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 March 31, 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)
<TABLE>
<S> <C>
West Virginia 55-0619957
(State or other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)
</TABLE>
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 preceeding 12 months (or for such shorter period that the registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [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 - 16,813,077 shares as of May 13, 1999.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q may include forward-looking financial information within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking information is identified
by phrases such as the Company expects or anticipates and words of similar
effect. The Company's actual results achieved may differ materially from those
projected in the forward-looking information. Factors that could cause such a
difference include, among others: changes in interest rates and economic and
other market conditions generally and in the Company's principal markets;
competition for origination and servicing of mortgage loans, particularly loans
with high loan-to-value ratios; and changes in regulations and government
policies affecting bank holding companies and their subsidiaries, including
changes in monetary policy. The forward-looking financial information is
provided to assist investors and Company stockholders in understanding
anticipated future financial operations of the Company and are included pursuant
to the Safe Harbor provisions of the Private Securities Litigation Reform Act of
1995. Further, the Company disclaims any intent or obligation to update this
forward-looking financial information.
<PAGE>
INDEX
CITY HOLDING COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1999 and December 31,
1998 Consolidated Statements of Income - Three months ended
March 31, 1999 and 1998 Consolidated Statements of Changes in
Stockholders' Equity - Three months ended March 31, 1999
and 1998
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 Notes to Consolidated Financial
Statements - March 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I, ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
------------------------------------------
(UNAUDITED)
<S> <C>
ASSETS
Cash and due from banks $ 91,611 $ 87,866
Federal funds sold 3,542 31,911
------------------------------------------
Cash and cash equivalents 95,153 119,777
Securities available for sale, at fair value 347,592 356,659
Securities held-to-maturity (approximate fair value at
March 31, 1999 and December 31, 1998 - $40,301 and $40,539) 39,037 39,063
Loans:
Gross loans 1,748,185 1,715,929
Allowance for loan losses (18,076) (17,610)
------------------------------------------
NET LOANS 1,730,109 1,698,319
Loans held for sale 290,669 246,287
Premises and equipment 70,679 71,094
Accrued interest receivable 24,678 21,660
Other assets 164,242 153,145
------------------------------------------
TOTAL ASSETS $2,762,159 $2,706,004
------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 291,085 $ 303,421
Interest-bearing 1,789,368 1,760,994
------------------------------------------
TOTAL DEPOSITS 2,080,453 2,064,415
Short-term borrowings 208,413 183,418
Long-term debt 110,602 102,719
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trusts holding solely subordinated
debentures of City Holding Company 87,500 87,500
Other liabilities 55,538 47,893
------------------------------------------
TOTAL LIABILITIES 2,542,506 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; 16,820,276 shares issued and outstanding at
March 31, 1999 and December 31, 1998, including 17,332 and
10,000 shares, respectively, in treasury 42,051 42,051
Capital surplus 58,348 58,365
Retained earnings 122,092 120,209
Cost of common stock in treasury (540) (274)
Accumulated other comprehensive loss (2,298) (292)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 219,653 220,059
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,762,159 $2,706,004
------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITY HOLDING COMPANY AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
---------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $43,708 $39,720
Interest on investment securities:
Taxable 4,274 4,588
Tax-exempt 1,288 1,203
Other interest income 1,325 542
---------------------------------------
TOTAL INTEREST INCOME 50,595 46,053
INTEREST EXPENSE
Interest on deposits 18,597 17,107
Interest on short-term borrowings 1,958 2,447
Interest on long-term debt 1,643 1,641
Interest on trust preferred securities 1,998 8
---------------------------------------
TOTAL INTEREST EXPENSE 24,196 21,203
---------------------------------------
NET INTEREST INCOME 26,399 24,850
Provision for loan losses 2,414 1,229
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 23,985 23,621
OTHER INCOME
Investment securities gains (losses) 42 (15)
Service charges 2,185 2,137
Mortgage loan servicing fees 5,685 3,883
Net origination fees on junior-lien mortgages 193 2,146
Gain on sale of loans 725 2,558
Other income 5,589 3,464
---------------------------------------
TOTAL OTHER INCOME 14,419 14,173
OTHER EXPENSES
Salaries and employee benefits 15,212 12,251
Occupancy, excluding depreciation 3,344 1,762
Depreciation 2,628 2,156
Advertising 1,120 3,177
Other expenses 8,315 8,026
---------------------------------------
TOTAL OTHER EXPENSES 30,619 27,372
---------------------------------------
INCOME BEFORE INCOME TAXES 7,785 10,422
INCOME TAXES 2,540 3,685
---------------------------------------
NET INCOME $5,245 $6,737
---------------------------------------
Basic earnings per common share $ 0.31 $0.40
---------------------------------------
Diluted earnings per common share $ 0.31 $0.40
---------------------------------------
Average common shares outstanding:
Basic 16,820 16,642
---------------------------------------
Diluted 16,820 16,789
---------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Loss Equity
---------- ---------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $42,051 $58,365 $120,209 $(274) $(292) $220,059
Comprehensive income:
Net income 5,245 5,245
Other comprehensive income, net
of deferred income taxes of
$1,337:
Unrealized loss on securities
of $1,981, net of
reclassification adjustment
for gains included in net
income of $25 (2,006) (2,006)
---------------
Total comprehensive income 3,239
Cash dividends declared ($.20/share) (3,362) (3,362)
Purchase of 11,999 shares of
treasury stock (398) (398)
Issuance of contingently-issuable
shares of common stock (17) 132 115
========== ========== =========== =========== =============== ===============
Balances at March 31, 1999 $42,051 $58,348 $122,092 $(540) $(2,298) $219,653
========== ========== =========== =========== =============== ===============
<CAPTION>
Accumulated
Other Total
Common Capital Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $41,926 $52,004 $127,142 $(3,248) $2,453 $220,277
Comprehensive income:
Net income 6,737 6,737
Other comprehensive income, net
of deferred income taxes of
$139:
Unrealized gain on securities
of $199, net of
reclassification adjustment
for losses included in net
income of $9 208 208
---------------
Total comprehensive income 6,945
Cash dividends declared
City ($.19 a share) (1,227) (1,227)
Horizon (1,739) (1,739)
Exercise of stock options 6 25 31
Purchase of shares of treasury stock
by Horizon (2,114) (2,114)
Common stock issued in acquisitions 155 2,831 2,986
========== ========== =========== =========== =============== ===============
Balances at March 31, 1998 $42,087 $54,860 $130,913 $(5,362) $2,661 $225,159
========== ========== =========== =========== =============== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
---------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 5,245 $ 6,737
Adjustments to reconcile net income to net cash
used in operating activities:
Net amortization 1,267 818
Provision for depreciation 2,628 2,033
Provision for possible loan losses 2,414 1,229
Loans originated for sale (110,593) (84,439)
Purchases of loans held for sale (60,225) (246,061)
Proceeds from loans sold 127,161 231,051
Realized gains on loans sold (725) (2,558)
Realized investment securities (gains) losses (42) 15
Increase in accrued interest receivable (3,018) (3,820)
Increase in other assets (12,762) (33,873)
Increase in other liabilities 7,645 1,690
---------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (41,005) (127,178)
INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held to maturity 27 830
Proceeds from sales of securities available for sale 5,607 6,088
Proceeds from maturities and calls of securities available for sale 26,020 39,219
Purchases of securities available for sale (24,012) (40,896)
Net increase in loans (34,204) (24,502)
Purchases of premises and equipment (2,213) (11,645)
---------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (28,775) (30,906)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest-bearing deposits (12,336) 8,750
Net increase in interest-bearing deposits 28,374 34,753
Net increase in short-term borrowings 24,995 46,309
Proceeds from long-term debt 8,000 31,403
Repayment of long-term debt (117) -
Net proceeds from issuance of trust preferred securities - 29,158
Purchases of treasury stock (398) (2,114)
Exercise of stock options - 31
Cash dividends paid (3,362) (2,966)
---------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,156 145,324
---------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (24,624) (12,760)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 119,777 132,532
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 95,153 $ 119,772
---------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998
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
three months ended March 31, 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 included in the City Holding Company annual
report on Form 10-K for the year ended December 31, 1998.
NOTE B - INVESTMENT SECURITIES
Horizon Bancorp, Inc., which was acquired December 31, 1998, maintained
selected debt securities in a held-to-maturity classification based on its
management's intent and Horizon's ability to hold such securities to maturity.
On April 1, 1999, the Company reclassified those securities from held to
maturity to available for sale. This transfer is consistent with the Company's
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.
<PAGE>
NOTE C - JUNIOR LIEN MORTGAGE LOAN ACTIVITY
During 1998, the Company completed quarterly securitizations of its
junior lien mortgage loan product and was actively involved in secondary market
loan sales of this product on a monthly basis. As a result, junior lien mortgage
loans acquired by the Company through either retail or wholesale delivery
channels were generally securitized or sold within 90-180 days during 1998.
Therefore, fees earned on, and costs to produce or acquire, junior lien mortgage
loans were generally recognized by the Company as incurred. During the first
quarter of 1999, management decided to transact fewer securitizations to take
advantage of economic efficiencies associated with the fixed costs in
transacting larger collateral pool securitizations. Additionally, as the
secondary market for third-party loan sales continued its contraction into the
first quarter of 1999, minimal secondary market sales of this product were
completed. Instead, these loans were accumulated on the Company's balance sheet
to be included in a planned second quarter securitization.
As a result, the Company deferred net origination costs of
approximately $3.00 million during the first quarter of 1999. Such net costs are
expected to be recognized by the Company upon consummation of the planned
securitization of this product during the second quarter of 1999. The deferred
net costs were included in the Company's valuation of the estimated fair value
of its loans held for sale portfolio as of March 31, 1999. Loans held for sale
are reported in the Company's balance sheet at the lower of aggregate cost or
estimated fair value and, based on management's estimated fair value analysis as
of March 31, 1999, no fair value adjustment was determined to be necessary.
NOTE D - TRUST PREFERRED SECURITIES
On October 27, 1998, City Holding Capital Trust II (Capital Trust II),
a special-purpose statutory trust subsidiary of the Company sold via public
offering $57.5 million of 9.125% trust preferred capital securities (the Capital
Securities II) and issued $1.8 million of common securities to the Company.
Distributions on the Capital Securities II are payable quarterly and each
Capital Security has a stated liquidation value of $25. To fund Capital Trust
II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior
Subordinated Debentures (the Debentures II) with a stated maturity date of
October 31, 2028. The sole assets of Capital Trust II are the Debentures II.
Cash distributions on the Capital Securities II in Capital Trust II are made to
the extent interest on the Debentures II is received by Capital Trust II. The
Company, through various agreements, has irrevocably and unconditionally
guaranteed all of Capital Trust II's obligations under the Capital Securities II
regarding payment of distributions and payment on liquidation or redemption of
<PAGE>
the Capital Securities II, but only to the extent of funds held by Capital Trust
II. The Capital Securities II are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Debentures II,
(ii) prior to October 31, 2003, in whole, but not in part, contemporaneously
with the optional redemption at any time by the Company of the Debentures II at
any time within 90 days following an event of certain changes or amendments to
regulatory requirements or federal income tax rules and (iii) in whole or in
part, at any time on or after October 31, 2003, contemporaneously with the
optional redemption by the Company of the Debentures II at a redemption price
equal to the aggregate liquidation amount of the Capital Securities II, plus
accumulated but unpaid distributions thereon. After deducting expenses incurred
in the issuance, the Company received proceeds of $55.34 million from the
Capital Securities II offering.
On March 31, 1998, City Holding Capital Trust (the Trust), a
special-purpose statutory trust subsidiary of the Company, issued $30 million in
9.15% trust preferred capital securities (the Capital Securities) to certain
qualified institutional investors and $928,000 of common securities (the Common
Securities) to the Company. Distributions on the Capital Securities are payable
semi-annually, and each Capital Security has a stated liquidation amount of
$1,000. To fund the Trust, the Company sold to the Trust $30.9 million in 9.15%
Junior Subordinated Debentures (the Debentures) with a stated maturity date of
April 1, 2028. The sole assets of the Trust are the Debentures. Cash
distributions on the Capital Securities are made to the extent interest on the
Debentures is received by the Trust. The Company, through various agreements,
has irrevocably and unconditionally guaranteed all of the Trust's obligations
under the Capital Securities regarding payment of distributions and payment on
liquidation or redemption of the Capital Securities, but only to the extent of
funds held by the Trust. In the event of certain changes or amendments to
regulatory requirements or federal income tax rules, the Capital Securities are
redeemable in whole at par or, if greater, a make-whole amount. Otherwise, the
Capital Securities are generally redeemable in whole or in part on or after
April 1, 2008, at a declining redemption price ranging from 104.58% to 100% of
the liquidation amount. On or after April 1, 2018, the Capital Securities may be
redeemed at 100% of the liquidation amount. After deducting expenses incurred in
the issuance, the Company received proceeds of $29.2 million from the Capital
Securities offering.
<PAGE>
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 E - 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 March 31, 1999, commitments
outstanding to extend credit totaled approximately $203.86 million. To a much
lesser extent, the Company offers standby letters of credit which require
payments to be made on behalf of customers when certain specified future events
occur. Amounts outstanding pursuant to such standby letters of credit were $7.02
million as of March 31, 1999. Substantially all standby letters of credit have
historically expired unfunded.
Both of the above arrangements have credit risks essentially the same as
that involved in extending loans to customers and are subject to the Company's
standard credit policies. Collateral is obtained based on management's credit
assessment of the customer. Management does not anticipate any material losses
as a result of these commitments.
NOTE F - 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 become effective for quarterly and annual reporting beginning
January 1, 2000. The impact of adopting the provisions of this statement on the
Company's financial position or results of operations subsequent to the
<PAGE>
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 G - LONG TERM DEBT
Long-term debt includes an obligation of the Parent Company consisting
of a $35 million revolving credit loan facility with an unrelated party. At
December 31, 1998, $23 million was outstanding. The loan has a variable rate
(6.465% at March 31, 1999) with interest payments due quarterly and principal
due at maturity in June 30, 1999. Management intends to refinance the loan
according to provisions provided in the agreement.
The loan agreement contains certain restrictive provisions applicable
to the Parent Company including limitations on additional long-term debt. The
Parent Company has pledged the common stock of City National Bank as collateral
for the revolving credit loan.
The Company, through its banking subsidiaries, maintains long-term
financing from the FHLB as follows:
<TABLE>
<CAPTION>
Amount Available Amount Outstanding Interest Rate Maturity Date
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
$ 2,000 $ 2,000 6.58% June 2000
10,000 10,000 5.60 July 2002
25,000 25,000 5.47 September 2002
1,500 1,500 6.94 June 2005
2,000 1,900 6.02 July 2005
1,500 1,400 5.94 July 2005
25,000 25,000 4.89 January 2008
5,000 5,000 5.48 February 2008
2,300 2,100 6.05 April 2008
2,000 2,000 5.62 July 2008
10,000 10,000 4.86 October 2008
1,500 1,500 7.14 June 2015
</TABLE>
In addition to the financing discussed above, one of the Company's
subsidiaries has as unused line of credit available with the FHLB in the amount
of $26.28 million.
NOTE H - 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
<PAGE>
banking operations include the origination, acquisition, servicing, and sale of
mortgage loans. The other financial services business segment consists of
nontraditional services offered to customers, such as investment advisory,
insurance, and internet technology products. Another defined business segment of
the Company is corporate support which includes the parent company and other
support needs.
The accounting policies for each of the business segments are the same
as those of the Company. 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 table:
<TABLE>
<CAPTION>
Other
Community Mortgage Financial General
(IN THOUSANDS) Banking Banking Services Corporate Eliminations Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
Net interest income (expense) $ 24,487 $ 2,240 $ 13 $ (341) $ - $ 26,399
Provision for loan losses (2,414) - - - - (2,414)
------------------------------------------------------------------------------
Net interest income after -
provision for loan losses 22,073 2,240 13 (341) 23,985
Other income 6,089 6,671 4,563 57 (2,961) 14,419
Other expenses 19,335 7,157 4,557 2,531 (2,961) 30,619
------------------------------------------------------------------------------
Income before income taxes 8,827 1,754 19 (2,815) - 7,785
Income tax expense (benefit) 2,905 697 6 (1,068) - 2,540
------------------------------------------------------------------------------
NET INCOME $ 5,922 $ 1,057 $ 13 $ (1,747) $ - $ 5,245
------------------------------------------------------------------------------
Average assets $ 2,312,983 $ 356,593 $ 15,972 $ 10,735 $ - $2,696,283
------------------------------------------------------------------------------
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Net interest income (expense) $ 22,801 $ 2,800 $ 16 $ (767) $ - $ 24,850
Provision for loan losses (1,229) - - - - (1,229)
------------------------------------------------------------------------------
Net interest income after
provision for loan losses 21,572 2,800 16 (767) - 23,621
Other income 4,412 8,431 970 681 (321) 14,173
Other expenses 16,997 7,243 960 2,493 (321) 27,372
------------------------------------------------------------------------------
Income before income taxes 8,987 3,988 26 (2,579) - 10,422
Income tax expense (benefit) 2,753 1,566 19 (654) - 3,685
------------------------------------------------------------------------------
NET INCOME $ 6,234 $ 2,422 $ 7 $ (1,925) $ - $ 6,737
------------------------------------------------------------------------------
Average assets $ 2,089,491 $ 234,674 $ 10,194 $ 5,202 $ - $2,339,561
------------------------------------------------------------------------------
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
Consolidated net income for the three months ended March 31, 1999 was
$5.25 million or $0.31 per diluted common share, compared to $6.74 million or
$0.40 per diluted common share for the three months ended March 31, 1998. Return
on average assets (ROA) was 0.78% and return on average equity (ROE) was 9.54%
<PAGE>
for the three months ended March 31, 1999. ROA and ROE were 1.15% and 12.13%,
respectively, for the same period in 1998.
The decline in net income, ROA and ROE for the quarter ended March 31,
1999, as compared to the quarter ended March 31, 1998, is primarily attributed
to the Company's mortgage banking segment. Within that business line, net income
declined $1.37 million in 1999, from $2.42 million to $1.06 million for the
three months ended March 31, 1998 and 1999, respectively. This decrease was due
to minimal secondary market sales of junior lien mortgage loans and no
securitization transaction during the first quarter of 1999. During the first
quarter of 1999, management decided to transact fewer securitizations to take
advantage of economic efficiencies associated with the fixed costs in
transacting larger collateral pool securitizations. Additionally, as the
secondary market for third-party loan sales continued its contraction into the
first quarter of 1999, minimal secondary market sales of this product were
completed. Instead, these loans were accumulated on the Company's balance sheet
to be included in a planned second quarter securitization. As a result, gains
recorded from the sale of loans, including securitization gains, decreased from
$2.56 million to $725,000 for the three months ended March 31, 1998 and 1999,
respectively. Management expects to complete a securitization of a larger, as
compared to previous transactions, pool of collateral loans during the second
quarter of 1999.
Within the community banking segment, net income decreased
approximately $312,000 from $6.23 million to $5.92 million for the three months
ended March 31, 1998 and 1999, respectively. This decline was primarily the
result of a $1.19 million increase in the provision for loan losses, on a
quarter-to-quarter comparison. The increased loan loss provision is associated
with the deterioration of a significant credit in the Summers County, West
Virginia market and the continued integration of the Horizon Bancorp, Inc. loan
portfolio into City Holding Company's risk management analysis.
<PAGE>
NET INTEREST INCOME
Although net interest income, on a tax equivalent basis, increased
$1.56 million or 6.09% when comparing the quarters ended March 31, 1999 and
1998, the Company experienced an overall decline in its net interest margin of
34 basis points from 4.76% to 4.42%. Within the community banking segment, the
yield earned on real estate loans declined 28 basis points on a
quarter-to-quarter comparison. Corresponding with the decline in the return on
the loan portfolio from 8.93% for the three months ended March 31, 1998, to
8.61% for the three months ended March 31, 1999, the average cost of total
interest and noninterest-bearing deposits decreased 19 basis points from 3.81%
to 3.62%. Additionally, costs of short-term and long-term borrowings decreased
108 basis points and 51 basis points, respectively, on a quarter-to-quarter
comparison.
Within the mortgage banking segment, the yield earned on loans held for
sale declined 66 basis points, quarter-to-quarter, from 10.76% to 10.10%. Volume
increases in loans held for sale resulted in $2.72 million of additional
interest income, partially offset by a $2.01 million decline due to interest
rate changes. During the first quarter of 1999, the Company earned $1.24 million
interest income resulting from its retained interest in its five securitized
loan pools, compared to $180,000 during the first quarter of 1998 recognized on
one securitized pool. Partially offsetting increases in interest income
resulting from mortgage banking activities, the cost of trust preferred
securities, used primarily to capitalize mortgage banking operations,
represented $2.00 million in interest expense during the first quarter of 1999
with minimal similar cost during the first quarter of 1998.
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS Loans (1):
Commercial and industrial $ 533,173 $11,425 8.57% $ 477,945 $11,008 9.21%
Real estate 837,602 16,901 8.07 673,977 14,070 8.35
Consumer obligations 355,870 8,819 9.91 365,822 8,795 9.62
----------------------------------------------------------------
Total loans 1,726,645 37,145 8.61 1,517,744 33,873 8.93
Loans held for sale 259,758 6,562 10.10 217,299 5,847 10.76
Securities:
Taxable 286,238 4,274 5.97 286,093 4,588 6.41
Tax-exempt (2) 104,961 1,982 7.55 94,767 1,883 7.95
----------------------------------------------------------------
Total securities 391,199 6,256 6.40 380,860 6,471 6.80
Retained interest in securitized 66,240 1,244 7.51 5,632 180 12.78
loans
Federal funds sold 8,349 81 3.88 25,739 362 5.63
----------------------------------------------------------------
Total earning assets 2,452,191 51,288 8.37 2,147,274 46,733 8.71
Cash and due from banks 82,467 64,413
Bank premises and equipment 70,015 58,155
Other assets 109,435 88,998
Less: allowance for possible
loan losses (17,825) (19,279)
----------------------------------------------------------------
Total assets $2,696,283 $2,339,561
----------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Demand deposits $ 346,249 $ 2,553 2.95% $ 296,777 $ 2,404 3.24%
Savings deposits 391,541 2,550 2.61 382,404 2,854 2.99
Time deposits 1,031,357 13,494 5.23 873,446 11,849 5.43
Short-term borrowings 181,111 1,958 4.32 181,223 2,447 5.40
Long-term debt 104,845 1,643 6.27 96,857 1,641 6.78
Trust preferred securities 87,500 1,998 9.13 333 8 9.15
----------------------------------------------------------------
Total interest-bearing 2,142,603 24,196 4.52 1,831,040 21,203 4.63
liabilities
Demand deposits 286,708 243,392
Other liabilities 47,126 42,905
Stockholders' equity 219,846 222,224
----------------------------------------------------------------
Total liabilities and
stockholders' equity $2,696,283 $2,339,561
----------------------------------------------------------------
Net interest income $27,092 $25,530
----------------------------------------------------------------
Net yield on earning assets 4.42% 4.76%
----------------------------------------------------------------
</TABLE>
(1) For purposes of this table, non-accruing loans have been included in
average balances and loan fees, which are immaterial, have been included in
interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35% in 1999 and 1998.
<PAGE>
RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 vs. 1998
Increase (Decrease)
Due to Change In:
Volume Rate Net
-----------------------------------------
<S> <C> <C> <C>
INTEREST INCOME FROM
Loans:
Commercial and industrial $ 4,086 $(3,669) $ 417
Real estate 5,794 (2,962) 2,832
Consumer obligations (1,005) 1,029 24
-----------------------------------------
Total loans 8,875 (5,602) 3,273
Loans held for sale 2,723 (2,008) 715
Securities:
Taxable 16 (330) (314)
Tax-exempt (1) 580 (481) 99
-----------------------------------------
Total securities 596 (811) (215)
Retained interest in securitized loans 1,597 (533) 1,064
Federal funds sold (193) (88) (281)
-----------------------------------------
Total interest-earning assets $13,598 $(9,402) $4,556
-----------------------------------------
INTEREST EXPENSE ON
Demand deposits $ 1,219 $(1,070) $ 149
Savings deposits 411 (715) (304)
Time deposits 4,190 (2,545) 1,645
Short-term borrowings (2) (487) (489)
Long-term debt 517 (515) 2
Trust preferred securities 1,990 - 1,990
-----------------------------------------
Total interest-bearing liabilities $8,325 $(5,332) $2,993
-----------------------------------------
NET INTEREST INCOME $5,273 $(3,710) $1,563
-----------------------------------------
</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.
LOAN PORTFOLIO
The composition of the Company's loan portfolio as of March 31, 1999, is
presented in the following table:
Commercial, financial and agricultural $ 553,333
Real estate-mortgage 840,387
Installment loans to individuals 354,465
-----------------
Total loans $ 1,748,185
-----------------
The loan portfolio increased 2.35% during the first three months of
1999, from $1.72 billion at December 31, 1998, to $1.75 billion at March 31,
1999. This increase is due to the Company's continued growth in its
existing markets.
<PAGE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management systematically monitors the loan portfolio and the adequacy
of the allowance for loan losses on a monthly basis to provide for losses
inherent in the portfolio. Through the Company's internal loan review
department, management assesses the risk in each loan type based on historical
trends, the general economic environment of its local markets, individual loan
performance and other relevant factors. Individual credits are selected
throughout the year for detail loan reviews, which are utilized by management to
assess the risk in the portfolio and the adequacy of the allowance. Due to the
nature of commercial lending, evaluation of the adequacy of the allowance as it
relates to these loan types is often based more upon specific credit review,
with consideration given to historical charge-off percentages and general
economic conditions. Conversely, due to the homogeneous nature of the real
estate and installment portfolios, the portions of the allowance allocated to
those portfolios are primarily based on prior charge-off history and general
economic conditions, with less emphasis placed on specifically reviewing
individual credits, unless circumstances suggest that specific reviews are
necessary. In these categories, specific loan reviews would be conducted on
higher balance and higher risk loans. In evaluating the adequacy of the
allowance, management considers both quantitative and qualitative factors.
Quantitative factors include actual repayment characteristics and loan
performance, cash flow analyses, and estimated fair values of underlying
collateral. Qualitative factors generally include overall trends within the
portfolio, composition of the portfolio, changes in pricing or underwriting,
seasoning of the portfolio, and general economic conditions. Reserves not
specifically allocated to individual credits are generally determined by
analyzing potential exposure and other qualitative factors that could negatively
impact the adequacy of the allowance. Determination of such reserves is
subjective in nature and requires management to periodically reassess the
validity of its assumptions. Differences between net charge-offs and estimated
losses are assessed such that management can timely modify its evaluation model
to ensure that adequate provision has been made for risk in the total loan
portfolio. At March 31, 1999, the allowance for loan losses was $18.08 million
or 1.03% of total period-end loans compared to $17.61 million or 1.03% as of
December 31, 1998. As of March 31, 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.
<PAGE>
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 $1.23 million to $2.41 million for the three
months ended March 31, 1998 and 1999, respectively. During the first three
months of 1999, the Company recorded loan charge-offs of approximately $2.35
million and recorded recoveries of $401,000 resulting in net charge-offs of
$1.95 million. This represents an increase of $597,000 or 44.19% from net
charge-offs of $1.35 million recorded during the three months ended March 31,
1998.
<TABLE>
<CAPTION>
Three months ended Year ended December
March 31, 31,
ALLOWANCE FOR LOAN LOSSES 1999 1998
----------------------------------------
<S> <C> <C>
Balance at beginning of year $17,610 $18,190
Charge-offs:
Commercial, financial and agricultural (593) (2,385)
Real estate-mortgage (140) (1,375)
Installment loans to individuals (1,616) (7,709)
-----------------------------------
Totals (2,349) (11,469)
Recoveries:
Commercial, financial and agricultural 34 297
Real estate-mortgage 47 43
Installment loans to individuals 320 1,283
-----------------------------------
Totals 401 1,623
-----------------------------------
Net charge-offs (1,948) (9,846)
Provision for loan losses 2,414 8,481
Balance of acquired institution - 785
===================================
Balance at end of year $18,076 $17,610
===================================
AS A PERCENT OF AVERAGE TOTAL LOANS
Net charge-offs .11% .58%
Provision for loan losses .14 .51
AS A PERCENT OF NONPERFORMINGLOANS
Allowance for loan losses 100.27% 118.59%
SUMMARY OF NON-PERFORMING ASSETS
Non-accrual loans $11,243 $8,844
Accruing loans past due 90 days or more 5,910 5,126
Restructured loans 875 879
---------------------- ---------
Total non-performing loans 18,028 14,849
Other real estate owned 1,815 2,626
====================== =========
Total non-performing assets $19,843 $17,475
====================== =========
</TABLE>
<PAGE>
LOANS HELD FOR SALE
Loans held for sale represent mortgage loans the Company has either
purchased or originated with the intent to sell or securitize and includes
traditional fixed-rate and junior lien mortgage loans. Certain traditional
fixed-rate mortgages are originated by the Company, with the intent to sell,
servicing released, in the secondary market. This product line enables the
Company to provide conventional, fixed-rate mortgage products to its customers,
but minimize the interest-rate risk associated with fixed-rate loans. At March
31, 1999, conventional mortgage loans represented $26.13 million or 8.99% of the
reported balance of loans held for sale.
The Company also purchases and originates junior lien and similar
mortgage loans for sale or securitization. Generally, these loans are used by
the borrower to finance property improvements or to consolidate personal debt.
Loans are acquired either on a flow or bulk basis from an approved network of
unaffiliated lenders. Additionally, the Company solicits loans directly from
borrowers on a nationwide basis.
Although these loans are generally obtained from borrowers outside of
the Company's community banking market areas, management believes that the
geographic diversification of the loan pool reduces the risks associated with
downturns in specific local economies. Because the retail and correspondent
lending divisions originate and acquire these loans on a nationwide basis, the
Company's risk related to geographic concentration is significantly reduced. In
addition to concentration risk, there are other risks associated with the junior
lien mortgage pool. Such risks include credit risk related to the quality of the
underlying loan and the borrower's financial capability to repay the loan,
market risk related to the continued attractiveness of the loan product to both
borrowers and end-investors, and interest rate risk related to potential changes
in interest rates and the resulting repricing of both financial assets and
liabilities. The Company manages this risk by continuously improving policies
and procedures designed to reduce the risk of loss to a level commensurate with
the return being earned on the Company's investment in this program.
The Company has established formal underwriting guidelines and quality
control procedures which emphasize the creditworthiness of the borrower, with
less focus placed on the value of the underlying collateral. Factors such as
credit scores, debt-to-income ratios, mortgage credit history and others are
factored into the lending decision for these loans. Additionally, property
appraisals, in varying degrees, are required for certain loans. Other
risk-reducing factors include the correspondent lending division's pre-approved
list of lenders from whom loans may be acquired. Approval of lenders is based on
due diligence procedures performed on each lender and continued evaluation of
the performance of loans purchased from each lender.
<PAGE>
During the first quarter of 1999, the Company originated $110.59
million and purchased $60.23 million in loans held for sale and sold $127.16
million during the same period. This compares to originations of $84 million,
purchases of $246 million and sales of $231 million during the first quarter of
1998.
LOAN SECURITIZATIONS
One of the methods utilized by management to mitigate the risk of loss
related to the origination and acquisition of junior lien mortgage loans is the
securitization of these loans. By securitizing originated and purchased junior
lien mortgage loans, the Company effectively removes these loans from its
balance sheet by creating an investment security or securities, supported by the
cash flows generated by these loans, and selling the resulting investment
security or securities to independent third parties. As part of this process,
the Company provides credit enhancement, in the form of overcollateralization,
with respect to the investment security created. As a result, the Company does
maintain a certain level of credit, prepayment and interest rate risk related to
these loans. The risk maintained by the Company, however, is less than that
which would be maintained had the Company held these loans on its balance sheet
until the loans matured.
In return for this risk exposure, the Company receives on-going income
from each securitization that is determined as a function of the "excess spread"
derived from the securitized loans. The "excess spread", generally, is
calculated as the difference between (A) the interest at the stated rate paid by
borrowers and (B) the sum of pass-through interest paid to third-party investors
and various fees, including trustee, insurance, servicing, and other similar
costs. The "excess spread" represents income to be recognized by the Company
over the life of the securitized loan pool.
As previously noted, the Company did not transact a securitization
during the first quarter of 1999. As of March 31, 1999 and March 31, 1998, the
Company reported retained interests in its securitized loan pools of
approximately $65.71 million and $12.40 million, 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. Assumptions used to estimate the retained interests include
default rates approximating 10% cumulative losses, prepayment rates of 17-21%
CPR, and a weighted-average discount rate of 12.23%. Management monitors the
actual default and prepayment rates of each securitized pool on a monthly basis,
in addition to the outstanding pool balance, to ensure the rates used to
estimate the retained interest are reasonable. Each of the securitized pools is
serviced by the Company's mortgage loan servicing division.
<PAGE>
LOAN SERVICING
As of March 31, 1999, City Mortgage Services (a division of City
National Bank) maintained a servicing portfolio of $1.96 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 $8.33 million in
Other Assets at March 31, 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 March 31, 1999, management has determined, based on this analysis, that
the recorded value of its servicing rights is fairly stated and there is no
impairment in that value.
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.
<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 March 31, 1999, $22.0 million of certificates of deposit had been
sold under these agreements at an average interest rate of 5.36%. The average
term of the issued certificates of deposit was 1.5 years at March 31, 1999.
An additional source of liquidity includes the parent company's $35.0
million revolving loan agreement. At March 31, 1999, $23.0 million was
outstanding pursuant to the terms of the agreement. As necessary, the Parent
Company has used funds available from this facility to provide additional
capital to its subsidiaries, to finance merger and acquisition activity, and to
fund internal growth and expansion.
The Company's cash and cash equivalents, represented by cash, due from
banks, and federal funds sold, are a product of its operating, investing and
financing activities as set forth in the Consolidated Statements of Cash Flows
included herein. The decrease in cash used in the Company's operating activities
during the first quarter of 1999 was generally associated with a $55.79 million
decrease in net fundings of loans held for sale.
As a result of less cash used in operating and investing activities
during the first quarter of 1999, as compared to the first quarter of 1998, the
Company obtained less cash through financing activities. During the first
quarter of 1998, cash was provided through the Company's issuance of trust
preferred securities ($29.16 million), net increases in short-term and long-term
borrowings ($77.71 million), and net increases in core deposits ($43.50
million). During the first quarter of 1999, net borrowings increased $32.88
million, net deposits increased $16.04 million, and there was no issuance of
trust preferred securities.
<PAGE>
CAPITAL RESOURCES
During the first three months of 1999, the Company's consolidated
stockholders' equity decreased approximately $410,000, from $220.06 million at
December 31, 1998 to $219.65 million at March 31, 1999. This decrease was
largely due to payment of normal dividends approximating $3.36 million and a
$2.01 million decline in Other Comprehensive Income, primarily the result of
declines in the fair market value of the Company's available-for-sale securities
portfolio.
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 March 31, 1999, the Company's total capital to
risk-adjusted assets ratio was 11.98%, its Tier I capital ratio was 10.58%, and
its leverage ratio was 9.43%.
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 March 31, 1999, the
Company's lead bank, City National, reported total capital, Tier I capital, and
leverage ratios of 10.53%, 9.99%, and 9.22%, respectively.
Continued improvement in operating results, effective management of
risks affecting the Company, and a focus on high asset quality have been, and
will remain, the key elements in maintaining the Company's present capital
position. Earnings from bank operations are expected to remain adequate to fund
payment of stockholders' dividends and internal growth. In management's opinion,
the subsidiary banks have the capability to upstream sufficient dividends to
meet the anticipated cash requirements of the Company.
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.
<PAGE>
Based on management's assessment of this issue, the Company determined
that it would be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with the
modifications that were implemented to existing software and conversions to new
hardware, the Year 2000 issue will not pose significant operational problems.
The Company's plan to resolve the Year 2000 issue is sponsored and
closely monitored by both senior and executive level management. The Federal
Financial Institutions Examination Council recommended that all systems
reprogramming efforts be completed by December 31, 1998 to allow for sufficient
testing and implementation. Management is of the opinion that the Company has
complied with this recommendation. Year 2000 plan components have been executed
in accordance with guidelines that were mandated by the Office of the
Comptroller of the Currency. The Company's approach to Year 2000 compliance
involves five industry standard phases:
1. Awareness Phase
2. Assessment Phase
3. Renovation Phase
4. Validation Phase
5. Implementation Phase
Each of these phases has been fully completed. A sixth phase, "post
implementation" was also adopted by the Company and is currently on-going and
involves further testing of systems, vendor and supplier monitoring, and
contingency plan assessments. The Company has developed a contingency plan for
certain critical applications. This plan includes the development of crisis
management procedures, manual back-up options, and the adjustment of staffing
strategies.
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.
<PAGE>
Based on the results, to date, of implementing the Company's strategic
plan, management believes that the risks affecting the Company associated with
the Year 2000 issue should be minimal. Accordingly, management does not believe
that the Year 2000 presents a material exposure as it relates to the Company's
products and services. In addition, the Company has gathered information about
the Year 2000 compliance status of its significant vendors, suppliers, and
customers and continues to monitor their compliance. To date, the Company's
management is not aware of any such party with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that such parties will
be Year 2000 ready. The inability of such parties to complete their Year 2000
remediation process in a timely manner could materially impact the Company. The
effect of non-compliance by such parties is not determinable.
The recent merger of Horizon Bancorp, Inc. into the Company does not
significantly impact the Company's Year 2000 readiness. The Company has
historically converted each of its acquired financial institutions to its
internal data processing environment. With the merger of Horizon, all
significant data processing systems would have been converted to the Company's
operating systems, regardless of the Year 2000 issue. Therefore, Year 2000
readiness has not necessarily accelerated the Company's replacement of equipment
and systems within the Horizon banks. All significant data processing
applications of the Horizon banks were converted to the Company's in-house data
processing systems as of April 30, 1999.
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner and in accordance with the guidelines set
forth by its regulatory authorities. As noted above, the Company is in its final
post-implementation phase of further testing. If final testing identifies
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.
<PAGE>
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6 Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule for the three
months ended March 31, 1999
Exhibit 27(a) - Restated Financial Data Schedule for
the three months ended March 31, 1998
Filings of Form 8-K - On January 12, 1999, the Company filed a
Current Report on Form 8-K to announce the completion of its
acquisition of Horizon Bancorp, Inc.
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
By: /s/ Michael D. Dean
--------------------------------
Michael D. Dean
Senior Vice President - Finance,
Principal Accounting Officer and
Duly Authorized Officer
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Three months ended March 31,
1999 1998
----------------------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic:
Net income $ 5,245 $6,737
Average shares outstanding 16,820 16,642
======================= ======================
Basic EPS $ 0.31 $0.40
======================= ======================
Diluted:
Net income $ 5,245 $6,737
Average shares outstanding 16,820 16,642
Effect of dilutive securities:
Employee stock options - 138
Contingently issuable stock 5 9
----------------------- ----------------------
Totals 16,825 16,789
======================= ======================
Diluted EPS $ 0.31 $0.40
======================= ======================
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000726854
<NAME> 1999 FDS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 91,611
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,542
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 347,592
<INVESTMENTS-CARRYING> 39,037
<INVESTMENTS-MARKET> 40,301
<LOANS> 1,748,185
<ALLOWANCE> 18,076
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42,051
0
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<TABLE> <S> <C>
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<CIK> 0000726854
<NAME> 1998 FDS
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