-----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, T2GjKDMx8buNNBOuFTKfeVFp1E3pa9Y4M9lSAplvKjVFkNXV6+Uxt/CDRqiIffg5 wOvjsY1CzarxR8kt0MdYzw== 0000916641-99-000447.txt : 19990518 0000916641-99-000447.hdr.sgml : 19990518 ACCESSION NUMBER: 0000916641-99-000447 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 000-11733 FILM NUMBER: 99625578 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-Q 1 CITY HOLDING COMPANY 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED March 31, 1999 OR [ ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________to_____________. Commission File number 0-1173 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 (State or other jurisdiction of incorporation or (IRS Employer Identification Number) organization)
25 Gatewater Road Charleston, West Virginia, 25313 (Address of principal executive officers) (304) 769-1100 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes [ ]No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, $2.50 Par Value - 16,813,077 shares as of May 13, 1999. FORWARD-LOOKING STATEMENTS This Form 10-Q may include forward-looking financial information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking information is identified by phrases such as the Company expects or anticipates and words of similar effect. The Company's actual results achieved may differ materially from those projected in the forward-looking information. Factors that could cause such a difference include, among others: changes in interest rates and economic and other market conditions generally and in the Company's principal markets; competition for origination and servicing of mortgage loans, particularly loans with high loan-to-value ratios; and changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policy. The forward-looking financial information is provided to assist investors and Company stockholders in understanding anticipated future financial operations of the Company and are included pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Further, the Company disclaims any intent or obligation to update this forward-looking financial information. INDEX CITY HOLDING COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity - Three months ended March 31, 1999 and 1998 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 Notes to Consolidated Financial Statements - March 31, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURE PART I, ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES (IN THOUSANDS)
March 31 December 31 1999 1998 ------------------------------------------ (UNAUDITED) ASSETS Cash and due from banks $ 91,611 $ 87,866 Federal funds sold 3,542 31,911 ------------------------------------------ Cash and cash equivalents 95,153 119,777 Securities available for sale, at fair value 347,592 356,659 Securities held-to-maturity (approximate fair value at March 31, 1999 and December 31, 1998 - $40,301 and $40,539) 39,037 39,063 Loans: Gross loans 1,748,185 1,715,929 Allowance for loan losses (18,076) (17,610) ------------------------------------------ NET LOANS 1,730,109 1,698,319 Loans held for sale 290,669 246,287 Premises and equipment 70,679 71,094 Accrued interest receivable 24,678 21,660 Other assets 164,242 153,145 ------------------------------------------ TOTAL ASSETS $2,762,159 $2,706,004 ------------------------------------------ LIABILITIES Deposits: Noninterest-bearing $ 291,085 $ 303,421 Interest-bearing 1,789,368 1,760,994 ------------------------------------------ TOTAL DEPOSITS 2,080,453 2,064,415 Short-term borrowings 208,413 183,418 Long-term debt 110,602 102,719 Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely subordinated debentures of City Holding Company 87,500 87,500 Other liabilities 55,538 47,893 ------------------------------------------ TOTAL LIABILITIES 2,542,506 2,485,945 STOCKHOLDERS' EQUITY Preferred stock, par value $25 per share: authorized - 500,000 shares: none issued Common stock, par value $2.50 per share: 50,000,000 shares authorized; 16,820,276 shares issued and outstanding at March 31, 1999 and December 31, 1998, including 17,332 and 10,000 shares, respectively, in treasury 42,051 42,051 Capital surplus 58,348 58,365 Retained earnings 122,092 120,209 Cost of common stock in treasury (540) (274) Accumulated other comprehensive loss (2,298) (292) ------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 219,653 220,059 ------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,762,159 $2,706,004 ------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) CITY HOLDING COMPANY AND SUBSIDIARIES (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Three Months Ended March 31 1999 1998 --------------------------------------- INTEREST INCOME Interest and fees on loans $43,708 $39,720 Interest on investment securities: Taxable 4,274 4,588 Tax-exempt 1,288 1,203 Other interest income 1,325 542 --------------------------------------- TOTAL INTEREST INCOME 50,595 46,053 INTEREST EXPENSE Interest on deposits 18,597 17,107 Interest on short-term borrowings 1,958 2,447 Interest on long-term debt 1,643 1,641 Interest on trust preferred securities 1,998 8 --------------------------------------- TOTAL INTEREST EXPENSE 24,196 21,203 --------------------------------------- NET INTEREST INCOME 26,399 24,850 Provision for loan losses 2,414 1,229 --------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 23,985 23,621 OTHER INCOME Investment securities gains (losses) 42 (15) Service charges 2,185 2,137 Mortgage loan servicing fees 5,685 3,883 Net origination fees on junior-lien mortgages 193 2,146 Gain on sale of loans 725 2,558 Other income 5,589 3,464 --------------------------------------- TOTAL OTHER INCOME 14,419 14,173 OTHER EXPENSES Salaries and employee benefits 15,212 12,251 Occupancy, excluding depreciation 3,344 1,762 Depreciation 2,628 2,156 Advertising 1,120 3,177 Other expenses 8,315 8,026 --------------------------------------- TOTAL OTHER EXPENSES 30,619 27,372 --------------------------------------- INCOME BEFORE INCOME TAXES 7,785 10,422 INCOME TAXES 2,540 3,685 --------------------------------------- NET INCOME $5,245 $6,737 --------------------------------------- Basic earnings per common share $ 0.31 $0.40 --------------------------------------- Diluted earnings per common share $ 0.31 $0.40 --------------------------------------- Average common shares outstanding: Basic 16,820 16,642 --------------------------------------- Diluted 16,820 16,789 ---------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (IN THOUSANDS)
Accumulated Other Total Common Capital Retained Treasury Comprehensive Stockholders' Stock Surplus Earnings Stock Loss Equity ---------- ---------- ----------- ----------- --------------- --------------- Balances at December 31, 1998 $42,051 $58,365 $120,209 $(274) $(292) $220,059 Comprehensive income: Net income 5,245 5,245 Other comprehensive income, net of deferred income taxes of $1,337: Unrealized loss on securities of $1,981, net of reclassification adjustment for gains included in net income of $25 (2,006) (2,006) --------------- Total comprehensive income 3,239 Cash dividends declared ($.20/share) (3,362) (3,362) Purchase of 11,999 shares of treasury stock (398) (398) Issuance of contingently-issuable shares of common stock (17) 132 115 ========== ========== =========== =========== =============== =============== Balances at March 31, 1999 $42,051 $58,348 $122,092 $(540) $(2,298) $219,653 ========== ========== =========== =========== =============== =============== Accumulated Other Total Common Capital Retained Treasury Comprehensive Stockholders' Stock Surplus Earnings Stock Income Equity ---------- ---------- ----------- ----------- --------------- --------------- Balances at December 31, 1997 $41,926 $52,004 $127,142 $(3,248) $2,453 $220,277 Comprehensive income: Net income 6,737 6,737 Other comprehensive income, net of deferred income taxes of $139: Unrealized gain on securities of $199, net of reclassification adjustment for losses included in net income of $9 208 208 --------------- Total comprehensive income 6,945 Cash dividends declared City ($.19 a share) (1,227) (1,227) Horizon (1,739) (1,739) Exercise of stock options 6 25 31 Purchase of shares of treasury stock by Horizon (2,114) (2,114) Common stock issued in acquisitions 155 2,831 2,986 ========== ========== =========== =========== =============== =============== Balances at March 31, 1998 $42,087 $54,860 $130,913 $(5,362) $2,661 $225,159 ========== ========== =========== =========== =============== =============== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS CITY HOLDING COMPANY AND SUBSIDIARIES (IN THOUSANDS)
Three Months Ended March 31 1999 1998 --------------------------------------- OPERATING ACTIVITIES Net income $ 5,245 $ 6,737 Adjustments to reconcile net income to net cash used in operating activities: Net amortization 1,267 818 Provision for depreciation 2,628 2,033 Provision for possible loan losses 2,414 1,229 Loans originated for sale (110,593) (84,439) Purchases of loans held for sale (60,225) (246,061) Proceeds from loans sold 127,161 231,051 Realized gains on loans sold (725) (2,558) Realized investment securities (gains) losses (42) 15 Increase in accrued interest receivable (3,018) (3,820) Increase in other assets (12,762) (33,873) Increase in other liabilities 7,645 1,690 --------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (41,005) (127,178) INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity 27 830 Proceeds from sales of securities available for sale 5,607 6,088 Proceeds from maturities and calls of securities available for sale 26,020 39,219 Purchases of securities available for sale (24,012) (40,896) Net increase in loans (34,204) (24,502) Purchases of premises and equipment (2,213) (11,645) --------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (28,775) (30,906) FINANCING ACTIVITIES Net (decrease) increase in noninterest-bearing deposits (12,336) 8,750 Net increase in interest-bearing deposits 28,374 34,753 Net increase in short-term borrowings 24,995 46,309 Proceeds from long-term debt 8,000 31,403 Repayment of long-term debt (117) - Net proceeds from issuance of trust preferred securities - 29,158 Purchases of treasury stock (398) (2,114) Exercise of stock options - 31 Cash dividends paid (3,362) (2,966) --------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 45,156 145,324 --------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (24,624) (12,760) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 119,777 132,532 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 95,153 $ 119,772 ---------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements, which are unaudited, include all the accounts of City Holding Company ("the Parent Company") and its wholly-owned subsidiaries (collectively, "the Company"). On December 31, 1998, the Company's merger of Horizon Bancorp, Inc. became effective. The transaction was accounted for under the pooling-of-interests method of accounting. As such, the Company's historical financial information has been restated to include the operations of Horizon for all periods presented. All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 1999, are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 1999. The Company's accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management's estimates. Certain amounts in the unaudited consolidated financial statements have been reclassified. Such reclassifications had no impact on net income or stockholders' equity in any period presented. For further information, refer to the consolidated financial statements and footnotes thereto included in the City Holding Company annual report on Form 10-K for the year ended December 31, 1998. NOTE B - INVESTMENT SECURITIES Horizon Bancorp, Inc., which was acquired December 31, 1998, maintained selected debt securities in a held-to-maturity classification based on its management's intent and Horizon's ability to hold such securities to maturity. On April 1, 1999, the Company reclassified those securities from held to maturity to available for sale. This transfer is consistent with the Company's Investment Portfolio accounting policies and provides management with additional liquidity alternatives and more flexibility in managing the Company's interest rate risk. At the date of transfer, the amortized cost of those securities was $39.04 million and the unrealized gain on those securities was $1.26 million. NOTE C - JUNIOR LIEN MORTGAGE LOAN ACTIVITY During 1998, the Company completed quarterly securitizations of its junior lien mortgage loan product and was actively involved in secondary market loan sales of this product on a monthly basis. As a result, junior lien mortgage loans acquired by the Company through either retail or wholesale delivery channels were generally securitized or sold within 90-180 days during 1998. Therefore, fees earned on, and costs to produce or acquire, junior lien mortgage loans were generally recognized by the Company as incurred. During the first quarter of 1999, management decided to transact fewer securitizations to take advantage of economic efficiencies associated with the fixed costs in transacting larger collateral pool securitizations. Additionally, as the secondary market for third-party loan sales continued its contraction into the first quarter of 1999, minimal secondary market sales of this product were completed. Instead, these loans were accumulated on the Company's balance sheet to be included in a planned second quarter securitization. As a result, the Company deferred net origination costs of approximately $3.00 million during the first quarter of 1999. Such net costs are expected to be recognized by the Company upon consummation of the planned securitization of this product during the second quarter of 1999. The deferred net costs were included in the Company's valuation of the estimated fair value of its loans held for sale portfolio as of March 31, 1999. Loans held for sale are reported in the Company's balance sheet at the lower of aggregate cost or estimated fair value and, based on management's estimated fair value analysis as of March 31, 1999, no fair value adjustment was determined to be necessary. NOTE D - TRUST PREFERRED SECURITIES On October 27, 1998, City Holding Capital Trust II (Capital Trust II), a special-purpose statutory trust subsidiary of the Company sold via public offering $57.5 million of 9.125% trust preferred capital securities (the Capital Securities II) and issued $1.8 million of common securities to the Company. Distributions on the Capital Securities II are payable quarterly and each Capital Security has a stated liquidation value of $25. To fund Capital Trust II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior Subordinated Debentures (the Debentures II) with a stated maturity date of October 31, 2028. The sole assets of Capital Trust II are the Debentures II. Cash distributions on the Capital Securities II in Capital Trust II are made to the extent interest on the Debentures II is received by Capital Trust II. The Company, through various agreements, has irrevocably and unconditionally guaranteed all of Capital Trust II's obligations under the Capital Securities II regarding payment of distributions and payment on liquidation or redemption of 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 and Capital Securities II are recorded in the consolidated statements of income as interest expense. The Company's interest payments on the Debentures and the Debentures II are fully tax deductible. NOTE E - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, certain financial products are offered by the Company to accommodate the financial needs of its customers. Loan commitments (lines of credit) represent the principal off-balance sheet financial product offered by the Company. At March 31, 1999, commitments outstanding to extend credit totaled approximately $203.86 million. To a much lesser extent, the Company offers standby letters of credit which require payments to be made on behalf of customers when certain specified future events occur. Amounts outstanding pursuant to such standby letters of credit were $7.02 million as of March 31, 1999. Substantially all standby letters of credit have historically expired unfunded. Both of the above arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Collateral is obtained based on management's credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments. NOTE F - NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet and allows hedge accounting when specific criteria are met. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000. The impact of adopting the provisions of this statement on the Company's financial position or results of operations subsequent to the effective date is not currently estimable and will depend on the financial position of the Company and the nature and purpose of the derivative instruments in use by management at that time. NOTE G - LONG TERM DEBT Long-term debt includes an obligation of the Parent Company consisting of a $35 million revolving credit loan facility with an unrelated party. At December 31, 1998, $23 million was outstanding. The loan has a variable rate (6.465% at March 31, 1999) with interest payments due quarterly and principal due at maturity in June 30, 1999. Management intends to refinance the loan according to provisions provided in the agreement. The loan agreement contains certain restrictive provisions applicable to the Parent Company including limitations on additional long-term debt. The Parent Company has pledged the common stock of City National Bank as collateral for the revolving credit loan. The Company, through its banking subsidiaries, maintains long-term financing from the FHLB as follows:
Amount Available Amount Outstanding Interest Rate Maturity 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 2,000 1,900 6.02 July 2005 1,500 1,400 5.94 July 2005 25,000 25,000 4.89 January 2008 5,000 5,000 5.48 February 2008 2,300 2,100 6.05 April 2008 2,000 2,000 5.62 July 2008 10,000 10,000 4.86 October 2008 1,500 1,500 7.14 June 2015
In addition to the financing discussed above, one of the Company's subsidiaries has as unused line of credit available with the FHLB in the amount of $26.28 million. NOTE H - SEGMENT INFORMATION The Company operates three business segments: community banking, mortgage banking, and other financial services. These business segments are primarily identified by the products or services offered and the channels through which the product or service is offered. The community banking operations consists of various community banks that offer customers traditional banking products and services through various delivery channels. The mortgage banking operations include the origination, acquisition, servicing, and sale of mortgage loans. The other financial services business segment consists of nontraditional services offered to customers, such as investment advisory, insurance, and internet technology products. Another defined business segment of the Company is corporate support which includes the parent company and other support needs. The accounting policies for each of the business segments are the same as those of the Company. Services provided to the banking segments by the divisions within the other financial services segment are eliminated in consolidation. Selected segment information is included in the following table:
Other Community Mortgage Financial General (IN THOUSANDS) Banking Banking Services Corporate Eliminations Consolidated ------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 1999 Net interest income (expense) $ 24,487 $ 2,240 $ 13 $ (341) $ - $ 26,399 Provision for loan losses (2,414) - - - - (2,414) ------------------------------------------------------------------------------ Net interest income after - provision for loan losses 22,073 2,240 13 (341) 23,985 Other income 6,089 6,671 4,563 57 (2,961) 14,419 Other expenses 19,335 7,157 4,557 2,531 (2,961) 30,619 ------------------------------------------------------------------------------ Income before income taxes 8,827 1,754 19 (2,815) - 7,785 Income tax expense (benefit) 2,905 697 6 (1,068) - 2,540 ------------------------------------------------------------------------------ NET INCOME $ 5,922 $ 1,057 $ 13 $ (1,747) $ - $ 5,245 ------------------------------------------------------------------------------ Average assets $ 2,312,983 $ 356,593 $ 15,972 $ 10,735 $ - $2,696,283 ------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 1998 Net interest income (expense) $ 22,801 $ 2,800 $ 16 $ (767) $ - $ 24,850 Provision for loan losses (1,229) - - - - (1,229) ------------------------------------------------------------------------------ Net interest income after provision for loan losses 21,572 2,800 16 (767) - 23,621 Other income 4,412 8,431 970 681 (321) 14,173 Other expenses 16,997 7,243 960 2,493 (321) 27,372 ------------------------------------------------------------------------------ Income before income taxes 8,987 3,988 26 (2,579) - 10,422 Income tax expense (benefit) 2,753 1,566 19 (654) - 3,685 ------------------------------------------------------------------------------ NET INCOME $ 6,234 $ 2,422 $ 7 $ (1,925) $ - $ 6,737 ------------------------------------------------------------------------------ Average assets $ 2,089,491 $ 234,674 $ 10,194 $ 5,202 $ - $2,339,561 ------------------------------------------------------------------------------
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL SUMMARY Consolidated net income for the three months ended March 31, 1999 was $5.25 million or $0.31 per diluted common share, compared to $6.74 million or $0.40 per diluted common share for the three months ended March 31, 1998. Return on average assets (ROA) was 0.78% and return on average equity (ROE) was 9.54% for the three months ended March 31, 1999. ROA and ROE were 1.15% and 12.13%, respectively, for the same period in 1998. The decline in net income, ROA and ROE for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998, is primarily attributed to the Company's mortgage banking segment. Within that business line, net income declined $1.37 million in 1999, from $2.42 million to $1.06 million for the three months ended March 31, 1998 and 1999, respectively. This decrease was due to minimal secondary market sales of junior lien mortgage loans and no securitization transaction during the first quarter of 1999. During the first quarter of 1999, management decided to transact fewer securitizations to take advantage of economic efficiencies associated with the fixed costs in transacting larger collateral pool securitizations. Additionally, as the secondary market for third-party loan sales continued its contraction into the first quarter of 1999, minimal secondary market sales of this product were completed. Instead, these loans were accumulated on the Company's balance sheet to be included in a planned second quarter securitization. As a result, gains recorded from the sale of loans, including securitization gains, decreased from $2.56 million to $725,000 for the three months ended March 31, 1998 and 1999, respectively. Management expects to complete a securitization of a larger, as compared to previous transactions, pool of collateral loans during the second quarter of 1999. Within the community banking segment, net income decreased approximately $312,000 from $6.23 million to $5.92 million for the three months ended March 31, 1998 and 1999, respectively. This decline was primarily the result of a $1.19 million increase in the provision for loan losses, on a quarter-to-quarter comparison. The increased loan loss provision is associated with the deterioration of a significant credit in the Summers County, West Virginia market and the continued integration of the Horizon Bancorp, Inc. loan portfolio into City Holding Company's risk management analysis. NET INTEREST INCOME Although net interest income, on a tax equivalent basis, increased $1.56 million or 6.09% when comparing the quarters ended March 31, 1999 and 1998, the Company experienced an overall decline in its net interest margin of 34 basis points from 4.76% to 4.42%. Within the community banking segment, the yield earned on real estate loans declined 28 basis points on a quarter-to-quarter comparison. Corresponding with the decline in the return on the loan portfolio from 8.93% for the three months ended March 31, 1998, to 8.61% for the three months ended March 31, 1999, the average cost of total interest and noninterest-bearing deposits decreased 19 basis points from 3.81% to 3.62%. Additionally, costs of short-term and long-term borrowings decreased 108 basis points and 51 basis points, respectively, on a quarter-to-quarter comparison. Within the mortgage banking segment, the yield earned on loans held for sale declined 66 basis points, quarter-to-quarter, from 10.76% to 10.10%. Volume increases in loans held for sale resulted in $2.72 million of additional interest income, partially offset by a $2.01 million decline due to interest rate changes. During the first quarter of 1999, the Company earned $1.24 million interest income resulting from its retained interest in its five securitized loan pools, compared to $180,000 during the first quarter of 1998 recognized on one securitized pool. Partially offsetting increases in interest income resulting from mortgage banking activities, the cost of trust preferred securities, used primarily to capitalize mortgage banking operations, represented $2.00 million in interest expense during the first quarter of 1999 with minimal similar cost during the first quarter of 1998. INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Three months ended March 31, 1999 1998 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------------------------------------------------------------- EARNING ASSETS Loans (1): Commercial and industrial $ 533,173 $11,425 8.57% $ 477,945 $11,008 9.21% Real estate 837,602 16,901 8.07 673,977 14,070 8.35 Consumer obligations 355,870 8,819 9.91 365,822 8,795 9.62 ---------------------------------------------------------------- Total loans 1,726,645 37,145 8.61 1,517,744 33,873 8.93 Loans held for sale 259,758 6,562 10.10 217,299 5,847 10.76 Securities: Taxable 286,238 4,274 5.97 286,093 4,588 6.41 Tax-exempt (2) 104,961 1,982 7.55 94,767 1,883 7.95 ---------------------------------------------------------------- Total securities 391,199 6,256 6.40 380,860 6,471 6.80 Retained interest in securitized 66,240 1,244 7.51 5,632 180 12.78 loans Federal funds sold 8,349 81 3.88 25,739 362 5.63 ---------------------------------------------------------------- Total earning assets 2,452,191 51,288 8.37 2,147,274 46,733 8.71 Cash and due from banks 82,467 64,413 Bank premises and equipment 70,015 58,155 Other assets 109,435 88,998 Less: allowance for possible loan losses (17,825) (19,279) ---------------------------------------------------------------- Total assets $2,696,283 $2,339,561 ---------------------------------------------------------------- INTEREST-BEARING LIABILITIES Demand deposits $ 346,249 $ 2,553 2.95% $ 296,777 $ 2,404 3.24% Savings deposits 391,541 2,550 2.61 382,404 2,854 2.99 Time deposits 1,031,357 13,494 5.23 873,446 11,849 5.43 Short-term borrowings 181,111 1,958 4.32 181,223 2,447 5.40 Long-term debt 104,845 1,643 6.27 96,857 1,641 6.78 Trust preferred securities 87,500 1,998 9.13 333 8 9.15 ---------------------------------------------------------------- Total interest-bearing 2,142,603 24,196 4.52 1,831,040 21,203 4.63 liabilities Demand deposits 286,708 243,392 Other liabilities 47,126 42,905 Stockholders' equity 219,846 222,224 ---------------------------------------------------------------- Total liabilities and stockholders' equity $2,696,283 $2,339,561 ---------------------------------------------------------------- Net interest income $27,092 $25,530 ---------------------------------------------------------------- Net yield on earning assets 4.42% 4.76% ----------------------------------------------------------------
(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35% in 1999 and 1998. RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (IN THOUSANDS)
Three months ended March 31, 1999 vs. 1998 Increase (Decrease) Due to Change In: Volume Rate Net ----------------------------------------- INTEREST INCOME FROM Loans: Commercial and industrial $ 4,086 $(3,669) $ 417 Real estate 5,794 (2,962) 2,832 Consumer obligations (1,005) 1,029 24 ----------------------------------------- Total loans 8,875 (5,602) 3,273 Loans held for sale 2,723 (2,008) 715 Securities: Taxable 16 (330) (314) Tax-exempt (1) 580 (481) 99 ----------------------------------------- Total securities 596 (811) (215) Retained interest in securitized loans 1,597 (533) 1,064 Federal funds sold (193) (88) (281) ----------------------------------------- Total interest-earning assets $13,598 $(9,402) $4,556 ----------------------------------------- INTEREST EXPENSE ON Demand deposits $ 1,219 $(1,070) $ 149 Savings deposits 411 (715) (304) Time deposits 4,190 (2,545) 1,645 Short-term borrowings (2) (487) (489) Long-term debt 517 (515) 2 Trust preferred securities 1,990 - 1,990 ----------------------------------------- Total interest-bearing liabilities $8,325 $(5,332) $2,993 ----------------------------------------- NET INTEREST INCOME $5,273 $(3,710) $1,563 -----------------------------------------
(1) Fully federal taxable equivalent using a tax rate of 35% in 1999 and 1998. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. LOAN PORTFOLIO The composition of the Company's loan portfolio as of March 31, 1999, is presented in the following table: Commercial, financial and agricultural $ 553,333 Real estate-mortgage 840,387 Installment loans to individuals 354,465 ----------------- Total loans $ 1,748,185 ----------------- The loan portfolio increased 2.35% during the first three months of 1999, from $1.72 billion at December 31, 1998, to $1.75 billion at March 31, 1999. This increase is due to the Company's continued growth in its existing markets. ALLOWANCE AND PROVISION FOR LOAN LOSSES Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a monthly basis to provide for losses inherent in the portfolio. Through the Company's internal loan review department, management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors. Individual credits are selected throughout the year for detail loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to historical charge-off percentages and general economic conditions. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior charge-off history and general economic conditions, with less emphasis placed on specifically reviewing individual credits, unless circumstances suggest that specific reviews are necessary. In these categories, specific loan reviews would be conducted on higher balance and higher risk loans. In evaluating the adequacy of the allowance, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, seasoning of the portfolio, and general economic conditions. Reserves not specifically allocated to individual credits are generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Determination of such reserves is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between net charge-offs and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio. At March 31, 1999, the allowance for loan losses was $18.08 million or 1.03% of total period-end loans compared to $17.61 million or 1.03% as of December 31, 1998. As of March 31, 1999, management is of the opinion that the consolidated allowance for loan losses is adequate to provide for losses on existing loans within the portfolio. As management continues to aggressively collect problem credits and restructure the Company's post-merger loan portfolio, the Company's provision for loan losses increased from $1.23 million to $2.41 million for the three months ended March 31, 1998 and 1999, respectively. During the first three months of 1999, the Company recorded loan charge-offs of approximately $2.35 million and recorded recoveries of $401,000 resulting in net charge-offs of $1.95 million. This represents an increase of $597,000 or 44.19% from net charge-offs of $1.35 million recorded during the three months ended March 31, 1998.
Three months ended Year ended December March 31, 31, ALLOWANCE FOR LOAN LOSSES 1999 1998 ---------------------------------------- Balance at beginning of year $17,610 $18,190 Charge-offs: Commercial, financial and agricultural (593) (2,385) Real estate-mortgage (140) (1,375) Installment loans to individuals (1,616) (7,709) ----------------------------------- Totals (2,349) (11,469) Recoveries: Commercial, financial and agricultural 34 297 Real estate-mortgage 47 43 Installment loans to individuals 320 1,283 ----------------------------------- Totals 401 1,623 ----------------------------------- Net charge-offs (1,948) (9,846) Provision for loan losses 2,414 8,481 Balance of acquired institution - 785 =================================== Balance at end of year $18,076 $17,610 =================================== AS A PERCENT OF AVERAGE TOTAL LOANS Net charge-offs .11% .58% Provision for loan losses .14 .51 AS A PERCENT OF NONPERFORMINGLOANS Allowance for loan losses 100.27% 118.59% SUMMARY OF NON-PERFORMING ASSETS Non-accrual loans $11,243 $8,844 Accruing loans past due 90 days or more 5,910 5,126 Restructured loans 875 879 ---------------------- --------- Total non-performing loans 18,028 14,849 Other real estate owned 1,815 2,626 ====================== ========= Total non-performing assets $19,843 $17,475 ====================== =========
LOANS HELD FOR SALE Loans held for sale represent mortgage loans the Company has either purchased or originated with the intent to sell or securitize and includes traditional fixed-rate and junior lien mortgage loans. Certain traditional fixed-rate mortgages are originated by the Company, with the intent to sell, servicing released, in the secondary market. This product line enables the Company to provide conventional, fixed-rate mortgage products to its customers, but minimize the interest-rate risk associated with fixed-rate loans. At March 31, 1999, conventional mortgage loans represented $26.13 million or 8.99% of the reported balance of loans held for sale. The Company also purchases and originates junior lien and similar mortgage loans for sale or securitization. Generally, these loans are used by the borrower to finance property improvements or to consolidate personal debt. Loans are acquired either on a flow or bulk basis from an approved network of unaffiliated lenders. Additionally, the Company solicits loans directly from borrowers on a nationwide basis. Although these loans are generally obtained from borrowers outside of the Company's community banking market areas, management believes that the geographic diversification of the loan pool reduces the risks associated with downturns in specific local economies. Because the retail and correspondent lending divisions originate and acquire these loans on a nationwide basis, the Company's risk related to geographic concentration is significantly reduced. In addition to concentration risk, there are other risks associated with the junior lien mortgage pool. Such risks include credit risk related to the quality of the underlying loan and the borrower's financial capability to repay the loan, market risk related to the continued attractiveness of the loan product to both borrowers and end-investors, and interest rate risk related to potential changes in interest rates and the resulting repricing of both financial assets and liabilities. The Company manages this risk by continuously improving policies and procedures designed to reduce the risk of loss to a level commensurate with the return being earned on the Company's investment in this program. The Company has established formal underwriting guidelines and quality control procedures which emphasize the creditworthiness of the borrower, with less focus placed on the value of the underlying collateral. Factors such as credit scores, debt-to-income ratios, mortgage credit history and others are factored into the lending decision for these loans. Additionally, property appraisals, in varying degrees, are required for certain loans. Other risk-reducing factors include the correspondent lending division's pre-approved list of lenders from whom loans may be acquired. Approval of lenders is based on due diligence procedures performed on each lender and continued evaluation of the performance of loans purchased from each lender. During the first quarter of 1999, the Company originated $110.59 million and purchased $60.23 million in loans held for sale and sold $127.16 million during the same period. This compares to originations of $84 million, purchases of $246 million and sales of $231 million during the first quarter of 1998. LOAN SECURITIZATIONS One of the methods utilized by management to mitigate the risk of loss related to the origination and acquisition of junior lien mortgage loans is the securitization of these loans. By securitizing originated and purchased junior lien mortgage loans, the Company effectively removes these loans from its balance sheet by creating an investment security or securities, supported by the cash flows generated by these loans, and selling the resulting investment security or securities to independent third parties. As part of this process, the Company provides credit enhancement, in the form of overcollateralization, with respect to the investment security created. As a result, the Company does maintain a certain level of credit, prepayment and interest rate risk related to these loans. The risk maintained by the Company, however, is less than that which would be maintained had the Company held these loans on its balance sheet until the loans matured. In return for this risk exposure, the Company receives on-going income from each securitization that is determined as a function of the "excess spread" derived from the securitized loans. The "excess spread", generally, is calculated as the difference between (A) the interest at the stated rate paid by borrowers and (B) the sum of pass-through interest paid to third-party investors and various fees, including trustee, insurance, servicing, and other similar costs. The "excess spread" represents income to be recognized by the Company over the life of the securitized loan pool. As previously noted, the Company did not transact a securitization during the first quarter of 1999. As of March 31, 1999 and March 31, 1998, the Company reported retained interests in its securitized loan pools of approximately $65.71 million and $12.40 million, including accrued interest. Because the retained interests are uncertificated, the Company has included the recorded value of its retained interests in Other Assets in the Consolidated Balance Sheets. Assumptions used to estimate the retained interests include default rates approximating 10% cumulative losses, prepayment rates of 17-21% CPR, and a weighted-average discount rate of 12.23%. Management monitors the actual default and prepayment rates of each securitized pool on a monthly basis, in addition to the outstanding pool balance, to ensure the rates used to estimate the retained interest are reasonable. Each of the securitized pools is serviced by the Company's mortgage loan servicing division. LOAN SERVICING As of March 31, 1999, City Mortgage Services (a division of City National Bank) maintained a servicing portfolio of $1.96 billion. Loans serviced for others are not included in the Consolidated Balance Sheets of the Company. The Company has recorded mortgage loan servicing rights of $8.33 million in Other Assets at March 31, 1999, associated with the right to service mortgage loans for others. The recorded value of mortgage servicing rights is assessed quarterly to determine if the value of those rights has become impaired during the period. In doing so, management estimates the present value of future net cash flows to be derived from its servicing activities. Factors included in the impairment analysis include anticipated servicing income, costs associated with servicing the portfolio, discount rates, and loan prepayment and default rates. As of March 31, 1999, management has determined, based on this analysis, that the recorded value of its servicing rights is fairly stated and there is no impairment in that value. MARKET RISK MANAGEMENT Market risk to the Company is the risk of loss arising from changes in current and future cash flows, fair values, earnings, or capital due to adverse movements in interest rates. The Company seeks to reduce interest rate risk through asset and liability management, where the goal is to optimize the balance between earnings and interest rate risk. The Company's asset and liability management function is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. Management measures interest rate risk through an interest sensitivity gap analysis and through performing earnings sensitivity analyses. In management's opinion, there have been no significant changes in the Company's market risk since December 31, 1998. The Company manages its liquidity position to provide necessary funding for asset growth and to ensure that the funding needs of its customers can be satisfied promptly. Liquidity management is accomplished by maintaining a significant portion of the Company's investment portfolio classified as available-for-sale, maintaining sufficient borrowing capacity with the Company's lenders and providing consistent growth in the core deposit base of its banking subsidiaries. The Company also utilizes its access to the capital markets as a tool for managing its liquidity position. During 1998, through the issuances of asset-backed and trust preferred securities, the Company successfully utilized the capital markets to diversify its available funding sources. Additionally, the Company has entered into agreements with three investment banking firms to issue over $100 million of the Company's certificates of deposit. The certificates of deposit can be issued in maturities of up to five years at rates equal to a comparable Treasury instrument at the time of issuance plus a market-based spread. The Company is not committed to issuing a pre-determined amount of its certificates of deposit under these agreements, the use of which is at the sole discretion of the Company. At March 31, 1999, $22.0 million of certificates of deposit had been sold under these agreements at an average interest rate of 5.36%. The average term of the issued certificates of deposit was 1.5 years at March 31, 1999. An additional source of liquidity includes the parent company's $35.0 million revolving loan agreement. At March 31, 1999, $23.0 million was outstanding pursuant to the terms of the agreement. As necessary, the Parent Company has used funds available from this facility to provide additional capital to its subsidiaries, to finance merger and acquisition activity, and to fund internal growth and expansion. The Company's cash and cash equivalents, represented by cash, due from banks, and federal funds sold, are a product of its operating, investing and financing activities as set forth in the Consolidated Statements of Cash Flows included herein. The decrease in cash used in the Company's operating activities during the first quarter of 1999 was generally associated with a $55.79 million decrease in net fundings of loans held for sale. As a result of less cash used in operating and investing activities during the first quarter of 1999, as compared to the first quarter of 1998, the Company obtained less cash through financing activities. During the first quarter of 1998, cash was provided through the Company's issuance of trust preferred securities ($29.16 million), net increases in short-term and long-term borrowings ($77.71 million), and net increases in core deposits ($43.50 million). During the first quarter of 1999, net borrowings increased $32.88 million, net deposits increased $16.04 million, and there was no issuance of trust preferred securities. CAPITAL RESOURCES During the first three months of 1999, the Company's consolidated stockholders' equity decreased approximately $410,000, from $220.06 million at December 31, 1998 to $219.65 million at March 31, 1999. This decrease was largely due to payment of normal dividends approximating $3.36 million and a $2.01 million decline in Other Comprehensive Income, primarily the result of declines in the fair market value of the Company's available-for-sale securities portfolio. Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8 percent, with at least one-half of capital consisting of tangible common stockholders' equity and a minimum Tier I leverage ratio of 4 percent. At March 31, 1999, the Company's total capital to risk-adjusted assets ratio was 11.98%, its Tier I capital ratio was 10.58%, and its leverage ratio was 9.43%. Similarly, the Company's banking subsidiaries are also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, the banking subsidiaries are required to maintain minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and 4.00%, respectively. To be classified as "well capitalized," the banking subsidiaries must maintain total capital, Tier I capital, and leverage ratios of 10.00%, 6.00%, and 5.00%, respectively. As of March 31, 1999, the Company's lead bank, City National, reported total capital, Tier I capital, and leverage ratios of 10.53%, 9.99%, and 9.22%, respectively. Continued improvement in operating results, effective management of risks affecting the Company, and a focus on high asset quality have been, and will remain, the key elements in maintaining the Company's present capital position. Earnings from bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, the subsidiary banks have the capability to upstream sufficient dividends to meet the anticipated cash requirements of the Company. IMPACT OF THE YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Based on management's assessment of this issue, the Company determined that it would be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with the modifications that were implemented to existing software and conversions to new hardware, the Year 2000 issue will not pose significant operational problems. The Company's plan to resolve the Year 2000 issue is sponsored and closely monitored by both senior and executive level management. The Federal Financial Institutions Examination Council recommended that all systems reprogramming efforts be completed by December 31, 1998 to allow for sufficient testing and implementation. Management is of the opinion that the Company has complied with this recommendation. Year 2000 plan components have been executed in accordance with guidelines that were mandated by the Office of the Comptroller of the Currency. The Company's approach to Year 2000 compliance involves five industry standard phases: 1. Awareness Phase 2. Assessment Phase 3. Renovation Phase 4. Validation Phase 5. Implementation Phase Each of these phases has been fully completed. A sixth phase, "post implementation" was also adopted by the Company and is currently on-going and involves further testing of systems, vendor and supplier monitoring, and contingency plan assessments. The Company has developed a contingency plan for certain critical applications. This plan includes the development of crisis management procedures, manual back-up options, and the adjustment of staffing strategies. The Company has historically updated systems, replaced software and hardware, and made other systematic investments in technology on a regular basis. As a result, the Company's costs associated with Year 2000 remediation efforts have not been significant. Where necessary, the Company has utilized both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications, and will continue to do so. However, due to the Company's technology plan of hardware, software, and systems maintenance, the sum of the costs incurred to-date and the estimated costs remaining to be incurred is not material to the consolidated financial statements. Based on the results, to date, of implementing the Company's strategic plan, management believes that the risks affecting the Company associated with the Year 2000 issue should be minimal. Accordingly, management does not believe that the Year 2000 presents a material exposure as it relates to the Company's products and services. In addition, the Company has gathered information about the Year 2000 compliance status of its significant vendors, suppliers, and customers and continues to monitor their compliance. To date, the Company's management is not aware of any such party with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that such parties will be Year 2000 ready. The inability of such parties to complete their Year 2000 remediation process in a timely manner could materially impact the Company. The effect of non-compliance by such parties is not determinable. The recent merger of Horizon Bancorp, Inc. into the Company does not significantly impact the Company's Year 2000 readiness. The Company has historically converted each of its acquired financial institutions to its internal data processing environment. With the merger of Horizon, all significant data processing systems would have been converted to the Company's operating systems, regardless of the Year 2000 issue. Therefore, Year 2000 readiness has not necessarily accelerated the Company's replacement of equipment and systems within the Horizon banks. All significant data processing applications of the Horizon banks were converted to the Company's in-house data processing systems as of April 30, 1999. Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner and in accordance with the guidelines set forth by its regulatory authorities. As noted above, the Company is in its final post-implementation phase of further testing. If final testing identifies previously unknown Year 2000 exposures and those exposures cannot be timely addressed, the Company could experience significant difficulties in processing daily operating activities. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, or failure to properly date business records. The amount of potential liability and lost income cannot be reasonably estimated at this time. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The information called for by this item is provided under the caption "Market Risk Management" under Item 2--Management Discussion and Analysis of Financial Condition and Results of Operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6 Exhibits and Reports on Form 8-K Exhibit 11 - Computation of Earnings per Share Exhibit 27 - Financial Data Schedule for the three months ended March 31, 1999 Exhibit 27(a) - Restated Financial Data Schedule for the three months ended March 31, 1998 Filings of Form 8-K - On January 12, 1999, the Company filed a Current Report on Form 8-K to announce the completion of its acquisition of Horizon Bancorp, Inc. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY By: /s/ Michael D. Dean -------------------------------- Michael D. Dean Senior Vice President - Finance, Principal Accounting Officer and Duly Authorized Officer EX-11 2 EXHIBIT 11 EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE Three months ended March 31, 1999 1998 ----------------------- ---------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic: Net income $ 5,245 $6,737 Average shares outstanding 16,820 16,642 ======================= ====================== Basic EPS $ 0.31 $0.40 ======================= ====================== Diluted: Net income $ 5,245 $6,737 Average shares outstanding 16,820 16,642 Effect of dilutive securities: Employee stock options - 138 Contingently issuable stock 5 9 ----------------------- ---------------------- Totals 16,825 16,789 ======================= ====================== Diluted EPS $ 0.31 $0.40 ======================= ====================== EX-27 3 EXHIBIT 27(A)
9 0000726854 1999 FDS 1,000 3-MOS DEC-31-1999 MAR-31-1999 91,611 0 3,542 0 347,592 39,037 40,301 1,748,185 18,076 2,762,159 2,080,453 208,413 55,538 198,102 42,051 0 0 177,602 2,762,159 43,708 5,562 1,325 50,595 18,597 24,196 26,399 2,414 42 30,619 7,785 0 0 0 5,245 0.31 0.31 4.42 11,243 5,910 875 0 17,610 2,349 401 18,076 18,076 0 0
EX-27 4 EXHIBIT 27(B)
9 0000726854 1998 FDS 1,000 3-MOS DEC-31-1998 MAR-31-1998 89,370 0 30,402 0 332,381 40,711 41,829 1,531,697 18,068 2,444,257 1,823,308 219,142 39,743 136,905 42,087 0 0 183,072 2,444,257 39,720 5,791 542 46,053 17,107 21,203 24,850 1,229 (15) 27,372 10,422 0 0 0 6,737 0.40 0.40 4.76 8,050 6,859 874 190 18,189 1,649 456 18,068 18,068 0 0
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