UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED June 30, 1999
OR
[ ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________to_____________.
Commission File number 0-1173
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
West Virginia 55-0619957
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
25 Gatewater Road
Charleston, West Virginia, 25313
(Address of principal executive officers)
(304) 769-1100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ]No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, $2.50 Par Value - 16,863,948 shares as of August 13, 1999.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q may include forward-looking financial information within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking information is identified
by phrases such as the Company expects or anticipates and words of similar
effect. The Company's actual results achieved may differ materially from those
projected in the forward-looking information. Factors that could cause such a
difference include, among others: changes in interest rates and economic and
other market conditions generally and in the Company's principal markets;
integration of operations issues resulting from mergers and acquisitions;
competition for origination and servicing of mortgage loans, particularly loans
with high loan-to-value ratios; and changes in regulations and government
policies affecting bank holding companies and their subsidiaries, including
changes in monetary policy. The forward-looking financial information is
provided to assist investors and Company stockholders in understanding
anticipated future financial operations of the Company and are included pursuant
to the Safe Harbor provisions of the Private Securities Litigation Reform Act of
1995. Further, the Company disclaims any intent or obligation to update this
forward-looking financial information.
2
<PAGE>
Index
City Holding Company and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and December 31,
1998
Consolidated Statements of Income - Six months ended June 30,
1999 and 1998 and Three months ended June 30, 1999 and
1998
Consolidated Statements of Changes in Stockholders' Equity -
Six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows - Six months ended June
30, 1999 and 1998 Notes to Consolidated Financial
Statements - June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
3
<PAGE>
PART I, ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 101,765 $ 87,866
Federal funds sold 439 31,911
------------------------------------------
Cash and cash equivalents 102,204 119,777
Securities available for sale, at fair value 380,650 356,659
Securities held-to-maturity (approximate fair value at December 31,
1998 - $40,539) - 39,063
Loans:
Gross loans 1,734,396 1,715,929
Allowance for loan losses (18,795) (17,610)
------------------------------------------
NET LOANS 1,715,601 1,698,319
Loans held for sale 105,918 246,287
Premises and equipment 68,132 71,094
Accrued interest receivable 22,975 21,660
Other assets 209,328 153,145
------------------------------------------
TOTAL ASSETS $2,604,808 $2,706,004
------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 248,027 $ 303,421
Interest-bearing 1,681,669 1,760,994
------------------------------------------
TOTAL DEPOSITS 1,929,696 2,064,415
Short-term borrowings 216,357 183,418
Long-term debt 100,472 102,719
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trusts holding solely subordinated debentures of City
Holding Company 87,500 87,500
Other liabilities 54,411 47,893
------------------------------------------
TOTAL LIABILITIES 2,388,436 2,485,945
STOCKHOLDERS' EQUITY
Preferred stock, par value $25 per share: authorized - 500,000 shares:
none issued
Common stock, par value $2.50 per share: 50,000,000 shares
authorized; 16,853,051 and 16,820,276 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
including 17,199 and 10,000 shares, respectively, in treasury 42,133 42,051
Capital surplus 58,685 58,365
Retained earnings 125,723 120,209
Cost of common stock in treasury (535) (274)
Accumulated other comprehensive loss (9,634) (292)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 216,372 220,059
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,604,808 $2,706,004
==========================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands, except earnings per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30
1999 1998
---------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $84,804 $82,918
Interest on investment securities:
Taxable 8,530 8,937
Tax-exempt 2,551 2,409
Other interest income 2,783 1,490
---------------------------------------
TOTAL INTEREST INCOME 98,668 95,754
INTEREST EXPENSE
Interest on deposits 36,370 36,259
Interest on short-term borrowings 4,549 4,561
Interest on long-term debt 2,999 2,715
Interest on trust preferred securities 3,996 694
---------------------------------------
TOTAL INTEREST EXPENSE 47,914 44,229
---------------------------------------
NET INTEREST INCOME 50,754 51,525
Provision for loan losses 4,643 2,467
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 46,111 49,058
OTHER INCOME
Investment securities gains (losses) 48 (6)
Service charges 4,507 4,541
Mortgage loan servicing fees 11,302 8,009
Net origination fees on junior-lien mortgages 4,031 6,217
Gain on sale of loans 5,208 7,333
Other income 17,034 7,630
---------------------------------------
TOTAL OTHER INCOME 42,130 33,724
OTHER EXPENSES
Salaries and employee benefits 28,991 25,872
Occupancy, excluding depreciation 6,651 3,937
Depreciation 5,619 4,585
Advertising 9,353 9,281
Other expenses 18,140 17,881
---------------------------------------
TOTAL OTHER EXPENSES 68,754 61,556
---------------------------------------
INCOME BEFORE INCOME TAXES 19,487 21,226
INCOME TAXES 7,248 7,490
---------------------------------------
NET INCOME $12,239 $13,736
=======================================
Basic earnings per common share $0.73 $0.82
=======================================
Diluted earnings per common share $0.73 $0.81
=======================================
Average common shares outstanding:
Basic 16,820 16,760
=======================================
Diluted 16,820 16,866
=======================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands, except earnings per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30
1999 1998
---------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $41,096 $43,198
Interest on investment securities:
Taxable 4,256 4,349
Tax-exempt 1,263 1,206
Other interest income 1,458 948
---------------------------------------
TOTAL INTEREST INCOME 48,073 49,701
INTEREST EXPENSE
Interest on deposits 17,773 19,152
Interest on short-term borrowings 2,591 1,940
Interest on long-term debt 1,356 1,248
Interest on trust preferred securities 1,998 686
---------------------------------------
TOTAL INTEREST EXPENSE 23,718 23,026
---------------------------------------
NET INTEREST INCOME 24,355 26,675
Provision for loan losses 2,229 1,238
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,126 25,437
OTHER INCOME
Investment securities gains 6 9
Service charges 2,322 2,404
Mortgage loan servicing fees 5,617 4,126
Net origination fees on junior-lien mortgages 3,838 4,071
Gain on sale of loans 4,483 4,775
Other income 11,445 4,166
---------------------------------------
TOTAL OTHER INCOME 27,711 19,551
OTHER EXPENSES
Salaries and employee benefits 13,779 13,621
Occupancy, excluding depreciation 3,307 2,175
Depreciation 2,991 2,429
Advertising 8,233 6,104
Other expenses 9,825 9,855
---------------------------------------
TOTAL OTHER EXPENSES 38,135 34,184
---------------------------------------
INCOME BEFORE INCOME TAXES 11,702 10,804
INCOME TAXES 4,708 3,805
---------------------------------------
NET INCOME $6,994 $6,999
=======================================
Basic earnings per common share $ 0.42 $ 0.41
=======================================
Diluted earnings per common share $ 0.42 $ 0.41
=======================================
Average common shares outstanding:
Basic 16,820 16,879
=======================================
Diluted 16,820 17,042
=======================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Loss Equity
---------- ---------- ----------- ----------- --------------- ---------------
<S> <C>
Balances at December 31, 1998 $42,051 $58,365 $120,209 $(274) $(292) $220,059
Comprehensive income:
Net income 12,239 12,239
Other comprehensive income:
Unrealized loss on securities
of $9,371, net of
reclassification adjustment
for gains included in net (9,342) (9,342)
income of $29
---------------
Total comprehensive income 2,897
Cash dividends declared ($.40/share) (6,725) (6,725)
Purchase of 11,999 shares of
treasury stock (398) (398)
Exercise of 22,908 stock options 82 337 5 424
Issuance of contingently-issuable
shares of common stock (17) 132 115
---------- ---------- ----------- ----------- --------------- ---------------
Balances at June 30, 1999 $42,133 $58,685 $125,723 $(535) $(9,634) $216,372
========== ========== =========== =========== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ----------- ----------- --------------- ---------------
<S> <C>
Balances at December 31, 1997 $41,926 $52,004 $127,142 $(3,248) $2,453 $220,277
Comprehensive income:
Net income 13,736 13,736
Other comprehensive income:
Unrealized gain on securities
of $584, net of
reclassification adjustment
for losses included in net 580 580
income of $4
---------------
Total comprehensive income 14,316
Cash dividends declared
City ($.38 a share) (2,506) (2,506)
Horizon (3,476) (3,476)
Exercise of stock options 7 25 32
Purchase of shares of treasury stock
by City (281) (281)
Purchase of shares of treasury stock
by Horizon (2,114) (2,114)
Common stock issued in acquisitions 807 14,965 15,772
---------- ---------- ----------- ----------- --------------- ---------------
Balances at June 30, 1998 $42,740 $66,994 $134,896 $(5,643) $3,033 $242,020
========== ========== =========== =========== =============== ===============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
1999 1998
---------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 12,239 $ 13,736
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net amortization 2,564 1,248
Provision for depreciation 5,619 4,585
Provision for possible loan losses 4,643 2,467
Loans originated for sale (215,001) (225,403)
Purchases of loans held for sale (129,887) (408,047)
Proceeds from loans sold 490,465 580,814
Realized gains on loans sold (5,208) (7,333)
Realized investment securities (gains) losses (48) 6
Increase in accrued interest receivable (1,513) (3,323)
Increase in other assets (60,973) (22,367)
Increase (decrease) in other liabilities 7,078 (7,319)
---------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 109,978 (70,936)
INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held to maturity 27 2,070
Proceeds from sales of securities available for sale 13,377 14,669
Proceeds from maturities and calls of securities available for sale 54,517 79,380
Purchases of securities available for sale (59,664) (89,668)
Net increase in loans (76,306) (74,179)
Net cash paid in branch sales (52,094) -
Realized gain on branch sales (8,681) -
Net cash acquired in acquisitions - 2,454
Purchases of premises and equipment (4,260) (16,708)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (133,084) (81,982)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (25,929) 44,547
Net increase in interest-bearing deposits 7,469 66,295
Net increase (decrease) in short-term borrowings 32,939 (17,211)
Proceeds from long-term debt 8,000 33,620
Repayment of long-term debt (10,247) (27,010)
Net proceeds from issuance of trust preferred securities - 29,158
Purchases of treasury stock (398) (2,395)
Exercise of stock options 424 31
Cash dividends paid (6,725) (5,982)
---------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,533 121,053
---------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (17,573) (31,865)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 119,777 132,532
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102,204 $ 100,667
=======================================
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements, which are
unaudited, include all the accounts of City Holding Company ("the Parent
Company") and its wholly-owned subsidiaries (collectively, "the Company"). On
December 31, 1998, the Company's merger of Horizon Bancorp, Inc. 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. All material intercompany transactions have been eliminated. The
consolidated financial statements include all adjustments that, in the opinion
of management, are necessary for a fair presentation of the results of
operations and financial condition for each of the periods presented. Such
adjustments are of a normal recurring nature. The results of operations for the
six months ended June 30, 1999, are not necessarily indicative of the results of
operations that can be expected for the year ending December 31, 1999. The
Company's accounting and reporting policies conform with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies
require management to make estimates and develop assumptions that affect the
amounts reported in the consolidated financial statements and related footnotes.
Actual results could differ from management's estimates. Certain amounts in the
unaudited consolidated financial statements have been reclassified. Such
reclassifications had no impact on net income or stockholders' equity in any
period presented. For further information, refer to the consolidated financial
statements and footnotes thereto incorporated by reference in the City Holding
Company Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE B - INVESTMENT SECURITIES
Horizon Bancorp, Inc., which was acquired December 31, 1998, maintained
selected debt securities in a held-to-maturity classification based on its
management's intent and Horizon's ability to hold such securities to maturity.
On April 1, 1999, the Company reclassified those securities from held to
maturity to available for sale. This transfer is consistent with the Company's
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<PAGE>
Investment Portfolio accounting policies and provides management with additional
liquidity alternatives and more flexibility in managing the Company's interest
rate risk. At the date of transfer, the amortized cost of those securities was
$39.04 million and the unrealized gain on those securities was $1.26 million.
NOTE C - LOAN SECURITIZATIONS
During the three months ended June 30, 1999, the Company completed a
securitization of approximately $261.51 million of junior lien mortgage loans.
To date, this represents the only securitization transacted by the Company
during 1999, and brings the total number of securitizations in which the Company
maintains a retained interest to six. As of June 30, 1999, the Company reported
retained interests, included in Other Assets in the Consolidated Balance Sheets,
in the securitized loan pools of approximately $91.37 million, including accrued
interest. At December 31, 1998, the Company reported total retained interests
approximating $65.62 million, including accrued interest.
As a result of re-forecasting anticipated cash flows to be derived from
the Company's retained interests, the estimated fair value of the total retained
interests has been reduced by approximately $4.63 million during the six months
ended June 30, 1999. Such fair value decline, deemed to be temporary, has been
recorded through the Other Comprehensive Income section within Stockholders'
Equity. Adjustments to the estimated fair value of the retained interests are
the result of both actual performance of the underlying collateral pools and
revised expected timing of the receipt of cash flows by the Company. Although a
fair value reduction has been recorded, re-forecasted cash flows as of June 30,
1999 indicate total expected cash flows to be received by the Company are 1.91
times the total retained interest values, before fair value adjustments,
recorded in the Company's consolidated balance sheet. Significant assumptions
used to estimate the value of the retained interests include: prepayment rates
of 18-21% CPR, default rates approximating 10.50% cumulative losses, and a
weighted average discount rate of 12.75%.
NOTE D - BRANCH SALES
Regulatory agencies approved the merger of Horizon Bancorp into the
Company subject to the Company's eventual divesting of certain branch facilities
in those locations where the combined entity would maintain an excessive
percentage of deposit market share. In complying with regulatory requirements,
and as part of the Company's overall post-merger reorganization, the Company
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completed the sale of six (6) branch locations during the second quarter of
1999. As a result of those sales, the Company sold approximately $116.26 million
of deposits and $54.38 million of loans to independent third parties resulting
in gains realized by the Company of approximately $8.68 million.
NOTE E - 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 II 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
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<PAGE>
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 and Capital Securities II are
recorded in the consolidated statements of income as interest expense. The
Company's interest payments on the Debentures and the Debentures II are fully
tax deductible.
NOTE F - 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 June 30, 1999, commitments
outstanding to extend credit totaled approximately $250.84 million. 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 $7.35
million as of June 30, 1999. Substantially all standby letters of credit have
historically 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
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credit assessment of the customer. Management does not anticipate any material
losses as a result of these commitments.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
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, as amended, become effective for quarterly and annual
reporting beginning January 1, 2001. 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.
NOTE H - LONG TERM DEBT
Long-term debt includes an obligation of the Parent Company consisting
of a $35 million revolving credit loan facility with an unrelated party. At June
30, 1999, $13 million was outstanding. The loan has a variable rate (5.8425% at
June 30, 1999) with interest payments due quarterly and principal due at
maturity on June 30, 1999. Through amendments dated June 30 and July 30, 1999,
the maturity date of this revolving credit line has been extended until
September 30, 1999. The extension of the stated maturity date was necessary to
provide both parties sufficient time to negotiate a longer-term, fully
amortizing, credit facility. Management anticipates transferring a significant
portion of the balance outstanding on the revolving line of credit to the term
loan upon its completion.
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.
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The Company, through its banking subsidiaries, maintains long-term
financing from the FHLB as follows:
<TABLE>
<CAPTION>
Amount Available Amount Outstanding Interest Rate Maturity Date
---------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
$ 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
2,000 1,900 6.02 July 2005
1,500 1,400 5.94 July 2005
25,000 25,000 4.89 January 2008
5,000 5,000 5.48 February 2008
2,300 2,100 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
</TABLE>
In addition to the financing discussed above, the community-banking
subsidiaries of the Company have unused lines of credit available with the FHLB
approximating $329.35 million.
NOTE I - SEGMENT INFORMATION
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.
To more effectively evaluate and manage the operating performance of
each of the Company's business lines, effective April 1, 1999 internal warehouse
funding was established for each division within the mortgage-banking and other
financial services segments. Prior to April 1, 1999, the community-banking
segment provided necessary funding to the divisions within the mortgage-banking
and other financial services segments with no associated interest charged to
those divisions. Beginning April 1, 1999, any division that has obtained
financing from the community-banking segment is charged a cost of funds, at
market interest rates, on the amount of funds borrowed from the
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community-banking segment. Management has determined that the internal warehouse
funding policy provides a "fully-costed" assessment of the operating performance
of each division and that instituting such policy provides a more accurate
analysis of the performance of each division and business segment. Financial
information presented in the following tables has been presented reflecting the
actual internal policy in place during each respective period.
The accounting policies for each of the business segments are the same
as those of the Company. Services provided to the banking segments by the
divisions within the other financial services segment are eliminated in
consolidation. Selected segment information is included in the following tables:
<TABLE>
<CAPTION>
Other
Community Mortgage Financial General
(in thousands) Banking Banking Services Corporate Eliminations Consolidated
------------------------------------------------------------------------------
For the six months ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Net interest income (expense) $ 52,049 $ (487) $ (200) $ (608) $ - $ 50,754
Provision for loan losses (4,643) - - - - (4,643)
------------------------------------------------------------------------------
Net interest income after -
provision for loan losses 47,406 (487) (200) (608) 46,111
Other income 18,582 20,291 6,942 2 (3,687) 42,130
Other expenses 40,516 20,250 8,265 3,410 (3,687) 68,754
------------------------------------------------------------------------------
Income before income taxes 25,472 (446) (1,523) (4,016) - 19,487
Income tax expense (benefit) 9,450 (141) (493) (1,568) - 7,248
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 16,022 $ (305) $ (1,030) $ (2,448) $ - $ 12,239
------------------------------------------------------------------------------
Average assets $2,394,206 $ 359,464 $ 12,464 $ 14,914 $(86,618) $2,694,430
------------------------------------------------------------------------------
For the six months ended June 30, 1998
Net interest income (expense) $ 46,339 $ 6,904 $ 38 $ (1,756)$ - $ 51,525
Provision for loan losses (2,467) - - - - (2,467)
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 43,872 6,904 38 (1,756) - 49,058
Other income 10,269 20,986 4,248 1,443 (3,222) 33,724
Other expenses 35,350 20,308 4,275 4,845 (3,222) 61,556
------------------------------------------------------------------------------
Income before income taxes 18,791 7,582 11 (5,158) - 21,226
Income tax expense (benefit) 6,463 2,944 51 (1,968) - 7,490
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 12,328 $ 4,638 $ (40) $ (3,190) $ - $ 13,736
------------------------------------------------------------------------------
Average assets $2,125,065 $ 269,391 $ 13,576 $ 8,799 $ - $2,416,831
------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Other
Community Mortgage Financial General
(in thousands) Banking Banking Services Corporate Eliminations Consolidated
------------------------------------------------------------------------------
For the three months ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Net interest income (expense) $ 27,562 $ (2,727) $ (213) $ (267) $ - $ 24,355
-
Provision for loan losses (2,229) - - - - (2,229)
------------------------------------------------------------------------------
Net interest income after -
provision for loan losses 25,333 (2,727) (213) (267) 22,126
Other income 12,493 13,620 2,379 (55) (726) 27,711
Other expenses 21,181 13,093 3,708 879 (726) 38,135
------------------------------------------------------------------------------
Income before income taxes 16,645 (2,200) (1,542) (1,201) - 11,702
Income tax expense (benefit) 6,545 (838) (520) (479) - 4,708
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 10,100 $ (1,362) $ (1,022) $ (722) $ - $ 6,994
------------------------------------------------------------------------------
Average assets $2,539,171 $328,474 $ 13,924 $ 20,836 $(191,277) $2,711,128
------------------------------------------------------------------------------
For the three months ended June 30, 1998
Net interest income (expense) $ 23,538 $ 4,104 $ 22 $ (989) $ - $ 26,675
Provision for loan losses (1,238) - - - - (1,238)
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 22,300 4,104 22 (989) - 25,437
Other income 5,857 12,555 2,901 762 (2,524) 19,551
Other expenses 18,353 13,065 2,938 2,352 (2,524) 34,184
------------------------------------------------------------------------------
Income before income taxes 9,804 3,594 (15) (2,579) - 10,804
Income tax expense (benefit) 3,710 1,378 32 (1,314) - 3,805
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,094 $ 2,216 $ (47) $(1,265) $ - $ 6,999
------------------------------------------------------------------------------
Average assets $2,179,059 $ 266,563 $ 13,586 $ 10,256 $ - $2,469,464
------------------------------------------------------------------------------
</TABLE>
NOTE J -SUBSEQUENT EVENT
Effective July 1, 1999, the Company acquired Frontier Bancorp and its
wholly-owned subsidiary, Frontier State Bank (collectively, "Frontier").
Frontier, headquartered in Redondo Beach, California, reported total assets and
total deposits of approximately $88 million and $71 million, respectively, at
June 30, 1999. Pursuant to the merger agreement, the Company paid approximately
$15.13 million cash for 100% of the outstanding common stock of Frontier
Bancorp. This transaction was accounted for under the purchase method of
accounting. Due to the immaterial impact on the Company's consolidated financial
statements, no pro-forma information has been presented.
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Six Months Ended June 30, 1999 vs. 1998
Consolidated net income for the six months ended June 30, 1999 was
$12.24 million or $0.73 per diluted common share, compared to $13.74 million or
$0.81 per diluted common share for the six months ended June 30, 1998. Return on
average assets ("ROA") was 0.91% and return on average equity ("ROE") was 11.08%
for the six months ended June 30, 1999. ROA and ROE were 1.13% and 11.95%,
respectively, for the same period in 1998.
The decline in net income, ROA, and ROE for the six months ended June
30, 1999, as compared to the same period in 1998, is due to operating results
within both the community-banking and mortgage-banking segments. Within the
community-banking segment, a declining interest margin coupled with a $2.18
million increase in the provision for loan losses has resulted in lower earnings
during the six months ended June 30, 1999. Within the mortgage-banking segment,
which is also experiencing a declining interest margin, a $3.29 million increase
in mortgage loan servicing fees during the period was offset by a $4.31 million
decline in combined net origination fees and gains realized from the sale of
loans. Other income increased $8.41 million during the six months ended June 30,
1999 due to $8.68 million in gains realized by the Company associated with its
sales of six branch locations as part of the Company's continued reorganization
following its acquisition of Horizon Bancorp.
Three Months Ended June 30, 1999 vs. 1998
Consolidated net income for the three months ended June 30, 1999 was
$6.99 million or $0.42 per diluted common share, compared to $7.00 million or
$0.41 per diluted common share for the three months ended June 30, 1998. ROA was
1.03% and ROE was 12.68% for the three months ended June 30, 1999. ROA and ROE
were 1.13% and 11.85%, respectively, for the same period in 1998.
In comparing the three months ended June 30, 1999 to the same period in
1998, declines in net interest margins during 1999 in both the community-banking
and mortgage-banking segments resulted in a $2.32 million decline in net
interest income from 1998 to 1999. Additionally, within the community-banking
segment, the provision for loan losses increased approximately $991,000 from
$1.24 million during the three months ended June 30, 1998 to $2.23 million
during the same period in 1999. Offsetting the overall decline in net interest
income during the quarter ended June 30, 1999, the Company realized $8.68
17
<PAGE>
million in gains, resulting from the sale of six branch locations, as discussed
previously. Except for advertising expense, non-interest expenses remained
relatively unchanged on a quarter-to-quarter basis. Advertising expense, which
increased approximately $2.13 million from 1998 to 1999, is primarily
attributable to the costs associated with the nationwide direct mail
solicitation of high loan-to-value loans. Approximately 85% of the total
advertising expense recognized during 1999 is associated with such activity,
which is expected to decline as the Company continues its reorganization within
its mortgage-banking segment.
NET INTEREST INCOME
Six Months Ended June 30, 1999 vs. 1998
On a tax equivalent basis, net interest income declined approximately
$644,000 or 1.21% from $52.77 million to $52.13 million during the six-month
periods ended June 30, 1998 and 1999, respectively. However, the net interest
margin declined 48 basis points during these periods as the yield on earning
assets declined 54 basis points and the total cost of funds declined 21 basis
points. Within the community-banking segment, the yield earned on the Company's
loan portfolio declined from 8.98% during the six months ended June 30, 1998 to
8.52% for the same period of 1999. The declining yield reflects the impact to
the Company's loan portfolio of the overall declining interest rate environment
experienced over the past several months. Within the mortgage-banking segment,
the yield earned on loans held for sale decreased from 10.78% during the six
months ended June 30, 1998 to 9.30% for the same period in 1999. While this
decline also reflects the impact of a declining interest rate environment,
interest income realized on loans held for sale was also negatively impacted by
the amortization of premiums paid on the wholesale acquisition of high
loan-to-value loans as further discussed below. Also within the mortgage-banking
segment, the yield earned on retained interests in securitized loans decreased
from 15.66% during the six months ended June 30, 1998 to 7.38% for the same
period in 1999. As a result of declines in the estimated fair value of the
retained interests, the Company has recorded less interest income associated
with those assets during the six months ended June 30, 1999.
18
<PAGE>
The Company's total cost of funds declined from 4.69% during the six
months ended June 30, 1998 to 4.48% during the same period in 1999. Within the
community-banking segment, the average cost of total interest and non-interest
bearing deposits declined from 3.88% to 3.61%, for the six month periods ended
June 30, 1998 and 1999, respectively. Similarly, the cost of borrowed funds,
excluding trust preferred securities, decreased from 5.63% in 1998 to 4.66% for
the six months ended June 30, 1999.
Three Months Ended June 30, 1999 vs. 1998
For the three months ended June 30, 1999, the Company reported $25.04
million net interest income (tax equivalent basis) compared to $27.32 million
for the three months ended June 30, 1998. This represents a decline in net
interest income of approximately $2.29 million during 1999, on a
quarter-to-quarter basis. Within the community-banking segment, the yield earned
on the Company's loan portfolio decreased 69 basis points, from 9.19% for the
three months ended June 30, 1998, to 8.50% for the same period in 1999. As
discussed previously, this decline reflects the impact of the overall declining
interest rate environment over the past several months. Also within the
community-banking segment, the Company's cost of total interest and non-interest
bearing deposits declined from 3.98% to 3.56% for the three month periods ended
June 30, 1998 and 1999, respectively.
Within the mortgage-banking segment, the yield earned on loans held for
sale decreased 257 basis points from 10.78% for the three months ended June 30,
1998 to 8.21% for the three months ended June 30, 1999. The 1999 yield of 8.21%
was negatively impacted by the amortization of approximately $1.50 million of
premium associated with the wholesale acquisition of high loan-to-value loans.
During the second quarter of 1999, this premium was amortized and reported as an
adjustment to the yield earned on loans held for sale. Also within the
mortgage-banking segment, the yield earned on the Company's retained interests
in its securitized loan pools decreased from 15.60% in 1998 to 7.28% for the
three months ended June 30, 1999. As previously discussed, declines in the
estimated fair value of those retained interests have resulted in the Company
having recorded less interest income associated with those assets during the
period.
19
<PAGE>
<TABLE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<CAPTION>
Six months ended June 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio (1) $1,743,106 $74,265 8.52% $1,586,237 $71,224 8.98%
Loans held for sale 226,694 10,539 9.30 216,978 11,694 10.78
Securities:
Taxable 284,458 8,530 6.00 280,605 8,937 6.37
Tax-exempt (2) 104,308 3,925 7.53 94,936 3,655 7.70
----------------------------------------------------------------
Total securities 388,766 12,455 6.41 375,541 12,592 6.71
Retained interest in securitized 72,413 2,673 7.38 8,593 673 15.66
loans
Federal funds sold 5,948 110 3.70 29,969 818 5.46
----------------------------------------------------------------
Total earning assets 2,436,927 $100,042 8.21% 2,217,318 $97,001 8.75%
Cash and due from banks 94,094 64,427
Bank premises and equipment 69,522 61,262
Other assets 112,115 92,758
Less: allowance for possible
loan losses (18,228) (18,934)
----------------------------------------------------------------
Total assets $2,694,430 $2,416,831
================================================================
INTEREST-BEARING LIABILITIES
Demand deposits $ 364,251 $ 5,511 3.03% $ 307,872 $ 4,965 3.23%
Savings deposits 336,150 5,011 2.98 390,592 5,906 3.02
Time deposits 1,025,388 25,848 5.04 914,059 25,388 5.56
Short-term borrowings 219,727 4,549 4.14 162,374 4,561 5.62
Long-term debt 104,076 2,999 5.76 96,080 2,715 5.65
Trust preferred securities 87,500 3,996 9.13 15,249 694 9.10
----------------------------------------------------------------
Total interest-bearing 2,137,092 47,914 4.48 1,886,226 44,229 4.69
liabilities
Demand deposits 287,017 257,595
Other liabilities 49,303 43,042
Stockholders' equity 221,018 229,968
----------------------------------------------------------------
Total liabilities and
stockholders' equity $2,694,430 $2,416,831
================================================================
Net interest income $52,128 $52,772
================================================================
Net yield on earning assets 4.28% 4.76%
================================================================
</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%.
20
<PAGE>
<TABLE>
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<CAPTION>
Six months ended June 30,
1999 vs. 1998
Increase (Decrease)
Due to Change In:
Volume Rate Net
-----------------------------------------
INTEREST INCOME FROM
<S> <C> <C> <C>
Loan portfolio $10,609 $(7,568) $3,041
Loans held for sale 1,296 (2,451) (1,155)
Securities:
Taxable 320 (727) (407)
Tax-exempt (1) 489 (219) 270
-----------------------------------------
Total securities 809 (946) (137)
Retained interest in securitized loans 3,196 (1,196) 2,000
Federal funds sold (515) (193) (708)
-----------------------------------------
Total interest-earning assets $15,395 $(12,354) $3,041
-----------------------------------------
INTEREST EXPENSE ON
Demand deposits $ 1,326 $ (780) $ 546
Savings deposits (813) (82) (895)
Time deposits 5,598 (5,138) 460
Short-term borrowings 2,743 (2,755) (12)
Long-term debt 230 54 284
Trust preferred securities 3,300 2 3,302
-----------------------------------------
Total interest-bearing liabilities $12,384 $(8,699) $3,685
=========================================
NET INTEREST INCOME $ 3,011 $(3,655) $ (644)
=========================================
</TABLE>
(1) Fully federal taxable equivalent using a tax rate of 35% in 1999 and 1998.
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.
21
<PAGE>
<TABLE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<CAPTION>
Three months ended June 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio (1) $1,747,574 $37,120 8.50% $1,625,125 $37,351 9.19%
Loans held for sale 193,629 3,976 8.21 216,956 5,847 10.78
Securities:
Taxable 283,751 4,256 6.00 281,692 4,349 6.18
Tax-exempt (2) 104,049 1,943 7.47 94,992 1,855 7.81
----------------------------------------------------------------
Total securities 387,800 6,199 6.39 376,684 6,204 6.59
Retained interest in securitized 78,518 1,429 7.28 12,644 493 15.60
loans
Federal funds sold 3,546 29 3.27 30,678 455 5.93
----------------------------------------------------------------
Total earning assets 2,411,067 $48,753 8.09% 2,262,087 $50,350 8.90%
Cash and due from banks 118,874 65,278
Bank premises and equipment 68,502 64,329
Other assets 131,312 96,515
Less: allowance for possible
loan losses (18,627) (18,745)
----------------------------------------------------------------
Total assets $2,711,128 $2,469,464
----------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Demand deposits $ 382,007 $ 2,958 3.10% $ 311,929 $ 2,561 3.28%
Savings deposits 330,425 2,461 2.98 399,557 3,052 3.06
Time deposits 1,005,116 12,354 4.92 943,095 13,539 5.74
Short-term borrowings 248,049 2,591 4.18 143,942 1,940 5.39
Long-term debt 103,307 1,356 5.25 93,891 1,248 5.32
Trust preferred securities 87,500 1,998 9.13 30,000 686 9.15
----------------------------------------------------------------
Total interest-bearing 2,156,404 23,718 4.40 1,922,414 23,026 4.79
liabilities
Demand deposits 280,326 268,266
Other liabilities 53,698 42,605
Stockholders' equity 220,700 236,179
----------------------------------------------------------------
Total liabilities and
stockholders' equity $2,711,128 $2,469,464
================================================================
Net interest income $25,035 $27,324
================================================================
Net yield on earning assets 4.15% 4.83%
================================================================
</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%.
22
<PAGE>
<TABLE>
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<CAPTION>
Three months ended June 30,
1999 vs. 1998
Increase (Decrease)
Due to Change In:
Volume Rate Net
-----------------------------------------
INTEREST INCOME FROM
<S> <C> <C> <C>
Loan portfolio $ 9,524 $ (9,755) $ (231)
Loans held for sale (582) (1,289) (1,871)
Securities:
Taxable 183 (276) (93)
Tax-exempt (1) 505 (417) 88
-----------------------------------------
Total securities 688 (693) (5)
Retained interest in securitized loans 2,757 (1,821) 936
Federal funds sold (283) (143) (426)
-----------------------------------------
Total interest-earning assets $12,104 $(13,701) $(1,597)
-----------------------------------------
INTEREST EXPENSE ON
Demand deposits $1,247 $ (850) $ 397
Savings deposits (517) (74) (591)
Time deposits 4,516 (5,701) (1,185)
Short-term borrowings 3,160 (2,509) 651
Long-term debt 207 (99) 108
Trust preferred securities 1,319 (7) 1,312
-----------------------------------------
Total interest-bearing liabilities $9,932 $(9,240) $ 692
-----------------------------------------
NET INTEREST INCOME $2,172 $(4,461) $(2,289)
-----------------------------------------
</TABLE>
(1) Fully federal taxable equivalent using a tax rate of 35% in 1999 and 1998.
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.
23
<PAGE>
LOAN PORTFOLIO
The composition of the Company's loan portfolio as of June 30, 1999 and
December 31, 1998, is presented in the following table:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 524,454 $ 509,214
Real estate-mortgage 853,605 842,727
Installment loans to individuals 356,874 363,988
-------------------------------------------
Total loans $ 1,734,993 $ 1,715,929
-------------------------------------------
</TABLE>
The loan portfolio has experienced an increase of 1.11% during the
first six months of 1999, from $1.72 billion at December 31, 1998, to $1.73
billion at June 30, 1999.
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 detailed 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
24
<PAGE>
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. At June 30, 1999, the allowance for loan losses was $18.80 million or
1.08% of total period-end loans compared to $17.61 million or 1.03% as of
December 31, 1998. As of June 30, 1999, management is of the opinion that the
consolidated allowance for loan losses is adequate to provide for losses on
existing loans within the portfolio.
As management continues to aggressively collect problem credits and
restructure the Company's post-merger loan portfolio, the Company's provision
for loan losses increased from $2.47 million to $4.64 million for the six months
ended June 30, 1998 and 1999, respectively. During the first six months of 1999,
the Company recorded loan charge-offs of approximately $4.22 million and
recorded recoveries of $757,000 resulting in net charge-offs of $3.46 million.
This represents an increase of $460,000 or 15.33% from net charge-offs of $3.00
million recorded during the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Six months ended Year ended December
June 30, 31,
Allowance for Loan Losses 1999 1998
------------------------------------------
<S> <C> <C>
Balance at beginning of year $17,610 $18,190
Charge-offs:
Commercial, financial and agricultural (1,050) (2,385)
Real estate-mortgage (330) (1,375)
Installment loans to individuals (2,835) (7,709)
------------------------------------------
Totals (4,215) (11,469)
Recoveries:
Commercial, financial and agricultural 63 297
Real estate-mortgage 102 43
Installment loans to individuals 592 1,283
------------------------------------------
Totals 757 1,623
------------------------------------------
Net charge-offs (3,458) (9,846)
Provision for loan losses 4,643 8,481
Balance of acquired institution - 785
==========================================
Balance at end of period $18,795 $17,610
==========================================
As a Percent of Average Total Loans:
Net charge-offs .39% .58%
Provision for loan losses .53 .51
As a Percent of Non-performing Loans:
Allowance for loan losses 97.73% 118.59%
25
<PAGE>
Summary of Non-performing Assets
Non-accrual loans $10,169 $8,844
Accruing loans past due 90 days or more 8,344 5,126
Restructured loans 718 879
------------------------------------------
Total non-performing loans 19,231 14,849
Other real estate owned 1,452 2,626
==========================================
Total non-performing assets $20,683 $17,475
==========================================
</TABLE>
LOANS HELD FOR SALE
Loans held for sale represent mortgage loans the Company has either
purchased or originated with the intent to sell or securitize and 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 June
30, 1999, conventional mortgage loans represented $33.09 million or 31.24% of
the reported balance of loans held for sale.
The Company also 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.
Loans are acquired either on a flow or bulk basis from an approved network of
unaffiliated lenders. Additionally, the Company solicits loans directly from
borrowers on a nationwide basis.
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. In
addition to concentration risk, 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,
26
<PAGE>
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 the first six months of 1999, the Company originated $215.00
million and purchased $129.89 million of loans held for sale and sold $490.47
million during the same period. This compares to originations of $225.40
million, purchases of $408.05 million and sales of $580.81 million during the
first six months of 1998.
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
27
<PAGE>
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.
As of June 30, 1999 and 1998, the Company reported retained interests
in its securitized loan pools of approximately $91.37 million and $24.61
million, respectively, including accrued interest. Because the retained
interests are uncertificated, the Company has included the recorded value of its
retained interests in Other Assets in the Consolidated Balance Sheets.
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 reasonable. Each of the
securitized pools is serviced by the Company's mortgage loan servicing division.
LOAN SERVICING
As of June 30, 1999, City Mortgage Services (a division of City
National Bank) maintained a servicing portfolio of $1.93 billion. Loans serviced
for others are not included in the Consolidated Balance Sheets of the Company.
The Company has recorded mortgage loan servicing rights of $11.22 million in
Other Assets at June 30, 1999, 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 June 30, 1999, 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.
OTHER ASSETS
As of June 30, 1999, Other Assets (as reported in the Consolidated
Balance Sheets) had increased approximately $56.18 million, from $153.15 million
at December 31, 1998 to $209.33 million. Of this increase, $29.16 million is
associated with the retained interest recorded resulting from the Company's
second quarter securitization of junior lien mortgage loans. Also, in April
1999, City National purchased an additional $20.00 million of bank owned life
insurance ("BOLI").
28
<PAGE>
REORGANIZATION OF MORTGAGE-BANKING SEGMENT
As disclosed in the 1998 Annual Report to Shareholders, the Company
initiated an overall restructuring of the retail and wholesale loan origination
divisions during the fourth quarter of 1998. The reorganization of this business
segment has continued through the first six months of 1999, during which time
the Company has consolidated its retail origination platforms into one operation
and consolidated its wholesale and broker divisions. Additionally, the Company
has diversified its product mix to include home equity and other
mortgage-related products while reducing its reliance on high loan-to-value
loans. Management has implemented significant workforce reductions within this
segment and has curtailed the wholesale acquisition of junior lien mortgage
loans. Management has also reduced the Company's level of nationwide direct mail
solicitation of potential borrowers. Such reductions are expected to reduce
compensation and advertising expenses beginning in the third quarter of 1999.
Similarly, revenues recognized from origination fees charged to borrowers and
gains from loan sales and securitizations are also expected to decline,
beginning in the third quarter of 1999.
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 and through performing earnings
sensitivity analyses. In management's opinion, there have been no significant
changes in the Company's market risk since December 31, 1998.
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.
29
<PAGE>
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 June 30, 1999, $22.00 million of certificates of deposit had been
sold under these agreements at an average interest rate of 5.36%. The average
remaining term of the issued certificates of deposit was 1.25 years at June 30,
1999.
An additional source of liquidity includes the parent company's $35.0
million revolving loan agreement. At June 30, 1999, $13.0 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.
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. Primarily the result of junior lien mortgage loan sales
exceeding purchases and originations of those loans, operating activities
provided $109.98 million of cash during the six months ended June 30, 1999.
Conversely, during the six months ended June 30, 1998, junior lien mortgage loan
purchases and originations exceeded sales of those loans by approximately $52.64
million, resulting in cash used in operating activities during the period of
$70.94 million.
In conjunction with the Company's sales of six branch locations during
the second quarter of 1999, the Company transferred $52.09 million of cash to
the entities that acquired the branches. As a result, net cash used in investing
activities increased $51.10 million from $81.98 million in 1998 to $133.08
million for the six months ended June 30, 1999.
With less cash used in operating and investing activities, the Company
needed less cash through financing activities during the first six months of
1999. During the first six months of 1998, cash was provided by net increases in
core deposits ($110.84 million), proceeds from long term debt ($33.62 million),
and the issuance of trust preferred securities ($29.16 million). During the
first six months of 1999, net deposits decreased $18.46 million and total
borrowed funds increased $30.69 million.
30
<PAGE>
CAPITAL RESOURCES
During the first six months of 1999, the Company's consolidated
stockholders' equity decreased approximately $3.69 million, from $220.06 million
at December 31, 1998 to $216.37 million at June 30, 1999. During the first six
months of 1999, the Company reported net income of $12.24 million, which was
partially offset by the payment of dividends of approximately $6.73 million.
Additionally, the Company reported a $9.34 million decline in Other
Comprehensive Income during the first six months of 1999. Of this $9.34 million
decline, approximately $4.63 million is attributable to the net decline in the
estimated fair value of the Company's retained interests in its securitized loan
pools. The remaining $4.71 million decline is due to declines in the estimated
fair value of the available-for-sale securities portfolio.
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 June 30, 1999, the Company's total capital to
risk-adjusted assets ratio was 11.70%, its Tier I capital ratio was 10.38%, and
its leverage ratio was 9.59%.
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 June 30, 1999, the
Company's lead bank, City National, reported total capital, Tier I capital, and
leverage ratios of 11.95%, 11.20%, and 9.58%, respectively.
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.
31
<PAGE>
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. Year 2000 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.
32
<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 recent merger of Horizon Bancorp, Inc. into the Company 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 data processing
applications of the Horizon banks were converted to the Company's in-house data
processing systems as of April 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
33
<PAGE>
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Market Risk Management" under Item 2--Management Discussion and Analysis of
Financial Condition and Results of Operations.
34
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company held its Annual Meeting of Shareholders on May 10, 1999 at which
time shareholders were to consider three proposals, as follows:
1. Election of seven Class One (I) directors, eight Class
Two (II) directors, and eight Class Three (III)
directors to the Company's Board of Directors.
2. Reservation of an additional one million (1,000,000)
shares of common stock for possible future issuance
under the Company's 1993 Stock Incentive Plan.
3. Ratification of the Board of Directors' appointment of
Ernst & Young LLP as independent auditors of the Company
for 1999.
The vote tabulation for each matter was as follows:
1. Election of Directors to the Board of Directors:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld Abstentions
- ------------------ ------------------------------- ------------------- ----------------------------
Class I Nominees
<S> <C> <C> <C>
*James E. Songer, Sr. 4,252,828 89,434 -
*Mark H Schaul 3,852,765 44,596 -
*David W. Hambrick 3,852,465 45,121 -
*Frank S. Harkins, Jr. 3,852,465 77,885 -
*Dr. D. K. Cales 3,852,465 44,596 -
*Albert M. Tieche, Jr. 3,852,465 67,677 -
*Phillip W. Cain 3,802,853 42,157 -
Robert M. Davidson - - -
Class II Nominees
**Leon K. Oxley 15,750,412 42,977 -
**William C. Dolin 15,752,465 45,121 -
**Carlin K. Harmon 15,747,968 42,157 -
**Steven J. Day 15,897,526 43,075 -
**Tracy W. Hylton, II 15,673,914 81,775 -
**Thomas L. McGinnis 15,796,917 42,157 -
**C. Dallas Kayser 15,752,465 44,556 -
**E. M. Payne, III 15,702,853 65,447 -
Nancy McGinnis Beckett 10,432,355 - -
Class III Nominees
***Samuel M. Bowling 15,752,465 42,344 -
***David E. Haden 15,752,465 42,977 -
***R. T. Rogers 15,752,465 44,934 -
***Jay C. Goldman 15,796,917 45,127 -
***Robert D. Fisher 15,752,465 46,583 -
***Philip L McLaughlin 15,752,465 42,157 -
***Hugh R. Clonch 15,752,465 46,182 -
***B. C. McGinnis, III 15,796,917 42,157 -
W. Michael Frazier 10,333,786 - -
</TABLE>
* Elected to the Board for a term of one year.
**Elected to the Board for a term of two years.
***Elected to the Board for a term of three years.
35
<PAGE>
<TABLE>
2. Reservation of an additional one million shares of common
stock for possible future issuance under the Company's 1993
Stock Incentive Plan:
<S> <C>
Votes For Votes Against Abstentions Non Vote
---------------- ----------------- ---------------- ----------------
9,945,871 646,365 183,716 2,330,082
3. Ratification of the Board of Directors' appointment of Ernst
& Young LLP as independent auditors of the Company for 1999:
Votes For Votes Against Abstentions Non Vote
---------------- ----------------- ---------------- ----------------
12,559,528 26,808 57,132 462,566
</TABLE>
Item 5. Other Information None
Item 6 Exhibits and Reports on Form 8-K:
Exhibit 3(i) - Amended and Restated Bylaws of City
Holding Company
Exhibit 11 - Computation of Earnings per Share Exhibit 27 -
Financial Data Schedule for the six months ended June
30, 1999
Exhibit 27(a) - Restated Financial Data Schedule for the
six months ended June 30, 1998
No reports on Form 8-K were filed during the three-month
period ended June 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities and 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
Date: August 16, 1999
By: /s/ Michael D. Dean
----------------------------------
Michael D. Dean
Senior Vice President - Finance,
Principal Accounting Officer and
Duly Authorized Officer
36
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.
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. From time to time, the Board of Directors
may elect one or more persons to serve as a Director Emeritus. A Director
Emeritus shall have the privilege of attending those meetings of the Board of
Directors at which the Board has invited in writing all Directors Emeritus. He
shall not have the right to vote on any matters or to receive attendance fees
for the meetings he attends.
Section 3. Qualifications. The members of the Board of Directors need
not be residents of the State of West Virginia. Each member of the Board of
Directors may serve until he reaches 70 years of age, at which time he shall be
deemed to have retired from the Board.
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.
(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.
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.
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.
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.
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.
<TABLE>
EXHIBIT 11 - STATEMENT Re: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Six months ended June 30,
1999 1998
------------------------ ----------------------
(in thousands, except per share data)
Basic:
<S> <C> <C>
Net income $ 12,239 $ 13,736
Average shares outstanding 16,820 16,760
======================== ======================
Basic EPS $ 0.73 $ 0.82
======================== ======================
Diluted:
Net income $ 12,239 $ 13,736
Average shares outstanding 16,820 16,760
Effect of dilutive securities:
Employee stock options - 104
Contingently issuable stock - 2
------------------------ ----------------------
Totals 16,820 16,866
------------------------ ----------------------
Diluted EPS $ 0.73 $ 0.81
======================== ======================
Three months ended June 30,
1999 1998
------------------------ ----------------------
(in thousands, except per share data)
Basic:
Net income $ 6,994 $ 6,999
Average shares outstanding 16,820 16,879
------------------------ ----------------------
Basic EPS $ 0.42 $ 0.41
======================== ======================
Diluted:
Net income $ 6,994 $ 6,999
Average shares outstanding 16,820 16,879
Effect of dilutive securities:
Employee stock options - 159
Contingently issuable stock - 4
------------------------ ----------------------
Totals 16,820 17,042
------------------------ ----------------------
Diluted EPS $ 0.42 $ 0.41
======================== ======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 101,765
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 439
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 380,650
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,734,396
<ALLOWANCE> 18,795
<TOTAL-ASSETS> 2,604,808
<DEPOSITS> 1,929,696
<SHORT-TERM> 216,357
<LIABILITIES-OTHER> 54,411
<LONG-TERM> 187,972
<COMMON> 42,133
0
0
<OTHER-SE> 174,239
<TOTAL-LIABILITIES-AND-EQUITY> 2,604,808
<INTEREST-LOAN> 84,804
<INTEREST-INVEST> 11,081
<INTEREST-OTHER> 2,783
<INTEREST-TOTAL> 98,668
<INTEREST-DEPOSIT> 36,370
<INTEREST-EXPENSE> 47,914
<INTEREST-INCOME-NET> 50,754
<LOAN-LOSSES> 4,643
<SECURITIES-GAINS> 48
<EXPENSE-OTHER> 68,754
<INCOME-PRETAX> 19,487
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,239
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 4.28
<LOANS-NON> 10,169
<LOANS-PAST> 8,344
<LOANS-TROUBLED> 718
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,610
<CHARGE-OFFS> 4,215
<RECOVERIES> 757
<ALLOWANCE-CLOSE> 18,795
<ALLOWANCE-DOMESTIC> 18,795
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 87,832
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,835
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 335,587
<INVESTMENTS-CARRYING> 40,430
<INVESTMENTS-MARKET> 41,572
<LOANS> 1,689,188
<ALLOWANCE> 18,464
<TOTAL-ASSETS> 2,542,007
<DEPOSITS> 1,993,215
<SHORT-TERM> 155,678
<LIABILITIES-OTHER> 33,827
<LONG-TERM> 117,267
<COMMON> 42,738
0
0
<OTHER-SE> 199,282
<TOTAL-LIABILITIES-AND-EQUITY> 2,542,007
<INTEREST-LOAN> 82,918
<INTEREST-INVEST> 11,346
<INTEREST-OTHER> 1,490
<INTEREST-TOTAL> 95,754
<INTEREST-DEPOSIT> 36,259
<INTEREST-EXPENSE> 44,229
<INTEREST-INCOME-NET> 51,525
<LOAN-LOSSES> 2,467
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 61,556
<INCOME-PRETAX> 21,226
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,736
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 4.76
<LOANS-NON> 10,042
<LOANS-PAST> 6,878
<LOANS-TROUBLED> 642
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,190
<CHARGE-OFFS> 3,858
<RECOVERIES> 856
<ALLOWANCE-CLOSE> 18,440
<ALLOWANCE-DOMESTIC> 18,440
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
