------------------------------------------------------------------
TABLE TEN
(in thousands)
Amounts Percentage
----------------------------
Three months or less $48,155 23%
Over three months through six months 38,581 18
Over six months through twelve months 69,429 33
Over twelve months 56,373 26
----------------------------
Total $212,538 100%
============================
- --------------------------------------------------------------------------------
<PAGE>
CAPITAL RESOURCES
- ------------------------------------------------------------------------------
During 1998, the Company's consolidated stockholders' equity decreased 0.10%
from $220.28 million at December 31, 1997 to $220.06 million at December 31,
1998. This decrease was largely due to the impact of the Company's merger of
Horizon Bancorp. After fourth quarter charges to earnings, the Company reported
$5.23 million net income for 1998. However, prior to the merger, both companies
paid approximately $12.17 million in cash dividends to their respective
shareholders. Additionally, the Company experienced a $2.75 million decline in
Other Comprehensive Income, primarily the result of declines in the fair market
value of the Company's available-for-sale securities portfolio. During 1998, the
Company repurchased approximately 111,000 shares of its outstanding common stock
at an average price of $43.24 per share, while Horizon, prior to the merger,
repurchased approximately 71,000 shares of its common stock. Together, treasury
stock transactions resulted in an additional $6.99 million reduction in
stockholders' equity. Combined, the net effect of net income less dividends
paid, declines in Other Comprehensive Income and treasury stock acquisitions
resulted in a net decrease to consolidated equity of approximately $16.67
million. This net decline was partially offset by a $15.77 million increase to
equity resulting from the Company's acquisitions of Del Amo, Jarrett/Aim
Communications, Morton Specialty Insurance Partners, Citynet Corporation, and
MarCom, Inc. Each of these transactions, accounted for under the purchase
accounting method, involved the issuance of the Company's common stock and,
therefore, resulted in increases to consolidated equity.
Regulatory guidelines require the Company to maintain a minimum total capital
to risk-adjusted assets ratio of 8 percent, with at least one-half of capital
consisting of tangible common stockholders' equity and a minimum Tier I leverage
ratio of 4 percent. At December 31, 1998, the Company's total capital to
risk-adjusted assets ratio was 12.00% and its Tier I capital ratio was 10.60%,
compared to 12.82% and 11.84%, respectively, at December 31, 1997. The Company's
leverage ratio at December 31, 1998 and 1997 was 9.99% and 8.73%, respectively.
<PAGE>
Similarly, the Company's banking subsidiaries are also required to maintain
minimum capital levels as set forth by various regulatory agencies. Under
capital adequacy guidelines, the banking subsidiaries are required to maintain
minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and
4.00%, respectively. To be classified as "well capitalized," the banking
subsidiaries must maintain total capital, Tier I capital, and leverage ratios of
10.00%, 6.00%, and 5.00%, respectively. As of December 31, 1998, the Company's
lead bank, City National, reported total capital, Tier I capital, and leverage
ratios of 10.70%, 10.10%, and 8.90%, respectively. As of December 31, 1998, the
Company and each of its banking subsidiaries satisfied capital requirements as
established by regulatory authorities to be categorized as well capitalized.
During 1998, the Company created two separate special-purpose statutory trust
subsidiaries which sold trust preferred securities generating gross proceeds of
$87.50 million. Pursuant to rulings released in 1996 by the Federal Reserve
Board, the Company's primary regulatory authority, the Company has included the
trust preferred securities in its regulatory capital ratio computations. At
December 31, 1998, $72.02 million of trust preferred securities are included in
the Company's Tier I capital, with the remaining $15.48 million added to the
Company's total regulatory capital. Proceeds from the issuance of the trust
preferred securities were used for general corporate purposes, including, but
not limited to, repayment of long-term debt and financing activities within the
mortgage banking business segment.
Continued improvement in operating results, effective management of risks
affecting the Company, and a focus on high asset quality have been, and will
remain, the key elements in maintaining the Company's present capital position.
Earnings from bank operations are expected to remain adequate to fund payment of
stockholders' dividends and internal growth. In management's opinion, the
subsidiary banks have the capability to upstream sufficient dividends to meet
the anticipated cash requirements of the Company.
IMPACT OF THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
Based on management's assessment of this issue, the Company determined that
it would be required to modify or replace significant portions of its software
and certain hardware so that those systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with the modifications
that were implemented to existing software and conversions to new hardware, the
Year 2000 issue will not pose significant operational problems.
The Company's plan to resolve the Year 2000 issue is sponsored and closely
monitored by both senior and executive level management. The Federal Financial
Institutions Examination Council recommended that all systems reprogramming
efforts be completed by December 31, 1998 to allow for sufficient testing and
implementation. Management is of the opinion that the Company has complied with
this recommendation. Plan components have been executed in accordance with
guidelines that were mandated by the Office of the Comptroller of the Currency.
The Company's approach to Year 2000 compliance involves five industry standard
phases:
1.Awareness Phase
2.Assessment Phase
3.Renovation Phase
4.Validation Phase
5.Implementation Phase
Each of these phases has been fully completed. A sixth phase, "post
implementation" was also adopted by the Company and is currently on-going and
involves further testing of systems, vendor and supplier monitoring, and
contingency plan assessments. The Company has developed a contingency plan for
certain critical applications. This plan includes the development of crisis
management procedures, manual back-up options, and the adjustment of staffing
strategies.
<PAGE>
The Company has historically updated systems, replaced software and hardware,
and made other systematic investments in technology on a regular basis. As a
result, the Company's costs associated with Year 2000 remediation efforts have
not been significant. Where necessary, the Company has utilized both internal
and external resources to reprogram or replace, test, and implement the software
and operating equipment for Year 2000 modifications, and will continue to do so.
However, due to the Company's technology plan of hardware, software, and systems
maintenance, the sum of the costs incurred to-date and the estimated costs
remaining to be incurred is not material to the consolidated financial
statements.
Based on the results, to date, of implementing the Company's strategic plan,
management believes that the risks affecting the Company associated with the
Year 2000 issue should be minimal. Accordingly, management does not believe that
the Year 2000 presents a material exposure as it relates to the Company's
products and services. In addition, the Company has gathered information about
the Year 2000 compliance status of its significant vendors, suppliers, and
customers and continues to monitor their compliance. To date, the Company's
management is not aware of any such party with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that such parties will
be Year 2000 ready. The inability of such parties to complete their Year 2000
remediation process in a timely manner could materially impact the Company. The
effect of non-compliance by such parties is not determinable.
The Company's recent merger of Horizon does not significantly impact the
Company's Year 2000 readiness. The Company has historically converted each of
its acquired financial institutions to its internal data processing environment.
With the merger of Horizon, all significant data processing systems would have
been converted to the Company's operating systems, regardless of the Year 2000
issue. Therefore, Year 2000 readiness has not necessarily accelerated the
Company's replacement of equipment and systems within the Horizon banks. All
significant applications of the Horizon banks are expected to be fully converted
by June 30, 1999.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner and in accordance with the guidelines set forth by
its regulatory authorities. As noted above, the Company is in its final
post-implementation phase of further testing. If final testing identifies
previously unknown Year 2000 exposures and those exposures cannot be timely
addressed, the Company could experience significant difficulties in processing
daily operating activities. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer systems product
failure, for example, or failure to properly date business records. The amount
of potential liability and lost income cannot be reasonably estimated at this
time.
INFLATION
Since the assets and liabilities of the Bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of banks is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same.
Non-financial assets, such as premises and equipment, comprise a relatively
small percentage of the Company's total assets. Therefore, inflation is less a
factor to the Company than it may be for non-financial entities. However, as the
rate of inflation increases, there generally could be a negative impact to the
Company, such as increases in operating costs. As operating costs rise, product
repricing and effective management of the Company's interest rate environment
are used to manage the impact of rising costs.
FORWARD-LOOKING STATEMENTS
Information included in the Annual Report includes forward-looking
information within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934. Such information
involves risks and uncertainties that could result in the Company's actual
results achieved being materially different from those projected in the
forward-looking information. The risks and uncertainties that could cause a
material difference include, but are not limited to, those associated with the
interest rate and general economic environment, federal and state banking
regulations, competition within each of the Company's operating segments,
remediation of Year 2000 issues, the successful integration of the Horizon banks
into the operations of the Company, and other areas. The forward-looking
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. 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 5, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 87,866 $ 78,469
Federal funds sold 31,911 54,063
-----------------------------
Cash and cash equivalents 119,777 132,532
Securities available for sale, at fair value 356,659 336,776
Securities held-to-maturity (approximate fair value at
December 31, 1998 and 1997 - $40,539 and $42,771) 39,063 41,554
Loans:
Gross loans 1,715,929 1,508,601
Allowance for possible loan losses (17,610) (18,190)
-----------------------------
NET LOANS 1,698,319 1,490,411
Loans held for sale 246,287 134,990
Premises and equipment 71,094 53,758
Accrued interest receivable 21,660 17,553
Other assets 153,145 78,850
-----------------------------
TOTAL ASSETS $2,706,004 $2,286,424
=============================
LIABILITIES
Deposits:
Noninterest-bearing $ 303,421 $ 250,257
Interest-bearing 1,760,994 1,529,548
-----------------------------
TOTAL DEPOSITS 2,064,415 1,779,805
Short-term borrowings 183,418 172,833
Long-term debt 102,719 75,502
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trusts holding solely 87,500 -
subordinated debentures of City Holding Company
Other liabilities 47,893 38,007
-----------------------------
TOTAL LIABILITIES 2,485,945 2,066,147
STOCKHOLDERS' EQUITY
Preferred stock, par value $25 per share: authorized -
500,000 shares: none issued
Common stock, par value $2.50 per share: authorized -
50,000,000 shares; issued and
outstanding: 1998 - 16,820,276 shares; 1997 - 16,770,400 42,051 41,926
shares including 10,000 and
11,236 shares in treasury at December 3l, 1998 and 1997
Capital surplus 58,365 52,004
Retained earnings 120,209 127,142
Cost of common stock in treasury (274) (3,248)
Accumulated other comprehensive income (292) 2,453
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 220,059 220,277
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,706,004 $2,286,424
=============================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
lNTEREST INCOME
Interest and fees on loans $170,549 $147,760 $133,465
Interest on investment securities:
Taxable 17,189 19,840 20,718
Tax-exempt 4,955 5,077 4,685
Other interest income 3,987 489 840
---------------------------------------
TOTAL INTEREST INCOME 196,680 173,166 159,708
INTEREST EXPENSE
Interest on deposits 74,432 63,086 57,662
Interest on short-term borrowings 9,677 9,898 8,984
Interest on long-term debt 9,228 3,028 1,688
---------------------------------------
TOTAL INTEREST EXPENSE 93,337 76,012 68,334
---------------------------------------
NET INTEREST INCOME 103,343 97,154 91,374
Provision for loan losses 8,481 4,064 5,012
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR 94,862 93,090 86,362
LOAN LOSSES
OTHER INCOME
Investment securities gains 7 8 8
Service charges 9,738 8,245 7,132
Mortgage loan servicing fees 19,058 11,933 2,958
Net origination fees on junior-lien mortgages 14,489 2,458 517
Gain on sale of loans 14,238 4,392 1,260
Other income 14,893 5,577 4,598
---------------------------------------
TOTAL OTHER INCOME 72,423 32,613 16,473
OTHER EXPENSES
Salaries and employee benefits 56,653 41,592 34,471
Occupancy, excluding depreciation 14,016 6,350 4,835
Depreciation 10,313 6,597 4,991
Advertising 27,827 4,935 1,499
Other expenses 46,749 25,425 24,270
---------------------------------------
TOTAL OTHER EXPENSES 155,558 84,899 70,066
---------------------------------------
INCOME BEFORE INCOME TAXES 11,727 40,804 32,769
INCOME TAXES 6,493 14,513 11,488
---------------------------------------
NET INCOME $ 5,234 $26,291 $21,281
---------------------------------------
Basic earnings per common share $ 0.31 $ 1.60 $ 1.34
---------------------------------------
Diluted earnings per common share $ 0.31 $ 1.60 $ 1.34
---------------------------------------
Average common shares outstanding:
Basic 16,799 16,428 15,914
---------------------------------------
Diluted 16,885 16,474 15,928
---------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Accumulated
Common Other Total
Stock Capital Retained Comprehensive Treasury Stockholders'
(Par Surplus Earnings Income Stock Equity
Value)
-----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $38,580 $29,143 $108,370 $1,964 $(535) $177,522
Comprehensive income:
Net income - - 21,281 - - 21,281
Other comprehensive income, net of
deferred income taxes
of $(805):
Unrealized loss on securities of
$1,321, net of reclassification - - - (1,316) - (1,316)
adjustment for gains included in ----------
net income of $5 19,965
Total comprehensive income
Exercise of stock options 3 17 - - - 20
Cash dividends declared:
City ($.63 a share) - - (3,540) - - (3,540)
Horizon - - (5,213) - - (5,213)
Sale of 2,299 shares of treasury stock - (2) - - 60 58
Redempton of fractional shares - (28) - - - (28)
Issuance of 10% stock dividend 1,268 9,508 (10,776) - - -
------------------------------------------------------------------------------------------
Balances at December 31, 1996 39,851 38,638 110,122 648 (475) 188,784
Comprehensive income:
Net income - - 26,291 - - 26,291
Other comprehensive income, net of
deferred income taxes
of $1,138:
Unrealized gain on securities of
$1,791, net of reclassification - - - 1,786 - 1,786
adjustment for gains included in
net income of $5 --------
28,077
Total comprehensive income
Cash dividends declared:
City ($.73 a share) - - (4,486) - - (4,486)
Horizon - - (6,935) - - (6,935)
Exercise of 2,629 stock options 13 81 - - - 94
Sale of 2,511 shares of treasury stock - 13 - - 67 80
Purchase of 2,300 shares of treasury - - - - (77) (77)
stock
Purchase of shares of treasury stock by - - - - (2,763) (2,763)
Horizon
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 41,926 52,004 127,142 2,453 (3,248) 220,277
Comprehensive income:
Net income - - 5,234 - - 5,234
Other comprehensive income, net of
deferred income taxes
of $(1,998):
Unrealized loss on securities of
$2,749, net of reclassification - - - (2,745) - (2,745)
adjustment for gains included in -------
net income of $4 2,489
Total comprehensive income
Cash dividends declared:
City ($.77 a share) - - (5,105) - - (5,105)
Horizon - - (7,062) - - (7,062)
Exercise of 36,768 stock options 82 422 - - 171 675
Purchase of 111,018 shares of treasury - - - - (4,873) (4,873)
stock
Purchase of shares of treasury stock by - - - - (2,114) (2,114)
Horizon
Common stock issued in acquisitions 807 14,965 - - - 15,772
Retirement of 108,396 shares of common (271) (4,396) - - 4,667 -
stock held in treasury
Retirement of shares of common stock (493) (4,630) - - 5,123 -
held in treasury by Horizon
-------------------------------------------------------------------------------------
Balances at December 31, 1998 $42,051 $58,365 $120,209 $(292) $(274) $220,059
=====================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,234 $26,291 $ 21,281
Adjustments to reconcile net income to net cash
(used in)
provided by operating activities:
Net amortization 2,647 1,776 1,561
Provision for depreciation 10,313 6,599 4,990
Provision for possible loan losses 8,481 4,064 5,012
Deferred income tax benefit (3,011) (909) (1,412)
Loans originated for sale (695,576) (97,465) (118,287)
Purchases of loans held for sale (754,703) (797,537) (1,029,098)
Proceeds from loans sold 1,364,657 850,742 1,178,395
Realized gains on loans sold (14,238) (4,392) (1,260)
Realized investment securities gains (7) (8) (8)
(Increase) decrease in accrued interest (3,515) (1,763) 657
receivable
Increase in other assets (58,030) (31,925) (2,545)
Increase in other liabilities 6,547 9,193 6,868
---------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING (131,201) (35,334) 66,154
ACTIVITIES
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment 3,390 4,565 154,066
securities
Purchases of investment securities (898) - (137,824)
Proceeds from sales of securities available for sale 33,930 87,139 58,772
Proceeds from maturities and calls of securities 146,140 79,912 87,799
available for sale
Purchases of securities available for sale (201,487) (102,523) (127,151)
Net increase in loans (119,225) (128,169) (57,847)
Net cash acquired (paid) in acquisitions 2,584 (4,516) -
Purchases of premises and equipment (26,446) (11,840) (15,686)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (162,012) (75,432) (37,871)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing 52,960 (3,262) 5,287
deposits
Net increase in interest-bearing deposits 129,083 79,733 23,201
Net increase (decrease) in short-term borrowings 10,529 52,940 (44,043)
Proceeds from long-term debt 87,917 41,252 14,250
Repayment of long-term debt (65,700) - -
Net proceeds from issuance of trust preferred 84,148 - -
securities
Purchases of treasury stock (6,987) (2,840) -
Proceeds from sales of treasury stock - 80 58
Redemption of dissenter and fractional shares - - (22)
Exercise of stock options 675 94 14
Cash dividends paid (12,167) (11,421) (8,753)
---------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING 280,458 156,576 (10,008)
ACTIVITIES
---------------------------------------
(DECREASE) INCREASE IN CASH AND CASH (12,755) 45,810 18,275
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 132,532 86,722 68,447
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $119,777 $132,532 $ 86,722
=======================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
- ------------------------------------------------------------------------------
Summary of Significant Accounting and Reporting Policies: The accounting and
reporting policies of City Holding Company and its subsidiaries (the Company)
conform with generally accepted accounting principles and require management to
make estimates and develop assumptions that affect the amounts reported in the
financial statements and related footnotes. Actual results could differ from
management's estimates. The following is a summary of the more significant
policies.
Principles of Consolidation: The consolidated financial statements include
the accounts of City Holding Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of Principal Markets and Services: The Company is a multi-bank
holding company headquartered in Charleston, West Virginia. The Company's
banking subsidiaries are retail and consumer oriented community banks with
offices in West Virginia, Ohio, and California. The nonbanking subsidiaries of
the Company are comprised of a full service securities brokerage and investment
advisory company headquartered in Charleston, two separate special-purpose
statutory trusts created to issue trust preferred securities and an inactive
mortgage banking company.
Cash and Due from Banks: The Company considers cash and due from banks and
federal funds sold as cash and cash equivalents.
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: 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.
<PAGE>
Additionally, the Company provides credit enhancement with respect to the
securities 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 allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance for loan
losses 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. This determination 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 is 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.
Premises and Equipment: 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 premises and furniture, fixtures, and equipment do not
exceed 30 and 7 years, respectively.
Intangibles: Intangible assets, not including mortgage servicing rights, 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.
Advertising: Advertising costs are expensed as incurred.
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 Financial Accounting
Standards Board (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 77,000, 42,000, and 14,000 in 1998, 1997, and 1996 while other
common stock equivalents were 9,000 and 4,000 in 1998 and 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.
Segment Reporting: Effective January 1, 1998, the Company adopted FASB
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement No. 131 establishes standards for reporting
information concerning the Company's operating segments. The adoption of
Statement No. 131 did not affect the results of operations or financial
position of the Company, but did result in additional financial statement
disclosures (see NOTE TWENTY-THREE).
<PAGE>
New Accounting Pronouncements: Certain provisions of FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, relating to repurchase agreements, securities lending and other
similar transactions, and pledged collateral, were deferred for one year by FASB
No. 127 and were adopted prospectively as of January 1, 1998. FASB No. 125,
established new criteria for determining whether a transfer of financial assets
in exchange for cash or other consideration should be accounted for as a sale or
as a pledge of collateral in a secured borrowing and also established new
accounting requirements for pledged collateral. The adoption of these provisions
did not have a material impact on financial position or results of operations.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The Company adopted the provisions
of this statement in 1998. These disclosure requirements had no impact on
financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this statement require
that derivative instruments be carried at fair value on the balance sheet and
allows hedge accounting when specific criteria are met. The provisions of this
statement become effective for quarterly and annual reporting beginning January
1, 2000. The impact of adopting the provisions of this statement on the
Company's financial position or results of operations subsequent to the
effective date is not currently estimable and will depend on the financial
position of the Company and the nature and purpose of the derivative instruments
in use by management at that time.
Statements of Cash Flows: Cash paid for interest, including long-term debt,
was $90.3 million, $74.9 million, and $68.7 million in 1998, 1997, and 1996,
respectively. Cash paid for income taxes was $14.0 million, $15.0 million and
$12.2 million in 1998, 1997, and 1996, respectively.
Reclassifications: Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation. Such
reclassifications had no impact on net income or stockholders' equity.
- ------------------------------------------------------------------------------
NOTE TWO
RESTRICTIONS ON CASH AND DUE FROM BANKS
- ------------------------------------------------------------------------------
Certain subsidiary banks are required to maintain an average reserve balance
with the Federal Reserve Bank. The average amount of the balance for the year
ended December 31, 1998, was approximately $33.66 million. Included in cash and
due from banks at December 31, 1998, is $19.50 million of cash restricted for
mortgage banking activities.
- ------------------------------------------------------------------------------
NOTE THREE
ACQUISITIONS
- ------------------------------------------------------------------------------
On December 31, 1998, the Company merged with Horizon Bancorp, Inc.
(Horizon), a $1 billion asset bank holding company headquartered in Beckley,
West Virginia, in a transaction accounted for as a pooling of interests. The
Company issued 10.2 million shares of common stock to the shareholders of
Horizon based upon an exchange ratio of 1.111 shares of the Company's common
stock for each outstanding share of Horizon common stock. The Company's
historical consolidated financial statements have been restated to reflect this
transaction.
Net interest income, net income, and diluted net income per share for the
Company and Horizon as originally reported for the two years ended December 31,
1997, prior to restatement are as follows:
1997 1996
----------------------
Net interest income:
Company $52,105 $47,005
Horizon 45,049 44,369
----------------------
Combined $97,154 $91,374
======================
Net income:
Company $12,464 $10,130
Horizon 13,827 11,151
----------------------
Combined $26,291 $21,281
======================
Diluted net income per common share:
Company $2.02 $1.81
Horizon 1.49 1.20
Combined 1.60 1.34
Merger expenses incurred in 1998 as a result of the merger with Horizon
approximated $13.5 million and consisted of: advisory and professional fees of
$4.8 million, employee severance costs of $3.2 million, data processing contract
terminations of $1.7 million, and other miscellaneous expenses of $3.8 million.
Included in the miscellaneous expenses is a $2.5 million write-down of goodwill,
determined to be impaired as a result of the merger, related to a branch
previously acquired by Horizon.
<PAGE>
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), a printing and direct mail corporation. In March 1998, City
National acquired Morton Specialty Insurance Partners, Inc. (Morton Insurance),
an insurance brokerage that 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), an internet service provider
and web site development firm, respectively. 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.
In October 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 1998 and in the fourth quarter of 1997, the
Company has paid $5.30 million of additional consideration. 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.
In September 1997, Horizon acquired Beckley Bancorp, Inc., headquartered in
Beckley, West Virginia. Under the terms of the agreement, Horizon paid $15.4
million in cash. The 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.
In January 1997, the Company consummated its acquisition of 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.
Intangible assets arising from purchase business combinations noted above and
in the previous years consist primarily of goodwill and core deposits which have
an aggregate unamortized balance at December 31, 1998 and 1997, of $38.37
million and $27.56 million, respectively. Excluding the fourth quarter 1998
write-down of goodwill determined to be impaired, amortization of goodwill and
core deposits approximated $3.08 million, $1.52 million, and $960,000 during the
years ended December 31, 1998, 1997, and 1996, respectively.
- ------------------------------------------------------------------------------
NOTE FOUR
INVESTMENTS
- ------------------------------------------------------------------------------
Included in the Company's investment portfolio are structured notes with an
estimated fair value of $1.4 million and $4.1 million at December 31, 1998 and
1997, 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.
<PAGE>
December 31, 1998
Gross Gross Estimated
realized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
(in thousands)
Available-for-sale
securities:
U.S. Treasury
securities and
obligations of
U.S.
government
corporations
and agencies $244,706 $2,508 $413 $246,801
Obligations of
states and
political
subdivisions 66,926 2,179 103 69,002
Mortgage-backed 11,102 199 7 11,294
securities
Other debt 8,565 292 - 8,857
securities --------------------------------------------------------
Total debt 331,299 5,178 523 335,954
securities
Equity 27,083 357 6,735 20,705
securities --------------------------------------------------------
$358,382 $5,535 $7,258 $356,659
========================================================
Held-to-maturity
securities:
Obligations of
states and
political
subdivisions $39,063 $1,476 $ - $ 40,539
========================================================
<PAGE>
December 31, 1997
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
(in thousands)
Available-for-sale
securities:
U.S. Treasury
securities and
obligations of
U.S.
government
corporations
and agencies $238,582 $1,661 $395 $239,848
Obligations of
states and
political
subdivisions 55,233 1,886 3 57,116
Mortgage-backed 18,868 302 82 19,088
securities
Other debt
securities 3,203 275 - 3,478
-----------------------------------------------------------
Total debt 315,886 4,124 480 319,530
securities
Equity
securities 16,968 368 90 17,246
-----------------------------------------------------------
$332,854 $4,492 $570 $336,776
===========================================================
Held-to-maturity
securities:
Obligations of
states and
political
subdivisions $41,554 $1,222 $ 5 $42,771
===========================================================
The amortized cost and estimated fair value of debt securities at December
31, 1998, 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.
Available-for-Sale Held-to-Maturity
Estimated Estimated
Fair Fair
Cost Value Cost Value
--------------------------------------------------------------
(in thousands)
Due in one year
or less $47,267 $47,654 $ 935 $ 945
Due after one
year through
five years 179,534 181,668 14,835 15,288
Due after five
years through
ten years 78,695 80,436 20,027 20,886
Due after ten
years 14,701 14,902 3,266 3,420
--------------------------------------------------------------
320,197 324,660 39,063 40,539
Mortgage-backed
securities 11,102 11,294 - -
--------------------------------------------------------------
$331,299 $335,954 $39,063 $40,539
==============================================================
Gross gains of $47,000, $431,000, and $109,000, and gross losses of $40,000,
$423,000, and $101,000, were realized on sales and calls of securities during
1998, 1997, and 1996, respectively.
The book value of securities pledged to secure public deposits and for other
purposes as required or permitted by law approximated $161 million and $175
million at December 31, 1998 and 1997, respectively.
- ------------------------------------------------------------------------------
NOTE FIVE
LOANS
- ------------------------------------------------------------------------------
The loan portfolio is summarized as follows:
December 31
1998 1997
------------------------------------------------
(in thousands)
Commercial, financial and
agricultural $509,214 $464,678
Residential real estate 842,727 676,828
Installment loans to
individuals 363,988 367,095
------------------------------------------------
$1,715,929 $1,508,601
------------------------------------------------
The Company grants portfolio loans to customers generally within the market
areas of its subsidiary banks. There is no significant concentration of credit
risk by industry or by related borrowers. There are no foreign loans outstanding
and highly leveraged loan transactions are insignificant.
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 following presents the activity with respect
to related party loans during 1998:
<PAGE>
1998
-----------
(in
thousands)
Balance at January 1, 1998 $47,233
Loans made 11,829
Principal payments received (10,648)
Other changes (23,406)
-----------
Balance at December 31, 1998 $25,008
===========
- ------------------------------------------------------------------------------
NOTE SIX
ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------
A summary of changes in the allowance for possible loan losses follows:
1998 1997 1996
-----------------------------------------
(in thousands)
Balance at beginning of
year $18,190 $16,888 $15,088
Provision for possible
loan losses 8,481 4,064 5,012
Charge-offs (11,469) (5,752) (5,011)
Recoveries 1,623 2,471 1,799
Balance of acquired
institution 785 519 -
------------------------------------------
BALANCE AT END OF YEAR $17,610 $18,190 $16,888
==========================================
The recorded investment in loans that were considered impaired was $9.13
million and $8.65 million at December 31, 1998 and 1997, respectively. Included
in these amounts are $4.04 million and $3.53 million, respectively, of impaired
loans for which the related allowance for loan losses is $1.68 million and $1.14
million, respectively, and $5.09 million and $5.12 million of impaired loans
that, as a result of write-downs or being well secured, do not have an allowance
for loan losses. The average recorded investments in impaired loans during the
years ended December 31, 1998, 1997 and 1996, were approximately $9.39 million,
$8.44 million, and $11.83 million. During the years ended December 31, 1998,
1997, and 1996, $1.04 million, $643,000, and $772,000, respectively, was
recognized as interest income on impaired loans and $527,000, $326,000, and
$619,000, respectively, was recognized as interest income using a cash basis
method of accounting.
- ------------------------------------------------------------------------------
NOTE SEVEN
LOAN SECURITIZATIONS AND SALES
- ------------------------------------------------------------------------------
The Company originates or purchases junior lien mortgage loans to be sold or
securitized. At December 31, 1998 and 1997, these loans held for sale were
approximately $201 million and $114 million, respectively. The Company also
originates and sells fixed rate mortgage loans on a servicing released basis. At
December 31, 1998 and 1997, these loans held for sale were approximately $45
million and $21 million, respectively.
During 1998, the Company completed four securitizations of junior lien
mortgage loans with total loan balances approximating $463.13 million. This
compares to one securitization of approximately $35 million of loans completed
in 1997. As of December 31, 1998 and 1997, the Company reported retained
interests in these securitized loan pools of approximately $65.62 million and
$4.36 million, respectively, including accrued interest. Each of the securitized
pools is serviced by the Company's mortgage loan servicing division. Significant
assumptions used to estimate the value of the retained interest include:
prepayment rates of 17-21% CPR, default rates approximating 10% cumulative
losses, and a weighted-average discount rate of 12.23%.
Gain on sales of loans approximated $14.24 million, $4.39 million, and
$1.26 million in 1998, 1997, and 1996, which included gains on securitization of
the junior lien mortgage loans of $8.6 million and $1.1 million in 1998 and
1997, respectively. The gain on sales of loans is recorded net of the change in
the valuation allowance for loans held for sale, which approximated $4.7 million
and $2.1 million in 1998 and 1997, respectively.
- ------------------------------------------------------------------------------
NOTE EIGHT
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
$1.77 billion and $1.25 billion at December 31, 1998 and 1997, respectively.
Mortgage loan servicing rights of $8.87 million and $2.46 million at December
31, 1998 and 1997, respectively, are included in other assets in the
accompanying balance sheets. The fair value of mortgage loan servicing rights at
December 31, 1998 and 1997, 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 $765,000,
$383,000, and $225,000 during the years ended December 31, 1998, 1997, and 1996,
respectively.
<PAGE>
- ------------------------------------------------------------------------------
NOTE NINE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
- ------------------------------------------------------------------------------
A summary of premises and equipment and related accumulated depreciation are
summarized as follows:
December 31
1998 1997
--------------------
(in thousands)
Land, buildings, and
improvements $64,034 $52,217
Furniture, fixtures, and
equipment 57,026 41,934
----------------------
121,060 94,151
Less allowance for
depreciation (49,966) (40,393)
----------------------
$71,094 $53,758
======================
- ------------------------------------------------------------------------------
NOTE TEN
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)
1998:
- ----
Average amount outstanding during the year $ 187,140
Maximum amount outstanding at any month end 307,185
Weighted average interest rate:
During the year 5.17%
End of the year 4.83%
1997:
- ----
Average amount outstanding during the year $190,467
Maximum amount outstanding at any month end 322,445
Weighted average interest rate:
During the year 5.22%
End of the year 5.24%
1996:
- ----
Average amount outstanding during the year $176,480
Maximum amount outstanding at any month end 229,870
Weighted average interest rate:
During the year 5.09%
End of the year 5.01%
- ------------------------------------------------------------------------------
NOTE ELEVEN
SCHEDULED MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
- ------------------------------------------------------------------------------
<PAGE>
Scheduled maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1998, are summarized as follows:
(in thousands)
Within one year $156,165
Over one through two years 42,603
Over two through three years 11,084
Over three through four years 1,202
Over four through five years 1,484
----------
Total $212,538
==========
The Company has agreements with three investment banking firms to issue over
$100 million of the Company's certificates of deposit. The certificates of
deposit can be issued in maturities of up to five years at rates equal to a
comparable treasury at the time of issuance plus a market-based spread. The
Company is not committed to issuing a pre-determined amount of its certificates
of deposit under these agreements, the use of which is at the sole discretion of
the Company. At December 31, 1998 and 1997, $22 million and $2 million,
respectively, of certificates of deposit had been sold under these agreements at
an average interest rate of 5.36% and 5.70%, respectively. The average term of
the issued certificates of deposit was 1.5 years and 2.0 years at December 31,
1998 and 1997, respectively.
- ------------------------------------------------------------------------------
NOTE TWELVE
LONG-TERM DEBT AND UNUSED LINES OF CREDIT
- ------------------------------------------------------------------------------
Long-term debt includes an obligation of the Parent Company consisting of a
$35 million revolving credit loan facility with an unrelated party. At December
31, 1998, $15 million was outstanding. The loan has a variable rate (7.125% at
December 31, 1998) with interest payments due quarterly and principal due at
maturity in June 30, 1999. 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.
<PAGE>
The Company, through its banking subsidiaries, maintains long-term financing
from the FHLB as follows:
December 31, 1998
--------------------
Amount Amount Interest Maturity
Available Outstanding Rate Date
- ------------------------------------------------------------------------
(in thousands)
$2,000 $2,000 6.58% June 2000
10,000 10,000 5.60 July 2002
25,000 25,000 5.47 September 2002
1,500 1,500 6.94 June 2005
82,212 3,414 6.02 July 2005
25,000 25,000 4.89 January 2008
5,000 5,000 5.48 February 2008
2,300 2,200 6.05 April 2008
2,000 2,000 5.62 July 2008
10,000 10,000 4.86 October 2008
1,500 1,500 7.14 June 2015
The Company has purchased, through its banking subsidiaries, 107,513 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.
Financing obtained from the FHLB 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,
1998, collateral pledged to the FHLB included approximately $24 million in
investment securities and $464 million in residential real estate loans.
In addition to the financing discussed above, one of the Company's
subsidiaries has as unused line of credit available with the FHLB in the amount
of $26.8 million.
- ------------------------------------------------------------------------------
NOTE THIRTEEN
TRUST PREFERRED SECURITIES
- ------------------------------------------------------------------------------
On October 27, 1998, City Holding Capital Trust II (Capital Trust II), a
special-purpose statutory trust subsidiary of the Company sold via public
offering $57.5 million of 9.125% trust preferred capital securities (the Capital
Securities II) and issued $1.8 million of common securities to the Company.
Distributions on the Capital Securities II are payable quarterly and each
Capital Security has a stated liquidation value of $25. To fund Capital Trust
II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior
Subordinated Debentures (the Debentures II) with a stated maturity date of
October 31, 2028. The sole assets of Capital Trust II are the Debentures II.
Cash distributions on the Capital Securities II in Capital Trust II are made to
the extent interest on the Debentures II is received by Capital Trust II. The
Company, through various agreements, has irrevocably and unconditionally
guaranteed all of Capital Trust II's obligations under the Capital Securities II
regarding payment of distributions and payment on liquidation or redemption of
the Capital Securities II, but only to the extent of funds held by Capital Trust
II. The Capital Securities II are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Debentures II,
(ii) prior to October 31, 2003, in whole, but not in part, contemporaneously
with the optional redemption at any time by the Company of the Debentures II at
any time within 90 days following an event of certain changes or amendments to
regulatory requirements or federal income tax rules and (iii) in whole or in
part, at any time on or after October 31, 2003, contemporaneously with the
optional redemption by the Company of the Debentures II at a redemption price
equal to the aggregate liquidation amount of the Capital Securities II, plus
accumulated but unpaid distributions thereon. After deducting expenses incurred
in the issuance, the Company received proceeds of $55.34 million from the
Capital Securities II offering.
On March 31, 1998, City Holding Capital Trust (the Trust), a special-purpose
statutory trust subsidiary of the Company, issued $30 million in 9.15% trust
preferred capital securities (the Capital Securities) to certain qualified
institutional investors and $928,000 of common securities (the Common
Securities) to the Company. Distributions on the Capital Securities are 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 $30.9 million in 9.15%
Junior Subordinated Debentures (the Debentures) with a stated maturity date of
April 1, 2028. The sole assets of the Trust are the Debentures. 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 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 income 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 obligations outstanding under Capital Trust II and the Capital Trust are
classified as "Corporation-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated debentures of City
Holding Company" in the liabilities section of the consolidated balance sheets.
Distributions on the capital securities are recorded in the consolidated
statements of income as interest expense. The Company's interest payments on the
Debentures are fully tax deductible.
<PAGE>
For regulatory purposes, the Company has included $72.02 million of the total
offerings in its Tier I capital for risk-based capital computations. The
remaining $15.48 million is included in the Company's total risk-based capital.
- ------------------------------------------------------------------------------
NOTE FOURTEEN
RESTRICTIONS ON SUBSIDIARY DIVIDENDS
- ------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the subsidiary banks to
transfer funds to the Parent Company in the form of cash dividends. The approval
of the banks' 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 1999, the
subsidiary banks can, without prior regulatory approval, declare dividends of
approximately $30.26 million to the Parent Company, plus retained net profits
for the interim period through the date of declaration.
- ------------------------------------------------------------------------------
NOTE FIFTEEN
INCOME TAXES
- ------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
December 31
1998 1997
-------------------------
(in thousands)
Deferred tax assets:
Allowance for loan losses $7,213 $7,216
Loans held for sale 2,224 832
Acquired net operating 484 741
loss carryforward
Deferred compensation 3,543 2,248
payable
Securities available for 416 -
sale
Loan securitizations 957 -
Goodwill 269 -
Other 215 281
--------------------------
TOTAL DEFERRED TAX 15,321 11,318
ASSETS
Deferred tax liabilities:
Federal income tax - 148
allowance for loan
losses
Premises and equipment 2,197 1,933
Core deposit intangible 947 358
Loans 713 1,101
Securities available for - 1,582
sale
Other 1,840 767
--------------------------
TOTAL DEFERRED TAX 5,697 5,889
LIABILITIES --------------------------
NET DEFERRED TAX ASSETS $9,624 $5,429
==========================
Significant components of the provision for income taxes are as follows:
1998 1997 1996
------------------------------
(in thousands)
Federal:
Current $9,261 $13,129 $11,086
Deferred (3,011) (909) (1,412)
------------------------------
6,250 12,220 9,674
State 243 2,293 1,814
------------------------------
TOTAL $6,493 $14,513 $11,488
==============================
Current income tax expense attributable to investment securities transactions
approximated $3,000 in 1998, 1997, and 1996.
As of December 31, 1998, the Company has approximately $1.2 million and $1.6
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:
1998 1997 1996
-----------------------------
(in thousands)
Computed federal taxes $4,104 $14,086 $11,469
and statutory rate
State income taxes, net 159 1,446 1,113
of federal tax benefit
Tax effects of:
Nontaxable interest (1,601) (1,648) (1,596)
income
Non-deductible merger 1,716 - -
charges
Non-deductible goodwill 1,110 - -
Other items, net 1,005 629 502
-----------------------------
$6,493 14,513 $11,488
=============================
- ------------------------------------------------------------------------------
NOTE SIXTEEN
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. The options granted under the Company's Plan have five year terms and vest
and become fully exercisable at the end of up to four years of continued
employment. As of December 31, 1998, 399,300 options are authorized for grant,
of which 300,087 have been awarded to date. Additionally, effective with the
merger of Horizon, outstanding options to acquire the common stock of Horizon
that were previously granted under Horizon's employee benefit plans were
converted into options to acquire the Company's common stock. As of December 31,
1998, there were 95,243 such options outstanding and included in the total
380,781 options outstanding at year end.
Proforma information regarding net income and earnings per share is required
by Statement No. 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
<PAGE>
assumptions: a risk-free interest rate of 5.37%, 5.90%, and 6.04% for 1998,
1997, and 1996, respectively; an expected dividend yield of 2.04%, 2.50%, and
2.75% for 1998, 1997, and 1996, respectively; a volatility factor of .255, .266,
and .232 for 1998, 1997, and 1996, respectively; and an expected life of the
option of four years for each period.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. Pro forma net income for
the year ended December 31, 1998 was $3.40 million or $0.20 per basic and
diluted common share. The effect of applying the fair value method to the
Company's employee stock options in 1997 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:
1998 1997
--------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
--------------------------------------------------------
Outstanding at 177,169 $21.73 123,744 $18.31
beginning of
year
Granted 249,438 40.62 58,720 30.10
Exercised (36,768) 18.43 (4,802) 19.52
Forfeited (9,058) 33.31 (493) 12.60
--------- ---------
Outstanding at 380,781 $32.26 177,169 $21.73
end of year ========= =========
Exercisable at 271,934 $31.35 88,688 $22.16
end of year
Weighted-average
fair value of $10.44 $6.57
options
granted during
the year
Exercise prices for options outstanding at December 31, 1998, ranged from
$12.83 to $42.75. The weighted-average remaining contractual life of those
options at December 31, 1998, 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 $2.28 million, $2.46 million, and
$2.13 million in 1998, 1997, and 1996, respectively. The total number of shares
of the Company's common stock held by the benefit plans is 333,402. Other than
the benefit plans, the Company offers no postretirement benefits.
Horizon has a defined benefit pension plan covering substantially all of its
employees. The following table summarizes the benefit obligation and plan asset
activity of the plan:
<PAGE>
Pension Benefits
1998 1997
----------------------
(in thousands)
Change in fair value of plan assets:
Balance at beginning of $8,093 $6,939
measurement period
Actual return on plan 584 1,297
assets
Employer contribution 875 116
Benefits paid (201) (259)
-----------------------
Balance at end of 9,351 8,093
measurement period
Change in benefit
obligation:
Balance at beginning of (8,870) (7,527)
measurement period
Service cost (1,018) (751)
Interest cost (718) (561)
Actuarial loss (gain) (1,629) (290)
Benefits paid 201 259
-----------------------
Balance at end of (12,034) (8,870)
measurement period -----------------------
unded status (2,683) (777)
Unamortized prior service 1,008 1,142
cost
Unrecognized net (156) (1,927)
actuarial loss (gain)
Unrecognized net (286) (316)
obligation -----------------------
PREPAID (ACCRUED) $(2,117) $(1,878)
BENEFIT COST =======================
Weighted-average assumptions as of
December 31:
Discount rate 7.25% 7.25%
Expected return on plan 8.50% 8.00%
assets
Rate of compensation 5.00% 5.00%
increase
Plan assets consist principally of U.S. Government securities, corporate
stocks and bonds, and other short-term investments.
The following table presents the components of net defined benefit pension
costs:
Pension Benefits
1998 1997 1996
-------------------------
(in thousands)
Components of net periodic benefit cost:
Service cost $1,018 $751 $513
Interest cost 718 561 547
Expected return on (680) (650) (528)
plan assets
Net amortization and 103 80 33
deferral ----------------------------
BENEFIT COST $1,159 $742 $565
============================
Horizon has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of active service from the date of
the respective agreement. The cost of such agreements approximated $449, $395,
and $420 during 1998, 1997, and 1996. The liability for such agreements
approximated $2,556 and $2,254 at December 31, 1998 and 1997, and is included in
other liabilities in the accompanying consolidated balance sheets.
To assist in funding the above liabilities, Horizon has insured the lives of
certain directors and officers. Horizon is the owner and beneficiary of the
insurance policies with a cash surrender value approximating $3,410 and $3,107
at December 31, 1998 and 1997, included in other assets in the accompanying
consolidated balance sheets.
- ------------------------------------------------------------------------------
NOTE SEVENTEEN
OTHER INCOME AND EXPENSES
- ------------------------------------------------------------------------------
The following items of other income and other expense exceeded one percent of
total revenue for the respective years:
1998 1997 1996
---------------------------
(in thousands)
Professional fees $9,671 $1,975 $2,578
Telecommunications 4,317 2,165 1,435
Bank supplies 3,558 2,252 2,220
- ------------------------------------------------------------------------------
NOTE EIGHTEEN
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, 1998 and 1997,
commitments outstanding to extend credit totaled approximately $195.60 million
and $198.14 million, 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 $9.07 million and $8.80 million
as of December 31, 1998 and 1997, 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 NINETEEN
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, 1998, 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
<PAGE>
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 acquirer. The value of
shares acquired under the plan would equal twice the exercise price.
- ------------------------------------------------------------------------------
NOTE TWENTY
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 subsidiaries' 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 subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined). Management believes, as
of December 31, 1998, that the Company and its banking subsidiaries met all
capital adequacy requirements to which they were subject.
As of December 31, 1998, the most recent notifications from banking
regulatory agencies categorized the Company and its banking subsidiaries as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized," the Company and its banking
subsidiaries 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 significant banking subsidiary's
actual capital amounts and ratios are presented in the following table.
<TABLE>
<CAPTION>
Well
1998 1997 Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to
Risk Weighted
Assets):
Consolidated $282,100 12.0% $206,327 12.8% 10% 8%
City National 162,248 10.07 109,693 12.3 10 8
Tier I Capital (to
Risk Weighted
Assets):
Consolidated 249,018 10.6 190,294 11.8 6 4
City National 153,608 10.1 102,020 11.5 6 4
Tier I Capital (to
Average Assets):
Consolidated 249,018 10.0 190,294 8.5 5 4
City National 153,608 8.9 102,020 7.7 5 4
</TABLE>
- ------------------------------------------------------------------------------
NOTE TWENTY-ONE
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:
Fair Value of Financial Instruments
1998 1997
-------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------
(in thousands)
Assets:
Cash and due $119,777 $119,777 $132,532 $132,532
from banks
Securities 396,444 397,398 378,330 379,547
Net loans 1,698,319 1,701,744 1,490,411 1,493,417
Loans held 246,287 246,287 134,990 134,990
for sale
Retained 65,623 65,623 4,356 4,356
interests
Liabilities:
Demand 1,056,342 1,056,342 899,981 899,981
deposits
Time deposits 1,008,073 1,027,503 879,824 896,782
Short-term 183,418 183,418 172,833 172,833
borrowings
Long-term 102,719 105,493 75,502 76,003
debt
Trust 87,500 87,493 - -
preferred
securities
<PAGE>
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 value of the trust preferred securities is estimated using a
discounted cash flow calculation that applies interest rates that would be
currently offered on such securities.
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,
1998 and 1997.
- ------------------------------------------------------------------------------
NOTE TWENTY-TWO
CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31
1998 1997
-----------------------
(in thousands)
Assets
Cash $6,362 $2,639
Securities available for 3,636 2,164
sale
Investment in subsidiaries 311,879 243,217
Fixed assets 6,080 7,957
Other assets 5,557 9,839
------------------------
TOTAL ASSETS $333,514 $265,816
========================
Liabilities
Long-term debt $15,000 $40,400
Junior subordinated 90,114 -
debentures
Advances from affiliates 1,191 934
Other liabilities 7,150 4,205
------------------------
TOTAL LIABILITIES 113,455 45,539
Stockholders' equity 220,059 220,277
------------------------
TOTAL LIABILITIES AND $333,514 $265,816
STOCKHOLDERS' EQUITY ========================
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 1999. Junior subordinated debentures, which
eliminate for purposes of the Company's consolidated financial statements,
represent the Parent Company's funding of City Holding Capital Trust II and City
Holding Capital Trust (see NOTE THIRTEEN).
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
1998 1997 1996
------------------------------
(in thousands)
INCOME
Dividends from bank $17,879 $20,351 $12,344
subsidiaries
Mortgage loan 1,147
servicing fees
Administrative fees 6,239 6,065 2,828
Other income 286 1,001 1,084
--------------------------------
24,404 27,417 17,403
EXPENSES
Interest expense 4,799 2,273 1,477
Other expenses 27,232 15,352 11,592
--------------------------------
32,031 17,625 13,069
--------------------------------
INCOME BEFORE
INCOME TAX BENEFIT
AND (EXCESS
DIVIDENDS) EQUITY
IN UNDISTRIBUTED
NET INCOME OF
SUBSIDIARIES (7,627) 9,792 4,334
Income tax benefit (7,795) (3,615) (2,965)
---------------------------------
INCOME BEFORE
(EXCESS DIVIDENDS)
EQUITY IN 168 13,407 7,299
UNDISTRIBUTED NET
INCOME OF
SUBSIDIARIES
EQUITY IN
UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 5,066 12,884 13,982
---------------------------------
NET INCOME $5,234 $26,291 $21,281
=================================
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
1998 1997 1996
-------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $5,234 $26,291 $21,281
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Provision for 2,687 1,843 1,679
depreciation
Increase (decrease) 7,278 219 (4,287)
in other assets
Increase in other 2,945 2,084 3,584
liabilities
(Equity in
undistributed net (5,066) (12,884) (13,982)
income) excess
dividends of
subsidiaries
Realized investment - (308) -
securities gain
---------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 13,078 17,245 8,275
INVESTING ACTIVITIES
Cash paid in - (15,447) -
acquisition
Proceeds from - 537 250
maturities of
investment securities
Proceeds from sales of 769 496 192
securities
Purchases of (2,132) (514) (483)
investment securities
Net change in loans - 1,644 (71)
Cash invested in (50,399) (4,495) (625)
subsidiaries
Purchases of premises (733) (3,953) (4,817)
and equipment
---------------------------------------
NET CASH USED IN (52,495) (21,732) (5,554)
INVESTING
ACTIVITIES
FINANCING ACTIVITIES
Proceeds from 43,800 9,150 9,250
long-term debt
Principal repayments (69,200) 7,000 -
on long-term debt
Increase in advance 257 - -
from affiliates
Net proceeds from
issuance of junior 86,762 - -
subordinated
debentures
Cash dividends paid (12,167) (11,421) (8,753)
Purchases of treasury (6,987) (2,840) -
stock
Proceeds from sales of - 80 58
treasury stock
Exercise of stock 675 65 -
options
Net cash received from - 29 14
stock transactions
Redemption of - - (22)
dissenter and
fractional shares
----------------------------------------
NET CASH PROVIDED
BY (USED IN) 43,140 2,063 547
FINANCING
ACTIVITIES
----------------------------------------
(DECREASE) INCREASE
IN CASH AND 3,723 (2,424) 3,268
CASH EQUIVALENTS
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR 2,639 5,063 1,795
----------------------------------------
CASH AND CASH
EQUIVALENTS AT
END OF YEAR $6,362 $2,639 $5,063
========================================
- ------------------------------------------------------------------------------
NOTE TWENTY-THREE
SEGMENT REPORTING
- ------------------------------------------------------------------------------
The Company operates three business segments: community banking, mortgage
banking, and other financial services. These business segments are primarily
identified by the products or services offered and the channels through which
the product or service is offered. The community banking operations consists of
various community banks that offer customers traditional banking products and
services through various delivery channels. The mortgage banking operations
include the origination, acquisition, servicing, and sale of mortgage loans. The
other financial services business segment consists of nontraditional services
offered to customers, such as investment advisory, insurance, and internet
technology products. Another defined business segment of the Company is
corporate support which includes the parent company and other support needs.
The accounting policies for each of the business segments are the same as
those of the Company described in Note One. Selected segment information is
included in the following table:
<PAGE>
<TABLE>
<CAPTION>
Other
Community Mortgage Financial General
Banking Banking Services Corporate Eliminations Consolidated
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Net interest income (expense) $96,085 $8,906 $ 64 $(1,712) $ - $103,343
Provision for loan losses (8,481) - - - - (8,481)
----------------------------------------------------------------------------------------
Net interest income after provision 87,604 8,906 64 (1,712) - 94,862
for loan losses
Other income 19,355 47,414 11,133 216 (5,695) 72,423
Other expenses 82,100 50,752 11,502 16,899 (5,695) 155,558
----------------------------------------------------------------------------------------
Income before income taxes 24,859 5,568 (305) (18,395) - 11,727
Income tax expense (benefit) 9,816 1,798 (8) (5,113) - 6,493
----------------------------------------------------------------------------------------
NET INCOME $15,043 $3,770 $(297) $(13,282) $ - $ 5,234
========================================================================================
Average assets $2,202,104 $336,367 $14,660 $12,969 $ - $2,566,100
========================================================================================
1997
Net interest income (expense) $90,769 $8,456 $ 3 $(2,074) $ - $97,154
Provision for loan losses (4,064) - - - - (4,064)
-----------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 86,705 8,456 3 (2,074) - 93,090
Other income 13,858 17,636 446 673 - 32,613
Other expenses 61,165 14,702 366 8,666 - 84,899
-----------------------------------------------------------------------------------------
Income before income taxes 39,398 11,390 83 (10,067) - 40,804
Income tax expense (benefit) 12,604 4,284 36 (2,411) - 14,513
-----------------------------------------------------------------------------------------
NET INCOME $26,794 $7,106 $ 47 $(7,656) $ - $26,291
=========================================================================================
Average assets $2,041,150 $133,792 $ 627 $4,892 $ - $2,180,461
=========================================================================================
1996
Net interest income (expense) $86,496 $6,113 $ 1 $(1,236) $ - $91,374
Provision for loan losses (5,012) - - - - (5,012)
-----------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 81,484 6,113 1 (1,236) - 86,362
Other income 11,732 3,924 111 706 - 16,473
Other expenses 59,399 4,637 129 5,901 - 70,066
-----------------------------------------------------------------------------------------
Income before income taxes 33,817 5,400 (17) (6,431) - 32,769
Income tax expense (benefit) 11,830 2,032 - (2,374) - 11,488
-----------------------------------------------------------------------------------------
NET INCOME $21,987 $3,368 $ (17) $(4,057) $ - $21,281
=========================================================================================
Average assets $1,867,334 $149,075 $ 92 $5,487 $ - $2,021,988
=========================================================================================
</TABLE>
Services provided to the banking segments by the direct mail, insurance, and
internet service provider divisions are eliminated in the Consolidated
Statements of Income.
- ------------------------------------------------------------------------------
NOTE TWENTY-FOUR
SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------
A summary of selected quarterly financial information for 1998 and 1997
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
(in thousands, except common share data)
<S> <C> <C> <C> <C>
1998
Interest income $46,053 $49,701 $51,050 $49,876
Interest expense 21,203 23,026 24,664 24,444
Net interest 24,850 26,675 26,386 25,432
income
Provision for 1,229 1,238 1,949 4,065
possible loan
losses
Investment (15) 9 11 2
securities gains
(losses)
Net income (loss) 6,737 6,999 6,575 (15,077)
Basic earnings 0.40 0.41 0.39 (0.89)
per common share
Diluted earnings 0.40 0.41 0.39 (0.89)
per common share
Average common
shares
outstanding:
Basic 16,642 16,879 16,850 16,821
Diluted 16,789 17,042 16,995 16,821
1997
Interest income $39,600 $42,928 $44,339 $46,299
Interest expense 16,864 18,343 19,352 21,453
Net interest 22,736 24,585 24,987 24,846
income
Provision for 1,088 840 802 1,334
possible loan
losses
Investment (10) (15) 8 25
securities gains
(losses)
Net income 6,071 6,687 7,012 6,521
Basic earnings 0.37 0.41 0.43 0.39
per common share
Diluted earnings 0.37 0.41 0.43 0.39
per common share
Average common
shares
outstanding:
Basic 16,395 16,382 16,342 16,602
Diluted 16,422 16,418 16,396 16,662
</TABLE>
Certain amounts previously reported during 1998 have been reclassified to
conform to the financial statement presentation. These reclassifications had no
impact on net income or stockholders' equity.
EXHIBIT 21
Subsidiaries of City Holding Company
As of December 31, 1998, the subsidiaries, each wholly-owned, of City Holding
Company included:
City National Bank of West Virginia Insured depository institution
3601 MacCorkle Avenue S.E.
Charleston, West Virginia
Bank of Raleigh Insured depository institution
One Park Avenue
Beckley, West Virginia
The Twentieth Street Bank Insured depository institution
Third Avenue and Twentieth Street
Huntington, West Virginia
Greenbrier Valley National Bank Insured depository institution
109 South Jefferson Street
Lewisburg, West Virginia
National Bank of Summers Insured depository institution
Temple Street
Hinton, West Virginia
First National Bank in Marlinton Insured depository institution
300 Eighth Street
Marlinton, West Virginia
Del Amo Savings Bank, F.S.B. Insured depository institution
3422 Carson Street
Torrance, California
City Financial Corporation Securities brokerage and investment
3601 MacCorkle Avenue S.E. advisory company
Charleston, West Virginia
City Mortgage Corporation Inactive mortgage banking company
Pittsburgh, Pennsylvania
City Holding Capital Trust Special-purpose statutory trust
25 Gatewater Road
Charleston, West Virginia
City Holding Capital Trust II Special-purpose statutory trust
25 Gatewater Road
Charleston, West Virginia
EXHIBIT 23
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 February 5, 1999, included in the
1998 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
February 5, 1999, with respect to the consolidated financial statements of City
Holding Company incorporated by reference in this Annual Report on Form 10-K for
the year ended December 31, 1998.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 87,866
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 31,911
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 356,659
<INVESTMENTS-CARRYING> 39,063
<INVESTMENTS-MARKET> 40,539
<LOANS> 1,715,929
<ALLOWANCE> 17,610
<TOTAL-ASSETS> 2,706,004
<DEPOSITS> 2,064,414
<SHORT-TERM> 183,418
<LIABILITIES-OTHER> 47,893
<LONG-TERM> 190,219
0
0
<COMMON> 42,051
<OTHER-SE> 178,008
<TOTAL-LIABILITIES-AND-EQUITY> 2,706,004
<INTEREST-LOAN> 170,549
<INTEREST-INVEST> 22,144
<INTEREST-OTHER> 3,987
<INTEREST-TOTAL> 196,680
<INTEREST-DEPOSIT> 74,432
<INTEREST-EXPENSE> 18,905
<INTEREST-INCOME-NET> 103,343
<LOAN-LOSSES> 8,481
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 155,558
<INCOME-PRETAX> 11,727
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,234
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 4.49
<LOANS-NON> 8,844
<LOANS-PAST> 5,126
<LOANS-TROUBLED> 879
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,190
<CHARGE-OFFS> 11,469
<RECOVERIES> 1,623
<ALLOWANCE-CLOSE> 17,610
<ALLOWANCE-DOMESTIC> 17,610
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 78,469
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 54,063
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 336,776
<INVESTMENTS-CARRYING> 41,554
<INVESTMENTS-MARKET> 42,771
<LOANS> 1,508,601
<ALLOWANCE> 18,190
<TOTAL-ASSETS> 2,286,424
<DEPOSITS> 1,779,805
<SHORT-TERM> 172,833
<LIABILITIES-OTHER> 38,007
<LONG-TERM> 75,502
0
0
<COMMON> 41,926
<OTHER-SE> 178,351
<TOTAL-LIABILITIES-AND-EQUITY> 2,286,424
<INTEREST-LOAN> 147,760
<INTEREST-INVEST> 24,917
<INTEREST-OTHER> 489
<INTEREST-TOTAL> 173,166
<INTEREST-DEPOSIT> 63,086
<INTEREST-EXPENSE> 12,926
<INTEREST-INCOME-NET> 97,154
<LOAN-LOSSES> 4,064
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 84,899
<INCOME-PRETAX> 40,804
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,291
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.95
<LOANS-NON> 7,801
<LOANS-PAST> 5,149
<LOANS-TROUBLED> 331
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,888
<CHARGE-OFFS> 5,752
<RECOVERIES> 2,471
<ALLOWANCE-CLOSE> 18,190
<ALLOWANCE-DOMESTIC> 18,190
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 83,854
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,868
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 328,867
<INVESTMENTS-CARRYING> 83,719
<INVESTMENTS-MARKET> 85,180
<LOANS> 1,331,966
<ALLOWANCE> 16,888
<TOTAL-ASSETS> 1,995,878
<DEPOSITS> 1,626,666
<SHORT-TERM> 119,452
<LIABILITIES-OTHER> 26,726
<LONG-TERM> 34,250
0
0
<COMMON> 39,851
<OTHER-SE> 148,933
<TOTAL-LIABILITIES-AND-EQUITY> 1,995,878
<INTEREST-LOAN> 133,465
<INTEREST-INVEST> 25,403
<INTEREST-OTHER> 840
<INTEREST-TOTAL> 159,708
<INTEREST-DEPOSIT> 57,662
<INTEREST-EXPENSE> 10,672
<INTEREST-INCOME-NET> 91,374
<LOAN-LOSSES> 5,012
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 70,066
<INCOME-PRETAX> 32,769
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,281
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 4.97
<LOANS-NON> 5,200
<LOANS-PAST> 6,402
<LOANS-TROUBLED> 235
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,088
<CHARGE-OFFS> 5,011
<RECOVERIES> 1,799
<ALLOWANCE-CLOSE> 16,888
<ALLOWANCE-DOMESTIC> 16,888
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
