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 September 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 of (IRS Employer Identification Number)
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 November 12, 1999.
1
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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: the joint venture transactions discussed in
Note K are subject to a number of conditions and may not be completed; revenues
following the joint venture transactions discussed in Note K, the recognized
gain and the principal amount of the notes resulting from the transactions may
be lower than expected or operating costs or customer loss and business
disruption following the transaction may be greater than expected; 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, 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
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Index
City Holding Company and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998
Consolidated Statements of Income - Nine months ended
September 30, 1999 and 1998 and Three months ended
September 30, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity -
Nine months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements -
September 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
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PART I, ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------------------------------------
<S> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 100,105 $ 87,866
Federal funds sold 1,617 31,911
------------------------------------------
Cash and cash equivalents 101,722 119,777
Securities available for sale, at fair value 389,700 356,659
Securities held-to-maturity (approximate fair value at December 31,
1998 - $40,539) - 39,063
Loans:
Gross loans 1,821,401 1,715,929
Allowance for loan losses (20,652) (17,610)
------------------------------------------
NET LOANS 1,800,749 1,698,319
Loans held for sale 113,442 246,287
Premises and equipment 69,497 71,094
Accrued interest receivable 24,438 21,660
Other assets 224,939 153,145
------------------------------------------
TOTAL ASSETS $2,724,487 $2,706,004
==========================================
LIABILITIES
Deposits:
Noninterest-bearing $ 253,439 $ 303,421
Interest-bearing 1,719,155 1,760,994
------------------------------------------
TOTAL DEPOSITS 1,972,594 2,064,415
Short-term borrowings 288,763 183,418
Long-term debt 106,634 102,719
Corporation-obligated mandatorily redeemable capital securities
of subsidiary trusts holding solely subordinated debentures of City
Holding Company 87,500 87,500
Other liabilities 53,141 47,893
------------------------------------------
TOTAL LIABILITIES 2,508,632 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; 16,879,815 and 16,820,276 shares issued and outstanding
at September 30, 1999 and December 31, 1998, including 15,867 and
10,000 shares, respectively, in treasury 42,199 42,051
Capital surplus 59,291 58,365
Retained earnings 124,668 120,209
Cost of common stock in treasury (491) (274)
Accumulated other comprehensive loss (9,812) (292)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 215,855 220,059
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,724,487 $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>
Nine Months Ended September 30
1999 1998
---------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $126,121 $126,401
Interest on investment securities:
Taxable 12,835 13,018
Tax-exempt 3,785 3,638
Other interest income 3,795 2,367
---------------------------------------
TOTAL INTEREST INCOME 146,536 145,424
INTEREST EXPENSE
Interest on deposits 54,142 55,198
Interest on short-term borrowings 7,278 7,252
Interest on long-term debt 4,470 3,680
Interest on trust preferred securities 6,010 1,383
---------------------------------------
TOTAL INTEREST EXPENSE 71,900 67,513
---------------------------------------
NET INTEREST INCOME 74,636 77,911
Provision for loan losses 7,327 4,416
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 67,309 73,495
OTHER INCOME
Investment securities gains 52 5
Service charges 7,301 7,082
Mortgage loan servicing fees 17,013 12,255
Net origination fees on junior-lien mortgages 4,493 11,486
Gain on sale of loans 5,805 12,811
Other income 20,934 11,265
---------------------------------------
TOTAL OTHER INCOME 55,598 54,904
OTHER EXPENSES
Salaries and employee benefits 42,793 39,358
Occupancy, excluding depreciation 8,428 6,338
Depreciation 8,578 7,301
Advertising 10,939 16,353
Other expenses 29,150 28,424
---------------------------------------
TOTAL OTHER EXPENSES 99,888 97,774
---------------------------------------
INCOME BEFORE INCOME TAXES 23,019 30,625
INCOME TAXES 8,462 10,314
---------------------------------------
NET INCOME $14,557 $20,311
=======================================
Basic earnings per common share $ 0.86 $ 1.21
=======================================
Diluted earnings per common share $ 0.86 $ 1.20
=======================================
Average common shares outstanding:
Basic 16,833 16,791
=======================================
Diluted 16,833 16,912
=======================================
</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 September 30
1999 1998
---------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $41,317 $43,483
Interest on investment securities:
Taxable 4,305 4,081
Tax-exempt 1,234 1,229
Other interest income 1,012 877
---------------------------------------
TOTAL INTEREST INCOME 47,868 49,670
INTEREST EXPENSE
Interest on deposits 17,772 18,939
Interest on short-term borrowings 2,729 2,691
Interest on long-term debt 1,471 965
Interest on trust preferred securities 2,014 689
---------------------------------------
TOTAL INTEREST EXPENSE 23,986 23,284
---------------------------------------
NET INTEREST INCOME 23,882 26,386
Provision for loan losses 2,684 1,949
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,198 24,437
OTHER INCOME
Investment securities gains 4 11
Service charges 2,794 2,541
Mortgage loan servicing fees 5,711 4,246
Net origination fees on junior-lien mortgages 462 5,269
Gain on sale of loans 216 5,478
Other income 4,281 3,635
---------------------------------------
TOTAL OTHER INCOME 13,468 21,180
OTHER EXPENSES
Salaries and employee benefits 13,802 13,486
Occupancy, excluding depreciation 1,777 2,401
Depreciation 2,959 2,716
Advertising 1,586 7,072
Other expenses 11,010 10,543
---------------------------------------
TOTAL OTHER EXPENSES 31,134 36,218
---------------------------------------
INCOME BEFORE INCOME TAXES 3,532 9,399
INCOME TAXES 1,214 2,824
---------------------------------------
NET INCOME $2,318 $6,575
=======================================
Basic earnings per common share $ 0.14 $ 0.39
=======================================
Diluted earnings per common share $ 0.14 $ 0.39
=======================================
Average common shares outstanding:
Basic 16,857 16,850
=======================================
Diluted 16,857 16,995
=======================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
CITY HOLDING COMPANY AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 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 14,557 14,557
Other comprehensive income:
Unrealized loss on securities
of $9,553, net of
reclassification adjustment
for gains included in net (9,520) (9,520)
income of $33
---------------
Total comprehensive income 5,037
Cash dividends declared ($.60/share) (10,098) (10,098)
Purchase of 11,999 shares of
treasury stock (398) (398)
Exercise of 24,240 stock options 82 311 49 442
Issuance of contingently-issuable
shares of common stock 66 615 132 813
---------- ---------- ----------- ----------- --------------- ---------------
Balances at September 30, 1999 $42,199 $59,291 $124,668 $(491) $(9,812) $215,855
========== ========== =========== =========== =============== ===============
</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 20,311 20,311
Other comprehensive income:
Unrealized loss on securities
of $310, net of
reclassification adjustment
for gains included in net (307) (307)
income of $3
---------------
Total comprehensive income 20,004
Cash dividends declared
City ($.57 a share) (3,776) (3,776)
Horizon (5,211) (5,211)
Exercise of stock options 7 (59) 156 104
Purchase of shares of treasury stock
by City (3,552) (3,552)
Purchase of shares of treasury stock
by Horizon (2,114) (2,114)
Common stock issued in acquisitions 807 14,965 15,772
---------- ---------- ----------- ----------- --------------- ---------------
Balances at September 30, 1998 $42,740 $66,910 $138,466 $(8,758) $2,146 $241,504
========== ========== =========== =========== =============== ===============
</TABLE>
7
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1999 1998
---------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 14,557 $ 20,311
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net amortization 4,607 3,199
Provision for depreciation 8,578 7,301
Provision for loan losses 7,327 4,416
Loans originated for sale (291,284) (429,316)
Purchases of loans held for sale (167,762) (621,527)
Proceeds from loans sold 597,696 931,101
Realized gains on loans sold (5,805) (12,811)
Realized investment securities gains (52) (5)
Increase in accrued interest receivable (2,677) (6,687)
Increase in other assets (66,683) (44,717)
Increase in other liabilities 5,309 3,757
---------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 103,811 (144,978)
INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held to maturity 27 2,070
Proceeds from sales of securities available for sale 17,330 23,693
Proceeds from maturities and calls of securities available for sale 64,650 110,125
Purchases of securities available for sale (81,780) (130,593)
Net increase in loans (104,402) (96,182)
Net cash paid in branch sales (52,094) -
Realized gain on branch sales (8,681) -
Net cash acquired in acquisitions 7,409 2,584
Purchases of premises and equipment (7,497) (21,187)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (165,038) (109,490)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (20,517) 25,862
Net (decrease) increase in interest-bearing deposits (20,383) 128,239
Net increase in short-term borrowings 105,345 19,177
Proceeds from long-term debt 8,000 57,532
Repayment of long-term debt (19,219) (30,700)
Net proceeds from issuance of trust preferred securities - 29,158
Purchases of treasury stock (398) (5,666)
Exercise of stock options 442 104
Cash dividends paid (10,098) (8,987)
---------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,172 214,719
---------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (18,055) (39,749)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 119,777 132,532
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,722 $ 92,783
=======================================
</TABLE>
8
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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
nine months ended September 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 - ACQUISITIONS
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.
9
<PAGE>
On September 20, 1999, the Company announced the signing of a
definitive acquisition agreement to acquire Summit State Bank ("Summit").
Summit, a state-chartered bank headquartered in Rohnert Park, California,
operates three full service locations in a high-growth California market north
of San Francisco. The merger entails a fixed exchange of 0.55 shares of City
Holding common stock for each share of Summit's common stock, including shares
under option. The transaction, subject to the approval of Summit shareholders
and regulatory authorities, is expected to close during the first quarter of
2000 and will be accounted for as a pooling of interests. As of September 30,
1999, Summit reported total assets and total deposits of $188.67 million and
$149.83 million, respectively.
NOTE C - INVESTMENT SECURITIES
Included in Securities Available for Sale in the Consolidated Balance
Sheets is a $10.00 million convertible preferred stock investment in Altiva
Financial Corporation ("Altiva"). As the market value of the underlying common
stock of Altiva has declined over the past fifteen months, the Company has
adjusted the carrying value of its investment in Altiva through the Accumulated
Other Comprehensive Income/Loss section within Stockholders' Equity. As of
September 30, 1999, the Company has written down the value of its investment in
Altiva to $3.00 million in this manner. In doing so, management has considered
the decline in the estimated market value of Altiva to be temporary in nature.
Should Altiva not achieve its remaining 1999 business goals set forth in its
stated strategic plan, this investment has the potential to become a permanent
loss in value for the Company.
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
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.
10
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NOTE D - LOAN SECURITIZATIONS
In May 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 September 30, 1999, the Company reported retained interests, included
in Other Assets in the Consolidated Balance Sheets, in the securitized loan
pools of approximately $92.25 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 nine months
ended September 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 September 30, 1999 indicate total expected undiscounted cash flows to be
received by the Company are 1.89 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
10.79% cumulative losses, and a weighted average discount rate of 12.87%.
NOTE E - 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
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.
11
<PAGE>
NOTE F - 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
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
12
<PAGE>
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 G - 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 September 30, 1999, commitments
outstanding to extend credit totaled approximately $283.99 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
$11.10 million as of September 30, 1999. Substantially all standby letters of
credit have historically expired unfunded.
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<PAGE>
Both of the above arrangements have credit risks essentially the same
as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Collateral is obtained based on management's
credit assessment of the customer. Management does not anticipate any material
losses as a result of these commitments.
NOTE H - 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 I - LONG TERM DEBT
At September 30, 1999, long-term debt included an obligation of the
Parent Company consisting of a $35 million revolving credit loan facility with
an unrelated party. At September 30, 1999, $28.13 million was outstanding. The
loan has a variable rate (6.275% at September 30, 1999) with interest payments
due quarterly and principal due at maturity on October 30, 1999. On October 19,
1999, the Parent Company completed the restructuring of its long-term debt by
entering into a $16.00 million term loan agreement (the "Loan") and a $24.00
million revolving credit facility (the "Line of Credit"). As a result, the
Parent Company transferred $16.00 million from the previously existing line of
credit to the fully-amortizing Loan and transferred the remaining $12.13 million
to the new Line of Credit. The Loan is to be repaid over a ten-year term, with
interest payable quarterly and annual principal reductions. The Line of Credit,
renewable annually, is to be repaid with interest quarterly and principal due at
maturity. Both the Loan and the Line of Credit maintain a variable rate of
interest.
Both the Loan and the Line of Credit agreements contain certain
restrictive provisions applicable to the Parent Company including limitations on
additional long-term debt and requiring the maintenance of certain pre-defined
ratios relative to Return on Average Assets, Equity to Assets, Loan Loss Reserve
and Non-performing Assets to Loans. The Parent Company has pledged the common
stock of its lead bank, City National Bank of West Virginia ("City National"),
as collateral for both credit facilities.
14
<PAGE>
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
---------------------------------------------------------------------------------------------
<S> <C>
(in thousands)
$2,000 $ 2,000 6.58% June 2000
10,000 10,000 5.60 July 2002
25,000 25,000 5.47 September 2002
1,500 1,500 6.94 June 2005
25,000 25,000 4.89 January 2008
5,000 5,000 5.48 February 2008
10,000 10,000 4.86 October 2008
</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 $338.62 million.
NOTE J - 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
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
15
<PAGE>
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.
16
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
------------------------------------------------------------------------------
<S> <C>
For the nine months ended September 30, 1999
Net interest income (expense) $ 78,056 $ (2,286) $ (98) $ (1,036) $ - $ 74,636
Provision for loan losses 7,327 - - - - 7,327
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 70,729 (2,286) (98) (1,036) - 67,309
Other income 24,117 26,396 9,316 63 (4,294) 55,598
Other expenses 59,797 27,779 11,456 5,150 (4,294) 99,888
------------------------------------------------------------------------------
Income before income taxes 35,049 (3,669) (2,238) (6,123) - 23,019
Income tax expense (benefit) 12,922 (1,350) (737) (2,373) - 8,462
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 22,127 $ (2,319) $ (1,501) $ (3,750) $ - $ 14,557
==============================================================================
Average assets $2,600,565 $214,326 $ 12,989 $ 11,924 $(122,029) $2,717,775
==============================================================================
For the nine months ended September 30, 1998
Net interest income (expense) $ 74,620 $ 4,753 $ 48 $ (1,510) $ - $ 77,911
Provision for loan losses 4,416 - - - - 4,416
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 70,204 4,753 48 (1,510) - 73,495
Other income 13,649 37,259 7,018 168 (3,190) 54,904
Other expenses 53,810 32,745 7,243 7,166 (3,190) 97,774
------------------------------------------------------------------------------
Income before income taxes 30,043 9,267 (177) (8,508) - 30,625
Income tax expense (benefit) 9,538 3,393 (10) (2,607) - 10,314
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 20,505 $ 5,874 $ (167) $ (5,901) $ - $ 20,311
==============================================================================
Average assets $2,200,968 $ 270,213 $ 13,227 $ 14,340 $ - $2,498,848
==============================================================================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Other
Community Mortgage Financial General
(in thousands) Banking Banking Services Corporate Eliminations Consolidated
------------------------------------------------------------------------------
<S> <C>
For the three months ended September 30, 1999
Net interest income (expense) $ 26,007 $ (1,799) $ 102 $ (428) $ - $ 23,882
Provision for loan losses 2,684 - - - - 2,684
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 23,323 (1,799) 102 (428) - 21,198
Other income 5,535 6,105 2,374 61 (607) 13,468
Other expenses 19,281 7,529 3,191 1,740 (607) 31,134
------------------------------------------------------------------------------
Income before income taxes 9,577 (3,223) (715) (2,107) - 3,532
Income tax expense (benefit) 3,472 (1,209) (244) (805) - 1,214
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,105 $ (2,014) $ (471) $ (1,302) $ - $ 2,318
==============================================================================
Average assets $2,715,081 $ 193,391 $ 13,437 $12,317 $(188,218) $2,746,008
==============================================================================
For the three months ended September 30, 1998
Net interest income (expense) $ 28,281 $ (2,151) $ 10 $ 246 $ - $ 26,386
Provision for loan losses 1,949 - - - - 1,949
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 26,332 (2,151) 10 246 - 24,437
Other income 3,380 16,273 2,770 336 (1,579) 21,180
Other expenses 18,460 12,437 2,968 3,932 (1,579) 36,218
------------------------------------------------------------------------------
Income before income taxes 11,252 1,685 (188) (3,350) - 9,399
Income tax expense (benefit) 3,075 449 (61) (639) - 2,824
------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,177 $ 1,236 $ (127) $ (2,711) $ - $ 6,575
==============================================================================
Average assets $2,318,882 $ 284,859 $13,953 $ 15,006 $ - $2,632,700
==============================================================================
</TABLE>
NOTE K -SUBSEQUENT EVENT
On November 12, 1999, the Company announced that City National had
signed a definitive agreement to form a residential mortgage loan servicing
joint venture with an affiliate of Pacific Financial Group, Inc. ("Pacific"), a
wholly-owned subsidiary of Pacific USA Holdings Corp. Pursuant to the definitive
agreement, City National will contribute approximately $1.85 billion in mortgage
loans serviced for others and will own a 20% equity interest in the newly formed
corporation. Additionally, City National will hold two promissory notes granted
by the new corporation which are expected to have a total principal amount of
approximately $28 million. Both promissory notes are expected to be insured, and
will be secured by certain assets of the new corporation, and guaranteed to a
limited extent by an affiliate of Pacific. This transaction, expected to be
consummated within sixty days, is subject to the approval of applicable
regulatory authorities and the satisfaction of certain other conditions.
18
<PAGE>
As part of its strategy to further lessen its involvement in the
specialty finance industry, particularly high loan-to-value products, City
National has also signed a non-binding letter of intent to form a residential
mortgage loan origination joint venture with Pacific. If consummated, City
National would contribute its retail and broker loan origination divisions to a
newly formed entity. This anticipated transaction is separate and distinct from
the aforementioned loan servicing joint venture and its specific terms are being
negotiated.
19
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Nine Months Ended September 30, 1999 vs. 1998
Consolidated net income for the nine months ended September 30, 1999
was $14.56 million or $0.86 per diluted common share, compared to $20.31 million
or $1.20 per diluted common share for the nine months ended September 30, 1998.
Return on average assets ("ROA") was 0.71% and return on average equity ("ROE")
was 8.81% for the nine months ended September 30, 1999. ROA and ROE were 1.08%
and 11.51%, respectively, for the same period in 1998.
The decline in net income, ROA, and ROE for the nine months ended
September 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 $2.91
million increase in the provision for loan losses has resulted in lower core
earnings during the nine months ended September 30, 1999. Within the
mortgage-banking segment, which is also experiencing a declining interest
margin, a $4.76 million increase in mortgage loan servicing fees during the
period was offset by a $14.00 million decline in combined net origination fees
and gains realized from the sale of loans. Other income increased $9.67 million
during the nine months ended September 30, 1999, primarily 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 September 30, 1999 vs. 1998
Consolidated net income for the three months ended September 30, 1999
was $2.32 million or $0.14 per diluted common share, compared to $6.58 million
or $0.39 per diluted common share for the three months ended September 30, 1998.
ROA was 0.34% and ROE was 4.27% for the three months ended September 30, 1999.
ROA and ROE were 1.00% and 10.95%, respectively, for the same period in 1998.
20
<PAGE>
In comparing the three months ended September 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 $2.50 million
decline in net interest income from 1998 to 1999. Additionally, within the
community-banking segment, the provision for loan losses increased approximately
$735,000 from $1.95 million during the three months ended September 30, 1998 to
$2.68 million during the same period in 1999. Consistent with the Company's
significantly reduced involvement in the junior lien mortgage loan product,
income derived from origination fees and gains realized on the sale of loans
declined dramatically in the third quarter of 1999 as compared to the same
period of 1998. Income generated from these activities decreased from $10.75
million during the three months ended September 30, 1998 to $678,000 for the
same period in 1999. Directly associated with this restructuring, advertising
expense also declined significantly, quarter-to-quarter, from $7.07 million
during the three months ended September 30, 1998 to $1.59 million during the
same period in 1999. Excluding the decline in advertising expense, non-interest
expenses remained relatively unchanged on a quarter-to-quarter comparison.
NET INTEREST INCOME
Nine Months Ended September 30, 1999 vs. 1998
On a tax equivalent basis, net interest income declined approximately
$3.20 million or 4.00% from $79.87 million to $76.67 million during the
nine-month periods ended September 30, 1998 and 1999, respectively. Factors
within both the community banking and mortgage banking segments have
significantly contributed to the overall decline in net interest margin. With
the community banking operations, although the average cost of total deposits
(interest and non-interest bearing) has declined 31 basis points, the yield
earned on the core loan portfolio has declined 42 basis points, comparing the
nine months ended September 30, 1999 and 1998. Within the mortgage banking
segment, the yield earned on loans held for sale declined 67 basis points from
9.87% for the nine months ended September 30, 1998 to 9.20% for the same period
in 1999. This decline, in part, is due to the amortization of $1.50 million of
premium, recorded during the second quarter of 1999, associated with the
wholesale acquisition of high loan-to-value loans. With the Company's reduced
involvement in this business line, any future premium amortization is expected
to be minimal. Also within the mortgage banking operations, the yield earned on
the Company's retained interests in securitized loan pools has declined from
10.02% for the nine months ended September 30, 1998 to 6.05% for the same period
in 1999. This decline is due primarily to the actual performance of the
underlying collateral pools and revised expected timing of the receipt of cash
flows by the Company.
21
<PAGE>
Three Months Ended September 30, 1999 vs. 1998
For the three months ended September 30, 1999, the Company reported
$24.55 million net interest income (tax equivalent basis) compared to $27.05
million for the same period in 1998. This decline, $2.50 million on a
quarter-to-quarter basis, was the result of factors within both the community
banking and mortgage banking segments. Within the community banking operations,
the yield earned on the core loan portfolio decreased 51 basis points while the
cost of total deposits (interest and non-interest bearing) declined only 24
basis points, from 3.67% to 3.43% for the three months ended September 30, 1998
and 1999, respectively. Additionally, the total cost of borrowed funds increased
83 basis points from 4.59% for the three months ended September 30, 1998 to
5.42% for the same period in 1999.
Within the mortgage banking segment, although the yield earned on loans
held for sale rose to 11.20% for the three months ended September 30, 1999, the
yield earned on the Company's retained interests in securitized loan pools fell
to 3.96% during the period. The increase in the loans held for sale yield is
primarily due to significantly reduced premium amortization associated with
purchased loans. The reduced yield earned on retained interests is due to
declines in the performance of the underlying collateral loans and revised
expected timing of the receipt of cash flows by the Company.
22
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
<S> <C>
INTEREST-EARNING ASSETS
Loan portfolio (1) $1,767,447 $112,288 8.47% $1,627,841 $108,498 8.89%
Loans held for sale 200,498 13,833 9.20 241,895 17,903 9.87
Securities:
Taxable 284,846 12,835 6.01 282,877 13,018 6.14
Tax-exempt (2) 104,450 5,823 7.43 96,699 5,597 7.72
----------------------------------------------------------------
Total securities 389,296 18,658 6.39 379,576 18,615 6.54
Retained interest in securitized 78,999 3,583 6.05 15,637 1,175 10.02
loans
Federal funds sold 5,956 212 4.75 29,342 1,192 5.42
----------------------------------------------------------------
Total earning assets 2,442,196 $148,574 8.11% 2,294,291 $147,383 8.57%
Cash and due from banks 90,207 67,647
Bank premises and equipment 70,139 63,435
Other assets 133,928 92,307
Less: allowance for possible
loan losses (18,695) (18,832)
----------------------------------------------------------------
Total assets $2,717,775 $2,498,848
================================================================
INTEREST-BEARING LIABILITIES
Demand deposits $ 383,645 $ 8,572 2.98% $ 320,084 $ 7,394 3.08%
Savings deposits 327,120 8,020 3.27 391,634 11,137 3.79
Time deposits 1,038,359 37,550 4.82 937,644 36,667 5.21
Short-term borrowings 205,060 7,278 4.73 192,969 7,252 5.01
Long-term debt 106,238 4,470 5.61 89,881 3,680 5.46
Trust preferred securities 87,500 6,010 9.16 20,220 1,383 9.12
----------------------------------------------------------------
Total interest-bearing 2,147,922 71,900 4.46 1,952,432 67,513 4.61
liabilities
Demand deposits 294,968 266,945
Other liabilities 54,659 44,307
Stockholders' equity 220,226 235,164
----------------------------------------------------------------
Total liabilities and
stockholders' equity $2,717,775 $2,498,848
================================================================
Net interest income $76,674 $79,870
================================================================
Net yield on earning assets 4.19% 4.64%
================================================================
</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%.
23
<PAGE>
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 vs. 1998
Increase (Decrease)
Due to Change In:
Volume Rate Net
-----------------------------------------
<S> <C>
INTEREST INCOME FROM
Loan portfolio $11,214 $ (7,424) $ 3,790
Loans held for sale (2,915) (1,155) (4,070)
Securities:
Taxable 135 (318) (183)
Tax-exempt (1) 531 (305) 226
-----------------------------------------
Total securities 666 (623) 43
Retained interest in securitized loans 3,325 (917) 2,408
Federal funds sold (848) (132) (980)
-----------------------------------------
Total interest-earning assets $11,442 $(10,251) $ 1,191
=========================================
INTEREST EXPENSE ON
Demand deposits $ 1,566 $ (388) $ 1,178
Savings deposits (1,697) (1,420) (3,117)
Time deposits 4,846 (3,963) 883
Short-term borrowings 583 (557) 26
Long-term debt 686 104 790
Trust preferred securities 4,621 6 4,627
-----------------------------------------
Total interest-bearing liabilities $10,605 $ (6,218) $ 4,387
=========================================
NET INTEREST INCOME $ 837 $ (4,033) $(3,196)
=========================================
</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.
24
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
<S> <C>
INTEREST-EARNING ASSETS
Loan portfolio (1) $1,841,436 $38,225 8.30% $1,691,925 $37,278 8.81%
Loans held for sale 110,385 3,092 11.20 290,911 6,205 8.53
Securities:
Taxable 282,046 4,305 6.11 290,599 4,081 5.62
Tax-exempt (2) 103,424 1,898 7.34 95,405 1,891 7.93
----------------------------------------------------------------
Total securities 385,470 6,203 6.44 386,004 5,972 6.19
Retained interest in securitized 91,956 910 3.96 26,157 616 9.42
loans
Federal funds sold 7,977 102 5.11 26,382 261 3.96
----------------------------------------------------------------
Total earning assets 2,437,224 $48,532 7.97% 2,421,379 $50,332 8.31%
Cash and due from banks 101,033 66,421
Bank premises and equipment 70,691 68,093
Other assets 156,989 95,831
Less: allowance for possible
loan losses (19,929) (19,024)
----------------------------------------------------------------
Total assets $2,746,008 $2,632,700
================================================================
INTEREST-BEARING LIABILITIES
Demand deposits $ 420,232 $ 3,061 2.91% $ 337,417 $ 2,459 2.92%
Savings deposits 319,338 3,009 3.77 398,204 3,142 3.16
Time deposits 1,031,722 11,702 4.54 982,395 13,338 5.43
Short-term borrowings 203,728 2,729 5.36 227,510 2,691 4.73
Long-term debt 106,447 1,471 5.53 91,339 965 4.23
Trust preferred securities 87,500 2,014 9.21 30,000 689 9.19
----------------------------------------------------------------
Total interest-bearing 2,168,967 23,986 4.42 2,066,865 23,284 4.51
liabilities
Demand deposits 298,877 278,737
Other liabilities 61,266 46,839
Stockholders' equity 216,898 240,259
----------------------------------------------------------------
Total liabilities and
stockholders' equity $2,746,008 $2,632,700
================================================================
Net interest income $24,546 $27,048
================================================================
Net yield on earning assets 4.03% 4.47%
================================================================
</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%.
25
<PAGE>
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30,
1999 vs. 1998
Increase (Decrease)
Due to Change In:
Volume Rate Net
-----------------------------------------
<S> <C>
INTEREST INCOME FROM
Loan portfolio $ 10,999 $(10,052) $ 947
Loans held for sale (12,402) 9,289 (3,113)
Securities:
Taxable (661) 885 224
Tax-exempt (1) 600 (593) 7
-----------------------------------------
Total securities 61 292 231
Retained interest in securitized loans 2,561 (2,267) 294
Federal funds sold (542) 383 (159)
-----------------------------------------
Total interest-earning assets $ 555 $(2,355) $(1,800)
=========================================
INTEREST EXPENSE ON
Demand deposits $ 611 $ (9) $ 602
Savings deposits (2,532) 2,399 (133)
Time deposits 3,723 (5,359) (1,636)
Short-term borrowings (1,241) 1,279 38
Long-term debt 177 329 506
Trust preferred securities 1,323 2 1,325
-----------------------------------------
Total interest-bearing liabilities $ 2,061 $(1,359) $ 702
=========================================
NET INTEREST INCOME $(1,506) $(996) $(2,502)
=========================================
</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.
26
<PAGE>
LOAN PORTFOLIO
The composition of the Company's loan portfolio as of September 30,
1999 and December 31, 1998, is presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------------------------------
(in thousands)
<S> <C>
Commercial, financial and agricultural $ 479,152 $ 509,214
Real estate-mortgage 982,405 842,727
Installment loans to individuals 359,844 363,988
-------------------------------------------
Total loans $ 1,821,401 $ 1,715,929
-------------------------------------------
</TABLE>
The loan portfolio has experienced an increase of 6.15% during the
first nine months of 1999, from $1.72 billion at December 31, 1998, to $1.82
billion at September 30, 1999. Of this $105.47 million increase, the acquisition
of Frontier represented $59.74 million.
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,
27
<PAGE>
seasoning of the portfolio, and general economic conditions. Reserves not
specifically allocated to individual credits are generally determined by
analyzing potential exposure and other qualitative factors that could negatively
impact the adequacy of the allowance. Determination of such reserves is
subjective in nature and requires management to periodically reassess the
validity of its assumptions. Differences between net charge-offs and estimated
losses are assessed such that management can timely modify its evaluation model
to ensure that adequate provision has been made for risk in the total loan
portfolio. At September 30, 1999, the allowance for loan losses was $20.65
million or 1.13% of total period-end loans compared to $17.61 million or 1.03%
as of December 31, 1998. As of September 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 $4.42 million to $7.33 million for the nine
months ended September 30, 1998 and 1999, respectively. During the first nine
months of 1999, the Company recorded loan charge-offs of approximately $6.20
million and recorded recoveries of $1.18 million resulting in net charge-offs of
$5.02 million. This represents an increase of $174,000 or 3.59% from net
charge-offs of $4.85 million recorded during the nine months ended September 30,
1998.
28
<PAGE>
<TABLE>
<CAPTION>
Nine months ended Year ended December
September 30, 31,
Allowance for Loan Losses 1999 1998
------------------------------------------
(in thousands)
<S> <C>
Balance at beginning of year $17,610 $18,190
Charge-offs:
Commercial, financial and agricultural (1,512) (2,385)
Real estate-mortgage (444) (1,375)
Installment loans to individuals (4,242) (7,709)
------------------------------------------
Total charge-offs (6,198) (11,469)
Recoveries:
Commercial, financial and agricultural 77 297
Real estate-mortgage 164 43
Installment loans to individuals 932 1,283
------------------------------------------
Total recoveries 1,175 1,623
------------------------------------------
Net charge-offs (5,023) (9,846)
Provision for loan losses 7,327 8,481
Balance of acquired institution 738 785
==========================================
Balance at end of period $20,652 $17,610
==========================================
As a Percent of Average Total Loans:
Net charge-offs .38% .58%
Provision for loan losses .55 .51
As a Percent of Non-performing Loans:
Allowance for loan losses 106.35% 118.59%
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Summary of Non-performing Assets
Non-accrual loans $11,290 $8,844
Accruing loans past due 90 days or more 7,419 5,126
Restructured loans 710 879
--------------------------- ---------------
Total non-performing loans 19,419 14,849
Other real estate owned 3,092 2,626
=========================== ===============
Total non-performing assets $22,511 $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 and includes traditional
fixed-rate and junior lien mortgage loans. Both the composition and the balance
of Loans Held for Sale have changed significantly since December 31, 1998. As of
September 30, 1999, the Company held approximately $66 million of junior lien
mortgage loans for sale, compared to $201 million held for sale as of December
31, 1998. Associated with this decline, the percentage of conventional mortgage
loans held for sale comprising the total reported balance of Loans Held for Sale
has increased from 18.27% at December 31, 1998 to 26.93% at September 30, 1999.
These changes also reflect the impact of the Company's overall
restructuring of its mortgage banking operation. Substantially all mortgage loan
products purchased or originated by the Company's retail and broker divisions
are intended to be included in cash sales to independent third parties. Although
the Company has securitized a portion of previous balances of Loans Held for
Sale, future securitization transactions are not anticipated at this time.
Loans obtained by the retail and broker divisions are generally
obtained from borrowers outside of the Company's community banking market areas.
As such, management believes that the geographic diversification of the loan
pool reduces the risks associated with downturns in specific local economies.
Because the retail and broker 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, 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.
30
<PAGE>
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 broker 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 nine months of 1999, the Company originated $291.28
million and purchased $167.76 million of loans held for sale and sold $597.70
million during the same period. This compares to originations of $429.32
million, purchases of $621.53 million and sales of $931.10 million during the
first nine months of 1998.
LOAN SECURITIZATIONS
One of the methods previously 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 expects to receive
on-going income from each securitization that is determined as a function of the
"excess spread" derived from the securitized loans. The "excess spread",
generally, is calculated as the difference between (A) the interest at the
stated rate paid by borrowers and (B) the sum of pass-through interest paid to
third-party investors and various fees, including trustee, insurance, servicing,
and other similar costs. The "excess spread" represents income to be recognized
by the Company over the life of the securitized loan pool.
31
<PAGE>
As of September 30, 1999 and 1998, the Company reported retained
interests in its securitized loan pools of approximately $92.25 million and
$41.46 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.
As discussed previously, management does not anticipate securitizing additional
junior lien mortgage loans at this time.
LOAN SERVICING
As of September 30, 1999, City Mortgage Services (a division of City
National Bank) maintained a servicing portfolio of $1.85 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 $10.58 million in
Other Assets at September 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 September 30, 1999, management has determined, based on this
analysis, that there is no impairment in the recorded value.
OTHER ASSETS
As of September 30, 1999, Other Assets (as reported in the Consolidated
Balance Sheets) had increased approximately $71.79 million, from $153.15 million
at December 31, 1998 to $224.94 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, City National's
purchase of an additional $20.00 million of bank owned life insurance ("BOLI"),
and $9.90 million associated with the inclusion of Frontier State Bank in the
September 30, 1999 reported balances.
32
<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 nine 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. As previously discussed herein, the impact
of this restructuring is evidenced by the declines in the reported balance of
loans held for sale, net origination fees, gains on loan sales, and advertising
expense, among others.
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.
33
<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 September 30, 1999, $12.00 million of certificates of deposit had
been sold under these agreements at an average interest rate of 5.41%. The
average remaining term of the issued certificates of deposit was approximately
12 months at September 30, 1999.
An additional source of liquidity includes the Parent Company's
revolving loan agreement. At September 30, 1999, the Parent Company maintained a
$35.00 million line of credit with an unrelated third party against which $28.13
million was outstanding. In October 1999, the Parent Company restructured its
long-term debt and entered into a $16.00 million term loan agreement and a
$24.00 million revolving credit facility. As a result, the Parent Company
transferred $16.00 million of its existing long term debt to the term loan and
transferred the remaining $12.13 million to the new revolving line of credit. As
necessary, the Parent Company has used funds available from its line of credit
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 $103.81 million of cash during the nine months ended September 30,
1999. Conversely, during the nine months ended September 30, 1998, junior lien
mortgage loan purchases and originations exceeded sales of those loans by
approximately $119.74 million, resulting in cash used in operating activities
during the period of $144.98 million.
34
<PAGE>
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 $55.55 million from $109.49 million in 1998 to $165.04
million for the nine months ended September 30, 1999.
With less cash used in operating and investing activities, the Company
needed less cash through financing activities during the first nine months of
1999. During the first nine months of 1998, cash was provided by net increases
in core deposits ($154.10 million), proceeds from long term debt ($57.53
million), and the issuance of trust preferred securities ($29.16 million).
During the first nine months of 1999, net deposits decreased $40.90 million and
total borrowed funds increased $94.13 million.
CAPITAL RESOURCES
During the first nine months of 1999, the Company's consolidated
stockholders' equity decreased approximately $4.20 million, from $220.06 million
at December 31, 1998 to $215.86 million at September 30, 1999. During the first
nine months of 1999, the Company reported net income of $14.56 million, which
was partially offset by the payment of dividends of approximately $10.10
million. Additionally, the Company reported a $9.52 million decline in Other
Comprehensive Income during the first nine months of 1999. Of this $9.52 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 $4.89 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 September 30, 1999, the Company's total capital
to risk-adjusted assets ratio was 11.14%, its Tier I capital ratio was 9.80%,
and its leverage ratio was 9.23%.
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 September 30, 1999, the
Company's lead bank, City National, reported total capital, Tier I capital, and
leverage ratios of 11.87%, 11.08%, and 10.37%, respectively.
35
<PAGE>
Continued improvement in operating results, effective management of
risks affecting the Company, and a focus on high asset quality have been, and
will remain, the key elements in maintaining the Company's present capital
position. Earnings from bank operations are expected to remain adequate to fund
payment of stockholders' dividends and internal growth. In management's opinion,
the subsidiary banks have the capability to upstream sufficient dividends to
meet the anticipated cash requirements of the Company.
IMPACT OF THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
Based on management's assessment of this issue, the Company determined
that it would be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with the
modifications that were implemented to existing software and conversions to new
hardware, the Year 2000 issue will not pose significant operational problems.
The Company's plan to resolve the Year 2000 issue is sponsored and
closely monitored by both senior and executive level management. The Federal
Financial Institutions Examination Council recommended that all systems
reprogramming efforts be completed by December 31, 1998 to allow for sufficient
testing and implementation. Management is of the opinion that the Company has
complied with this recommendation. 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:
36
<PAGE>
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.
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.
37
<PAGE>
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
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.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities
On July 22, 1999, the Company issued 26,764 shares of its
common stock to three individuals pursuant to a
Supplemental Purchase Agreement entered into on April 15,
1998, between City National Bank of West Virginia, a
subsidiary of the Company, and the previous owners of
MarCom, Inc. The Company's common stock issued in this
transaction was not registered under the Securities Act of
1933, in reliance on Section 4(2) of such Act, as a
transaction not involving any public offering.
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information
On November 12, 1999, the Company announced that its
wholly-owned banking subsidiary, City National Bank of
West Virginia ("City National") had signed a definitive
agreement to form a residential mortgage servicing joint
venture with an affiliate of Pacific Financial Group, Inc.
("Pacific)", a wholly-owned subsidiary of Pacific USA
Holdings Corp. Under the Agreement, City National and
Pacific will contribute their loan servicing operations to
a new entity in exchange for ownership interests and
additional consideration. The News Release in its entirety
in included herein as Exhibit 99.
Item 6. Exhibits and Reports on Form 8-K:
Exhibit 11 - Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule for the nine
months ended September 30, 1999
Exhibit 27(a) - Restated Financial Data Schedule for the
nine months ended September 30, 1998
Exhibit 99 - Press release, dated November 12, 1999
announcing City Holding Company and Pacific
Financial Group, Inc. Servicing Joint Venture.
Filings of Form 8-K - On September 14, 1999, the Company
filed a Current Report on Form 8-K, attaching a report
to shareholders of City Holding Company for the quarter
ended June 30, 1999, together with a letter from the
Company's President and Chief Executive Officer, Steven
J. Day.
</TABLE>
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: November 15, 1999
By:/s/ Michael D. Dean
------------------------
Michael D. Dean
Senior Vice President - Finance,
Chief Accounting Officer and
Duly Authorized Officer
39
EXHIBIT 11 - STATEMENT Re: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
----------------------------------------------
<S> <C>
(in thousands, except per share data)
Basic:
Net income $ 14,557 $ 20,311
Average shares outstanding 16,833 16,791
----------------------------------------------
Basic EPS $ 0.86 $ 1.21
==============================================
Diluted:
Net income $ 14,557 $ 20,311
Average shares outstanding 16,833 16,791
Effect of dilutive securities:
Employee stock options - 119
Contingently issuable stock - 2
----------------------------------------------
Totals 16,833 16,912
----------------------------------------------
Diluted EPS $ 0.86 $ 1.20
==============================================
Three months ended September 30,
1999 1998
----------------------------------------------
(in thousands, except per share data)
Basic:
Net income $ 2,318 $ 6,575
Average shares outstanding 16,857 16,850
----------------------------------------------
Basic EPS $ 0.14 $ 0.39
==============================================
Diluted:
Net income $ 2,318 $ 6,575
Average shares outstanding 16,857 16,850
Effect of dilutive securities:
Employee stock options - 142
Contingently issuable stock - 3
----------------------------------------------
Totals 16,857 16,995
----------------------------------------------
Diluted EPS $ 0.14 $ 0.39
==============================================
</TABLE>
40
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 100,105
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,617
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 389,700
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,821,401
<ALLOWANCE> 20,652
<TOTAL-ASSETS> 2,724,487
<DEPOSITS> 1,972,594
<SHORT-TERM> 288,763
<LIABILITIES-OTHER> 53,141
<LONG-TERM> 194,134
42,199
0
<COMMON> 0
<OTHER-SE> 173,656
<TOTAL-LIABILITIES-AND-EQUITY> 2,724,487
<INTEREST-LOAN> 126,121
<INTEREST-INVEST> 16,620
<INTEREST-OTHER> 3,795
<INTEREST-TOTAL> 146,536
<INTEREST-DEPOSIT> 54,142
<INTEREST-EXPENSE> 71,900
<INTEREST-INCOME-NET> 74,636
<LOAN-LOSSES> 7,327
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 99,888
<INCOME-PRETAX> 23,019
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,557
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 4.19
<LOANS-NON> 11,290
<LOANS-PAST> 7,419
<LOANS-TROUBLED> 710
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,610
<CHARGE-OFFS> 6,198
<RECOVERIES> 1,175
<ALLOWANCE-CLOSE> 20,652
<ALLOWANCE-DOMESTIC> 20,652
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 62,529
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 30,254
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 335,525
<INVESTMENTS-CARRYING> 40,415
<INVESTMENTS-MARKET> 41,911
<LOANS> 1,709,320
<ALLOWANCE> 18,542
<TOTAL-ASSETS> 2,651,458
<DEPOSITS> 2,036,474
<SHORT-TERM> 192,066
<LIABILITIES-OTHER> 44,080
<LONG-TERM> 137,334
42,740
0
<COMMON> 0
<OTHER-SE> 198,764
<TOTAL-LIABILITIES-AND-EQUITY> 2,651,458
<INTEREST-LOAN> 126,401
<INTEREST-INVEST> 16,656
<INTEREST-OTHER> 2,367
<INTEREST-TOTAL> 145,424
<INTEREST-DEPOSIT> 55,198
<INTEREST-EXPENSE> 67,513
<INTEREST-INCOME-NET> 77,911
<LOAN-LOSSES> 4,416
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 97,774
<INCOME-PRETAX> 30,625
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,311
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 4.64
<LOANS-NON> 10,409
<LOANS-PAST> 7,025
<LOANS-TROUBLED> 1,582
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,190
<CHARGE-OFFS> 6,104
<RECOVERIES> 1,255
<ALLOWANCE-CLOSE> 18,542
<ALLOWANCE-DOMESTIC> 18,542
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
NEWS RELEASE
- --------------------------------------------------------------------------------
For Immediate Release
November 12, 1999
For Further Information Contact:
Steven J. Day, President & CEO
(304) 769-1101
CITY HOLDING COMPANY AND PACIFIC FINANCIAL GROUP, INC.
ANNOUNCE SERVICING JOINT VENTURE
Charleston, West Virginia - Charleston-based City Holding Company (NASDAQ-NMS:
"CHCO") ("City Holding") announced today that its wholly-owned banking
subsidiary, City National Bank of West Virginia ("City National"), has signed a
definitive agreement to form a residential mortgage servicing joint venture with
an affiliate of Pacific Financial Group, Inc. ("Pacific"), a wholly owned
subsidiary of Pacific USA Holdings Corp. Under the Agreement, City National and
Pacific will contribute their loan servicing operations to a new entity in
exchange for ownership interests and additional consideration. City National
expects to recognize a gain of approximately $12 million from this transaction,
although the exact amount will not be determined until a post closing adjustment
is made shortly after closing.
Under the definitive agreement, City National will contribute
approximately $1.85 billion in servicing assets and Pacific will contribute
approximately $860 million in servicing assets. Pacific will hold an 80% equity
interest in the new corporation and City National will own the remaining 20%.
City National will also hold two promissory notes granted by the new
corporation, which are expected to have a total principal amount of
approximately $28 million. Both promissory notes are expected to be insured, and
will be secured by certain of the assets of the new corporation, and guaranteed
to a limited extent by an affiliate of Pacific.
"We look forward to our new relationship with Pacific. They have been a
significant player in the consumer specialty finance business for years and have
a top notch servicing operation, similar to ours. Jointly, we expect this new
venture to be a profitable leader in the alternative mortgage servicing
industry", stated Steven J. Day, President and Chief Executive Officer of City
Holding Company.
"City and Pacific are working towards a similar concept with our loan
origination units. Pacific is one of the few origination companies that
weathered the market upheaval in August 1998 and we think they are better suited
<PAGE>
to manage that end of the business than we, as commercial bankers, are. These
joint venture concepts will allow our management team to focus more clearly on
the community banking segment of our Company", Mr. Day stated.
"We are excited about the possibilities of this new joint venture with
City Holding. By joining our servicing operations we create a major servicing
business with an outstanding management team", stated Larry Horner, Chairman of
Pacific USA Holdings Corp.
The joint venture transaction is subject to the approval of applicable
regulatory authorities and the satisfaction of certain other conditions and is
expected to close within approximately sixty (60) days.
City Holding Company is the parent company of City National Bank of
West Virginia, Del Amo Savings Bank, FSB, Frontier State Bank, and City
Financial Corporation. City National Bank, in addition to its banking divisions,
operates: City Mortgage Services, a retail originator, wholesaler and servicer
of mortgage loans; RMI, ltd., an insurance agency offering a full range of
insurance products and services; Jarrett/Aim Communications, a printing and
direct mail service provider; and Citynet, an internet service provider and
web-site development firm.
Pacific Financial Group, Inc., headquartered in Dallas, Texas, is a
specialty consumer finance company engaged in loan servicing, mortgage banking,
automobile financing and credit card collection services.
This news release contains certain forward-looking statements relating
to City Holding's proposed contribution of its servicing assets that are
included pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve certain
risks and uncertainties, including a variety of factors that may cause the
actual results of City Holding or the Joint Venture to differ materially from
the anticipated results or other expectations expressed in such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to: (1) the transaction is subject to a number of conditions and may not
be completed; (2) revenues following the transaction, the recognized gain from
the transaction and the principal amount of the notes may be lower than
expected, or operating costs or customer loss and business disruption following
the transaction may be greater than expected; (3) competitive pressures may
increase significantly; (4) costs or difficulties related to the integration of
the business of the companies may be greater than expected; (5) changes in the
interest rate environment may reduce margins; (6) general economic or business
conditions, either nationally or in the states or regions in which the companies
do business, may be less favorable than expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand for credit; (7)
legislative or regulatory changes may adversely affect the businesses in which
the companies are engaged; and (8) changes may occur in the securities markets.
