-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EkGdpzStQDJbEgdOYKL6FBNVLNmczfUWg33bEpfnQMZi8xWIYHRrQaFiKm6iWscn OtIugwmg4KYXBr5bFKy2mg== 0000916641-99-000273.txt : 19990402 0000916641-99-000273.hdr.sgml : 19990402 ACCESSION NUMBER: 0000916641-99-000273 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY HOLDING CO CENTRAL INDEX KEY: 0000726854 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 550619957 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11733 FILM NUMBER: 99580761 BUSINESS ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 BUSINESS PHONE: 3047691102 MAIL ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 10-K405 1 CITY HOLDING COMPANY 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period __________ to __________. Commission File Number 0-11733 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 25 Gatewater Road Charleston, West Virginia 25313 (Address of principal offices) Registrant's telephone number, including area code: (304) 769-1100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered: Common Stock, $2.50 par value The Nasdaq Stock Market - --------------------------------- ------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by nonaffiliates of the registrant based on the closing price as of March 29, 1999 (Registrant has assumed that all of its executive officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose.): Aggregate Market Value -- $ 384,562,285 The number of shares outstanding of the issuer's common stock as of March 29, 1999: Common Stock, $2.50 Par Value -- 16,812,944 shares - --------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Documents Part of Form 10-K into which Document is incorporated Portions of the Annual Part I, Item 1; Part Report to Shareholders II, Items 5, 6, 7, of City Holding Company and 8; Part III, Item for the year ended 13; Part IV, Item 14. December 31, 1998. _____________ Portions of City Holding Part III, Items 10, Company's Proxy statement 11, 12 and 13. for the 1999 Annual Meeting of Shareholders. ______________ FORM 10-K INDEX
PART I Page ---- Item 1. Business 4 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of 12-13 Security Holders PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of 13 Financial Condition and Results of Operations Item 7a. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes In and Disagreements with Accountants 14 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial 14 Owners and Management Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and 15-16 Reports on Form 8-K Signatures 17-18 Exhibit Index
PART I ITEM 1 BUSINESS City Holding Company (the Company), a West Virginia corporation headquartered in Charleston, West Virginia, is a multi-bank holding company that provides diversified financial products and services to consumers and local businesses. Through its network of 63 banking offices in West Virginia (60 offices), Ohio (1 office) and California (2 offices), the Company provides credit, deposit, investment advisory, insurance, and technology products and services to its customers. In addition to its branch network, the Company's delivery channels include ATMs, check cards, telemarketing, direct mail solicitation, interactive voice response systems, and Internet technology. Community banking is the core business segment of the Company. Since 1983, the Company has provided traditional banking products and services through its lead bank, City National Bank of West Virginia (City National), and through the various financial institutions the Company has acquired over the years. In conjunction with the evolution of the financial services industry, the Company, in recent years, has diversified its business to offer additional products and services to existing and new customers. Mortgage banking, including the origination, acquisition, servicing and sale of mortgage loans has developed into a significant product line for the Company. Additionally, the Company provides other financial services, including investment advisory, insurance, and internet technology products. When combined, these business lines reflect the diversification of the Company and depth and breadth of the products and services the Company delivers to its customers. In addition to the Company's community banking, mortgage banking, and other financial services business segments, the Company has identified a fourth segment, general corporate, which primarily includes the parent company and other administrative areas which provide general corporate support. These business segments are primarily identified by the products and services offered and the delivery channels through which the product or service is offered. The following tables summarize selected segment information for each of the last three years: Other
Community Mortgage Financial General (in thousands) Banking Banking Services Corporate Eliminations Consolidated --------------------------------------------------------------------------------------- 1998 Net interest income (expense) $ 96,085 $ 8,906 $ 64 $ (1,712) - $ 103,343 Provision for loan losses (8,481) - - - - (8,481) --------------------------------------------------------------------------------------- Net interest income after provision for loan losses 87,604 8,906 64 (1,712) 94,862 Other income 19,355 47,414 11,133 216 $ (5,695) 72,423 Other expenses 82,100 50,752 11,502 16,899 (5,695) 155,558 --------------------------------------------------------------------------------------- Income before income taxes 24,859 5,568 (305) (18,395) - 11,727 Income tax expense (benefit) 9,816 1,798 (8) (5,113) - 6,493 --------------------------------------------------------------------------------------- NET INCOME $ 15,043 $ 3,770 $ (297) $ (13,282) $ - 5,234 ======================================================================================= Average assets $ 2,202,104 $ 336,367 $ 14,660 $ 12,969 $ - $ 2,566,100 ======================================================================================= 1997 Net interest income (expense) $ 90,769 $ 8,456 $ 3 $ (2,074) - $ 97,154 Provision for loan losses (4,064) - - - - (4,064) --------------------------------------------------------------------------------------- Net interest income after provision for loan losses 86,705 8,456 3 (2,074) - 93,090 Other income 13,858 17,636 446 673 - 32,613 Other expenses 61,165 14,702 366 8,666 - 84,899 --------------------------------------------------------------------------------------- Income before income taxes 39,399 11,389 83 (10,067) - 40,804 Income tax expense (benefit) 12,604 4,284 36 (2,411) - 14,513 --------------------------------------------------------------------------------------- NET INCOME $ 26,795 $ 7,105 $ 47 $ (7,656) - $ 26,291 ======================================================================================= Average assets $ 2,041,150 $ 133,792 $ 627 $ 4,892 - $ 2,180,461 ======================================================================================= 1996 Net interest income (expense) $ 86,496 $ 6,113 $ 1 $ (1,236) - $ 91,374 Provision for loan losses (5,012) - - - - (5,012) --------------------------------------------------------------------------------------- Net interest income after provision for loan losses 81,484 6,113 1 (1,236) - 86,362 Other income 11,732 3,924 111 706 - 16,473 Other expenses 59,399 4,637 129 5,901 - 70,066 --------------------------------------------------------------------------------------- 33,817 5,400 (17) (6,431) - 32,769 Income tax expense (benefit) 11,830 2,032 - (2,374) - 11,488 --------------------------------------------------------------------------------------- NET INCOME $ 21,987 $ 3,368 $ (17) $ (4,057) - $ 21,281 ======================================================================================= Average assets $ 1,867,334 $ 149,075 $ 92 $ 5,487 - $ 2,021,988 =======================================================================================
Services provided to the banking segments by the direct mail, insurance, and internet service provider divisions are eliminated in the Consolidated Statements of Income. MERGERS AND ACQUISITIONS On December 31, 1998, the Company's merger with Horizon Bancorp, Inc. (Horizon) became effective. The merger into the Company of Horizon, a $1.0 billion bank holding company headquartered in Beckley, West Virginia, increased total assets by approximately 65% and increased deposit market share such that the Company currently ranks third in West Virginia in that category. The transaction was accounted for under the pooling-of-interests method of accounting. As such, the Company's historical financial information has been restated to include the operations of Horizon for all periods presented. With the addition of the Horizon banks, the Company significantly strengthens its presence in the Beckley and Huntington markets of West Virginia. Both areas are considered growth locations and the Company expects to capitalize and expand on its existing customer base in those cities. Additionally, the community banking philosophy utilized by Horizon management was very similar to the Company's management style. With minimal impact from overlapping markets and management's identification of operational efficiencies to be achieved, Horizon was identified as an ideal strategic partner that could significantly enhance the Company's community banking franchise. On April 1, 1998, the Company consummated its acquisition of Del Amo Savings Bank (Del Amo), a federally-chartered savings bank headquartered in Torrance, California. At the date of acquisition, Del Amo reported total assets and deposits of approximately $116 million and $102 million, respectively. This transaction was accounted for under the purchase method of accounting. Accordingly, the operations of Del Amo have been included in the consolidated financial statements from the date of acquisition. This acquisition represented a strong addition to the Company's existing operations in the Southern California area and the Company's continued commitment to grow its community banking operating segment. The other financial services business line also experienced growth during 1998. In April 1998, City National acquired Citynet Corporation and MarCom, Inc. The operations of these entities were consolidated into Citynet, a division of City National. With the addition of these companies, City National is expanding its Internet banking capabilities and introducing new Internet technology products, including balance inquiry and funds transfer capabilities, loan payment processing and web site development. In March 1998, City National increased the size of its insurance brokerage division with the acquisition of Morton Specialty Insurance Partners, Inc. (Morton). Morton was subsequently consolidated into RMI, Ltd., a division of City National, and increased the diversity of insurance products the Company offers. Also within the Other Financial Services business segment, City National acquired Jarrett/Aim Communications (Jarrett/Aim) in January 1998. Jarrett/Aim, a division of City National, conducts printing and direct mail marketing for the Company and third party customers. Within the community-banking segment, no portion of the Company's deposits are derived from a single person or a few persons, the loss of which could have a material adverse affect on liquidity capital, or other elements of financial performance. No material portion of the Company's loans, within this segment, are concentrated within a single industry or group of related industries. Within the mortgage banking segment, the Company has focused on the origination, acquisition, servicing and sale of mortgage loans, primarily junior lien mortgages and, to a lesser extent, traditional mortgage products. Junior lien mortgage loans, which comprise approximately 82% of loans classified as held for sale at December 31, 1998, are originated by the Company's four retail origination platforms on a nationwide basis. These loan production offices, located in West Virginia, California and Texas solicit potential borrowers through direct mail and telemarketing delivery channels. Additionally, the Company's correspondent lending division acquires loans either on a flow or bulk basis from an approved network of unaffiliated lenders. Because the retail and correspondent lending divisions originate and acquire these loans on a nationwide basis, the Company's risk related to geographic concentration is significantly reduced. These loans are generally expected to either be sold or securitized within 90 to 180 days. The other financial services business segment is not significant to the Company's consolidated balance sheets or statements of income, representing less than 1% of total assets and net income in 1998. The Company's business is not seasonal and has no foreign sources or applications of funds. There are no anticipated material capital expenditures, or any expected material effects on earnings or the Company's competitive position as a result of compliance with federal, state and local provisions enacted or adopted relating to environmental protection. REGULATION AND SUPERVISION The Company, as a registered bank holding company and its banking subsidiaries, as insured depository institutions, operate in a highly regulated environment and are regularly examined by federal and state regulators. The following description briefly discusses certain provisions of federal and state laws and certain regulations and the potential impact of such provisions to which the Company and its subsidiaries are subject. These federal and state laws and regulations have been enacted for the protection of depositors in national and state banks and not for the protection of shareholders of bank holding companies. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Company is subject to regulation by the Federal Reserve Board. The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the Bank Insurance Fund (BIF) as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the BIF. The FDIC's claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Federal Deposit Insurance Act (FDIA) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of any of the banking divisions. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include: operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; and acting as an insurance agent for certain types of credit-related insurance. The banking subsidiaries are subject to supervision and regulation by the Office of the Comptroller of the Currency ("OCC"), West Virginia Division of Banking, the Federal Reserve Board and the FDIC. The various laws and regulations administered by the regulatory agencies affect corporate practices, such as payment of dividends, incurring debt and acquisition of financial institutions and other companies, and affect business practices, such as payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices. FDICIA In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became effective. FDICIA substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and revised several other federal banking statutes. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, calculated under regulatory accounting practices. The Company's and its banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The Federal Reserve Board has adopted regulations establishing relevant capital measures and relevant capital levels for banks. The relevant capital measures are the total risk-adjusted capital ratio, Tier I risk-adjusted capital ratio and the leverage ratio. Under the regulations, a bank is considered (i) well capitalized if it has a total capital ratio of ten percent or greater, a Tier 1 capital ratio of six percent or greater and a leverage ratio of five percent or greater and is not subject to any order or written directive by such regulator to meet and maintain a specific capital level for any capital measure, (ii) adequately capitalized if it has a total capital ratio of eight percent or greater, a Tier I capital ratio of four percent or greater and a leverage ratio of four percent or greater (three percent in certain circumstances) and is not well capitalized, (iii) undercapitalized if it has a total capital ratio of less than eight percent, a Tier 1 capital ratio of less than four percent or a leverage ratio of less than four percent (three percent in certain circumstances), (iv) significantly undercapitalized if it has a total capital ratio of less than six percent, a Tier 1 capital ratio of less than three percent or a leverage ratio of less than three percent, and (v) critically undercapitalized if its tangible equity is equal to or less than two percent of average quarterly tangible assets. As of December 31, 1997, City National had capital levels that qualify it as being well capitalized under such regulations. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve Board. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. In order to obtain acceptance of a capital restoration plan, a depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Furthermore, in the event of a bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Under FDICIA, a depository institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. In addition, pass-through insurance coverage may not be available for certain employee benefit accounts. CAPITAL REQUIREMENTS Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and its banking subsidiaries are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 10% in order to remain categorized as "well capitalized". At least half of the total capital is required to be "Tier 1 capital", which consists principally of common and certain qualifying preferred shareholders' equity, less certain intangibles and other adjustments. The remainder, "Tier 2 capital," consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average tangible assets). These guidelines provide for a minimum ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other institutions are expected to maintain a leverage ratio of at least 100 to 200 basis points above the minimum. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. During 1998, the Company created two separate special-purpose statutory trust subsidiaries which sold trust preferred securities generating gross proceeds of $87.50 million. Pursuant to rulings released in 1996 by the Federal Reserve Board, the Company has included the trust preferred securities in its regulatory capital ratio computations. At December 31, 1998, $72.02 million of trust preferred securities are included in the Company's Tier I capital, with the remaining $15.48 million added to the Company's total regulatory capital. Proceeds from the issuance of the trust preferred securities were used for general corporate purposes, including, but not limited to, repayment of long-term debt and infusion of capital into the Company's lead bank, City National Bank of West Virginia. The Tier 1 capital, total capital and leverage ratios of the Company as of December 31, 1998 were 10.60%, 12.00%, and 9.99%, respectively, meeting the minimums required to be considered well capitalized. As of December 31, 1998, the most recent notifications from banking regulatory agencies categorized the Company and its banking subsidiaries as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since notifications that management believes have changed the institution's classifications. LIMITS ON DIVIDENDS AND OTHER PAYMENTS The Company is a legal entity separate and distinct from its subsidiaries. Most of the Company's revenues result from dividends paid to the Company by those subsidiaries. The right of the Company, and shareholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of such subsidiary, except to the extent that claims of the Company in its capacity as a creditor may be recognized. Moreover, there are various legal limitations applicable to the payment of dividends to the Company as well as the payment of dividends by the Company to its shareholders. Under federal law, the Company's subsidiaries may not, subject to certain limited expectations, make loans or extensions of credit to, or investment in the securities of, or take securities of the Company as collateral for loans to any borrower. The Company's subsidiaries are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions. The Company's banking subsidiaries are subject to various statutory restrictions on their ability to pay dividends to the Company. Under applicable regulations, at December 31, 1998, the banking subsidiaries have paid aggregate dividends to the Company of $30.26 million without obtaining prior approval of the Office of the Comptroller of the Currency (the OCC). The payment of dividends by the Company and the banking subsidiaries may also be limited by other factors, such as requirements to maintain adequate capital above regulatory guidelines. The OCC has the authority to prohibit any bank under its jurisdiction from engaging in an unsafe and unsound practice in conducting its business. The payment of dividends, depending upon the financial condition of the subsidiary in question, could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board and the OCC have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The Federal Reserve Board has stated that, as a matter of prudent banking, a bank or bank holding company should not maintain its existing rate of cash dividends on common stock unless (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. Moreover, the Federal Reserve Board has indicated that bank holding companies should serve as a source of managerial and financial strength to their subsidiary banks. Accordingly, the Federal Reserve Board has stated that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company's ability to serve as a source of strength. The ability of the Company's subsidiaries to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies and by capital guidelines. The OCC has broad discretion in developing and applying policies and guidelines, in monitoring compliance with existing policies and guidelines, and in determining whether to modify such policies and guidelines. GOVERNMENTAL POLICIES The operations of the Company and its banking subsidiaries are also affected by the policies set forth by regulatory authorities. In particular, the Federal Reserve Board regulates money and credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Various other legislation, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds are from time to time introduced in Congress. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations. OTHER SAFETY AND SOUNDNESS REGULATIONS The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. (d) Employees As of December 31, 1998, City Holding Company employed 1,869 associates. Employee relations within the Company are considered to be satisfactory. (e) Statistical Information The information noted below is provided pursuant to Guide 3 -- Statistical Disclosure by Bank Holding Companies. Page references are to the Annual Report to Shareholders for the year ended December 31, 1998 and such pages are incorporated herein by reference.
Page Description of Information Reference - -------------------------- ---------- 1. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL a. Average Balance Sheets 29 b. Analysis of Net Interest Earnings 29-30 c. Rate Volume Analysis of Changes in 30 Interest Income and Expense 2. a. Book Value of Investments 35 b. Maturity Schedule of Investments 35 c. Securities of Issuers Exceeding 10% of 35 Stockholders' Equity 3. LOAN PORTFOLIO a. Types of Loans 35 b. Maturities and Sensitivity to Changes in Interest Rates 36 c. Risk Elements 38 d. Other Interest Bearing Assets N/A
4. SUMMARY OF LOAN LOSS EXPERIENCE 37 5. DEPOSITS a. Breakdown of Deposits by Categories, Average Balance 29 and Average Rate Paid b. Maturity Schedule of Time Certificates of Deposit 40 and Other Time Deposits of $100,000 or More $100,000 or More 6. RETURN ON EQUITY AND ASSETS 25
ITEM 2 PROPERTIES City Holding Company and its subsidiaries own the facilities maintained as the Company's headquarters and generally own all of the facilities maintained as operating facilities by the subsidiaries. Those facilities not owned by the Company are maintained under long term lease agreements. The properties owned or leased by the Company consist generally of the main corporate office, sixty (60) banking offices in West Virginia, one branch office in Ohio, two banking and four loan production offices in California, two loan production offices in West Virginia and one non-banking office in West Virginia. All of the properties are suitable and adequate for their current operations and are generally being fully utilized. ITEM 3 LEGAL PROCEEDINGS There are various legal proceedings pending to which City Holding Company and/or its subsidiaries are parties. These proceedings are incidental to the business of City Holding Company and its subsidiaries and, after reviewing the matters and consulting with counsel, management is of the opinion that the ultimate resolution of such matters will not materially affect the consolidated financial statements. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 9, 1998, the Company held a special meeting of its shareholders to vote on: (1) A proposal to approve the Agreement and Plan of Reorganization, dated August 7, 1998, between City Holding Company and Horizon Bancorp, Inc. ("Horizon"), a related Plan of Merger, and the transactions contemplated by those documents. These transactions included the merger of Horizon into City Holding Company. They also included the issuance of City Holding Company common shares to Horizon shareholders in connection with the merger of Horizon and the Company. Results of shareholder votes cast were as follows: NUMBER % OF SHARES SHARES OUTSTANDING ------ ----------- Voting For 4,682,695 70.30% Voting Against 28,097 0.43 Abstain From Voting 32.921 0.49 =========== =========== Total 4,743,713 71.22% =========== =========== (2) A proposal to increase the authorized shares of common stock of the Company to fifty million (50,000,000) shares. Results of shareholder votes cast were as follows: NUMBER % OF SHARES SHARES OUTSTANDING Voting For 4,892,062 73.45% Voting Against 329,950 4.95 Abstain From Voting 24,347 0.37 ------------ -------------- Total 5,246,359 78.77% ============ ============== PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Page 26 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 1998, included in this report as Exhibit 13, is incorporated herein by reference. During 1998, the Company issued 74,401 shares of its common stock to the owners and certain employees of acquired businesses in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. ITEM 6 SELECTED FINANCIAL DATA Selected Financial Data on page 25 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 1998, included in this report as Exhibit 13, is incorporated herein by reference. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 26 through 42 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 1998, included in this report as Exhibit 13, is incorporated herein by reference. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing under the caption "Market Risk Management" appearing on pages 32 through 34 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 1998, included in this report as Exhibit 13, is incorporated herein by reference. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent auditors and consolidated financial statements, included on pages 43 through 62 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 1998, included in this report as Exhibit 13, are incorporated herein by reference. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by Item 10 of FORM 10-K appears in the Company's 1999 Proxy Statement to be filed within 120 days of fiscal year end under the captions "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS". ITEM 11 EXECUTIVE COMPENSATION The information required by Item 11 of FORM 10-K appears in the Company's 1999 Proxy Statement under the caption "EXECUTIVE COMPENSATION". ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of FORM 10-K appears in the Company's 1999 Proxy Statement under the caption "OWNERSHIP OF EQUITY SECURITIES". ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of FORM 10-K appears in the Company's 1999 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and in NOTE FIVE of Notes to Consolidated Financial Statements appearing on pages 52 and 53 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, included in this report as Exhibit 13, and incorporated herein by reference. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements Filed; Financial Statement Schedules The following consolidated financial statements of City Holding Company and subsidiaries, included in the Company's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated by reference in Item 8: Page Number ----------- Report of Independent Auditors 43 Consolidated Balance Sheets - December 31, 1998 and 1997 44 Consolidated Statements of Income - Years Ended December 31, 1998, 1997, and 1996 45 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31,1998, 1997 and 1996 46 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 47 Notes to Consolidated Financial Statements - December 31, 1998 48-62 FINANCIAL SCHEDULES I AND II UNDER ARTICLE 9 OF REGULATION S-X ARE NOT APPLICABLE. (b) Reports on Form 8-K: NONE. (c) Exhibits The exhibits listed in the EXHIBIT INDEX included herein are filed herewith or incorporated by reference from previous filings. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CITY HOLDING COMPANY ------------------------------- (Registrant) /s/ Steven J. Day ------------------------------ Steven Day, President/Director (Principal Executive Officer) /s/ Robert A. Henson ------------------------------- Robert A. Henson, Chief Financial Officer (Principal Financial Officer) /s/ Michael D. Dean ------------------------------- Michael D. Dean Senior Vice President - Finance (Principal Accounting Officer) POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 8, 1999. Each of the directors and/or officers of City Holding Company whose signature appears below hereby appoints Steven J. Day and Robert A. Henson and each of them severally, as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below and to file with the Commission, any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as officers and directors to enable City Holding Company to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission. /s/ Samuel M. Bowling /s/ D. K. Cales - ---------------------- ----------------------- Samuel M. Bowling Dr. D. K. Cales Director Director /s/ Hugh R. Clonch /s/ Robert D. Fisher - ---------------------- ---------------------- Hugh R. Clonch Robert D. Fisher Director Director /s/ William M. Frazier /s/ Jay C. Goldman - ---------------------- ---------------------- William M. Frazier Jay C. Goldman Director Director /s/ David E. Haden /s/ Carlin K. Harmon - ---------------------- ---------------------- David E. Haden Carlin K. Harmon Director Director /s/ C. Dallas Kayser - ---------------------- ---------------------- C. Dallas Kayser Leon K. Oxley Director Director /s/ Mark H. Schaul /s/ Steven J. Day - ---------------------- ---------------------- Mark H. Schaul Steven J. Day Director Director/President /s/ James E. Songer, Sr. /s/ Philip L. McLaughlin - ---------------------- ---------------------- James E. Songer, Sr. Philip L. McLaughlin Director Director /s/ B. C. McGinnis III /s/Tracy W. Hylton II - ---------------------- ---------------------- B. C. McGinnis III Tracy W. Hylton II Director Director /s/ Albert M. Tieche, Jr. /s/ Phillip W. Cain - ---------------------- ---------------------- Albert M. Tieche, Jr. Phillip W. Cain Director Director /s/ William C. Dolin /s/ David W. Hambrick - ---------------------- ---------------------- William C. Dolin David W. Hambrick Director Director /s/ Frank S. Harkins, Jr. /s/ Thomas L. McGinnis - ---------------------- ---------------------- Frank S. Harkins, Jr. Thomas L. McGinnis Director Director /s/ R. T. Rogers /s/ E. M. Payne III - ---------------------- ---------------------- R. T. Rogers E. M. Payne III Director Director EXHIBIT INDEX The following exhibits are filed herewith or are incorporated herein by reference.
Prior Filing Exhibit Reference Number Description (if applicable) - ------ ----------- ----------------- 3(a) Articles of Incorporation of I City Holding Company 3(b) Articles of Amendment to the II Articles of Incorporation of City Holding Company, dated March 6, 1984 3(c) Articles of Amendment to the III Articles of Incorporation of City Holding Company, dated March 4, 1986 3(d) Articles of Amendment to the IV Articles of Incorporation of City Holding Company, dated September 29, 1987 3(e) Articles of Amendment to the V Articles of Incorporation of City Holding Company, dated May 6, 1991 3(f) Articles of Amendment to the V Articles of Incorporation of City Holding Company, dated May 7, 1991 3(g) Articles of Amendment to the VIII Articles of Incorporation of City Holding Company, dated August 1, 1994 3(h) Articles of Amendment to the Articles of Incorporation of City Holding Company, dated December 9, 1998 3(i) Amended and Restated By laws of City Holding Company 4(a) Amendment and Restated Rights VII Agreement, dated as of May 7, 1991, between the Company and Sovran Bank, N.A. (predecessor to Nations Bank, N.A.), as Rights Agent 4(b) Supplement, dated as of June 30, XIII 1998, between City Holding Company and SunTrust Bank, Atlanta, as Rights Agent, to Amended and Restated Rights Agreement dated May 7, 1991 10(a) Agreement dated June 5, 1986, by III and between Steven J. Day and City Holding Company
10(b) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Steven J. Day 10(c) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Robert A. Henson 10(d) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Matthew B. Call 10(e) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Philip L. McLaughlin 10(f) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Bernard C. McGinnis, III 10(g) Form of Employment and Consulting IX Agreement, dated as of December 31, 1998 by and between City Holding Company and Frank S. Harkins, Jr. 10(h) Junior Subordinated Indenture, X dated as of March 31, 1998, between City Holding Company and The Chase Manhatten Bank, as Trustee 10(i) Form of City Holding Company's X 9.15% Debenture due April 1, 2028 10(j) Form of City Holding Company's XI 9.125% Debenture due October 31, 2028 10(k) City Holding Company's 1993 XII Stock Incentive Plan 11 Statement Re: Computation of Per Share Earnings 13 City Holding Company Annual Report to Shareholders for Year Ended December 31, 1998 21 Subsidiaries of City Holding Company 23 Consent of Ernst & Young LLP 24 Power of Attorney (included on the signature page hereof) 27(a) Financial Data Schedule for the year ending 27(b) Restated Financial Data Schedule for the year ending December 31, 1997 27(c) Restated Financial Data Schedule for the year ending December 31, 1996
- ---- I Attached to, and incorporated by reference from Amendment No. 1 to City Holding Company's statement on Form S-4, Registration No. 2-86250, filed November 4, 1983, with the Securities and Exchange Commission. II Attached to, and incorporated by reference from City Holding Company's Form 8-K Report dated March 7, 1984, and filed with the Securities and Exchange Commission on March 22, 1984. III Attached to, and incorporated by reference from City Holding Company's Form 10-K Annual Report dated December 31, 1986, and filed March 31, 1987, with the Securities and Exchange Commission. IV Attached to and incorporated by reference from City Holding Company's Registration Statement on Form S-4, Registration No. 33-23295, filed with the Securities and Exchange Commission on August 3, 1988. Attached to, and incorporated by reference from City Holding Company's Form 10-K Annual Report dated December 31, 1991, and filed March 17, 1992, with the Securities and Exchange Commission. V Attached to, and incorporated by reference from City Holding Company's Form 10-K Annual Report dated December 31, 1991, and filed March 17, 1992, with the Securities and Exchange Commission. VI Attached to, and incorporated by reference from City Holding Company's Form 10-K Annual Report dated December 31, 1988, and filed March 30, 1989, with the Securities and Exchange Commission. VII Attached to, and incorporated by reference from City Holding Company's Form 8-K Current Report dated May 7, 1991, and filed May 14, 1991, with the Securities and Exchange Commission. VIII Attached to, and incorporated by reference from City Holding Company's Form 10-Q Quarterly Report dated September 30, 1994 and filed November 14, 1994, with the Securities and Exchange Commission. IX Attached to, and incorporated by reference from, City Holding Company's Registration Statement on Form S-4, Registration No. 333-64205, filed with the Securities and Exchange Commission on September 24, 1998. X Attached to, and incorporated by reference from, City Holding Company's Registration Statement on Form S-4, Registration No. 333-62419, filed with the Securities and Exchange Commission on August 28, 1998. XI Attached to, and incorporated by reference from, the Pre-Effective Amendment No. 1 to City Holding Company's Registration Statement on Form S-3, Registration No. 333-64809, filed with the Securities and Exchange Commission on October 21, 1998. XII Attached to, and incorporated by reference from, City Holding Company's Registration Statement on Form S-8, Registration No. 033-62738, filed with the Securities and Exchange Commission on May 14, 1993. XIII Attached to, and incorporated by reference from, City Holding Company's Form 10-Q Quarterly Report dated June 30, 1998 and filed August 14, 1998, with the Securities and Exchange Commission. EX-3.(H) 2 EXHIBIT 3 (H) EXHIBIT 3(h) ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF CITY HOLDING COMPANY 1. Name. The name of the corporation is City Holding Company. 2. Amendment Adopted. The text of the amendment adopted is as follows: The first paragraph of Article VI of the Articles of Incorporation is deleted in its entirety and the following is substituted in its place: VI. The Corporation shall have the authority to issue 500,000 shares of preferred stock of a par value of $25 per share and 50,000,000 shares of common stock of a par value of $2.50 per share. The remainder of Article VI shall be unchanged. 3. Shareholder Vote. The amendment was adopted at a special meeting of shareholders of the Corporation on December 9, 1998. As of the record date for the special meeting, the Corporation had 6,660,717 shares of common stock outstanding and entitled to vote, and no shares of preferred stock outstanding. The number of shares of common stock voted for and against the amendment was 4,892,062 shares and 329,950 shares, respectively. The holders of 24,347 shares abstained. As a result of the amendment, the stated capital of the Corporation is increased to $137,500,000. 4. Document Preparation. These Articles of Amendment were prepared by Hunton & Williams, Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond, Virginia 23219. Dated: December 9, 1998 CITY HOLDING COMPANY By: /s/ Steven J. Day ------------------------------------- Steven J. Day President and Chief Executive Officer And /s/ Otis L. O'Connor ------------------------------------- Otis L. O'Connor Secretary ACKNOWLEDGEMENT STATE OF WEST VIRGINIA COUNTY OF KANAWHA I, Drema T. Gibson, a Notary Public, do hereby certify that on this 21st day of December, 1998, personally appeared before me, Steven J. Day, who being first duly sworn, declared himself to be President and Chief Executive Officer of City Holding Company, a corporation, that he signed the foregoing document as President and Chief Executive Officer of the Corporation, and that the statements therein contained are true. /s/ Drema T. Gibson ------------------------------ Notary Public My commission expires September 11, 2001 (SEAL) EX-3.(I) 3 EXHIBIT 3 (I) Exhibit 3(i) CITY HOLDING COMPANY AMENDED AND RESTATED BYLAWS ARTICLE I STOCKHOLDERS Section 1. Annual Meetings. The annual meeting of the shareholders shall be held at the principal office of the corporation at Charleston, Kanawha County, West Virginia, on the 30th of March of each year, or at such other place and on such other date as the Board of Directors may designate by resolution from time to time. For the purpose of determining shareholders entitled to vote at the annual meeting of the shareholders or any adjournment thereof, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date to be not more than fifty days and not less than ten days prior to the date of the annual meeting. Section 2. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors or by the President and Secretary, or by any three or more shareholders holding together not less than ten percentum (10%) of the capital stock of the corporation. For the purpose of determining shareholders entitled to vote at the special meeting of the shareholders or any adjournment thereof, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date to be not more than fifty days and not less than ten days prior to the date of the special meeting. Section 3. Notice of Meetings. Notice of either annual or special meetings of the shareholders shall be given by mailing to each shareholder of record at his last know post office address, postage prepaid, at least ten (10) days prior to the date of the meeting, a written notice thereof. Such notice shall state the time and place of the meeting. The call for the meeting, if made by shareholders, shall be signed by the shareholders making the call. If the call should be made by the Board of Directors, it shall be signed by the President, a Vice President or the Secretary of the corporation. If the call be made by the President or the Secretary, it shall be signed by both of them. The notice of special meetings of the shareholders shall state the business to be transacted, and no business other than that included in the notice or incidental thereto shall be transacted at any such meeting. Notice of the time, place or purpose of any meeting of shareholders may be dispensed with if each shareholder shall attend either in person or by proxy of if every absent shareholder shall, in writing filed with the records of the meeting, either before or after the holding thereof, waive such notice, any such meetings may be held at any time and place that the shareholders agree upon. Section 4. Quorum. The holders of a majority of all the shares of the capital stock of the corporation entitled to vote shall constitute a quorum at any meeting for all purposes, including the election of Directors. Any number less than a quorum present may adjourn any shareholders' meeting until a quorum is present. Section 5. Voting. In all elections of Directors, each shareholder shall have the right to cast one (1) vote for each share of stock owned by him and entitled to a vote, and he may cast the same in person or by proxy, for as many persons as there are Directors to be elected, or he may cumulate such votes and give one candidate as many votes as the number of Directors to be elected multiplied by the number of his shares of stock shall equal; or he may distribute them on the same principle among as many candidates and in such manner as he shall desire, and the Directors shall not be elected in any other manner; and on any other question to be determined by a vote of shares at any meeting of shareholders, each shareholder shall be entitled to one (1) vote for each share of stock in person or by proxy. Section 6. Annual Report. The President shall annually prepare a full and true statement of the affairs of the corporation, which shall be submitted at the annual meeting of the shareholders and filed within twenty (20) days thereafter in the principal office of the corporation at Charleston, West Virginia, where it shall, during the usual business hours of each secular day be open for inspection by any shareholder of the corporation. ARTICLE II DIRECTORS Section 1. Number. The Board shall consist of not less than five nor more than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which: (i) exceeds by more than three the number of directors last elected by shareholders where such number was fifteen or less; and (ii) to a number which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more except when directors are added as a result of a business combination accounted for as a pooling-of-interests, but in no event shall the number of directors exceed twenty-five, and provided, further, however, that no decrease shall have the effect of shortening the term of any incumbent director. Section 2. Director Emeritus. Any director between the ages of 65 and 70 shall have the right to become a director emeritus. If the right is not exercised then when a director reaches 70 years of age, he shall automatically become a director emeritus. A director emeritus shall have the privilege of attending any meetings of the Board of Directors; to voice his opinion in matters before the Board. He shall not have the right to vote on any matters or to receive attendance fee for the meetings he attends. This provision shall not apply to any director who was a member of the Board of Directors of The City National Bank of Charleston on February 12, 1976, and who had attained the age of 70 on or before February 12, 1976. Section 3. Qualifications. The members of the Board of Directors need not be residents of the State of West Virginia. Any shareholder who intends to nominate or cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the corporation's management) shall notify the corporation. The notification shall be made in writing and delivered or sent by first class registered or certified mail to the President of the corporation not less than 14 days nor more than 50 days prior to any meeting of stockholders called for the election of directors, provided, however, that if less than 21 days notice of the meeting is given to shareholders, such nomination shall be delivered or sent by first class registered or certified mail to the President of the corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholders. (a) the names and addresses of the proposed nominees; (b) the principal occupation of each proposed nominee; (c) the total number of shares that to the knowledge of the notifying shareholders will be voted for each of the proposed nominees; (d) the name and residence address of the notifying shareholders; and (e) the number of shares owned by the notifying shareholders. Section 4. Time of Holding Office. Commencing with the 1986 annual meeting of stockholder, the Board of Directors shall be divided into three classes, Class I, Class II, and Class III, as nearly equal in number as possible. At the 1986 annual meeting of stockholders, directors of the first class (Class I) shall be elected to hold office for a term expiring at the 1987 annual meeting of stockholders; directors of the second class (Class II) shall be elected to hold office for a term expiring at the 1988 annual meeting of stockholders; and directors of the third class (Class III) shall be elected to hold office for a term expiring at the 1989 annual meeting of stockholders. At each annual meeting of stockholders after 1986, the successors to the class of directors whose term shall then expire shall be identified as being of the same class of directors they succeed and elected to hold office for a term expiring at the third succeeding annual meeting of stockholders. When the number of directors is changed, any newly-created directorships or any decrease in directorship shall be so apportioned among the classes by the Board of Directors as to make all classes as nearly equal as possible. Section 5. Election of Officers. The Board of Directors shall elect from within their number a President. The Board shall also elect from within or without their number one or more Vice Presidents, a Secretary, a Treasurer, and all such other officers and agents as they may deem proper. The Board shall have the authority to fix the salaries of all officers and agents, whether such officers and agents be Directors or not. All officers and agents elected by the Board shall hold office during the pleasure of the Board. Section 6. Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business. Any number less than a quorum present may adjourn any Directors' meeting until a quorum is present. Section 7. Regular Meetings. Regular meetings of the Board of Directors shall be held as needed. Section 8. Special Meetings. Special meetings of the Board of Directors may be called by the President, or any three Directors to be held at such time and place and for such purposes as shall be specified in the notice. Section 9. Notice of Special Meetings. Telephonic or written notice of every special meeting of the Board of Directors shall be duly give to each Director not less than one (1) day before such meeting. Such notice shall state the time and place of the meeting and, if the meeting is being called for the purpose of amending the bylaws or for the purpose of authorizing the sale of all or substantially all of the assets of the corporation, such notice shall set forth the nature of the business intended to be transacted. Notice of any meeting of the Board may be dispensed with if every Director shall attend in person, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened, or if every absent Director shall in writing filed with the records of the meeting, either before or after the holding thereof, waive such notice. Any provision of these bylaws to the contrary notwithstanding a meeting of the Board of Directors may be held immediately following the adjournment of any meeting of the shareholders, and no notice need be given for any such meeting of the Board of Directors. Section 10. Chairman of the Board. The Board of Directors shall elect from among its members a Chairman of the Board of Directors who shall preside at all meetings of the Board of Directors and perform such other duties as may be designated by the Board. Section 11. Committees. The Board of Directors may, by resolution of resolutions passed by a majority of the whole Board, designate one or more committees, each to consist of two or more of the Directors, which, to the extent provided in such resolution or resolutions, shall have and may exercise the powers of the Board in the management of the business and affairs of the corporation, and may have power to authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. Section 12. Powers of Directors. The Board of Directors may exercise all of the powers of the corporation except such as are by law or by the charter or by the bylaws conferred upon or reserved to the shareholders. It shall also have the power to fix the compensation of the officers elected or appointed by it, and of all other officers and employees of the corporation; to purchase or otherwise acquire for the corporation any property rights or privileges which the corporation is authorized to acquire, at such price and on such terms and conditions as the Board may think proper; to sell or otherwise dispose of any property owned by the corporation and not necessary for carrying on the business of the corporation and upon such terms and conditions and for such consideration as the Board may deem proper. The Board may also confer on any officers of the corporation the right to choose, remove or suspend any subordinate officer, agent, or employee. The Directors shall further have the power to fix Directors' fees form time to time in such amounts as the Directors shall deem proper. Section 13. Newly-Created Directorships and Vacancies. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 14. Voting. No member of the Board of Directors shall vote on a question in which he is interested otherwise than as a shareholder, except the election of a President or other officer or employee or be present at the Board while the same is being considered; but if his retirement from the Board in such case reduces the number present below a quorum, the question may nevertheless be decided by those who remain. On any question the names of those voting each way shall be entered on the record of their proceedings if any member at the time requires it. Section 15. Depositories. The Board of Directors shall have the power to designate the bank in which corporate funds and securities shall be deposited. Section 16. Bonds for Officers. The Board of Directors may require any officer of the corporation whose duties involve the handling of its funds, or a part thereof, to furnish proper bond, such bond to be in a penalty to be prescribed by the Board. Section 17. Removal of Directors. Any director may be removed, with or without cause, only by the affirmative vote of the holders of a majority of the outstanding common stock. ARTICLE III OFFICERS Section 1. Executive Officers. The executive officers of the corporation shall be a President, one or more Vice Presidents as the Board of Directors may fix from time to time by proper resolutions, a Secretary and a Treasurer, all of whom shall be chosen by the Board of Directors as provided for in Section 4 of Article II of these bylaws. Any two of the above-named offices, except those of President and Secretary, may be held by the same person, but no officer shall execute an acknowledgement or verify any instrument in more than one capacity, if such instrument is required by law or by these bylaws to be executed, acknowledged, verified or countersigned by two or more officers. The Board may, by resolution, provide for an Assistant Secretary and an Assistant Treasurer, and may also elect or appoint such other officers, agents and employees as the Board may deem proper. Section 2. Powers and Duties. The officers of the corporation shall have such powers and duties as are usually incident to their respective offices, as well as such powers and duties as from time to time shall be assigned to them by the Board of Directors. Section 3. Checks, Notes, Etc. All checks and drafts of the corporation, bank accounts, and all bills of exchange, promissory notes, and all acceptances, obligations and other instruments for the payment of money shall be signed and/or countersigned by such officers as the Board of Directors may designate. Section 4. Corporate Acknowledgments. The corporation may acknowledge any instrument required by law to be acknowledged by its attorney appointed to serve, and such appointment may be embodied in the deed or instrument to be acknowledged, or be made by a separate instrument, or such deed or other instrument may be acknowledged by the President or a Vice President of the corporation without such appointment, or in any manner provided by law. ARTICLE IV CAPITAL STOCK Section 1. Stock Certificates. The certificates of stock of this corporation shall be in such form as shall be approved by the Board of Directors, and shall be signed by the President or a Vice President and countersigned by the Secretary or Assistant Secretary and evidenced by the seal of the corporation. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the corporation properly endorsed. Section 2. Issuing Stock and Fixing Value. The Board of Directors of this corporation may issue the shares of its capital stock from time to time for such considerations as the Board may deem advisable. If the stock is to be issued for consideration other than cash, the Directors shall by resolution state their opinion of the actual value of any consideration other than cash for which such stock is issued. Section 3. Title. Title to a certificate and to the shares represented thereby may be transferred only (a) by delivery of the certificate endorsed, either in blank or to a specific person, by the person appearing by the certificate to be the owner of the shares represented thereby; or (b) by the delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, to be signed by the person appearing by the certificate to be the owner of the shares represented thereby. Such assignment or power of attorney may be either in blank or to a specified person. Section 4. Lost Certificate. A new certificate may be issued in lieu of one lost or destroyed without requiring publication of notice of loss and the cost of said publication applied on a bond of proportionately increased penalty in any case where such procedure is agreed to by said holder of record and deemed adequate by the Board of Directors. A new certificate may also be issued in the discretion of the Board without requiring either the publication of notice of loss or the giving of a bond; and upon such other conditions as may be agreed to by said holder of record and deemed adequate by the Board for the protection of the corporation and its shareholders. ARTICLE V FISCAL YEAR AND CORPORATE SEAL Section 1. Fiscal Year. The fiscal year of the corporation shall begin on the first day of January and shall end on the 31st day of December of each year. Section 2. Corporate Seal. The Board of Directors shall provide a suitable seal containing the name of the corporation, which seal shall be in the charge and custody of the Secretary and Treasurer. ARTICLE VI DIVIDENDS Section 1. Dividends. The Board of Directors may from time to time declare and pay dividends from the surplus or any profits of the corporation, whenever they shall deem it expedient in the exercise of discretion and in conformity with the provisions upon which the capital stock of the corporation has been issued. If any shareholder shall be indebted to the corporation, his dividend, or so much as is necessary thereof, may be applied to the payment of such indebtedness, if then due and payable. Section 2. Working Capital. The Board of Directors may fix a sum which may be set aside or retained over and above the corporation's capital stock paid in as working capital for the corporation, and from time to time as the Board may increase, diminish and vary the same in its absolute judgment and discretion. ARTICLE VII AMENDMENT OF BYLAWS Section 1. Amendment. The Board of Directors shall have the power to make, amend and repeal the bylaws of the corporation at any regular or special meeting by a majority of the votes cast thereat. EX-11 4 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ---- ---- ---- Numerator: Net Income $ 5,234,000 $ 26,291,000 $ 21,281,000 =============== =============== ============== Denominator: Denominator for basic earnings per share -- Weighted average shares outstanding 16,799,000 16,428,000 15,914,000 Effect of dilutive securities: Employee stock options 77,000 42,000 14,000 Contingent stock-acquisition 9,000 4,000 - --------------- --------------- -------------- Dilutive potential common shares 86,000 46,000 14,000 --------------- --------------- -------------- Denominator for diluted earnings per share - Weighted average shares and assumed Conversions 16,885,000 16,474,000 15,928,000 =============== =============== ============== Basic earnings per share $ 0.31 $ 1.60 $ 1.34 =============== =============== ============== Diluted earnings per share $ 0.31 $ 1.60 $ 1.34 =============== =============== ==============
EX-13 5 ANNUAL REPORT Exhibit 13 SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------ TABLE ONE FIVE-YEAR FINANCIAL SUMMARY (in thousands, except per share data)
1998 1997 1996 1995 1994 --------------------------------------------------------------------------------- Summary of Operations Total interest income $196,680 $173,166 $159,708 $145,743 $124,993 Total interest expense 93,337 76,012 68,334 61,180 46,857 Net interest income 103,343 97,154 91,374 84,563 78,136 Provision for loan losses 8,481 4,064 5,012 3,609 3,304 Total other income 72,423 32,613 16,473 11,343 9,106 Total other expenses 155,558 84,899 70,066 61,908 57,277 Income before income taxes 11,727 40,804 32,769 30,389 26,661 Net income 5,234 26,291 21,281 20,200 18,266 Per Share Data Net income (basic) $ 0.31 $ 1.60 $ 1.34 $ 1.26 $ 1.14 Net income (diluted) 0.31 1.60 1.34 1.26 1.14 Cash dividends declared (1) 0.77 .73 .63 .56 .49 Book value per share 13.08 13.13 11.86 11.52 9.66 Selected Average Balances Total loans $1,676,828 $1,427,269 $1,286,868 $1,206,408 $1,056,997 Securities 377,834 409,713 419,974 464,024 516,999 Deposits 1,974,995 1,698,699 1,616,479 1,559,106 1,487,888 Long-term debt 95,926 46,129 24,666 8,204 6,252 Trust preferred 32,452 - - - - securities Stockholders' equity 235,616 204,114 181,923 168,353 158,525 Total assets 2,566,099 2,180,460 2,021,988 1,874,056 1,735,469 Selected Year End Balances Net loans $1,698,319 $1,490,411 $1,315,078 $1,262,243 $1,121,862 Securities 395,722 378,330 412,586 450,570 477,148 Deposits 2,064,415 1,779,805 1,626,666 1,602,996 1,509,424 Long-term debt 102,719 75,502 34,250 20,000 6,875 Trust preferred 87,500 - - - - securities Stockholders' equity 220,059 220,277 188,784 177,522 159,191 Total assets 2,706,004 2,286,424 1,995,878 1,983,871 1,778,391 Selected Ratios Return on average assets 0.20% 1.21% 1.05% 1.08% 1.05% Return on average equity 2.22 12.88 11.70 12.00 11.52 Average equity to 9.18 9.36 9.00 8.98 9.13 average assets Dividend payout ratio (1) 248.39 35.96 34.81 36.47 33.91
(1) Cash dividends and the related payout ratio are based on historical results of the Company and do not include cash dividends of acquired companies prior to the dates of consummation. - ------------------------------------------------------------------------------ On December 31, 1998, the Company's merger with Horizon Bancorp, Inc. (Horizon) became effective. The transaction was accounted for under the pooling-of-interests method of accounting. As such, the Company's historical financial information has been restated to include the operations of Horizon for all periods presented. TWO YEAR SUMMARY OF COMMON STOCK PRICES AND DIVIDENDS Cash Dividends Market Value Per Share* Low High ------------------------------------- 1998 Fourth Quarter $ .20 $30.000 $37.125 Third Quarter .19 34.250 44.875 Second Quarter .19 41.000 48.000 First Quarter .19 41.500 51.000 1997 Fourth Quarter $ .19 $39.875 $42.375 Third Quarter .18 32.250 43.250 Second Quarter .18 30.000 34.500 First Quarter .18 25.750 34.750 City Holding Company's common stock trades on The Nasdaq Stock Market under the symbol CHCO. This table sets forth the cash dividends paid per share and information regarding the market prices per share of the Company's Common Stock for the periods indicated. The price ranges are based on transactions as reported on the The Nasdaq Stock Market. At December 31, 1998, there were 4,762 stockholders of record. See NOTE FOURTEEN of the Audited Consolidated Financial Statements for a discussion of restrictions on bank dividends. *Cash dividends represent amounts declared by the Company and do not include cash dividends of acquired companies prior to the dates of acquisition. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CITY HOLDING COMPANY City Holding Company (the Company), a West Virginia corporation headquartered in Charleston, West Virginia, is a multi-bank holding company that provides diversified financial products and services to consumers and local businesses. Through its network of 63 banking offices in West Virginia, Ohio and California, the Company provides credit, deposit, investment advisory, insurance and technology products and services to its customers. In addition to its branch network, the Company's delivery channels include ATMs, check cards, telemarketing, direct mail solicitation, interactive voice response systems, and Internet technology. Community banking is the core business segment of the Company. Since 1983, the Company has provided traditional banking products and services through its lead bank, City National Bank of West Virginia (City National), and through the various financial institutions the Company has acquired over the years. In conjunction with the evolution of the financial services industry, the Company, in recent years, has diversified its business to offer additional products and services to existing and new customers. Mortgage banking, including the origination, acquisition, servicing and sale of mortgage loans has developed into a significant product line for the Company. Additionally, the Company provides other financial services, including investment advisory, insurance, and internet technology products. When combined, these business lines reflect the diversification of the Company and depth and breadth of the products and services the Company delivers to its customers. MERGERS AND ACQUISITIONS On December 31, 1998, the Company's merger with Horizon Bancorp, Inc. (Horizon) became effective. The merger with Horizon, a $1.0 billion bank holding company headquartered in Beckley, West Virginia, increased total assets by approximately 65% and increased deposit market share such that the Company currently ranks third in West Virginia. The transaction was accounted for under the pooling-of-interests method of accounting. As such, the Company's historical financial information contained in this discussion and analysis and in the consolidated financial statements has been restated to include the operations of Horizon for all periods presented. With the addition of the Horizon banks, the Company significantly strengthens its presence in the Beckley and Huntington markets of West Virginia. Both areas are considered growth locations and the Company expects to capitalize and expand on its existing customer base in those cities. Additionally, the community banking philosophy of Horizon's management was very similar to the Company's management style. With minimal impact from overlapping markets and management's identification of operational efficiencies to be achieved, Horizon was identified as an ideal strategic partner that could significantly enhance the Company's community banking franchise. On April 1, 1998, the Company consummated its acquisition of Del Amo Savings Bank (Del Amo), a federally-chartered savings bank headquartered in Torrance, California. At the date of acquisition, Del Amo reported total assets and deposits of approximately $116 million and $102 million, respectively. This transaction was accounted for under the purchase method of accounting. Accordingly, the operations of Del Amo have been included in the consolidated financial statements from the date of acquisition. This acquisition represented a strong addition to the Company's existing operations in the Southern California area and the Company's continued commitment to grow its community banking operating segment. The other financial services business line also experienced growth during 1998. In April 1998, City National acquired Citynet Corporation and MarCom, Inc. The operations of these entities were consolidated into Citynet, a division of City National. With the addition of these companies, City National is expanding its Internet banking capabilities and introducing new Internet technology products to its customers, including balance inquiry and funds transfer capabilities, loan payment processing, bill payment processing, and web site development. In March 1998, City National increased the size of its insurance brokerage division with the acquisition of Morton Specialty Insurance Partners, Inc. (Morton). Morton was subsequently consolidated into RMI, Ltd., a division of City National, and increased the diversity of insurance products the Company offers. Also within the other financial services business segment, City National acquired Jarrett/Aim Communications (Jarrett/Aim) in January 1998. Jarrett/Aim, a division of City National, conducts printing and direct mail marketing for the Company and third party customers. FINANCIAL SUMMARY Consolidated net income for 1998 was $5.23 million or $0.31 per diluted common share, compared to $26.29 million or $1.60 per diluted common share in 1997. These results include the operating results of Horizon and the $20.28 million charges to pre-tax earnings recorded during the fourth quarter of 1998. Net income for 1996 was $21.28 million or $1.34 per diluted common share. Return on average assets (ROA), a measure of the effectiveness of asset utilization, for 1998, 1997, and 1996 was 0.20%, 1.21%, and 1.05%, respectively. Return on average equity (ROE), a measure of the return on stockholders' investment for 1998, 1997, and 1996 was 2.22%, 12.88%, and 11.70%, respectively. The decline in 1998 net income, ROA, and ROE was due primarily to the one-time costs associated with the merger of Horizon. Merger-related charges of $13.55 million, including fees of $4.8 million for advisory and other professional services, data processing contract termination costs of $1.7 million, and employee severance costs of $3.2 million, were recorded during the fourth quarter of 1998, after the merger of Horizon received necessary shareholder and regulatory approvals. Also included in merger-related charges is $2.5 million associated with the write down of goodwill, determined to be impaired as a result of the merger, related to a branch previously acquired by Horizon. The goodwill was determined to be impaired based on an undiscounted cash flow analysis of the branch and the amount to be written-off was based on the excess of the carrying value over the discounted net future revenue of the branch. In addition to merger-related charges, the Company recorded $2.93 million of additional loan loss provision during the fourth quarter of 1998 as a result of identifying credit quality deterioration within the indirect lending portfolio and other credit quality issues identified in one of the Company's geographic markets. Specifically, during the fourth quarter management identified additional credit quality concerns associated with its indirect automobile lending relationships that resulted in increases to the loan loss provision of approximately $1.51 million. During the fourth quarter, management also quantified certain credit quality exposures within one of its geographic markets that resulted in an additional increase to the loan loss provision of approximately $1.42 million. Also associated with the merger, the Company recorded a $1.80 million charge to earnings related to conforming operating and accounting policies and procedures of the two companies. The Company also recorded a $2.00 million charge to earnings in its mortgage banking segment, in part due to the changing economic environment within the industry. As exit strategies for the Company's junior lien mortgage loans became less profitable during the fourth quarter, the Company initiated an overall restructuring of the retail and wholesale divisions, which includes combining these separate entities into one division, restructuring and diversifying the product lines and developing a comprehensive marketing plan. As more fully discussed in the Other Income and Expense section, total other income increased $39.81 million or 122% during 1998 while total other expenses increased $50.31 million, excluding fourth quarter charges, or 63%. While the other financial services segment represented approximately $4.99 million and $5.44 million of the increases in other income and expense, respectively, the mortgage banking segment represented $29.78 million and $36.05 million of the increases in those respective classifications. The increases in other income and expense reflect the Company's emphasis on diversifying its operations into revenue sources independent of the net interest margin. INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES Average interest-earning assets increased $332.82 million or 16.42% during 1998 from $2.03 billion in 1997 to $2.36 billion in 1998. Of this increase, the acquisition of Del Amo represented approximately $85 million (primarily in the real estate loan classification), increases in the average balance of loans held for sale represented approximately $70 million, and increases in the average balance of retained interests in securitized loan pools represented $24.35 million. The remaining $154 million increase, 7.60% of the 1997 average earning assets balance, reflects the Company's continued growth in its existing operating markets. This in-market growth, primarily in real estate and commercial loan products, is attributable to the Company's community banking philosophy of retaining local autonomy at its banking divisions and emphasis on community-based banking relationships. Of the $332.82 million increase in interest-earning assets, approximately $239 million is attributable to the community banking segment. The acquisition of Del Amo and in-market growth, as described above, represents the majority of this growth. Increases in the average balances of loans held for sale and retained interests in securitized loan pools are derived from the Company's mortgage banking segment. These are the direct result of the Company's investment in and creation of its retail origination and correspondent lending divisions and its loan securitization program during the fourth quarter of 1997. The increase in interest-earning assets resulting from retained interests in securitized loan pools is the result of the Company's four loan securitizations transacted during 1998, which yielded approximately 9.51% during 1998. From 1996 to 1997, average interest-earning assets increased $134.63 million or 7.11%, from $1.89 billion to $2.03 billion. The majority of this increase was due to growth in the community banking segment resulting from a $140.40 million or 10.91% increase in portfolio loans. Of this increase, growth within the commercial and consumer loan classifications represented $63.25 million and $55.84 million, respectively. Commercial loan growth was attributable to the Company's more active solicitation of commercial loan volume, while increases in the consumer loan portfolio were primarily related to certain loan products previously offered by the Horizon-affiliated banks. Average interest-bearing liabilities increased approximately $319.36 million or 18.84% to $2.01 billion in 1998 from $1.69 billion in 1997. Of this increase, the acquisition of Del Amo represented approximately $83 million or 4.90%. Average interest-bearing deposit growth, excluding Del Amo, represented approximately $157.44 million or 9.29% as the Company's banking subsidiaries continued to experience increases in deposit market share within their existing markets. The average balance of long term debt increased approximately $49.80 million during 1998 as the Company took advantage of declines in longer term interest rates, utilizing long term borrowing facilities through the Federal Home Loan Bank that are available to its subsidiary banks. This additional funding was used to finance the growth experienced in the Company's loan portfolio and loans held for sale balances. Although a portion of the increase in long term debt is attributable to the General Corporate operating segment, the majority of the increase in long term debt and increases in the deposit base are associated with the Company's community banking segment. Also during 1998, the Company, through its wholly-owned trust subsidiaries, issued $87.50 million of trust preferred securities, resulting in an average balance for 1998 of $32.45 million. While portions of the proceeds received were used for general corporate purposes, the majority of the proceeds were used to either provide necessary capital to the mortgage banking segment or to repay long term debt that had originally been obtained to provide such capital. Therefore, all of the interest expense associated with the trust preferred securities is considered by management in its evaluation of the profitability of the mortgage banking segment. From 1996 to 1997, interest-bearing liabilities increased approximately $109.50 million or 6.9%. Of this increase, $74.05 million was attributable to increases in core deposits. This increase was primarily associated with, and used to fund, increases in the loan portfolio of the community banking segment. The remaining increase of $35.45 million was attributable to increases in the average balances of short- and long-term borrowings primarily to fund loan growth. - ------------------------------------------------------------------------------ TABLE TWO EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
1998 1997 1996 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------- EARNING ASSETS Loans (1): Commercial and $499,781 $44,745 8.95% $466,704 $42,025 9.00% $403,455 $38,457 9.53% industrial Real estate 805,380 64,285 7.98 623,456 53,242 8.54 602,144 48,155 8.00 Consumer obligations 371,667 38,506 10.36 337,109 34,967 10.37 281,269 31,597 11.23 ------------------------------------------------------------------------------------------------------- Total loans 1,676,828 147,536 8.80 1,427,269 130,234 9.12 1,286,868 118,209 9.19 Loans held for sale 250,968 23,013 9.17 180,543 17,847 9.89 171,308 15,394 8.99 Securities: Taxable 279,086 17,189 6.16 311,560 19,840 6.37 331,184 20,718 6.26 Tax-exempt (2) 98,748 7,623 7.72 98,153 7,811 7.96 88,790 7,160 8.06 ------------------------------------------------------------------------------------------------------- Total securities 377,834 24,812 6.57 409,713 27,651 6.75 419,974 27,878 6.64 Retained interest in 24,346 2,315 9.51 - - - - - - securitized loans Federal funds sold 30,191 1,672 5.54 9,817 489 4.98 14,561 840 5.77 ------------------------------------------------------------------------------------------------------- Total earning assets 2,360,167 199,348 8.45 2,027,342 176,221 8.69 1,892,711 162,321 8.58 Cash and due from banks 58,750 71,311 59,429 Bank premises and 63,991 48,610 44,286 equipment Other assets 101,858 51,467 41,407 Less: allowance for possible (18,667) (18,270) (15,845) loan losses ----------------------------------------------------------------------------------------------------- Total assets $2,566,099 $2,180,460 $2,021,988 ===================================================================================================== INTEREST-BEARING LIABILITIES Demand deposits $299,543 $9,447 3.15% $262,036 $7,782 2.97% $238,240 $6,728 2.82% Savings deposits 411,886 12,026 2.92 393,088 12,075 3.07 430,009 13,609 3.16 Time deposits 987,170 52,959 5.36 803,035 42,949 5.35 715,865 37,325 5.21 Short-term borrowings 187,140 9,677 5.17 190,467 9,945 5.22 176,480 8,984 5.09 Long-term debt 95,926 6,223 6.49 46,129 3,028 6.56 24,666 1,688 6.84 Trust preferred 32,452 3,005 9.26 - - - - - - securities ----------------------------------------------------------------------------------------------------- Total 2,014,117 93,337 4.63 1,694,755 75,779 4.47 1,585,260 68,334 4.31 interest-bearing liabilities Demand deposits 276,396 240,540 232,365 Other liabilities 39,970 41,051 22,440 Stockholders' equity 235,616 204,114 181,923 ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,566,099 $2,180,460 $2,021,988 ===================================================================================================== Net interest income $106,011 $100,442 $93,987 ===================================================================================================== Net yield on earning 4.49% 4.95% 4.97% assets =====================================================================================================
(1)For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2)Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35% in 1998 and 1997 and 34% in 1996. - ------------------------------------------------------------------------------ NET INTEREST INCOME Net interest income is generally most significantly impacted by activities conducted within the community banking operation segment. However, the mortgage banking segment also affected net interest income during 1998 through net interest income earned on loans held for sale, retained interests in securitized loan pools, and the cost of capital utilized by the Company to finance mortgage-banking activities. Although net interest income, on a tax equivalent basis, increased $5.57 million or 5.54% during 1998, the Company experienced an overall decline in its net interest margin of 46 basis points from 4.95% in 1997 to 4.49%. Within the community banking segment, the yield earned on real estate loans declined 59 basis points in 1998 as interest rates on residential real estate loans reached record lows nationwide. Although yields on the commercial and consumer obligation portfolios remained relatively stable, the rate decline in the real estate portfolio resulted in an overall decline of 32 basis points for the total loan portfolio. While the return on the loan portfolio decreased from 9.12% in 1997 to 8.80% in 1998, the average cost of total interest and noninterest-bearing deposits increased 7 basis points from 3.70% in 1997 to 3.77% in 1998. This increase was partially offset by a 5 basis point decline in short-term borrowing interest rates during 1998. Within the mortgage banking segment, the yield earned on loans held for sale declined 72 basis points during 1998 from 9.89% in 1997 to 9.17%. This decline was also due to changes in the residential real estate interest rate environment. Volume increases in loans held for sale resulted in $6.54 million of additional interest income, partially offset by a $1.37 million decline due to interest rate changes. During 1998, the Company earned $2.32 million interest income resulting from its retained interest in its five securitized loan pools, compared to no similar income in 1997. Partially offsetting increases in interest income resulting from mortgage banking activities, the cost of trust preferred securities, used primarily to capitalize mortgage banking operations, represented $3.01 million in interest expense during 1998 with no similar cost in 1997. - ------------------------------------------------------------------------------ TABLE THREE RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)
1998 vs. 1997 1997 vs. 1996 Increase (Decrease) Increase (Decrease) Due to Change In: Due to Change In: Volume Rate Net Volume Rate Net ------------------------------------------------------- INTEREST INCOME FROM Loans: Commercial and industrial $2,963 $ (243) $2,720 $5,790 $(2,222) $3,568 Real estate 14,707 (3,664) 11,043 2,120 2,967 5,087 Consumer obligations 3,580 (41) 3,539 6,126 (2,756) 3,370 ------------------------------------------------------- Total loans 21,250 (3,948) 17,302 14,036 (2,011) 12,025 Loans held for sale 6,537 (1,371) 5,166 859 1,594 2,453 Securities: Taxable (2,016) (635) (2,651) (1,302) 424 (878) Tax-exempt (1) 47 (235) (188) 720 (69) 651 ------------------------------------------------------- Total securities (1,969) (870) (2,839) (582) 355 (227) Federal funds sold 1,122 61 1,183 (262) (89) (351) Retained interest in securitized 2,315 - 2,315 - - - loans ------------------------------------------------------- Total interest-earning assets $29,255 $(6,128) $23,127 $14,051 $ (151) $13,900 ======================================================= INTEREST EXPENSE ON Demand deposits $1,162 $ 503 $1,665 $ 745 $ 309 $1,054 Savings deposits 563 (612) (49) (1,152) (382) (1,534) Time deposits 9,878 132 10,010 4,643 981 5,624 Short-term borrowings (173) (95) (268) 636 325 961 Long-term debt 3,231 (36) 3,195 1,412 (72) 1,340 Trust preferred securities 3,005 - 3,005 - - - ------------------------------------------------------- Total interest-bearing liabilities $17,666 $ (108) $17,558 $6,284 $1,161 $7,445 ======================================================= NET INTEREST INCOME $11,589 $(6,020) $5,569 $7,767 $(1,312) $6,455 =======================================================
(1)Fully federal taxable equivalent using a tax rate of approximately 35% in 1998 and 1997 and 34% in 1996. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. - ------------------------------------------------------------------------------ OTHER INCOME AND EXPENSES Total other income and total other expenses were significantly affected by three separate series of events that occurred during 1998. First, the Company's retail origination of junior lien mortgage loans became fully operational during the first quarter of 1998, after the platforms for the originations were established during the fourth quarter of 1997. The impact of this product line is reflected within the Company's mortgage banking segment. Second, the Company's acquisitions of insurance, direct mail, and internet service providers resulted in increases in other income and expense, which are reflected within the other financial services operating segment. Third, the Company's merger with Horizon resulted in significant charges to earnings, impacting other expenses, which are reflected within the community banking and general corporate operating segments. Within the community banking segment, other income increased approximately $5.50 million or 39.67%, from $13.86 million in 1997 to $19.36 million in 1998. Generally, this increase is associated with the overall volume growth of products offered by the banking divisions and the related fee income generated by these products. Other expenses increased approximately $20.94 million or 34.23% during 1998, from $61.17 million in 1997 to $82.10 million. Fourth quarter charges to earnings of approximately $5.87 million, comprised primarily of a $2.50 million write down in the recorded value of goodwill determined to be impaired, and $1.58 million associated with employee severance costs, represented 28% of the 1998 increase in other expenses within this segment. Increases in occupancy, depreciation, maintenance and data processing represented approximately $3.85 million or 18% of the increase during 1998. Additionally, the acquisition of Del Amo in 1998 further increased total other expenses by approximately $2.47 million or 12% of the 1998 increase. Other income within the mortgage banking segment increased $29.78 million or 169% during 1998, from $17.64 million in 1997 to $47.41 million. Net origination fees on junior lien mortgage loans increased $12.03 million in 1998, representing 40% of the increase. Gains recognized from the sale or securitization of mortgage loans increased approximately $9.85 million, representing 33% of the increase. Additionally, mortgage loan servicing fees increased $7.13 million during 1998, representing 24% of the increase in other income within the mortgage banking segment. Each of these increases was primarily the result of the Company's fourth quarter 1997 investment in its network of retail origination platforms and the corresponding development of exit strategies for junior lien mortgage loans, including third-party loan sales and securitizations. Increases realized from mortgage loan servicing were primarily the result of fees earned from servicing securitized loan pools. Additionally, in September 1998, the servicing division completed the acquisition of the right to service an additional $535 million of junior lien mortgage loans from a third party, which resulted in increased servicing fees recognized during the fourth quarter. Other expenses within the mortgage banking segment also experienced significant increases, from $14.70 million in 1997 to $50.75 million in 1998, an increase of $36.05 million or 245%. Of this increase, approximately $25.04 million is associated with the advertising for and direct mail solicitation of junior lien mortgage loans. Additionally, employee compensation and benefits represented an increase of $3.77 million during the year. Costs associated with the four loan securitizations completed during the year, primarily underwriting and other professional fees, represented $2.80 million of the 1998 increase in other expenses. Finally, the Company also recorded a $2.00 million charge to earnings during the fourth quarter of 1998 involving the restructuring of its retail origination and wholesale acquisition divisions. With the December 1997 acquisition of RMI, Ltd. and the first and second quarter acquisitions of Jarrett/Aim Communications, Morton Specialty Insurance Partners, Inc., Citynet Corporation and MarCom, Inc., the other financial services operating segment was essentially formed during 1998. As a result, after minimal other income and expense in 1996 and 1997, this operating segment realized $11.13 million of other income and $11.50 million of other expense during 1998. Of these amounts, $5.70 million, representing services provided to the banking segments, is eliminated in the Consolidated Statements of Income. The general corporate segment, which generally includes the parent company, recognized an increase in other expenses of approximately $8.23 million or 95% during 1998. This increase was primarily due to merger-related charges associated with the Company's merger of Horizon. Of the increase, $4.61 million was the result of advisory and other professional fees, $1.70 million due to the termination of data processing contracts previously entered into by Horizon, and $1.60 million associated with employee severance costs. From 1996 to 1997, total other income increased $16.14 million or 98%, from $16.47 million in 1996 to $32.61 million in 1997. The majority of this increase, $13.71 million, is attributable to growth within the mortgage banking segment, while $2.13 million is associated with the community banking segment. Within the mortgage banking segment, income derived from mortgage loan servicing increased $8.98 million, from $2.96 million in 1996 to $11.93 million in 1997. Additionally, gains generated from sales of mortgage loans increased $3.13 million in 1997, from $1.26 million in 1996 to $4.39 million in 1997. Other expenses increased $14.83 million or 21% in 1997, from $70.07 million in 1996 to $84.90 million. As with the increase in other income, the increase in other expenses was primarily due to activities within the mortgage banking segment. Within this segment, other expenses increased from $4.64 million in 1996 to $14.70 million in 1997, an increase of $10.07 million or 217%. Of this increase, $6.86 million was associated with costs incurred by the mortgage loan servicing division, primarily attributed to salaries and employee benefits. The remaining $3.21 million of increase in other expenses within the mortgage banking segment was due to costs incurred by the retail origination platforms, established during the fourth quarter of 1997. INCOME TAXES Income tax expense for the year ended December 31, 1998 was $6.49 million, compared to $14.51 million and $11.49 million for the years ended December 31, 1997 and 1996, respectively. The Company's effective tax rates for 1998, 1997, and 1996 were 55.37%, 35.57%, and 35.06%, respectively. The significant increase in the effective tax rate for 1998 was the result of certain non-deductible, merger-related expenses incurred by the Company. Investment banker advisory fees, regulatory filing fees, valuation adjustments related to impaired intangible values, and certain other merger-related charges were non-deductible for income tax purposes, but recognized as expense for financial reporting purposes. MARKET RISK MANAGEMENT Market risk to the Company is the risk of loss arising from changes in current and future cash flows, fair values, earnings, or capital due to adverse movements in interest rates. The Company seeks to reduce interest rate risk through asset and liability management, where the goal is to optimize the balance between earnings and interest rate risk. The Company's asset and liability management function is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. Management measures interest rate risk through an interest sensitivity gap analysis as illustrated in TABLE FOUR and through performing an earnings sensitivity analysis which is further discussed in this section. At December 31, 1998, the one year period shows a negative gap (liability sensitive) of $632 million. This analysis is a "static gap" presentation and movements in deposit rates offered by the Bank lag behind movements in the prime rate. Such time lags affect the repricing frequency of many items on the Company's balance sheet. Accordingly, the sensitivity of deposits to changes in market rates may differ significantly from the related contractual terms. TABLE FOUR is first presented without adjustment for expected repricing behavior. Then, as presented in the "management adjustment" line, these balances have been notionally distributed over the first three periods to reflect those portions of such accounts that are expected to reprice fully with market rates over the respective periods. The distribution of the balances over the repricing periods represents an aggregation of such allocations and is based upon historical experience with individual markets and customers. Management expects to continue the same pricing methodology in response to market rate changes; however, management adjustments may change as customer preferences, competitive market conditions, liquidity, and loan growth change. Also presented in the management adjustment line are loan prepayment assumptions, which may differ from the related contractual terms of the loans. These balances have been distributed over the four periods to reflect those loans that are expected to be repaid in full prior to their maturity date. After management adjustments, TABLE FOUR shows a negative gap in the one-year period of $604 million. Generally, a negative gap position is advantageous when interest rates are falling because interest-bearing liabilities are being repriced at lower rates and in greater volume, which has a positive effect on net interest income. However, when interest rates are rising, this position produces the converse effect. - ------------------------------------------------------------------------------ TABLE FOUR INTEREST RATE SENSITIVITY GAPS (in thousands)
1 TO 3 MO. 3 TO 12 MO. 1 TO 5 YRS. OVER 5 YRS. TOTAL ----------------------------------------------------------- ASSETS Gross loans $393,009 $252,135 $851,285 $219,500 $1,715,929 Loans held for sale 246,287 - - - 246,287 Securities 33,844 111,625 209,211 41,042 395,722 Federal funds sold 31,911 - - - 31,911 Retained interest 65,623 - - - 65,623 ----------------------------------------------------------- Total interest-earning assets 770,674 363,760 1,060,496 260,542 2,455,472 LIABILITIES Savings and NOW accounts 707,208 - - - 707,208 All other interest-bearing 283,928 508,792 260,987 79 1,053,786 deposits Short-term borrowings 176,204 7,214 - - 183,418 Long-term debt 47,719 35,000 5,000 15,000 102,719 Trust preferred securities - - - 87,500 87,500 ----------------------------------------------------------- Total interest-bearing 1,215,059 551,006 265,987 102,579 2,134,631 liabilities ----------------------------------------------------------- Interest sensitivity gap $(444,385) $(187,246) $794,509 $157,963 $320,841 ----------------------------------------------------------- Cumulative sensitivity gap $(444,385) $(631,631) $162,878 $320,841 =========================================================== Management adjustments $ 9,319 $27,957 $17,795 $(55,071) =========================================================== Cumulative management adjusted gap $(435,066) $(603,674) $180,673 $265,770 ===========================================================
The table above includes various assumptions and estimates by management as to maturity and repricing patterns. Future interest margins will be impacted by balances and rates which are subject to change periodically throughout the year. - ------------------------------------------------------------------------------ In addition to the interest rate sensitivity gap analysis, the Company performs an earnings sensitivity analysis to identify the impact of changes in interest rates on its net interest income. Since the simulated gap analysis incorporates management assumptions as noted in the previous gap analysis discussion, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. The Company's policy objective is to avoid negative fluctuations in net interest income of 10% within a twelve-month period. As of December 31, 1998, the Company had the following estimated earnings sensitivity profile: Basis Point Percentage Change Change in in Interest Rates Net Interest Income ------------------------------------ 200 point (9.79)% increase 100 point (1.52) increase 100 point 3.91 decrease 200 point 9.05 decrease The results of the simulation model indicate that an immediate and sustained 200 basis point increase in interest rates would result in a corresponding reduction in net interest income of 9.79% over a twelve-month period, while a 200 basis point decrease in interest rates would result in an increase of 9.05% in net interest income within one year. Similarly, an immediate and sustained 100 basis point increase in interest rates would reduce net interest income by 1.52%, while a 100 basis point decrease in interest rates would result in a 3.91% increase in net interest income over a twelve-month period. Liquidity: The Company manages its liquidity position to provide necessary funding for asset growth and to ensure that the funding needs of its customers can be satisfied promptly. Liquidity management is accomplished by maintaining a significant portion of the Company's investment portfolio classified as available-for-sale, maintaining sufficient borrowing capacity with the Company's lenders and providing consistent growth in the core deposit base of its banking subsidiaries. The Company also utilizes its access to the capital markets as a tool for managing its liquidity position. During 1998, through the issuances of asset-backed and trust preferred securities, the Company successfully utilized the capital markets to diversify its available funding sources. Additionally, the Company has entered into agreements with three investment banking firms to issue over $100 million of the Company's certificates of deposit. The certificates of deposit can be issued in maturities of up to five years at rates equal to a comparable Treasury instrument at the time of issuance plus a market-based spread. The Company is not committed to issuing a pre-determined amount of its certificates of deposit under these agreements, the use of which is at the sole discretion of the Company. At December 31, 1998 and 1997, $22.0 million and $2.0 million, respectively, of certificates of deposit had been sold under these agreements at an average interest rate of 5.36% and 5.70%, respectively. The average term of the issued certificates of deposit was 1.5 years and 2.0 years at December 31, 1998 and 1997, respectively. An additional source of liquidity includes the parent company's $35.0 million revolving loan agreement. At December 31, 1998, $15.0 million was outstanding pursuant to the terms of the agreement. As necessary, the parent company has used funds available from this facility to provide additional capital to its subsidiaries, to finance merger and acquisition activity, and to fund internal growth and expansion. As available, dividends from the Company's subsidiaries have been and will continue to be used to satisfy the cash needs of the parent company. As more fully discussed in NOTE FOURTEEN, during 1999, the subsidiary banks can, without prior regulatory approval, declare dividends of approximately $30.26 million to the parent company, plus net profits earned during the year. The Company's cash and cash equivalents, represented by cash, due from banks, and federal funds sold, are a product of its operating, investing and financing activities as set forth in the Consolidated Statements of Cash Flows included herein. The increase in cash used in the Company's operating activities during 1998 was generally associated with a $31.52 million increase in net fundings of loans held for sale. Additionally, overcollateralization requirements associated with loan securitizations transacted during 1998 represented an additional $33.20 million use of cash during the year. This increase in cash uses is reflected in the increase in other assets within the Consolidated Statements of Cash Flows. Also impacting the increased use of cash in 1998, the change in net income for the year, a decline of $21.06 million as compared to 1997, resulted in less cash provided by operating activities for the Company. Cash used in investing activities increased in 1998 from $75.43 million in 1997 to $162.01 million in 1998, primarily the result of activity within the Company's investment portfolio. To finance increases in the loans held for sale balance, the investment portfolio and other growth experienced during 1998, the Company primarily utilized cash provided by deposit growth and the issuance of trust preferred securities, as set forth in the financing activities section of the Consolidated Statements of Cash Flows. The net increase in deposits in 1998 was $182.04 million, compared to a net increase of $76.47 million during 1997, as the Company continued to experience core deposit growth within the markets of its subsidiary banks. Net increases in short term borrowings and long term debt approximated $32.75 million during 1998, compared to a net increase of $11.69 million during 1997. Additionally, the net proceeds from the issuance of trust preferred securities in 1998 were utilized to finance the overall growth of the Company's consolidated balance sheet during the year, principally within the mortgage banking business segment. INVESTMENTS As illustrated in TABLE FIVE, the Company's investment portfolio is comprised primarily of U.S. Treasury and other U.S. government agency securities. As of December 31, 1998, 1997, and 1996, investments in these securities represented 75%, 79%, and 67% of the total investment securities portfolio. The remaining investments within the portfolio include securities of state and local subdivisions and other debt and equity securities. The Company's investment portfolio is structured to provide flexibility in managing liquidity and interest rate risk, while providing acceptable rates of return. Although the Company reclassified its entire held-to-maturity securities portfolio to the available-for-sale classification in June 1997, Horizon maintained a portion of its investment portfolio in the held-to-maturity category. Such amounts are reflected in the 1998 and 1997 held-to-maturity classification in TABLE FIVE. The Company had $1.4 million in structured notes as of December 31, 1998. All structured notes are federal agency securities that are classified as available for sale. They have a weighted average coupon of 4.43% and a weighted average maturity of 2.7 years. The impact of holding these securities on the results of operations was immaterial for the period ending December 31, 1998. - ------------------------------------------------------------------------------ TABLE FIVE INVESTMENT PORTFOLIO (in thousands)
CARRYING VALUES AS OF DECEMBER 31 1998 1997 1996 ---------------------------------- Securities available-for-sale: U.S. Treasury and other U.S. government corporations $258,095 $258,936 $261,445 and agencies States and political subdivisions 69,002 57,116 32,718 Other 29,562 20,724 34,705 Securities held to maturity: U.S. Treasury and other U.S. government corporations - - 15,416 and agencies States and political subdivisions 39,063 41,554 67,756 Other - - 546 ---------------------------------- Total $395,722 $378,330 $412,586 ==================================
At December 31, 1998, there were no securities of any non-governmental issuers whose aggregate carrying or market value exceeded 10% of stockholders' equity.
MATURING Within After One But After Five But After One Year Within Five Within Ten Ten Years Years Years Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------- U.S. Treasury and other U.S. government $42,460 6.22% $150,460 5.97% $60,710 6.54% $4,465 7.39% corporations and agencies States and political 4,120 7.90 42,558 7.94 43,219 7.79 18,168 7.36 subdivisions Other 22,537 4.43 6,748 6.98 - - 277 7.15 ---------------------------------------------------------------------- Total $69,117 5.73% $199,766 6.42% $103,929 7.06% $22,910 7.36% ======================================================================
Weighted average yields on tax-exempt obligations of states and political subdivisions have been computed on a fully federal tax-equivalent basis using a tax rate of approximately 35%. - ------------------------------------------------------------------------------ LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table: - ------------------------------------------------------------------------------ TABLE SIX (in thousands)
DECEMBER 31 1998 1997 1996 1995 1994 ------------------------------------------------------------ Commercial, financial and $509,214 $464,678 $442,981 $417,828 $343,164 agricultural Real estate-mortgage 842,727 676,828 574,897 537,097 492,490 Installment loans to individuals 363,988 367,095 327,222 337,786 315,225 ------------------------------------------------------------ Total loans $1,715,929 $1,508,601 $1,345,100 $1,292,711 $1,150,879 ============================================================
- ------------------------------------------------------------------------------ The loan portfolio increased 13.74% in 1998, from $1.51 billion at December 31, 1997, to $1.72 billion at December 31, 1998. Of this $207.33 million increase, the acquisition of Del Amo represented $86.98 million or 5.72%. The remaining $120.35 million or 7.98% increase is due to the Company's continued growth in its existing markets. The Company grants portfolio loans to customers generally within the market areas of its subsidiary banks. Although the Company has, in recent years, more actively solicited commercial loan volume, the loan portfolio remains relatively concentrated in residential real estate loans. Approximately 49% of the total portfolio is comprised of residential real estate loans at December 31, 1998, compared to 45% of the total portfolio at December 31, 1997. The increase in the percentage of the total portfolio comprised of real estate loans is due to the acquisition of Del Amo, which is predominantly a lender of mortgage loans. The following table shows the maturity of loans outstanding as of December 31, 1998:
MATURING ------------------------------------------------- Within After One After Total One Year But Within Five Year Five Years -------------------------------------------------- Commercial,financial $298,004 $174,999 $36,211 $509,214 and agricultural Real estate-mortgage 283,561 369,615 189,551 842,727 Installment loans to individuals 66,154 276,677 21,157 363,988 -------------------------------------------------- Total loans $647,719 $821,291 $246,919 $1,715,929 ================================================== Loans maturing after one year with: Fixed interest rates $789,910 Variable interest rates 278,300 ---------- Total $1,068,210 ==========
ALLOWANCE AND PROVISION FOR LOAN LOSSES Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a monthly basis to provide for losses inherent in the portfolio. Through the Company's internal loan review department, management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors. Individual credits are selected throughout the year for detail loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to historical charge-off percentages and general economic conditions. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior charge-off history and general economic conditions, with less emphasis placed on specifically reviewing individual credits, unless circumstances suggest that specific reviews are necessary. In these categories, specific loan reviews would be conducted on higher balance and higher risk loans. In evaluating the adequacy of the allowance, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, seasoning of the portfolio, and general economic conditions. Reserves not specifically allocated to individual credits are generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Determination of such reserves is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between net charge-offs and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio. As of December 31, 1998, management is of the opinion that the consolidated allowance for loan losses is adequate to provide for losses on existing loans within the portfolio. At December 31, 1998, the allowance for loan losses was $17.61 million or 1.03% of total year-end loans compared to $18.19 million or 1.21% and $16.89 million or 1.26% as of December 31, 1997 and 1996, respectively. These numbers reflect the historical trend of both the Company and Horizon as if the companies had been combined. As management has worked aggressively to collect problem credits and restructure its post-merger portfolio, charge-offs have reduced the allowance. The 1998 decrease in the allowance and the related percentages of the allowance to total year-end loans is primarily due to certain charge-offs occurring in the fourth quarter of 1998 related to Horizon's indirect lending portfolio, as more fully discussed below. In addition, the level of charge-off activity throughout 1998 for the installment loan portfolio compared to the previous years has increased due to the additional indirect lending business that Horizon concentrated on in 1998 and 1997. However, indirect lending has not been a significant product line of the Company nor does management expect it to be in the future. As a result, Horizon began to curtail its indirect lending in the fourth quarter of 1998 and, accordingly, increased the number of loans charged-off. Going forward, management anticipates that as a result of the curtailment of the indirect lending business and other restructuring of the portfolio, the allowance will be adequate to absorb any remaining future charge-offs in its portfolio. During 1998, the Company recorded loan charge-offs of approximately $11.47 million and recorded recoveries of $1.62 million resulting in net charge-offs of $9.85 million. This represents an increase of $6.57 million or 200% from 1997 net charge-offs of $3.28 million. Loans charged-off within the installment loan portfolio represented approximately $2.94 million of this increase. Charge-offs related to indirect automobile loans offered by certain Horizon banks, represented approximately $2.4 million of this increase. As part of the restructuring resulting from the merger of Horizon into the Company, participation in indirect automobile lending was significantly reduced during the fourth quarter of 1998. Commercial loan charge-offs represented $2.4 million of the 1998 increase, while real estate loan charge-offs comprised the remaining $1.23 million. The increase in commercial loan charge-offs can primarily be attributed to credit exposure related to three significant credits associated with the former Horizon banks. Included primarily in the real estate charge-offs, and to a lesser extent the commercial and installment portfolios, are charge-offs of $1.20 million associated with the Company's identification of credit quality issues within one of its geographic markets. As these exposures were quantified, management increased the Company's provision for loan losses accordingly. As a result, the provision for loan losses increased $4.42 million or 109% during 1998. As previously indicated, fourth quarter quantification of additional indirect lending portfolio expected losses and management's restructuring of this program resulted in a $1.51 million charge to earnings, recorded through the loan loss provision. Additionally, $1.42 million of additional loan loss provision associated with the Company's quantification of loss exposure within one of its geographic markets was charged to earnings during the fourth quarter. Non-performing loans, consisting of non-accrual, past-due and restructured credits, increased $1.57 million in 1998, of which $1.04 million was included in the non-accrual category. This increase is due, in part, to the second quarter acquisition of Del Amo, which reported $1.33 million of non-accrual loans at December 31, 1998. As a general policy, Del Amo has historically reclassified all loans greater than 90 days past due to non-accrual status and, therefore, has a proportionately larger balance of non-accrual loans, but has no loans past due 90 days and accruing interest. Tables Seven, Eight and Nine detail loan performance and analyze the allowance for loan losses. - ------------------------------------------------------------------------------ TABLE SEVEN ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (in thousands)
DECEMBER 31 1998 1997 1996 1995 1994 ------------------------------------------------- Balance at beginning of year $18,190 $16,888 $15,088 $14,630 $13,510 Charge-offs: Commercial, financial and agricultural (2,385) (906) (1,625) (1,213) (906) Real estate-mortgage (1,375) (252) (323) (367) (351) Installment loans to individuals (7,709) (4,594) (3,063) (2,540) (2,003) ------------------------------------------------- Totals (11,469) (5,752) (5,011) (4,120) (3,260) Recoveries: Commercial, financial and agricultural 297 1,219 794 157 310 Real estate-mortgage 43 149 191 44 49 Installment loans to individuals 1,283 1,103 814 768 717 ------------------------------------------------- Totals 1,623 2,471 1,799 969 1,076 ------------------------------------------------- Net charge-offs (9,846) (3,281) (3,212) (3,151) (2,184) Provision for loan losses 8,481 4,064 5,012 3,609 3,304 Balance of acquired institution 785 519 - - - ------------------------------------------------- Balance at end of year $17,610 $18,190 $16,888 $15,088 $14,630 ================================================= AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs .58% .23% .25% .26% .21% Provision for loan losses .51 .28 .39 .30 .31 AS A PERCENT OF NONPERFORMING AND POTENTIAL PROBLEM LOANS Allowance for loan losses 118.59% 136.97% 142.67% 126.94% 143.83% - ------------------------------------------------------------------------------------------
TABLE EIGHT NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS (in thousands)
DECEMBER 31 1998 1997 1996 1995 1994 ------------------------------------------------- Nonaccrual loans $8,844 $7,801 $5,200 $7,081 $6,087 Accruing loans past due 90 days or more 5,126 5,149 6,402 4,664 3,823 Restructured loans 879 331 235 141 262 ------------------------------------------------- $14,849 $13,281 $11,837 $11,886 $10,172 =================================================
During 1998, the Company recognized approximately $527,000 of interest income received in cash on nonaccrual and restructured loans. Approximately $1.04 million of interest income would have been recognized during the year if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on nonaccrual, restructured, or other potential problem loans at December 31, 1998. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest unless the loan is well collateralized and in the process of collection. When interest accruals are discontinued, interest credited to income in the current year that is unpaid and deemed uncollectible is charged to operations. Prior year interest accruals that are unpaid and deemed uncollectible are charged to the allowance for loan losses, provided that such amounts were specifically reserved. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ TABLE NINE ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (in thousands)
DECEMBER 31 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------------- Percent Percent Percent Percent Percent of of of of of Loans Loans Loans Loans Loans in Each in Each in Each in Each in Each Category Category Category Category Category to to to to to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------------------------------------------------------------------------------------ Commercial, financial and $6,270 29% $7,284 31% $6,549 33% $5,931 32% $5,151 30% agricultural Real estate-mortgage 6,227 49 5,575 45 5,604 43 4,930 42 4,867 43 Installment loans to 5,113 22 5,331 24 4,735 24 4,227 26 4,612 27 individuals ------------------------------------------------------------------------------------ $17,610 100% $18,190 100% $16,888 100% $15,088 100% $14,630 100% ====================================================================================
The portion of the allowance for loan losses that is not specifically allocated to individual credits has been apportioned among the separate loan portfolios based on the risk of each portfolio. - ------------------------------------------------------------------------------ LOANS HELD FOR SALE Loans held for sale represent mortgage loans the Company has either purchased or originated with the intent to sell or securitize and includes traditional fixed-rate and junior lien mortgage loans. Certain traditional fixed-rate mortgages are originated by the Company, with the intent to sell, servicing released, in the secondary market. This product line enables the Company to provide conventional, fixed-rate mortgage products to its customers, but minimize the interest-rate risk associated with fixed-rate loans. At December 31, 1998, conventional mortgage loans represented $45 million or 18.2% of the reported balance of loans held for sale. Through the Company's correspondent lending division and four separate loan origination platforms, the Company purchases and originates junior lien and similar mortgage loans for sale or securitization. Generally, these loans are used by the borrower to finance property improvements or to consolidate personal debt. The correspondent lending division acquires loans either on a flow or bulk basis from an approved network of unaffiliated lenders. Additionally, through its retail origination divisions, located in West Virginia, California and Texas, the Company solicits loans directly from borrowers on a nationwide basis. These loans are generally expected to either be sold or securitized within 90 to 180 days. From 1994 through the first quarter of 1998, the Company participated in a whole loan purchasing program whereby the Company purchased HUD Title I home improvement and other junior lien mortgage loans. In May 1998, the Company terminated its participation in this program. Although these loans are generally obtained from borrowers outside of the Company's community banking market areas, management believes that the geographic diversification of the loan pool reduces the risks associated with downturns in specific local economies. Because the retail and correspondent lending divisions originate and acquire these loans on a nationwide basis, the Company's risk related to geographic concentration is significantly reduced. At December 31, 1998, 11.89% of the loans held for sale were to borrowers located in California and no other state had a concentration of loans greater than 6.50%. In addition to concentration risk, as discussed above, there are other risks associated with the junior lien mortgage pool. Such risks include credit risk related to the quality of the underlying loan and the borrower's financial capability to repay the loan, market risk related to the continued attractiveness of the loan product to both borrowers and end-investors, and interest rate risk related to potential changes in interest rates and the resulting repricing of both financial assets and liabilities. The Company manages this risk by continuously improving policies and procedures designed to reduce the risk of loss to a level commensurate with the return being earned on the Company's investment in this program. The Company has established formal underwriting guidelines and quality control procedures which emphasize the creditworthiness of the borrower, with less focus placed on the value of the underlying collateral. Factors such as credit scores, debt-to-income ratios, mortgage credit history and others are factored into the lending decision for these loans. Additionally, property appraisals, in varying degrees, are required for certain loans. Other risk-reducing factors include the correspondent lending division's pre-approved list of lenders from whom loans may be acquired. Approval of lenders is based on due diligence procedures performed on each lender and continued evaluation of the performance of loans purchased from each lender. During 1998, the Company originated $696 million and purchased $755 million in loans held for sale and sold $1.36 billion during the same period. This compares to originations of $97 million, purchases of $798 million, and sales of $851 million during 1997. LOAN SECURITIZATIONS One of the methods utilized by management to mitigate the risk of loss related to the origination and acquisition of junior lien mortgage loans is the securitization of these loans. By securitizing originated and purchased junior lien mortgage loans, the Company effectively removes these loans from its balance sheet by creating an investment security or securities, supported by the cash flows generated by these loans, and selling the resulting investment security or securities to independent third parties. As part of this process, the Company provides credit enhancement, in the form of overcollateralization, with respect to the investment security created. As a result, the Company does maintain a certain level of credit, prepayment and interest rate risk related to these loans. The risk maintained by the Company, however, is less than that which would be maintained had the Company held these loans on its balance sheet until the loans matured. In return for this risk exposure, the Company receives on-going income from each securitization that is determined as a function of the "excess spread" derived from the securitized loans. The "excess spread", generally, is calculated as the difference between (A) the interest at the stated rate paid by borrowers and (B) the sum of pass-through interest paid to third-party investors and various fees, including trustee, insurance, servicing, and other similar costs. The "excess spread" represents income to be recognized by the Company over the life of the securitized loan pool. During 1998, the Company completed four securitizations of junior lien mortgage loans with total loan balances approximating $463.13 million. This compares to one securitization of approximately $35 million of loans completed in December 1997. As of December 31, 1998 and 1997, the Company reported retained interests in these securitized loan pools of approximately $65.62 million and $4.36 million, respectively, including accrued interest. Assumptions used to estimate the retained interest include default rates approximating 10% cumulative losses, prepayment rates of 17-21% CPR, and a weighted-average discount rate of 12.23%. Management monitors the actual default and prepayment rates of each securitized pool on a monthly basis, in addition to the outstanding pool balance, to ensure the rates used to estimate the retained interest are still reasonable. Each of the securitized pools is serviced by the Company's mortgage loan servicing division. LOAN SERVICING City Mortgage Services, a division of City National Bank, was ranked as the seventh largest servicer of non-conforming loans in the country, according to a recently released national industry publication. This division has grown from a de-novo operation in 1996 to a servicing portfolio of $1.98 billion and approximately 81,000 accounts at December 31, 1998. Of the $1.98 billion servicing portfolio, $1.77 billion of loans are serviced for others at December 31, 1998, compared to $1.25 billion at December 31, 1997. Loans serviced for others are not included in the Consolidated Balance Sheets of the Company. The servicing division, with operations in West Virginia, California, and Texas, specializes in servicing sub-prime and other non-conforming loans, home improvement and home equity loans and similar products. The Company has recorded mortgage loan servicing rights of $8.87 million and $2.46 million in Other Assets at December 31, 1998 and 1997, respectively, associated with the right to service mortgage loans for others. The recorded value of mortgage servicing rights is assessed quarterly to determine if the value of those rights has become impaired during the period. In doing so, management estimates the present value of future net cash flows to be derived from its servicing activities. Factors included in the impairment analysis include anticipated servicing income, costs associated with servicing the portfolio, discount rates, and loan prepayment and default rates. As of December 31, 1998, management has determined, based on this analysis, that the recorded value of its servicing rights is fairly stated and there is no impairment in that value. CERTIFICATES OF DEPOSIT Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1998, are summarized as follows: - -------------------------------------------------------------------------------- TABLE TEN (in thousands) Amounts Percentage ---------------------------- Three months or less $48,155 23% Over three months through six months 38,581 18 Over six months through twelve months 69,429 33 Over twelve months 56,373 26 ---------------------------- Total $212,538 100% ============================ - -------------------------------------------------------------------------------- CAPITAL RESOURCES - ------------------------------------------------------------------------------ During 1998, the Company's consolidated stockholders' equity decreased 0.10% from $220.28 million at December 31, 1997 to $220.06 million at December 31, 1998. This decrease was largely due to the impact of the Company's merger of Horizon Bancorp. After fourth quarter charges to earnings, the Company reported $5.23 million net income for 1998. However, prior to the merger, both companies paid approximately $12.17 million in cash dividends to their respective shareholders. Additionally, the Company experienced a $2.75 million decline in Other Comprehensive Income, primarily the result of declines in the fair market value of the Company's available-for-sale securities portfolio. During 1998, the Company repurchased approximately 111,000 shares of its outstanding common stock at an average price of $43.24 per share, while Horizon, prior to the merger, repurchased approximately 71,000 shares of its common stock. Together, treasury stock transactions resulted in an additional $6.99 million reduction in stockholders' equity. Combined, the net effect of net income less dividends paid, declines in Other Comprehensive Income and treasury stock acquisitions resulted in a net decrease to consolidated equity of approximately $16.67 million. This net decline was partially offset by a $15.77 million increase to equity resulting from the Company's acquisitions of Del Amo, Jarrett/Aim Communications, Morton Specialty Insurance Partners, Citynet Corporation, and MarCom, Inc. Each of these transactions, accounted for under the purchase accounting method, involved the issuance of the Company's common stock and, therefore, resulted in increases to consolidated equity. Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8 percent, with at least one-half of capital consisting of tangible common stockholders' equity and a minimum Tier I leverage ratio of 4 percent. At December 31, 1998, the Company's total capital to risk-adjusted assets ratio was 12.00% and its Tier I capital ratio was 10.60%, compared to 12.82% and 11.84%, respectively, at December 31, 1997. The Company's leverage ratio at December 31, 1998 and 1997 was 9.99% and 8.73%, respectively. Similarly, the Company's banking subsidiaries are also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, the banking subsidiaries are required to maintain minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and 4.00%, respectively. To be classified as "well capitalized," the banking subsidiaries must maintain total capital, Tier I capital, and leverage ratios of 10.00%, 6.00%, and 5.00%, respectively. As of December 31, 1998, the Company's lead bank, City National, reported total capital, Tier I capital, and leverage ratios of 10.70%, 10.10%, and 8.90%, respectively. As of December 31, 1998, the Company and each of its banking subsidiaries satisfied capital requirements as established by regulatory authorities to be categorized as well capitalized. During 1998, the Company created two separate special-purpose statutory trust subsidiaries which sold trust preferred securities generating gross proceeds of $87.50 million. Pursuant to rulings released in 1996 by the Federal Reserve Board, the Company's primary regulatory authority, the Company has included the trust preferred securities in its regulatory capital ratio computations. At December 31, 1998, $72.02 million of trust preferred securities are included in the Company's Tier I capital, with the remaining $15.48 million added to the Company's total regulatory capital. Proceeds from the issuance of the trust preferred securities were used for general corporate purposes, including, but not limited to, repayment of long-term debt and financing activities within the mortgage banking business segment. Continued improvement in operating results, effective management of risks affecting the Company, and a focus on high asset quality have been, and will remain, the key elements in maintaining the Company's present capital position. Earnings from bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, the subsidiary banks have the capability to upstream sufficient dividends to meet the anticipated cash requirements of the Company. IMPACT OF THE YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Based on management's assessment of this issue, the Company determined that it would be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with the modifications that were implemented to existing software and conversions to new hardware, the Year 2000 issue will not pose significant operational problems. The Company's plan to resolve the Year 2000 issue is sponsored and closely monitored by both senior and executive level management. The Federal Financial Institutions Examination Council recommended that all systems reprogramming efforts be completed by December 31, 1998 to allow for sufficient testing and implementation. Management is of the opinion that the Company has complied with this recommendation. Plan components have been executed in accordance with guidelines that were mandated by the Office of the Comptroller of the Currency. The Company's approach to Year 2000 compliance involves five industry standard phases: 1.Awareness Phase 2.Assessment Phase 3.Renovation Phase 4.Validation Phase 5.Implementation Phase Each of these phases has been fully completed. A sixth phase, "post implementation" was also adopted by the Company and is currently on-going and involves further testing of systems, vendor and supplier monitoring, and contingency plan assessments. The Company has developed a contingency plan for certain critical applications. This plan includes the development of crisis management procedures, manual back-up options, and the adjustment of staffing strategies. The Company has historically updated systems, replaced software and hardware, and made other systematic investments in technology on a regular basis. As a result, the Company's costs associated with Year 2000 remediation efforts have not been significant. Where necessary, the Company has utilized both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications, and will continue to do so. However, due to the Company's technology plan of hardware, software, and systems maintenance, the sum of the costs incurred to-date and the estimated costs remaining to be incurred is not material to the consolidated financial statements. Based on the results, to date, of implementing the Company's strategic plan, management believes that the risks affecting the Company associated with the Year 2000 issue should be minimal. Accordingly, management does not believe that the Year 2000 presents a material exposure as it relates to the Company's products and services. In addition, the Company has gathered information about the Year 2000 compliance status of its significant vendors, suppliers, and customers and continues to monitor their compliance. To date, the Company's management is not aware of any such party with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that such parties will be Year 2000 ready. The inability of such parties to complete their Year 2000 remediation process in a timely manner could materially impact the Company. The effect of non-compliance by such parties is not determinable. The Company's recent merger of Horizon does not significantly impact the Company's Year 2000 readiness. The Company has historically converted each of its acquired financial institutions to its internal data processing environment. With the merger of Horizon, all significant data processing systems would have been converted to the Company's operating systems, regardless of the Year 2000 issue. Therefore, Year 2000 readiness has not necessarily accelerated the Company's replacement of equipment and systems within the Horizon banks. All significant applications of the Horizon banks are expected to be fully converted by June 30, 1999. Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner and in accordance with the guidelines set forth by its regulatory authorities. As noted above, the Company is in its final post-implementation phase of further testing. If final testing identifies previously unknown Year 2000 exposures and those exposures cannot be timely addressed, the Company could experience significant difficulties in processing daily operating activities. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, or failure to properly date business records. The amount of potential liability and lost income cannot be reasonably estimated at this time. INFLATION Since the assets and liabilities of the Bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of banks is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. Non-financial assets, such as premises and equipment, comprise a relatively small percentage of the Company's total assets. Therefore, inflation is less a factor to the Company than it may be for non-financial entities. However, as the rate of inflation increases, there generally could be a negative impact to the Company, such as increases in operating costs. As operating costs rise, product repricing and effective management of the Company's interest rate environment are used to manage the impact of rising costs. FORWARD-LOOKING STATEMENTS Information included in the Annual Report includes forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company's actual results achieved being materially different from those projected in the forward-looking information. The risks and uncertainties that could cause a material difference include, but are not limited to, those associated with the interest rate and general economic environment, federal and state banking regulations, competition within each of the Company's operating segments, remediation of Year 2000 issues, the successful integration of the Horizon banks into the operations of the Company, and other areas. The forward-looking information is provided to assist investors and Company stockholders in understanding anticipated future financial operations of the Company and are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company disclaims any intent or obligation to update this forward-looking information. REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders City Holding Company We have audited the accompanying consolidated balance sheets of City Holding Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of City Holding Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Charleston, West Virginia February 5, 1999 CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES
DECEMBER 31 1998 1997 ----------------------------- (in thousands) ASSETS Cash and due from banks $ 87,866 $ 78,469 Federal funds sold 31,911 54,063 ----------------------------- Cash and cash equivalents 119,777 132,532 Securities available for sale, at fair value 356,659 336,776 Securities held-to-maturity (approximate fair value at December 31, 1998 and 1997 - $40,539 and $42,771) 39,063 41,554 Loans: Gross loans 1,715,929 1,508,601 Allowance for possible loan losses (17,610) (18,190) ----------------------------- NET LOANS 1,698,319 1,490,411 Loans held for sale 246,287 134,990 Premises and equipment 71,094 53,758 Accrued interest receivable 21,660 17,553 Other assets 153,145 78,850 ----------------------------- TOTAL ASSETS $2,706,004 $2,286,424 ============================= LIABILITIES Deposits: Noninterest-bearing $ 303,421 $ 250,257 Interest-bearing 1,760,994 1,529,548 ----------------------------- TOTAL DEPOSITS 2,064,415 1,779,805 Short-term borrowings 183,418 172,833 Long-term debt 102,719 75,502 Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely 87,500 - subordinated debentures of City Holding Company Other liabilities 47,893 38,007 ----------------------------- TOTAL LIABILITIES 2,485,945 2,066,147 STOCKHOLDERS' EQUITY Preferred stock, par value $25 per share: authorized - 500,000 shares: none issued Common stock, par value $2.50 per share: authorized - 50,000,000 shares; issued and outstanding: 1998 - 16,820,276 shares; 1997 - 16,770,400 42,051 41,926 shares including 10,000 and 11,236 shares in treasury at December 3l, 1998 and 1997 Capital surplus 58,365 52,004 Retained earnings 120,209 127,142 Cost of common stock in treasury (274) (3,248) Accumulated other comprehensive income (292) 2,453 ----------------------------- TOTAL STOCKHOLDERS' EQUITY 220,059 220,277 ----------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,706,004 $2,286,424 =============================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME CITY HOLDING COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1998 1997 1996 --------------------------------------- (in thousands, except per share data) lNTEREST INCOME Interest and fees on loans $170,549 $147,760 $133,465 Interest on investment securities: Taxable 17,189 19,840 20,718 Tax-exempt 4,955 5,077 4,685 Other interest income 3,987 489 840 --------------------------------------- TOTAL INTEREST INCOME 196,680 173,166 159,708 INTEREST EXPENSE Interest on deposits 74,432 63,086 57,662 Interest on short-term borrowings 9,677 9,898 8,984 Interest on long-term debt 9,228 3,028 1,688 --------------------------------------- TOTAL INTEREST EXPENSE 93,337 76,012 68,334 --------------------------------------- NET INTEREST INCOME 103,343 97,154 91,374 Provision for loan losses 8,481 4,064 5,012 --------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR 94,862 93,090 86,362 LOAN LOSSES OTHER INCOME Investment securities gains 7 8 8 Service charges 9,738 8,245 7,132 Mortgage loan servicing fees 19,058 11,933 2,958 Net origination fees on junior-lien mortgages 14,489 2,458 517 Gain on sale of loans 14,238 4,392 1,260 Other income 14,893 5,577 4,598 --------------------------------------- TOTAL OTHER INCOME 72,423 32,613 16,473 OTHER EXPENSES Salaries and employee benefits 56,653 41,592 34,471 Occupancy, excluding depreciation 14,016 6,350 4,835 Depreciation 10,313 6,597 4,991 Advertising 27,827 4,935 1,499 Other expenses 46,749 25,425 24,270 --------------------------------------- TOTAL OTHER EXPENSES 155,558 84,899 70,066 --------------------------------------- INCOME BEFORE INCOME TAXES 11,727 40,804 32,769 INCOME TAXES 6,493 14,513 11,488 --------------------------------------- NET INCOME $ 5,234 $26,291 $21,281 --------------------------------------- Basic earnings per common share $ 0.31 $ 1.60 $ 1.34 --------------------------------------- Diluted earnings per common share $ 0.31 $ 1.60 $ 1.34 --------------------------------------- Average common shares outstanding: Basic 16,799 16,428 15,914 --------------------------------------- Diluted 16,885 16,474 15,928 ---------------------------------------
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES
Accumulated Common Other Total Stock Capital Retained Comprehensive Treasury Stockholders' (Par Surplus Earnings Income Stock Equity Value) ----------------------------------------------------------------------------------------- (in thousands) Balances at December 31, 1995 $38,580 $29,143 $108,370 $1,964 $(535) $177,522 Comprehensive income: Net income - - 21,281 - - 21,281 Other comprehensive income, net of deferred income taxes of $(805): Unrealized loss on securities of $1,321, net of reclassification - - - (1,316) - (1,316) adjustment for gains included in ---------- net income of $5 19,965 Total comprehensive income Exercise of stock options 3 17 - - - 20 Cash dividends declared: City ($.63 a share) - - (3,540) - - (3,540) Horizon - - (5,213) - - (5,213) Sale of 2,299 shares of treasury stock - (2) - - 60 58 Redempton of fractional shares - (28) - - - (28) Issuance of 10% stock dividend 1,268 9,508 (10,776) - - - ------------------------------------------------------------------------------------------ Balances at December 31, 1996 39,851 38,638 110,122 648 (475) 188,784 Comprehensive income: Net income - - 26,291 - - 26,291 Other comprehensive income, net of deferred income taxes of $1,138: Unrealized gain on securities of $1,791, net of reclassification - - - 1,786 - 1,786 adjustment for gains included in net income of $5 -------- 28,077 Total comprehensive income Cash dividends declared: City ($.73 a share) - - (4,486) - - (4,486) Horizon - - (6,935) - - (6,935) Exercise of 2,629 stock options 13 81 - - - 94 Sale of 2,511 shares of treasury stock - 13 - - 67 80 Purchase of 2,300 shares of treasury - - - - (77) (77) stock Purchase of shares of treasury stock by - - - - (2,763) (2,763) Horizon Common stock issued in acquisitions 860 12,974 - - - 13,834 Issuance of stock for Old National 1,202 298 2,150 19 - 3,669 --------------------------------------------------------------------------------------- Balances at December 31, 1997 41,926 52,004 127,142 2,453 (3,248) 220,277 Comprehensive income: Net income - - 5,234 - - 5,234 Other comprehensive income, net of deferred income taxes of $(1,998): Unrealized loss on securities of $2,749, net of reclassification - - - (2,745) - (2,745) adjustment for gains included in ------- net income of $4 2,489 Total comprehensive income Cash dividends declared: City ($.77 a share) - - (5,105) - - (5,105) Horizon - - (7,062) - - (7,062) Exercise of 36,768 stock options 82 422 - - 171 675 Purchase of 111,018 shares of treasury - - - - (4,873) (4,873) stock Purchase of shares of treasury stock by - - - - (2,114) (2,114) Horizon Common stock issued in acquisitions 807 14,965 - - - 15,772 Retirement of 108,396 shares of common (271) (4,396) - - 4,667 - stock held in treasury Retirement of shares of common stock (493) (4,630) - - 5,123 - held in treasury by Horizon ------------------------------------------------------------------------------------- Balances at December 31, 1998 $42,051 $58,365 $120,209 $(292) $(274) $220,059 =====================================================================================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------- (in thousands) OPERATING ACTIVITIES Net income $ 5,234 $26,291 $ 21,281 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Net amortization 2,647 1,776 1,561 Provision for depreciation 10,313 6,599 4,990 Provision for possible loan losses 8,481 4,064 5,012 Deferred income tax benefit (3,011) (909) (1,412) Loans originated for sale (695,576) (97,465) (118,287) Purchases of loans held for sale (754,703) (797,537) (1,029,098) Proceeds from loans sold 1,364,657 850,742 1,178,395 Realized gains on loans sold (14,238) (4,392) (1,260) Realized investment securities gains (7) (8) (8) (Increase) decrease in accrued interest (3,515) (1,763) 657 receivable Increase in other assets (58,030) (31,925) (2,545) Increase in other liabilities 6,547 9,193 6,868 --------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING (131,201) (35,334) 66,154 ACTIVITIES INVESTING ACTIVITIES Proceeds from maturities and calls of investment 3,390 4,565 154,066 securities Purchases of investment securities (898) - (137,824) Proceeds from sales of securities available for sale 33,930 87,139 58,772 Proceeds from maturities and calls of securities 146,140 79,912 87,799 available for sale Purchases of securities available for sale (201,487) (102,523) (127,151) Net increase in loans (119,225) (128,169) (57,847) Net cash acquired (paid) in acquisitions 2,584 (4,516) - Purchases of premises and equipment (26,446) (11,840) (15,686) --------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (162,012) (75,432) (37,871) FINANCING ACTIVITIES Net increase (decrease) in noninterest-bearing 52,960 (3,262) 5,287 deposits Net increase in interest-bearing deposits 129,083 79,733 23,201 Net increase (decrease) in short-term borrowings 10,529 52,940 (44,043) Proceeds from long-term debt 87,917 41,252 14,250 Repayment of long-term debt (65,700) - - Net proceeds from issuance of trust preferred 84,148 - - securities Purchases of treasury stock (6,987) (2,840) - Proceeds from sales of treasury stock - 80 58 Redemption of dissenter and fractional shares - - (22) Exercise of stock options 675 94 14 Cash dividends paid (12,167) (11,421) (8,753) --------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING 280,458 156,576 (10,008) ACTIVITIES --------------------------------------- (DECREASE) INCREASE IN CASH AND CASH (12,755) 45,810 18,275 EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 132,532 86,722 68,447 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $119,777 $132,532 $ 86,722 =======================================
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CITY HOLDING COMPANY AND SUBSIDIARIES - ------------------------------------------------------------------------------ NOTE ONE SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - ------------------------------------------------------------------------------ Summary of Significant Accounting and Reporting Policies: The accounting and reporting policies of City Holding Company and its subsidiaries (the Company) conform with generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. Actual results could differ from management's estimates. The following is a summary of the more significant policies. Principles of Consolidation: The consolidated financial statements include the accounts of City Holding Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Description of Principal Markets and Services: The Company is a multi-bank holding company headquartered in Charleston, West Virginia. The Company's banking subsidiaries are retail and consumer oriented community banks with offices in West Virginia, Ohio, and California. The nonbanking subsidiaries of the Company are comprised of a full service securities brokerage and investment advisory company headquartered in Charleston, two separate special-purpose statutory trusts created to issue trust preferred securities and an inactive mortgage banking company. Cash and Due from Banks: The Company considers cash and due from banks and federal funds sold as cash and cash equivalents. Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities to maturity, they are classified as investment securities and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale along with the Company's investment in equity securities. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. Securities classified as available for sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. The specific identification method is used to determine the cost basis of securities sold. Loans: Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods which generally result in level rates of return. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in process of collection. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Loans Held for Sale: Loans held for sale represent mortgage loans the Company has either purchased or originated with the intent to sell or securitize in the secondary market and are carried at the lower of aggregate cost or estimated fair value. Mortgage Servicing Rights: The value of mortgage servicing rights, regardless of how obtained, are capitalized and amortized in proportion to and over the period of estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. To determine fair value, the Company estimates the present value of future cash flows incorporating various assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. For purposes of measuring impairment, the mortgage servicing rights are stratified based upon predominant risk characteristics of the underlying loans. Retained Interest: The Company retains a financial interest in its securitized loan sales. This retained interest is generally comprised of two components: excess spread receivable and overcollateralization. Excess spread receivable represents the present value of the excess cash flows generated by the securitized loans. The excess cash flows generally represent the difference between interest at the stated rate paid by borrowers and the sum of (A) pass-through interest paid to third-party investors and (B) on-going securitization expenses, including servicing, insurance, and trustee costs. The Company determines the present value of the excess cash flows at the time each securitization closes, based on valuation assumptions, including default rates, prepayment rates, and discount rates. Additionally, the Company provides credit enhancement with respect to the securities issued, in the form of overcollateralization. The initial overcollateralization will generally be required to increase to a pre-determined amount, at which time the excess cash flows discussed above will be released, monthly, to the Company. The initial overcollateralization amount will reach the required overcollateralization level through the application of monthly excess cash to accelerate payment of the note(s). Generally, the required overcollateralization amount will decrease or increase, subject to pre-established requirements based on the performance of the collateral loans. The Company determines the present value of cash flows to be received by the Company related to the overcollateralization feature at the time each securitization closes, based on the same assumptions previously discussed for the excess spread component. The retained interest is accounted for similar to an available-for-sale security, and as such, the recorded value is adjusted, quarterly, to its estimated fair value with the related increase or decrease in fair value recorded as a separate component of stockholders' equity, net of tax. If the decrease in fair value is determined to be permanent, the impairment is charged to operations. Because the retained interest is uncertificated, the Company has included the recorded value of the retained interest in Other Assets in the consolidated balance sheet. Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based upon management's evaluation of individual credits in the loan portfolio, historical loan loss experience, current and expected future economic conditions, and other relevant factors. This determination is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Generally, estimated useful lives of premises and furniture, fixtures, and equipment do not exceed 30 and 7 years, respectively. Intangibles: Intangible assets, not including mortgage servicing rights, are comprised of goodwill and core deposits and are included in other assets in the consolidated balance sheets. Goodwill is being amortized on a straight-line basis over a 10 to 15 year period and core deposits are being amortized using accelerated methods over 10 year estimated useful lives. The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as indicated based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows discounted over the remaining amortization period. Advertising: Advertising costs are expensed as incurred. Income Taxes: The consolidated provision for income taxes is based upon reported income and expense. Deferred income taxes (included in other assets) are provided for temporary differences between financial reporting and tax bases of assets and liabilities. The Company files a consolidated income tax return. The respective subsidiaries generally provide for income taxes on a separate return basis and remit amounts determined to be currently payable to the Parent Company. Stock-Based Compensation: In accordance with Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock options. Because the exercise price of the Company's employee stock options granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Basic and Diluted Earnings per Common Share: The Company adopted the provisions of FASB Statement No. 128, Earnings per Share, effective December 31, 1997. Under Statement No. 128, basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding, while diluted earnings per share is computed by dividing net income by the weighted-average number of shares outstanding increased by the number of shares of common stock which would be issued assuming the exercise of stock options and other immaterial common stock equivalents. The incremental shares related to the options were 77,000, 42,000, and 14,000 in 1998, 1997, and 1996 while other common stock equivalents were 9,000 and 4,000 in 1998 and 1997. The impact of this change was not significant and all per share amounts for all periods have been presented to conform to Statement No. 128 requirements. Segment Reporting: Effective January 1, 1998, the Company adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131 establishes standards for reporting information concerning the Company's operating segments. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Company, but did result in additional financial statement disclosures (see NOTE TWENTY-THREE). New Accounting Pronouncements: Certain provisions of FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, relating to repurchase agreements, securities lending and other similar transactions, and pledged collateral, were deferred for one year by FASB No. 127 and were adopted prospectively as of January 1, 1998. FASB No. 125, established new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing and also established new accounting requirements for pledged collateral. The adoption of these provisions did not have a material impact on financial position or results of operations. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity and bypass net income. The Company adopted the provisions of this statement in 1998. These disclosure requirements had no impact on financial position or results of operations. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet and allows hedge accounting when specific criteria are met. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000. The impact of adopting the provisions of this statement on the Company's financial position or results of operations subsequent to the effective date is not currently estimable and will depend on the financial position of the Company and the nature and purpose of the derivative instruments in use by management at that time. Statements of Cash Flows: Cash paid for interest, including long-term debt, was $90.3 million, $74.9 million, and $68.7 million in 1998, 1997, and 1996, respectively. Cash paid for income taxes was $14.0 million, $15.0 million and $12.2 million in 1998, 1997, and 1996, respectively. Reclassifications: Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. Such reclassifications had no impact on net income or stockholders' equity. - ------------------------------------------------------------------------------ NOTE TWO RESTRICTIONS ON CASH AND DUE FROM BANKS - ------------------------------------------------------------------------------ Certain subsidiary banks are required to maintain an average reserve balance with the Federal Reserve Bank. The average amount of the balance for the year ended December 31, 1998, was approximately $33.66 million. Included in cash and due from banks at December 31, 1998, is $19.50 million of cash restricted for mortgage banking activities. - ------------------------------------------------------------------------------ NOTE THREE ACQUISITIONS - ------------------------------------------------------------------------------ On December 31, 1998, the Company merged with Horizon Bancorp, Inc. (Horizon), a $1 billion asset bank holding company headquartered in Beckley, West Virginia, in a transaction accounted for as a pooling of interests. The Company issued 10.2 million shares of common stock to the shareholders of Horizon based upon an exchange ratio of 1.111 shares of the Company's common stock for each outstanding share of Horizon common stock. The Company's historical consolidated financial statements have been restated to reflect this transaction. Net interest income, net income, and diluted net income per share for the Company and Horizon as originally reported for the two years ended December 31, 1997, prior to restatement are as follows: 1997 1996 ---------------------- Net interest income: Company $52,105 $47,005 Horizon 45,049 44,369 ---------------------- Combined $97,154 $91,374 ====================== Net income: Company $12,464 $10,130 Horizon 13,827 11,151 ---------------------- Combined $26,291 $21,281 ====================== Diluted net income per common share: Company $2.02 $1.81 Horizon 1.49 1.20 Combined 1.60 1.34 Merger expenses incurred in 1998 as a result of the merger with Horizon approximated $13.5 million and consisted of: advisory and professional fees of $4.8 million, employee severance costs of $3.2 million, data processing contract terminations of $1.7 million, and other miscellaneous expenses of $3.8 million. Included in the miscellaneous expenses is a $2.5 million write-down of goodwill, determined to be impaired as a result of the merger, related to a branch previously acquired by Horizon. Effective April 1, 1998, the Company consummated its acquisition of Del Amo Savings Bank, FSB (Del Amo). Del Amo is a federally chartered savings bank, headquartered in Torrance, California, with total assets and total deposits of approximately $116 million and $102 million, respectively, at March 31, 1998. The merger involved the exchange of approximately 261,000 shares of the Company's common stock for all of the outstanding shares of Del Amo. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations have been included in the consolidated totals from the date of acquisition. Due to the immaterial impact on the Company's financial statements, no proforma information has been included for the information provided herein. In January 1998, City National Bank of West Virginia (City National), a wholly-owned subsidiary of the Company, acquired Jarrett/Aim Communications, Inc. (Jarrett/Aim), a printing and direct mail corporation. In March 1998, City National acquired Morton Specialty Insurance Partners, Inc. (Morton Insurance), an insurance brokerage that offers property and casualty insurance and bonding programs to established commercial and industrial clients, primarily in energy-related industries. In April 1998, City National acquired Citynet Corporation (Citynet) and MarCom, Inc. (MarCom), an internet service provider and web site development firm, respectively. These transactions were accounted for under the purchase method of accounting. Accordingly, the results of operations attributable to these transactions have been included in the consolidated totals from the dates of the acquisitions. The assets of Jarrett/Aim, Morton Insurance, Citynet, and MarCom represent less than 1% of the total assets of the Company. Accordingly, no proforma information has been included for the information provided herein. In October 1997, City National Bank acquired First Allegiance Financial Corporation (First Allegiance), a mortgage loan origination company headquartered in Irvine, California. The acquisition involved an initial purchase price of approximately $15 million, which was comprised of 300,000 shares of the Company's common stock valued at approximately $12 million (286,000 issued at the acquisition date and the remaining 14,000 to be issued over a three year period), and cash in exchange for substantially all of the assets and liabilities of First Allegiance, which approximated $7.5 million and $6.8 million, respectively, at September 30, 1997. Additional consideration was contingent upon the First Allegiance division satisfying certain pre-established loan production levels subsequent to the acquisition. As a result of certain loan production levels achieved in 1998 and in the fourth quarter of 1997, the Company has paid $5.30 million of additional consideration. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations attributable to the acquisition have been included in the consolidated totals from the date of acquisition. In September 1997, Horizon acquired Beckley Bancorp, Inc., headquartered in Beckley, West Virginia. Under the terms of the agreement, Horizon paid $15.4 million in cash. The transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations attributable to the acquisition have been included in the consolidated totals from the date of acquisition. In January 1997, the Company consummated its acquisition of Old National Bank of Huntington (Old National). Under the terms of the agreement, the Company acquired all the outstanding shares of Old National common stock for 480,917 shares of the Company's common stock valued at approximately $10.1 million. Old National's total assets at December 31, 1996, were approximately $49 million or 4.7% of the Company's consolidated assets. This transaction was accounted for under the pooling of interests method of accounting. However, due to the immateriality of the transaction, prior period financial statements have not been restated and the results of operations attributable to the acquisition have been included in the consolidated totals from the date of acquisition. Intangible assets arising from purchase business combinations noted above and in the previous years consist primarily of goodwill and core deposits which have an aggregate unamortized balance at December 31, 1998 and 1997, of $38.37 million and $27.56 million, respectively. Excluding the fourth quarter 1998 write-down of goodwill determined to be impaired, amortization of goodwill and core deposits approximated $3.08 million, $1.52 million, and $960,000 during the years ended December 31, 1998, 1997, and 1996, respectively. - ------------------------------------------------------------------------------ NOTE FOUR INVESTMENTS - ------------------------------------------------------------------------------ Included in the Company's investment portfolio are structured notes with an estimated fair value of $1.4 million and $4.1 million at December 31, 1998 and 1997, respectively. Such investments are used by management to enhance yields, diversify the investment portfolio, and manage the Company's exposure to interest rate fluctuations. These securities consist of federal agency securities with an average maturity of less than two years. Management periodically performs sensitivity analyses to determine the Company's exposure to fluctuation in interest rates of 3% and has determined that the structured notes meet regulatory price sensitivity guidelines. The aggregate carrying and approximate market values of securities follow. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. December 31, 1998 Gross Gross Estimated realized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------- (in thousands) Available-for-sale securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $244,706 $2,508 $413 $246,801 Obligations of states and political subdivisions 66,926 2,179 103 69,002 Mortgage-backed 11,102 199 7 11,294 securities Other debt 8,565 292 - 8,857 securities -------------------------------------------------------- Total debt 331,299 5,178 523 335,954 securities Equity 27,083 357 6,735 20,705 securities -------------------------------------------------------- $358,382 $5,535 $7,258 $356,659 ======================================================== Held-to-maturity securities: Obligations of states and political subdivisions $39,063 $1,476 $ - $ 40,539 ======================================================== December 31, 1997 Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------- (in thousands) Available-for-sale securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $238,582 $1,661 $395 $239,848 Obligations of states and political subdivisions 55,233 1,886 3 57,116 Mortgage-backed 18,868 302 82 19,088 securities Other debt securities 3,203 275 - 3,478 ----------------------------------------------------------- Total debt 315,886 4,124 480 319,530 securities Equity securities 16,968 368 90 17,246 ----------------------------------------------------------- $332,854 $4,492 $570 $336,776 =========================================================== Held-to-maturity securities: Obligations of states and political subdivisions $41,554 $1,222 $ 5 $42,771 =========================================================== The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Available-for-Sale Held-to-Maturity Estimated Estimated Fair Fair Cost Value Cost Value -------------------------------------------------------------- (in thousands) Due in one year or less $47,267 $47,654 $ 935 $ 945 Due after one year through five years 179,534 181,668 14,835 15,288 Due after five years through ten years 78,695 80,436 20,027 20,886 Due after ten years 14,701 14,902 3,266 3,420 -------------------------------------------------------------- 320,197 324,660 39,063 40,539 Mortgage-backed securities 11,102 11,294 - - -------------------------------------------------------------- $331,299 $335,954 $39,063 $40,539 ============================================================== Gross gains of $47,000, $431,000, and $109,000, and gross losses of $40,000, $423,000, and $101,000, were realized on sales and calls of securities during 1998, 1997, and 1996, respectively. The book value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $161 million and $175 million at December 31, 1998 and 1997, respectively. - ------------------------------------------------------------------------------ NOTE FIVE LOANS - ------------------------------------------------------------------------------ The loan portfolio is summarized as follows: December 31 1998 1997 ------------------------------------------------ (in thousands) Commercial, financial and agricultural $509,214 $464,678 Residential real estate 842,727 676,828 Installment loans to individuals 363,988 367,095 ------------------------------------------------ $1,715,929 $1,508,601 ------------------------------------------------ The Company grants portfolio loans to customers generally within the market areas of its subsidiary banks. There is no significant concentration of credit risk by industry or by related borrowers. There are no foreign loans outstanding and highly leveraged loan transactions are insignificant. Subsidiaries of the Company have granted loans to the officers and directors of the Company and its subsidiaries, and to their associates. The loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The following presents the activity with respect to related party loans during 1998: 1998 ----------- (in thousands) Balance at January 1, 1998 $47,233 Loans made 11,829 Principal payments received (10,648) Other changes (23,406) ----------- Balance at December 31, 1998 $25,008 =========== - ------------------------------------------------------------------------------ NOTE SIX ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------ A summary of changes in the allowance for possible loan losses follows: 1998 1997 1996 ----------------------------------------- (in thousands) Balance at beginning of year $18,190 $16,888 $15,088 Provision for possible loan losses 8,481 4,064 5,012 Charge-offs (11,469) (5,752) (5,011) Recoveries 1,623 2,471 1,799 Balance of acquired institution 785 519 - ------------------------------------------ BALANCE AT END OF YEAR $17,610 $18,190 $16,888 ========================================== The recorded investment in loans that were considered impaired was $9.13 million and $8.65 million at December 31, 1998 and 1997, respectively. Included in these amounts are $4.04 million and $3.53 million, respectively, of impaired loans for which the related allowance for loan losses is $1.68 million and $1.14 million, respectively, and $5.09 million and $5.12 million of impaired loans that, as a result of write-downs or being well secured, do not have an allowance for loan losses. The average recorded investments in impaired loans during the years ended December 31, 1998, 1997 and 1996, were approximately $9.39 million, $8.44 million, and $11.83 million. During the years ended December 31, 1998, 1997, and 1996, $1.04 million, $643,000, and $772,000, respectively, was recognized as interest income on impaired loans and $527,000, $326,000, and $619,000, respectively, was recognized as interest income using a cash basis method of accounting. - ------------------------------------------------------------------------------ NOTE SEVEN LOAN SECURITIZATIONS AND SALES - ------------------------------------------------------------------------------ The Company originates or purchases junior lien mortgage loans to be sold or securitized. At December 31, 1998 and 1997, these loans held for sale were approximately $201 million and $114 million, respectively. The Company also originates and sells fixed rate mortgage loans on a servicing released basis. At December 31, 1998 and 1997, these loans held for sale were approximately $45 million and $21 million, respectively. During 1998, the Company completed four securitizations of junior lien mortgage loans with total loan balances approximating $463.13 million. This compares to one securitization of approximately $35 million of loans completed in 1997. As of December 31, 1998 and 1997, the Company reported retained interests in these securitized loan pools of approximately $65.62 million and $4.36 million, respectively, including accrued interest. Each of the securitized pools is serviced by the Company's mortgage loan servicing division. Significant assumptions used to estimate the value of the retained interest include: prepayment rates of 17-21% CPR, default rates approximating 10% cumulative losses, and a weighted-average discount rate of 12.23%. Gain on sales of loans approximated $14.24 million, $4.39 million, and $1.26 million in 1998, 1997, and 1996, which included gains on securitization of the junior lien mortgage loans of $8.6 million and $1.1 million in 1998 and 1997, respectively. The gain on sales of loans is recorded net of the change in the valuation allowance for loans held for sale, which approximated $4.7 million and $2.1 million in 1998 and 1997, respectively. - ------------------------------------------------------------------------------ NOTE EIGHT LOAN SERVICING - ------------------------------------------------------------------------------ Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others was $1.77 billion and $1.25 billion at December 31, 1998 and 1997, respectively. Mortgage loan servicing rights of $8.87 million and $2.46 million at December 31, 1998 and 1997, respectively, are included in other assets in the accompanying balance sheets. The fair value of mortgage loan servicing rights at December 31, 1998 and 1997, was not materially different from the recorded value and since the fair value exceeds the recorded value, no valuation allowance is necessary. Amortization of mortgage loan servicing rights approximated $765,000, $383,000, and $225,000 during the years ended December 31, 1998, 1997, and 1996, respectively. - ------------------------------------------------------------------------------ NOTE NINE - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ PREMISES AND EQUIPMENT - ------------------------------------------------------------------------------ A summary of premises and equipment and related accumulated depreciation are summarized as follows: December 31 1998 1997 -------------------- (in thousands) Land, buildings, and improvements $64,034 $52,217 Furniture, fixtures, and equipment 57,026 41,934 ---------------------- 121,060 94,151 Less allowance for depreciation (49,966) (40,393) ---------------------- $71,094 $53,758 ====================== - ------------------------------------------------------------------------------ NOTE TEN SHORT-TERM BORROWINGS - ------------------------------------------------------------------------------ Short-term borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh (FHLB) and securities sold under agreement to repurchase. The underlying securities included in repurchase agreements remain under the Company's control during the effective period of the agreements. A summary of the Company's short-term borrowings is set forth below: (in thousands) 1998: - ---- Average amount outstanding during the year $ 187,140 Maximum amount outstanding at any month end 307,185 Weighted average interest rate: During the year 5.17% End of the year 4.83% 1997: - ---- Average amount outstanding during the year $190,467 Maximum amount outstanding at any month end 322,445 Weighted average interest rate: During the year 5.22% End of the year 5.24% 1996: - ---- Average amount outstanding during the year $176,480 Maximum amount outstanding at any month end 229,870 Weighted average interest rate: During the year 5.09% End of the year 5.01% - ------------------------------------------------------------------------------ NOTE ELEVEN SCHEDULED MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE - ------------------------------------------------------------------------------ Scheduled maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 1998, are summarized as follows: (in thousands) Within one year $156,165 Over one through two years 42,603 Over two through three years 11,084 Over three through four years 1,202 Over four through five years 1,484 ---------- Total $212,538 ========== The Company has agreements with three investment banking firms to issue over $100 million of the Company's certificates of deposit. The certificates of deposit can be issued in maturities of up to five years at rates equal to a comparable treasury at the time of issuance plus a market-based spread. The Company is not committed to issuing a pre-determined amount of its certificates of deposit under these agreements, the use of which is at the sole discretion of the Company. At December 31, 1998 and 1997, $22 million and $2 million, respectively, of certificates of deposit had been sold under these agreements at an average interest rate of 5.36% and 5.70%, respectively. The average term of the issued certificates of deposit was 1.5 years and 2.0 years at December 31, 1998 and 1997, respectively. - ------------------------------------------------------------------------------ NOTE TWELVE LONG-TERM DEBT AND UNUSED LINES OF CREDIT - ------------------------------------------------------------------------------ Long-term debt includes an obligation of the Parent Company consisting of a $35 million revolving credit loan facility with an unrelated party. At December 31, 1998, $15 million was outstanding. The loan has a variable rate (7.125% at December 31, 1998) with interest payments due quarterly and principal due at maturity in June 30, 1999. Management intends to refinance the loan according to provisions provided in the agreement. The loan agreement contains certain restrictive provisions applicable to the Parent Company including limitations on additional long-term debt. The Parent Company has pledged the common stock of City National Bank as collateral for the revolving credit loan. The Company, through its banking subsidiaries, maintains long-term financing from the FHLB as follows: December 31, 1998 -------------------- Amount Amount Interest Maturity Available Outstanding Rate Date - ------------------------------------------------------------------------ (in thousands) $2,000 $2,000 6.58% June 2000 10,000 10,000 5.60 July 2002 25,000 25,000 5.47 September 2002 1,500 1,500 6.94 June 2005 82,212 3,414 6.02 July 2005 25,000 25,000 4.89 January 2008 5,000 5,000 5.48 February 2008 2,300 2,200 6.05 April 2008 2,000 2,000 5.62 July 2008 10,000 10,000 4.86 October 2008 1,500 1,500 7.14 June 2015 The Company has purchased, through its banking subsidiaries, 107,513 shares of FHLB stock at par value. Such purchases entitle the Company to dividends declared by the FHLB and provide an additional source of short-term and long-term funding, in the form of collateralized advances. Financing obtained from the FHLB is based in part on the amount of qualifying collateral available, specifically U.S. Treasury and agency securities, mortgage-backed securities, and residential real estate loans. At December 31, 1998, collateral pledged to the FHLB included approximately $24 million in investment securities and $464 million in residential real estate loans. In addition to the financing discussed above, one of the Company's subsidiaries has as unused line of credit available with the FHLB in the amount of $26.8 million. - ------------------------------------------------------------------------------ NOTE THIRTEEN TRUST PREFERRED SECURITIES - ------------------------------------------------------------------------------ On October 27, 1998, City Holding Capital Trust II (Capital Trust II), a special-purpose statutory trust subsidiary of the Company sold via public offering $57.5 million of 9.125% trust preferred capital securities (the Capital Securities II) and issued $1.8 million of common securities to the Company. Distributions on the Capital Securities II are payable quarterly and each Capital Security has a stated liquidation value of $25. To fund Capital Trust II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior Subordinated Debentures (the Debentures II) with a stated maturity date of October 31, 2028. The sole assets of Capital Trust II are the Debentures II. Cash distributions on the Capital Securities II in Capital Trust II are made to the extent interest on the Debentures II is received by Capital Trust II. The Company, through various agreements, has irrevocably and unconditionally guaranteed all of Capital Trust II's obligations under the Capital Securities II regarding payment of distributions and payment on liquidation or redemption of the Capital Securities II, but only to the extent of funds held by Capital Trust II. The Capital Securities II are subject to mandatory redemption (i) in whole, but not in part, at the Stated Maturity upon repayment of the Debentures II, (ii) prior to October 31, 2003, in whole, but not in part, contemporaneously with the optional redemption at any time by the Company of the Debentures II at any time within 90 days following an event of certain changes or amendments to regulatory requirements or federal income tax rules and (iii) in whole or in part, at any time on or after October 31, 2003, contemporaneously with the optional redemption by the Company of the Debentures II at a redemption price equal to the aggregate liquidation amount of the Capital Securities II, plus accumulated but unpaid distributions thereon. After deducting expenses incurred in the issuance, the Company received proceeds of $55.34 million from the Capital Securities II offering. On March 31, 1998, City Holding Capital Trust (the Trust), a special-purpose statutory trust subsidiary of the Company, issued $30 million in 9.15% trust preferred capital securities (the Capital Securities) to certain qualified institutional investors and $928,000 of common securities (the Common Securities) to the Company. Distributions on the Capital Securities are payable semi-annually, and each Capital Security has a stated liquidation amount of $1,000. To fund the Trust, the Company sold to the Trust $30.9 million in 9.15% Junior Subordinated Debentures (the Debentures) with a stated maturity date of April 1, 2028. The sole assets of the Trust are the Debentures. Cash distributions on the Capital Securities are made to the extent interest on the Debentures is received by the Trust. The Company, through various agreements, has irrevocably and unconditionally guaranteed all of the Trust's obligations under the Capital Securities regarding payment of distributions and payment on liquidation or redemption of the Capital Securities, but only to the extent of funds held by the Trust. In the event of certain changes or amendments to regulatory requirements or federal income tax rules, the Capital Securities are redeemable in whole at par or, if greater, a make-whole amount. Otherwise, the Capital Securities are generally redeemable in whole or in part on or after April 1, 2008, at a declining redemption price ranging from 104.58% to 100% of the liquidation amount. On or after April 1, 2018, the Capital Securities may be redeemed at 100% of the liquidation amount. After deducting expenses incurred in the issuance, the Company received proceeds of $29.2 million from the Capital Securities offering. The obligations outstanding under Capital Trust II and the Capital Trust are classified as "Corporation-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of City Holding Company" in the liabilities section of the consolidated balance sheets. Distributions on the capital securities are recorded in the consolidated statements of income as interest expense. The Company's interest payments on the Debentures are fully tax deductible. For regulatory purposes, the Company has included $72.02 million of the total offerings in its Tier I capital for risk-based capital computations. The remaining $15.48 million is included in the Company's total risk-based capital. - ------------------------------------------------------------------------------ NOTE FOURTEEN RESTRICTIONS ON SUBSIDIARY DIVIDENDS - ------------------------------------------------------------------------------ Certain restrictions exist regarding the ability of the subsidiary banks to transfer funds to the Parent Company in the form of cash dividends. The approval of the banks' applicable primary regulator is required prior to the payment of dividends by a subsidiary bank in excess of its earnings retained in the current year plus retained net profits for the preceding two years. During 1999, the subsidiary banks can, without prior regulatory approval, declare dividends of approximately $30.26 million to the Parent Company, plus retained net profits for the interim period through the date of declaration. - ------------------------------------------------------------------------------ NOTE FIFTEEN INCOME TAXES - ------------------------------------------------------------------------------ Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31 1998 1997 ------------------------- (in thousands) Deferred tax assets: Allowance for loan losses $7,213 $7,216 Loans held for sale 2,224 832 Acquired net operating 484 741 loss carryforward Deferred compensation 3,543 2,248 payable Securities available for 416 - sale Loan securitizations 957 - Goodwill 269 - Other 215 281 -------------------------- TOTAL DEFERRED TAX 15,321 11,318 ASSETS Deferred tax liabilities: Federal income tax - 148 allowance for loan losses Premises and equipment 2,197 1,933 Core deposit intangible 947 358 Loans 713 1,101 Securities available for - 1,582 sale Other 1,840 767 -------------------------- TOTAL DEFERRED TAX 5,697 5,889 LIABILITIES -------------------------- NET DEFERRED TAX ASSETS $9,624 $5,429 ========================== Significant components of the provision for income taxes are as follows: 1998 1997 1996 ------------------------------ (in thousands) Federal: Current $9,261 $13,129 $11,086 Deferred (3,011) (909) (1,412) ------------------------------ 6,250 12,220 9,674 State 243 2,293 1,814 ------------------------------ TOTAL $6,493 $14,513 $11,488 ============================== Current income tax expense attributable to investment securities transactions approximated $3,000 in 1998, 1997, and 1996. As of December 31, 1998, the Company has approximately $1.2 million and $1.6 million, respectively, of federal and state net operating loss carryforwards which expire in 2006. A reconciliation between income taxes as reported and the amount computed by applying the statutory federal income tax rate to income before income taxes follows: 1998 1997 1996 ----------------------------- (in thousands) Computed federal taxes $4,104 $14,086 $11,469 and statutory rate State income taxes, net 159 1,446 1,113 of federal tax benefit Tax effects of: Nontaxable interest (1,601) (1,648) (1,596) income Non-deductible merger 1,716 - - charges Non-deductible goodwill 1,110 - - Other items, net 1,005 629 502 ----------------------------- $6,493 14,513 $11,488 ============================= - ------------------------------------------------------------------------------ NOTE SIXTEEN EMPLOYEE BENEFIT PLANS - ------------------------------------------------------------------------------ The Company's 1993 Stock Incentive Plan has authorized the grant of options to key employees for up to 300,000 shares of the Company's common stock adjusted for changes in the capital structure of the Company since the adoption of the plan. The options granted under the Company's Plan have five year terms and vest and become fully exercisable at the end of up to four years of continued employment. As of December 31, 1998, 399,300 options are authorized for grant, of which 300,087 have been awarded to date. Additionally, effective with the merger of Horizon, outstanding options to acquire the common stock of Horizon that were previously granted under Horizon's employee benefit plans were converted into options to acquire the Company's common stock. As of December 31, 1998, there were 95,243 such options outstanding and included in the total 380,781 options outstanding at year end. Proforma information regarding net income and earnings per share is required by Statement No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: a risk-free interest rate of 5.37%, 5.90%, and 6.04% for 1998, 1997, and 1996, respectively; an expected dividend yield of 2.04%, 2.50%, and 2.75% for 1998, 1997, and 1996, respectively; a volatility factor of .255, .266, and .232 for 1998, 1997, and 1996, respectively; and an expected life of the option of four years for each period. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. Pro forma net income for the year ended December 31, 1998 was $3.40 million or $0.20 per basic and diluted common share. The effect of applying the fair value method to the Company's employee stock options in 1997 results in net income and earnings per share that are not materially different from the amounts reported. A summary of the Company's stock option activity and related information for the years ended December 31 is presented below: 1998 1997 -------------------------------------------------------- Weighted- Weighted- Average Average Exercise Exercise Options Price Options Price -------------------------------------------------------- Outstanding at 177,169 $21.73 123,744 $18.31 beginning of year Granted 249,438 40.62 58,720 30.10 Exercised (36,768) 18.43 (4,802) 19.52 Forfeited (9,058) 33.31 (493) 12.60 --------- --------- Outstanding at 380,781 $32.26 177,169 $21.73 end of year ========= ========= Exercisable at 271,934 $31.35 88,688 $22.16 end of year Weighted-average fair value of $10.44 $6.57 options granted during the year Exercise prices for options outstanding at December 31, 1998, ranged from $12.83 to $42.75. The weighted-average remaining contractual life of those options at December 31, 1998, was four years. The City Holding Company Profit Sharing and 401(k) Plan (the Plan) is a deferred compensation plan under section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Participants may contribute from 1% to 15% of pre-tax earnings to their respective accounts. These contributions may be invested in any of six investment options selected by the employee, one of which is City Holding Company common stock. The Company matches 50% of the first 6% of compensation deferred by the participant with City Holding Company common stock. Although the profit sharing features of this plan remain intact, future profit contributions, if any, are expected to be made to the employee stock ownership plan discussed below. The City Holding Company Employees' Stock Ownership Plan (ESOP), covering all employees who have completed one year of service and have attained the age of 21, was created January 1, 1996 and includes both Money Purchase and Stock Bonus plan features. Annually, the Company will contribute to the Money Purchase account an amount equal to 9% of eligible compensation. Contributions to the Stock Bonus account are discretionary, as determined by the Company's Board of Directors. The Company's total expense associated with the Plan and the ESOP (collectively, the benefit plans) approximated $2.28 million, $2.46 million, and $2.13 million in 1998, 1997, and 1996, respectively. The total number of shares of the Company's common stock held by the benefit plans is 333,402. Other than the benefit plans, the Company offers no postretirement benefits. Horizon has a defined benefit pension plan covering substantially all of its employees. The following table summarizes the benefit obligation and plan asset activity of the plan: Pension Benefits 1998 1997 ---------------------- (in thousands) Change in fair value of plan assets: Balance at beginning of $8,093 $6,939 measurement period Actual return on plan 584 1,297 assets Employer contribution 875 116 Benefits paid (201) (259) ----------------------- Balance at end of 9,351 8,093 measurement period Change in benefit obligation: Balance at beginning of (8,870) (7,527) measurement period Service cost (1,018) (751) Interest cost (718) (561) Actuarial loss (gain) (1,629) (290) Benefits paid 201 259 ----------------------- Balance at end of (12,034) (8,870) measurement period ----------------------- unded status (2,683) (777) Unamortized prior service 1,008 1,142 cost Unrecognized net (156) (1,927) actuarial loss (gain) Unrecognized net (286) (316) obligation ----------------------- PREPAID (ACCRUED) $(2,117) $(1,878) BENEFIT COST ======================= Weighted-average assumptions as of December 31: Discount rate 7.25% 7.25% Expected return on plan 8.50% 8.00% assets Rate of compensation 5.00% 5.00% increase Plan assets consist principally of U.S. Government securities, corporate stocks and bonds, and other short-term investments. The following table presents the components of net defined benefit pension costs: Pension Benefits 1998 1997 1996 ------------------------- (in thousands) Components of net periodic benefit cost: Service cost $1,018 $751 $513 Interest cost 718 561 547 Expected return on (680) (650) (528) plan assets Net amortization and 103 80 33 deferral ---------------------------- BENEFIT COST $1,159 $742 $565 ============================ Horizon has individual deferred compensation and supplemental retirement agreements with certain directors and officers. The cost of such individual agreements is being accrued over the period of active service from the date of the respective agreement. The cost of such agreements approximated $449, $395, and $420 during 1998, 1997, and 1996. The liability for such agreements approximated $2,556 and $2,254 at December 31, 1998 and 1997, and is included in other liabilities in the accompanying consolidated balance sheets. To assist in funding the above liabilities, Horizon has insured the lives of certain directors and officers. Horizon is the owner and beneficiary of the insurance policies with a cash surrender value approximating $3,410 and $3,107 at December 31, 1998 and 1997, included in other assets in the accompanying consolidated balance sheets. - ------------------------------------------------------------------------------ NOTE SEVENTEEN OTHER INCOME AND EXPENSES - ------------------------------------------------------------------------------ The following items of other income and other expense exceeded one percent of total revenue for the respective years: 1998 1997 1996 --------------------------- (in thousands) Professional fees $9,671 $1,975 $2,578 Telecommunications 4,317 2,165 1,435 Bank supplies 3,558 2,252 2,220 - ------------------------------------------------------------------------------ NOTE EIGHTEEN COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------------------------------------ In the normal course of business, certain financial products are offered by the Company to accommodate the financial needs of its customers. Loan commitments (lines of credit) represent the principal off-balance sheet financial product offered by the Company. At December 31, 1998 and 1997, commitments outstanding to extend credit totaled approximately $195.60 million and $198.14 million, respectively. To a much lesser extent, the Company offers standby letters of credit which require payments to be made on behalf of customers when certain specified future events occur. Amounts outstanding pursuant to such standby letters of credit were $9.07 million and $8.80 million as of December 31, 1998 and 1997, respectively. Historically, substantially all standby letters of credit have expired unfunded. Both of the above arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Collateral is obtained based on management's credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments. - ------------------------------------------------------------------------------ NOTE NINETEEN PREFERRED STOCK AND SHAREHOLDER RIGHTS PLAN - ------------------------------------------------------------------------------ The Company's Board of Directors has the authority to issue preferred stock, and to fix the designation, preferences, rights, dividends and all other attributes of such preferred stock, without any vote or action by the shareholders. As of December 31, 1998, there are no such shares outstanding, nor are any expected to be issued, except as might occur pursuant to the Stock Rights Plan discussed below. The Company's Stock Rights Plan provides that each share of common stock carries with it one right. The rights would be exercisable only if a person or group, as defined, acquired 10% or more of the Company's common stock, or announces a tender offer for such stock. Under conditions described in the Stock Rights Plan, holders of rights could acquire shares of preferred stock or additional shares of the Company's common stock, or in the event of a 50% or more change-in-control, shares of common stock of the acquirer. The value of shares acquired under the plan would equal twice the exercise price. - ------------------------------------------------------------------------------ NOTE TWENTY REGULATORY MATTERS - ------------------------------------------------------------------------------ The Company, including its banking subsidiaries, is subject to various regulatory capital requirements administered by the various banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, action by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company's and its banking subsidiaries' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 1998, that the Company and its banking subsidiaries met all capital adequacy requirements to which they were subject. As of December 31, 1998, the most recent notifications from banking regulatory agencies categorized the Company and its banking subsidiaries as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Company and its banking subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, and Tier I leverage ratios set forth in the table below. There are no conditions or events since notifications that management believes have changed the institutions' categories. The Company's and its significant banking subsidiary's actual capital amounts and ratios are presented in the following table.
Well 1998 1997 Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio ----------------------------------------------------------------------------- (in thousands) Total Capital (to Risk Weighted Assets): Consolidated $282,100 12.0% $206,327 12.8% 10% 8% City National 162,248 10.07 109,693 12.3 10 8 Tier I Capital (to Risk Weighted Assets): Consolidated 249,018 10.6 190,294 11.8 6 4 City National 153,608 10.1 102,020 11.5 6 4 Tier I Capital (to Average Assets): Consolidated 249,018 10.0 190,294 8.5 5 4 City National 153,608 8.9 102,020 7.7 5 4
- ------------------------------------------------------------------------------ NOTE TWENTY-ONE FAIR VALUES OF FINANCIAL INSTRUMENTS - ------------------------------------------------------------------------------ FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following table represents the estimates of fair value of financial instruments: Fair Value of Financial Instruments 1998 1997 ------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------- (in thousands) Assets: Cash and due $119,777 $119,777 $132,532 $132,532 from banks Securities 396,444 397,398 378,330 379,547 Net loans 1,698,319 1,701,744 1,490,411 1,493,417 Loans held 246,287 246,287 134,990 134,990 for sale Retained 65,623 65,623 4,356 4,356 interests Liabilities: Demand 1,056,342 1,056,342 899,981 899,981 deposits Time deposits 1,008,073 1,027,503 879,824 896,782 Short-term 183,418 183,418 172,833 172,833 borrowings Long-term 102,719 105,493 75,502 76,003 debt Trust 87,500 87,493 - - preferred securities The following methods and assumptions were used in estimating fair value amounts for financial instruments: The fair values for the loan portfolio are estimated using discounted cash flow analyses at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying values of accrued interest approximate fair value. The fair values of demand deposits (i.e. interest and noninterest-bearing checking, regular savings, and other types of money market demand accounts) are, by definition, equal to their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits. Securities sold under agreements to repurchase represent borrowings with original maturities of less than 90 days. The carrying amount of advances from the FHLB and borrowings under repurchase agreements approximate their fair values. The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the trust preferred securities is estimated using a discounted cash flow calculation that applies interest rates that would be currently offered on such securities. The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair values approximated the carrying values of these commitments and letters of credit as of December 31, 1998 and 1997. - ------------------------------------------------------------------------------ NOTE TWENTY-TWO CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION - ------------------------------------------------------------------------------ CONDENSED BALANCE SHEETS December 31 1998 1997 ----------------------- (in thousands) Assets Cash $6,362 $2,639 Securities available for 3,636 2,164 sale Investment in subsidiaries 311,879 243,217 Fixed assets 6,080 7,957 Other assets 5,557 9,839 ------------------------ TOTAL ASSETS $333,514 $265,816 ======================== Liabilities Long-term debt $15,000 $40,400 Junior subordinated 90,114 - debentures Advances from affiliates 1,191 934 Other liabilities 7,150 4,205 ------------------------ TOTAL LIABILITIES 113,455 45,539 Stockholders' equity 220,059 220,277 ------------------------ TOTAL LIABILITIES AND $333,514 $265,816 STOCKHOLDERS' EQUITY ======================== Advances from affiliates, which eliminate for purposes of the Company's consolidated financial statements, represent amounts borrowed from banking subsidiaries to fund the purchase of certain bank premises and to meet other cash needs of the Parent. Such debt is collateralized by the securities and fixed assets of the Parent Company. Interest is due quarterly at prime with principal due at maturity in 1999. Junior subordinated debentures, which eliminate for purposes of the Company's consolidated financial statements, represent the Parent Company's funding of City Holding Capital Trust II and City Holding Capital Trust (see NOTE THIRTEEN). CONDENSED STATEMENTS OF INCOME Year Ended December 31 1998 1997 1996 ------------------------------ (in thousands) INCOME Dividends from bank $17,879 $20,351 $12,344 subsidiaries Mortgage loan 1,147 servicing fees Administrative fees 6,239 6,065 2,828 Other income 286 1,001 1,084 -------------------------------- 24,404 27,417 17,403 EXPENSES Interest expense 4,799 2,273 1,477 Other expenses 27,232 15,352 11,592 -------------------------------- 32,031 17,625 13,069 -------------------------------- INCOME BEFORE INCOME TAX BENEFIT AND (EXCESS DIVIDENDS) EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES (7,627) 9,792 4,334 Income tax benefit (7,795) (3,615) (2,965) --------------------------------- INCOME BEFORE (EXCESS DIVIDENDS) EQUITY IN 168 13,407 7,299 UNDISTRIBUTED NET INCOME OF SUBSIDIARIES EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 5,066 12,884 13,982 --------------------------------- NET INCOME $5,234 $26,291 $21,281 ================================= CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31 1998 1997 1996 ------------------------------------- (in thousands) OPERATING ACTIVITIES Net income $5,234 $26,291 $21,281 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for 2,687 1,843 1,679 depreciation Increase (decrease) 7,278 219 (4,287) in other assets Increase in other 2,945 2,084 3,584 liabilities (Equity in undistributed net (5,066) (12,884) (13,982) income) excess dividends of subsidiaries Realized investment - (308) - securities gain --------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,078 17,245 8,275 INVESTING ACTIVITIES Cash paid in - (15,447) - acquisition Proceeds from - 537 250 maturities of investment securities Proceeds from sales of 769 496 192 securities Purchases of (2,132) (514) (483) investment securities Net change in loans - 1,644 (71) Cash invested in (50,399) (4,495) (625) subsidiaries Purchases of premises (733) (3,953) (4,817) and equipment --------------------------------------- NET CASH USED IN (52,495) (21,732) (5,554) INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from 43,800 9,150 9,250 long-term debt Principal repayments (69,200) 7,000 - on long-term debt Increase in advance 257 - - from affiliates Net proceeds from issuance of junior 86,762 - - subordinated debentures Cash dividends paid (12,167) (11,421) (8,753) Purchases of treasury (6,987) (2,840) - stock Proceeds from sales of - 80 58 treasury stock Exercise of stock 675 65 - options Net cash received from - 29 14 stock transactions Redemption of - - (22) dissenter and fractional shares ---------------------------------------- NET CASH PROVIDED BY (USED IN) 43,140 2,063 547 FINANCING ACTIVITIES ---------------------------------------- (DECREASE) INCREASE IN CASH AND 3,723 (2,424) 3,268 CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,639 5,063 1,795 ---------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $6,362 $2,639 $5,063 ======================================== - ------------------------------------------------------------------------------ NOTE TWENTY-THREE SEGMENT REPORTING - ------------------------------------------------------------------------------ The Company operates three business segments: community banking, mortgage banking, and other financial services. These business segments are primarily identified by the products or services offered and the channels through which the product or service is offered. The community banking operations consists of various community banks that offer customers traditional banking products and services through various delivery channels. The mortgage banking operations include the origination, acquisition, servicing, and sale of mortgage loans. The other financial services business segment consists of nontraditional services offered to customers, such as investment advisory, insurance, and internet technology products. Another defined business segment of the Company is corporate support which includes the parent company and other support needs. The accounting policies for each of the business segments are the same as those of the Company described in Note One. Selected segment information is included in the following table:
Other Community Mortgage Financial General Banking Banking Services Corporate Eliminations Consolidated ---------------------------------------------------------------------------------------- 1998 Net interest income (expense) $96,085 $8,906 $ 64 $(1,712) $ - $103,343 Provision for loan losses (8,481) - - - - (8,481) ---------------------------------------------------------------------------------------- Net interest income after provision 87,604 8,906 64 (1,712) - 94,862 for loan losses Other income 19,355 47,414 11,133 216 (5,695) 72,423 Other expenses 82,100 50,752 11,502 16,899 (5,695) 155,558 ---------------------------------------------------------------------------------------- Income before income taxes 24,859 5,568 (305) (18,395) - 11,727 Income tax expense (benefit) 9,816 1,798 (8) (5,113) - 6,493 ---------------------------------------------------------------------------------------- NET INCOME $15,043 $3,770 $(297) $(13,282) $ - $ 5,234 ======================================================================================== Average assets $2,202,104 $336,367 $14,660 $12,969 $ - $2,566,100 ======================================================================================== 1997 Net interest income (expense) $90,769 $8,456 $ 3 $(2,074) $ - $97,154 Provision for loan losses (4,064) - - - - (4,064) ----------------------------------------------------------------------------------------- Net interest income after provision for loan losses 86,705 8,456 3 (2,074) - 93,090 Other income 13,858 17,636 446 673 - 32,613 Other expenses 61,165 14,702 366 8,666 - 84,899 ----------------------------------------------------------------------------------------- Income before income taxes 39,398 11,390 83 (10,067) - 40,804 Income tax expense (benefit) 12,604 4,284 36 (2,411) - 14,513 ----------------------------------------------------------------------------------------- NET INCOME $26,794 $7,106 $ 47 $(7,656) $ - $26,291 ========================================================================================= Average assets $2,041,150 $133,792 $ 627 $4,892 $ - $2,180,461 ========================================================================================= 1996 Net interest income (expense) $86,496 $6,113 $ 1 $(1,236) $ - $91,374 Provision for loan losses (5,012) - - - - (5,012) ----------------------------------------------------------------------------------------- Net interest income after provision for loan losses 81,484 6,113 1 (1,236) - 86,362 Other income 11,732 3,924 111 706 - 16,473 Other expenses 59,399 4,637 129 5,901 - 70,066 ----------------------------------------------------------------------------------------- Income before income taxes 33,817 5,400 (17) (6,431) - 32,769 Income tax expense (benefit) 11,830 2,032 - (2,374) - 11,488 ----------------------------------------------------------------------------------------- NET INCOME $21,987 $3,368 $ (17) $(4,057) $ - $21,281 ========================================================================================= Average assets $1,867,334 $149,075 $ 92 $5,487 $ - $2,021,988 =========================================================================================
Services provided to the banking segments by the direct mail, insurance, and internet service provider divisions are eliminated in the Consolidated Statements of Income. - ------------------------------------------------------------------------------ NOTE TWENTY-FOUR SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - ------------------------------------------------------------------------------ A summary of selected quarterly financial information for 1998 and 1997 follows:
First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------- (in thousands, except common share data) 1998 Interest income $46,053 $49,701 $51,050 $49,876 Interest expense 21,203 23,026 24,664 24,444 Net interest 24,850 26,675 26,386 25,432 income Provision for 1,229 1,238 1,949 4,065 possible loan losses Investment (15) 9 11 2 securities gains (losses) Net income (loss) 6,737 6,999 6,575 (15,077) Basic earnings 0.40 0.41 0.39 (0.89) per common share Diluted earnings 0.40 0.41 0.39 (0.89) per common share Average common shares outstanding: Basic 16,642 16,879 16,850 16,821 Diluted 16,789 17,042 16,995 16,821 1997 Interest income $39,600 $42,928 $44,339 $46,299 Interest expense 16,864 18,343 19,352 21,453 Net interest 22,736 24,585 24,987 24,846 income Provision for 1,088 840 802 1,334 possible loan losses Investment (10) (15) 8 25 securities gains (losses) Net income 6,071 6,687 7,012 6,521 Basic earnings 0.37 0.41 0.43 0.39 per common share Diluted earnings 0.37 0.41 0.43 0.39 per common share Average common shares outstanding: Basic 16,395 16,382 16,342 16,602 Diluted 16,422 16,418 16,396 16,662
Certain amounts previously reported during 1998 have been reclassified to conform to the financial statement presentation. These reclassifications had no impact on net income or stockholders' equity. EX-21 6 EXHIBIT 21 EXHIBIT 21 Subsidiaries of City Holding Company As of December 31, 1998, the subsidiaries, each wholly-owned, of City Holding Company included: City National Bank of West Virginia Insured depository institution 3601 MacCorkle Avenue S.E. Charleston, West Virginia Bank of Raleigh Insured depository institution One Park Avenue Beckley, West Virginia The Twentieth Street Bank Insured depository institution Third Avenue and Twentieth Street Huntington, West Virginia Greenbrier Valley National Bank Insured depository institution 109 South Jefferson Street Lewisburg, West Virginia National Bank of Summers Insured depository institution Temple Street Hinton, West Virginia First National Bank in Marlinton Insured depository institution 300 Eighth Street Marlinton, West Virginia Del Amo Savings Bank, F.S.B. Insured depository institution 3422 Carson Street Torrance, California City Financial Corporation Securities brokerage and investment 3601 MacCorkle Avenue S.E. advisory company Charleston, West Virginia City Mortgage Corporation Inactive mortgage banking company Pittsburgh, Pennsylvania City Holding Capital Trust Special-purpose statutory trust 25 Gatewater Road Charleston, West Virginia City Holding Capital Trust II Special-purpose statutory trust 25 Gatewater Road Charleston, West Virginia EX-23 7 EXHIBIT 23 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of City Holding Company of our report dated February 5, 1999, included in the 1998 Annual Report to Shareholders of City Holding Company. We also consent to the incorporation by reference in the Registration Statements (Form S-3, Number 33-38391, Form S-8, Number 33-38269, and Form S-8, Number 33-62738) pertaining to the Dividend Reinvestment and Stock Purchase Plan, the Profit-Sharing and 401(k) Plan, and the 1993 Stock Incentive Plan, respectively, of City Holding Company and in the related Prospectuses of our report dated February 5, 1999, with respect to the consolidated financial statements of City Holding Company incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Ernst & Young LLP Charleston, West Virginia March 29, 1999 EX-27 8 EXHIBIT 27 (A) FDS
9 1,000 YEAR DEC-31-1998 DEC-31-1998 87,866 0 31,911 0 356,659 39,063 40,539 1,715,929 17,610 2,706,004 2,064,414 183,418 47,893 190,219 0 0 42,051 178,008 2,706,004 170,549 22,144 3,987 196,680 74,432 18,905 103,343 8,481 7 155,558 11,727 0 0 0 5,234 0.31 0.31 4.49 8,844 5,126 879 0 18,190 11,469 1,623 17,610 17,610 0 0
EX-27 9 EXHIBIT 27 (B) RESTATED FDS
9 1,000 YEAR DEC-31-1997 DEC-31-1997 78,469 0 54,063 0 336,776 41,554 42,771 1,508,601 18,190 2,286,424 1,779,805 172,833 38,007 75,502 0 0 41,926 178,351 2,286,424 147,760 24,917 489 173,166 63,086 12,926 97,154 4,064 8 84,899 40,804 0 0 0 26,291 1.60 1.60 4.95 7,801 5,149 331 0 16,888 5,752 2,471 18,190 18,190 0 0
EX-27 10 EXHIBIT 27 (C) RESTATED FDS
9 1,000 YEAR DEC-31-1996 DEC-31-1996 83,854 0 2,868 0 328,867 83,719 85,180 1,331,966 16,888 1,995,878 1,626,666 119,452 26,726 34,250 0 0 39,851 148,933 1,995,878 133,465 25,403 840 159,708 57,662 10,672 91,374 5,012 8 70,066 32,769 0 0 0 21,281 1.34 1.34 4.97 5,200 6,402 235 0 15,088 5,011 1,799 16,888 16,888 0 0
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