-----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, H26FWQCtyOPt+RVioaxhcSDfP7IFHYnozb5idtJkTLLAq2AClhvdRIh//1aRGmeR wmHOVHaLXg8kIcg8JxQjCg== 0000916641-01-000471.txt : 20010402 0000916641-01-000471.hdr.sgml : 20010402 ACCESSION NUMBER: 0000916641-01-000471 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 1586506 BUSINESS ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 BUSINESS PHONE: 3047691100 MAIL ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 10-K405 1 0001.txt FORM 10-K405 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, 2000. 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: Title of Each Class Name of Each Exchange on Which Registered: Common Stock, $2.50 par value The Nasdaq Stock Market - -------------------------------- ------------------------------------------ Securities registered pursuant to Section 12(g) of the Act: None. 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 as of March 28, 2001 was $147,937,055. As of March 28, 2001, there were 16,887,934 shares of the Company's common stock outstanding. (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.) DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders' report for the year ended December 31, 2000 are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual shareholders' meeting to be held June 13, 2001 are incorporated by reference into Part III. 1 FORM 10-K INDEX --------------- PART I Page ---- Item 1. Business......................................... 3 Item 2. Properties....................................... 11 Item 3. Legal Proceedings................................ 11 Item 4. Submission of Matters to a Vote of Security Holders............................... 11 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.................... 12 Item 6. Selected Financial Data.......................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 12 Item 8. Financial Statements and Supplementary Data...... 12 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure......... 12 PART III Item 10. Directors and Executive Officers of Registrant... 12 Item 11. Executive Compensation........................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 12 Item 13. Certain Relationships and Related Transactions... 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 13 Signatures....................................... 14-15 Exhibit Index 2 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 62 banking offices in West Virginia (56 offices), Ohio (2 offices) and California (4 offices), the Company's subsidiaries provide 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. The Company operates three business segments: community banking, mortgage banking, and other financial services. These segments are primarily identified by the products or services offered and the delivery channels through which the product or service is delivered. The Company also maintains a general corporate business segment that includes the operations of the Parent Company. 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. The mortgage banking segment includes the origination, acquisition, servicing and sale of, primarily, junior lien mortgage loans. Over the past few years, mortgage banking operations grew to represent a significant percentage of the Company's operating results. However, during 2000, the Company closed its California mortgage loan origination divisions and sold the mortgage servicing rights to approximately $1.10 billion or 92% of its mortgage loan servicing portfolio. Additionally, the Company announced its intentions to close its remaining specialty finance loan origination operations. As a result, the mortgage banking segment is expected to have minimal operations during 2001. The Company's other financial services segment includes brokerage and investment advisory services, insurance sales, internet service operations, and a direct mail division. Community-Banking Included within the community banking segment are the operating results generated from providing traditional banking products and services, including credit, deposit, trust and other similar services. No portion of the Company's deposits are derived from a single person or persons, the loss of which could have a material adverse effect on liquidity, capital, or other elements of financial performance. City National does, however, maintain approximately 37% of its borrowings with the Federal Home Loan Bank (FHLB). City National has historically utilized borrowing capacity with the FHLB to fund asset growth. Although no portion of the Company's loan portfolio is concentrated within a single industry or group of related industries, the Company historically has held residential mortgage loans as a significant portion of its loan portfolio. At December 31, 2000, 49% of the Company's loan portfolio was categorized as residential mortgage loans. However, due to the fractionated nature of residential mortgage lending, there is no concentration of credits that would be considered detrimental to the Company's financial position or operating results. City National, headquartered in Charleston, West Virginia, represents 92% of the total assets of the community banking segment. City National operates 56 offices in West Virginia and 2 offices in Ohio. The Company also maintains two wholly-owned banking subsidiaries, Del Amo Savings Bank FSB and Frontier Bancorp, headquartered in Torrance and Redondo Beach, California, respectively. Combined, the California banking franchises represent approximately 8% of the total assets of the community banking segment. During 2000, the Company announced its intention to complete an orderly exit from its California operations, which would include divesting of its investments in the California banking entities. The Company hopes to complete its divestiture of these entities by the end of 2001. 3 Mortgage Banking The mortgage banking segment generally includes the Company's operations that are devoted to the origination, acquisition, servicing, and sale of mortgage loan products. In previous years, the Company increased its mortgage banking operations to include the retail origination and wholesale acquisition of junior lien mortgage and similar loan products. The Company initiated this program, in part, to continue the growth of the Company's loan servicing division. Additionally, in December 1997, the Company initiated a loan securitization program, which included the securitization of junior lien mortgage loans. Including one securitization completed in May 1999, the Company has completed six such loan securitizations. As noted above, the Company is working to terminate its operations within the mortgage banking segment. Although the Company intends to continue to originate traditional, first lien mortgage loans for sale on the secondary market, this product line within the mortgage banking segment has historically not had a significant impact to the Company's results of operations or total assets. With the closure of its California specialty finance loan origination operations, the announced intention to close its remaining junior lien loan origination divisions, and the sale of its mortgage loan servicing rights, it is anticipated that the mortgage banking segment will have minimal operations in 2001. The Company does retain, however, residual interests from its six loan securitizations completed between 1997 and 1999. Although the Company terminated its loan securitization program in 1999, it still retains a residual interest in those securitizations. The retained interests and related funding and capital allocations are maintained in the mortgage banking segment. Other Financial Services The other financial services business segment includes the operations of the Company's securities brokerage subsidiary and City National's insurance, internet, and printing divisions. This segment is not considered significant to the Company's consolidated financial statements. In addition to the Company's community banking, mortgage banking, and other financial services business segments, the Company's general corporate business segment, which primarily includes the parent company and other administrative areas, provides general corporate support. Each of these business segments is 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 (in thousands) Community Mortgage Financial General Banking Banking Services Corporate Eliminations Consolidated --------- -------- --------- --------- ------------ ------------ 2000 - ---- Net interest income (expense)................... $ 102,916 $(11,302) $ (289) $(2,169) $ -- $ 89,156 Provision for loan losses....................... 25,480 -- -- -- -- 25,480 ---------- -------- ------- ------- --------- ---------- Net interest income (expense) after provision for loan losses................................ 77,436 (11,302) (289) (2,169) -- 63,676 Other income.................................... 12,421 13,729 12,921 3,629 (8,136) 34,564 Other expenses.................................. 91,369 40,668 19,536 8,906 (8,136) 152,343 ---------- -------- ------- ------- --------- ---------- Income before income taxes...................... (1,512) (38,241) (6,904) (7,446) -- (54,103) Income tax expense (benefit).................... 1,643 (15,283) (285) (1,806) -- (15,730) ---------- -------- ------- ------- --------- ---------- Net loss........................................ $ (3,155) $(22,958) $(6,619) $(5,640) $ -- $ (38,373) ========== ======== ======= ======= ========= ========== Average assets.................................. $2,732,085 $176,111 $13,085 $ 9,583 $ (153,845) $2,777,019 ========== ======== ======= ======= ========= ==========
4
Other (in thousands) Community Mortgage Financial General Banking Banking Services Corporate Eliminations Consolidated --------- -------- --------- --------- ------------ ------------ 1999 - ---- Net interest income (expense)................... $ 105,381 $ (5,273) $ (171) $ (1,517) $ -- $ 98,420 Provision for loan losses....................... 19,286 -- -- -- -- 19,286 ---------- -------- ------- -------- --------- ---------- Net interest income (expense) after provision for loan losses................................ 86,095 (5,273) (171) (1,517) -- 79,134 Other income.................................... 29,850 22,523 12,495 64 (5,397) 59,535 Other expenses.................................. 80,387 33,528 14,792 7,304 (5,397) 130,614 ---------- -------- ------- -------- --------- ---------- Income before income taxes...................... 35,558 (16,278) (2,468) (8,757) -- 8,055 Income tax expense (benefit).................... 12,920 (5,995) (808) (4,275) -- 1,842 ---------- -------- ------- -------- --------- ---------- Net income...................................... $ 22,638 $(10,283) $(1,660) $ (4,482) $ -- $ 6,213 ========== ======== ======= ======== ========= ========== Average assets.................................. $2,572,162 $306,819 $13,381 $ 12,697 $(186,327) $2,718,732 ========== ======== ======= ======== ========= ========== 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 (expense) 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 $ 12,968 $ -- $2,566,099 ========== ======== ======= ======== ========= ==========
Internal warehouse funding between the community banking segment and the mortgage banking and other financial services segments is eliminated in the Consolidated Balance Sheets. Services provided to the banking segments by the direct mail, insurance, and internet service provider divisions are eliminated in the Consolidated Statements of Income. 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 that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. 5 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"), the Office of Thrift Supervision, 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. On July 12, 2000, the Company announced that City National had entered into a formal agreement with the Comptroller of the Currency. The agreement required City National to adopt a three-year comprehensive strategic plan, improve its loan portfolio management, and develop and adhere to a written plan for liquidity, including a formal asset and liability management policy. City National also agreed to incorporate liquidity planning in its financial management process, implement a satisfactory program to manage interest rates, and ensure full compliance of its securitization program with recent OCC regulations. Additionally, City National agreed to develop a plan to dispose of loans held for sale that are held in excess of 90 days, develop a three-year capital plan, strengthen internal controls and its audit committee, and establish a program to maintain an adequate allowance for loan and lease losses. Additionally, as a consequence of entering into this agreement, City National became subject to certain FDIC restrictions regarding the issuance of brokered deposits. City National also agreed to maintain its regulatory Total Capital ratio above 10.00% and to establish a committee of its Board of Directors to oversee compliance with the agreement. 6 Since the date of the agreement, City National has devoted significant time and resources to comply with the formal agreement. City National established a compliance oversight committee, which meets regularly to determine the status of compliance with the agreement. City National, and the Company, have adopted a three-year comprehensive strategic plan and formalized its policies and procedures related to asset and liability management, including liquidity and interest rate risk issues. City National has also disposed of substantially all of its loans held for sale that had been held in excess of 90 days and transferred the unsold loans to the permanent portfolio at estimated fair market value. City National continues to address the remaining issues identified in the formal agreement, including improving its loan portfolio management, managing its allowance for losses, and strengthening internal controls. 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. 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. 7 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. Federal banking agencies have broad powers 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. As an example, 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. 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 be 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. At December 31, 2000, the Company's total capital, Tier I capital, and leverage ratios were 11.61%, 9.05%, and 7.94%, respectively. Similarly, City National's total capital, Tier I capital, and leverage ratios were 12.72%, 11.47%, and 10.10%. Despite these relatively strong capital ratios, City National cannot be categorized as "well capitalized" under the regulatory framework discussed previously. Any bank that has entered into a formal agreement with the OCC such as that disclosed is precluded from being categorized as "well capitalized', regardless of its capital ratios. Additionally, the formal agreement requires that City National maintain its total capital ratio above 10.00%. 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 banking 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. 8 The Company's banking subsidiaries are subject to various statutory restrictions on their ability to pay dividends to the Company. Specifically, the approval of the banks' 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. 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. Depending upon the financial condition of the subsidiary in question, the payment of dividends 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. As a result of the net loss reported for 2000 and depressed earnings at the subsidiary bank levels in 1999 and 1998, the subsidiary banks will be required to request and obtain regulatory approval prior to the payment of dividends to the Parent Company in 2001. Because of recent earnings trends, on January 31, 2001, the Company announced a suspension of the payment of dividends to holders of its common stock. Additionally, the Company will be required to request and obtain regulatory approval prior to the payment of future distributions on the Company's trust preferred issues. City National obtained OCC approval in order to pay a $2.69 million dividend to the Parent Company in March 2001, primarily for the purpose of satisfying the Parent Company's debt service requirements. The Parent Company obtained Federal Reserve approval to pay a $1.37 million interest distribution on the Company's trust preferred securities in March 2001. However, both the OCC and the Federal Reserve have broad discretionary authority in developing and applying policies and guidelines regarding the payment of dividends and other cash distributions. The recently received approvals obtained from the OCC and the Federal Reserve Board are not necessarily indicative of future regulatory decisions expected by the Company. Governmental Policies 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. (d) Employees --------- As of December 31, 2000, City Holding Company employed 1,352 associates. Employee relations within the Company are considered to be satisfactory. 9 (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, 2000 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...................................... 6 b. Analysis of Net Interest Earnings........................... 6-7 c. Rate Volume Analysis of Changes in Interest Income and Expense................................ 8 2. Investment Portfolio a. Book Value of Investments................................... 13 b. Maturity Schedule of Investments............................ 13 c. Securities of Issuers Exceeding 10% of Stockholders' Equity....................................... 13 3. Loan Portfolio a. Types of Loans.............................................. 13 b. Maturities and Sensitivity to Changes in Interest Rates..... 14 c. Risk Elements............................................... 17 d. Other Interest Bearing Assets............................... N/A 4. Summary of Loan Loss Experience................................. 17 5. Deposits a. Breakdown of Deposits by Categories, Average Balance and Average Rate Paid...................................... 6 b. Maturity Schedule of Time Certificates of Deposit and Other Time Deposits of $100,000 or More $100,000 or More........................................... 19 6. Return on Equity and Assets..................................... 3 10 Item 2 Properties - ---------------------- At December 31, 2000, the Company and its subsidiaries owned the majority of their principal business locations, including the Company's corporate headquarters. The corporate headquarters also house City National's primary data processing center, the main office of the loan servicing division, and the operations of City National's internet service division. City National also maintains 56 banking offices and one loan production office in West Virginia, two banking locations in Ohio, and two loan production offices near Costa Mesa, California. In addition to the office located in West Virginia, the loan servicing division maintains an office near Dallas, Texas and another office in Costa Mesa, California. Del Amo Savings Bank and Frontier Bancorp, wholly owned subsidiaries of the Company, each maintain two offices in Southern California. 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 Company's consolidated financial statements. Item 4 Submission of Matters to a Vote of Security Holders - --------------------------------------------------------------- None. 11 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters - -------------------------------------------------------------------------------- Pages 2 and 38 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, included in this report as Exhibit 13, are incorporated herein by reference. Item 6 Selected Financial Data - ----------------------------------- Selected Financial Data on page 1 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, 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 2 through 21 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, 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 10 through 11 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, 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 22 through 43 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, 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 2001 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 2001 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 2001 Proxy Statement under the caption "OWNERSHIP OF EQUITY SECURITIES". 12 Item 13 Certain Relationships and Related Transactions - ---------------------------------------------------------- The information required by Item 13 of FORM 10-K appears in the Company's 2001 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". 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, 2000, are incorporated by reference in Item 8: Page Number ----------- Report of Independent Auditors............................... 22 Consolidated Balance Sheets - December 31, 2000 and 1999..... 23 Consolidated Statements of Income - Years Ended December 31, 2000, 1999, and 1998............................ 24 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2000, 1999 and 1998................. 25 Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998................. 26 Notes to Consolidated Financial Statements - December 31, 2000............................................ 27 - 43 (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. 13 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/ Robert A. Henson ---------------------------------- Robert A. Henson Acting Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial Officer) /s/ Michael D. Dean ---------------------------------- Michael D. Dean Senior Vice President - Finance and Chief Accounting Officer (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 28, 2001. Each of the directors and/or officers of City Holding Company whose signature appears below hereby appoints Robert A. Henson, 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/ C. Dallas Kayser - ---------------------------- -------------------------------- Samuel M. Bowling C. Dallas Kayser Director Director /s/ Hugh R. Clonch /s/ Thomas E. Lilly - ---------------------------- -------------------------------- Hugh R. Clonch Thomas E. Lilly Director Director /s/ Robert D. Fisher /s/ Philip L. McLaughlin - ---------------------------- -------------------------------- Robert D. Fisher Philip L. McLaughlin Director Chairman of the Board of Directors /s/ Jay C. Goldman /s/ E. M. Payne III - ---------------------------- -------------------------------- Jay C. Goldman E. M. Payne III Director Director 14 /s/ David E. Haden /s/ R. T. Rogers - ---------------------------- -------------------------------- David E. Haden R. T. Rogers Director Director /s/ David W. Hambrick /s/ Mark H. Schaul - ---------------------------- -------------------------------- David W. Hambrick Mark H. Schaul Director Director /s/ Frank S. Harkins, Jr. /s/ James E. Songer, II - ---------------------------- -------------------------------- Frank S. Harkins, Jr. James E. Songer, II Director Director /s/ Carlin K. Harmon /s/ Albert M. Tieche, Jr. - ---------------------------- -------------------------------- Carlin K. Harmon Albert M. Tieche, Jr. Director Director /s/ Tracy W. Hylton II - ---------------------------- Tracy W. Hylton II Director 15 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 XIV 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 16 4(b) Supplement, dated as of June 1, 1998, XIII between City Holding Company and SunTrust Bank, Atlanta, as Rights Agent, to Amended and Restated Rights Agreement dated May 7, 1991 10(a) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Robert A. Henson 10(b) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Matthew B. Call 10(c) Form of Employment Agreement, IX dated as of December 31, 1998, by and between City Holding Company and Philip L. McLaughlin 10(d) 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(e) Junior Subordinated Indenture, X dated as of March 31, 1998, between City Holding Company and The Chase Manhattan Bank, as Trustee 10(f) Form of City Holding Company's X 9.15% Debenture due April 1, 2028 10(g) Form of City Holding Company's XI 9.125% Debenture due October 31, 2028 10(h) City Holding Company's 1993 XII Stock Incentive Plan 10(i) Form of Interim Employment Agreement, dated as of January 31, 2001, by and between City Holding Company and Gerald R. Francis 10(j) Form of Employment Agreement, dated as of January 31, 2001, by and between City Holding Company and Gerald R. Francis 11 The information required by Item 14, Exhibit 11 of Form 10-K appears on page 43 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2000, included in this report as Exhibit 13 and incorporated herein by reference. 17 13 Portions of City Holding Company Annual Report to Shareholders for Year Ended December 31, 2000 21 Subsidiaries of City Holding Company 23 Consent of Ernst & Young LLP 24 Power of Attorney (included on the signature page hereof) ____ 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. 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. XIV Attached to, and incorporated by reference from, City Holding Company's Form 10-K Annual Report dated December 31, 1998, and filed March 31, 1999, with the Securities and Exchange Commission. 18 EX-3.I 2 0002.txt AMENDED AND RESTATED BY-LAWS OF CHC Exhibit 3(i) CITY HOLDING COMPANY -------------------- AMENDED AND RESTATED BYLAWS ARTICLE I SHAREHOLDERS 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 and 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. If such notice is mailed, it shall be deemed to have been given to a shareholder when deposited in the United States mail, postage prepaid, directed to the shareholder at such shareholder's address as it appears on the record of shareholders of the corporation. Such further notice shall be given as may be required by law. A written waiver of any notice of any annual or special meeting signed by the person entitled thereto, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders needs to be specified in a written waiver of notice. Attendance of a shareholder at a meeting of shareholders shall constitute a waiver of notice of such meeting, except when the shareholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 4. Notice of Shareholder Business and Nominations ---------------------------------------------- (a) Annual Meetings of Shareholders. ------------------------------- (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by shareholders at an annual meeting may be made only (A) by the Board of Directors or the Chief Executive Officer, or (B) by any shareholder entitled to vote at the meeting who complies with the requirements of the Securities Exchange Act of 1934 -1- (the "Exchange Act") and rules and regulations promulgated thereunder and the notice procedures set forth in clause (ii) of this Section 4(a) and who was a shareholder of record at the time such notice is delivered to the Secretary of the corporation. (ii) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (B) of paragraph (a)(i) of this Section 4, the shareholder must have given timely notice thereof in writing to the Secretary and any such business must be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than 120 calendar days prior to the first anniversary of the previous year's annual meeting. If no annual meeting was held in the previous year or the date of the annual meeting was changed by more than 30 days from the anniversary date of the previous year's annual meeting, notice by the shareholder must be so received not later than 120 calendar days prior to such annual meeting or 10 calendar days following the date on which public announcement of the date of the meeting is first made. (iii) In no event shall an adjournment or postponement of an annual meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of shareholders' notice as described below. Such shareholder's notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, and Rule 14a-11 thereunder, including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Articles of Incorporation or the bylaws, the language of the proposed amendment; (C) any material interest in such business of such shareholder and of any beneficial owner on whose behalf the proposal is made and, in case of nominations, a description of all arrangements or understandings between the shareholder and each nominee and any other persons (naming them) pursuant to which the nominations are to be made by the shareholder; (D) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by a qualified representative at the meeting to propose such business; (E) if the shareholder intends to solicit proxies in support of such shareholder's proposals, a representation to that effect; and (F) as to the shareholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made, (1) the name and address of such shareholder, as it appears on the corporation's books, and of such beneficial owner and (2) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. If such shareholder does not appear or send a qualified representative to present such proposal at such annual meeting, the corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the corporation. The presiding officer of any annual meeting of shareholders shall refuse to permit any business proposed by a shareholder to be brought before such annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder's proposal without such shareholder having made the representation required by clause (E) above. (b) Special Meetings of Shareholders. -------------------------------- (i) Only such business as shall have been brought before the special meeting of the shareholders pursuant to the corporation's notice of meeting pursuant to Article I, Section 3 of these bylaws shall be conducted at such meeting. -2- (ii) In the event that Directors are to be elected at a special meeting of shareholders pursuant to the corporation's notice of meeting, nominations of persons for election to the Board of Directors may be made at such special meeting of shareholders (1) by the Board of Directors or (2) by any shareholder entitled to vote at the meeting who complies with the notice procedures set forth in this Section 4 and who is a shareholder of record at the time such notice is delivered to the Secretary. Nominations by shareholders of persons for election to the Board of Directors may be made at such special meeting if the shareholder's notice required by paragraph (a)(ii) of this Section 4 shall be delivered to the Secretary at the principal executive offices of the corporation not later than 150 calendar days prior to such special meeting or 10 calendar days following the date on which public announcement of the date of the special meeting and of the nominees to be elected at such meeting is first made. In no event shall the adjournment or postponement of a special meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of a shareholder's notice as described above. (c) General. Only persons who are nominated in accordance with the ------- procedures set forth in this Section 4 and in Article II, Section 15 herein shall be eligible to serve as Directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 4. Except as otherwise provided by law, the Articles of Incorporation or these bylaws, the presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed in accordance with the procedures set forth in this Section 4 and, if any proposed nomination or business is not in compliance with this Section 4, to declare that such defective proposal or nomination shall be disregarded. Section 5. 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 6. Conduct of Meetings. The Board of Directors may adopt rules for ------------------- the conduct of meetings of shareholders. Unless inconsistent with any such rules, the presiding officer shall convene and adjourn the meeting and prescribe such appropriate procedures for the conduct of the meeting. Such procedures may include: (i) establishment of an agenda for the meeting; (ii) procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record of the corporation, their proxies or such other persons as the presiding officer shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. Section 7. 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. If a shareholder intends to cumulate his votes in an election of directors, he must provide the corporation with written notice of his intention to do so. Such notice must be received by the corporation at least 48 hours before the beginning of the meeting being held to consider the election of directors. -3- Section 8. Inspectors. An appropriate number of inspectors for any meeting ---------- of shareholders may be appointed by the chairman of such meeting. Inspectors so appointed will open and close the polls, will receive and take charge of proxies and ballots, and will decide all questions as to the qualifications of voters, validly of proxies and ballots, and the number of votes properly cast. Section 9. Annual Report. The President shall annually prepare a full and -------------- true statement of the affairs of the corporation, which shall be submitted at the annual meeting of the shareholders and filed within twenty (20) days thereafter in the principal office of the corporation at Charleston, West Virginia, where it shall, during the usual business hours of each secular day be open for inspection by any shareholder of the corporation. ARTICLE II DIRECTORS Section 1. Number. The Board shall consist of not less than five nor more ------- than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors may not - --------- -------- increase the number of directors to a number which: (i) exceeds by more than three the number of directors last elected by shareholders where such number was fifteen or less; and (ii) to a number which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more except when directors are added as a result of a business combination accounted for as a pooling-of-interests, but in no event shall the number of directors exceed twenty-five, and provided, further, however, that no decrease --------- --------- -------- shall have the effect of shortening the term of any incumbent director. Section 2. Director Emeritus. From time to time, the Board of Directors ------------------ may elect one or more persons to serve as a Director Emeritus. A Director Emeritus shall have the privilege of attending those meetings of the Board of Directors at which the Board has invited in writing all Directors Emeritus. He shall not have the right to vote on any matters or to receive attendance fees for the meetings he attends. Section 3. Qualifications. The members of the Board of Directors need not --------------- be residents of the State of West Virginia. Each member of the Board of Directors may serve until he reaches 70 years of age, at which time he shall be deemed to have retired from the Board. Section 4. Time of Holding Office. Commencing with the 1986 annual meeting ----------------------- of shareholder, 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 shareholders, directors of the first class (Class I) shall be elected to hold office for a term expiring at the 1987 annual meeting of shareholders; directors of the second class (Class II) shall be elected to hold office for a term expiring at the 1988 annual meeting of shareholders; and directors of the third class (Class III) shall be elected to hold office for a term expiring at the 1989 annual meeting of shareholders. At each annual meeting of shareholders 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 shareholders. 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. -4- 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. Action by Telephonic Communications. Members of the Board of ----------------------------------- Directors may participate in any meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in any meeting pursuant to this provision shall constitute presence in person at such meeting. Section 11. Action Without a Meeting. Any action required or permitted to ------------------------ be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. Action taken under this section is effective when the last Director signs the consent unless the consent specifies a different effective date, in which event the action taken is effective as of the date specified therein provided the consent states the date of execution by each Director. Section 12. 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 13. 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 14. 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. -5- Section 15. 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. A director elected or appointed, as the case may be, to fill a vacancy shall be elected or appointed for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by the board of directors for a term of office continuing only until the next election of directors. 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. Officers. The 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. -6- 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. 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. -7- 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. * * * * * * * * I hereby certify that the foregoing Amended and Restated Bylaws consisting of eight (8) pages, are the Amended and Restated Bylaws of City Holding Company adopted by the directors of the corporation as of December 18, 2000, and that they are the whole thereof exactly as adopted, and that I make this certificate to identify the same pursuant to instructions of the Board of Directors. ________________________________ Victoria A. Evans, Secretary -8- EX-10.I 3 0003.txt INTERIM EMPLOYMENT AGREEMENT Exhibit 10(i) INTERIM EMPLOYMENT AGREEMENT ---------------------------- THIS INTERIM EMPLOYMENT AGREEMENT ("Agreement") effective as of January 31, 2001, between CITY HOLDING COMPANY, a West Virginia corporation ("Employer"), and Gerald R. Francis ("Employee"), recites and provides: Recitals: - -------- A. Employer and Employee are entering into an Employment Agreement (the "Employment Agreement") pursuant to which Employee will be employed as President and Chief Executive Officer of Employer and its subsidiary, City National Bank Of West Virginia ("City National"). B. Before Employee can become President and Chief Executive Officer of Employer and City National, the Office of the Comptroller of the Currency ("OCC") must issue a notice of non-objection to such appointment. C. Employer desires to employ Employee as a special assistant to the Board of Directors of Employer and City National until commencement of the term of the Employment Agreement. Agreement: - --------- In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Employment. Employee is employed as special assistant to the Board of ---------- Directors of Employer and City National, with such duties and responsibilities as are assigned to him by the Board of Directors. While employed as a special assistant, Employee shall not perform any policy-making functions. 2. Term of Employment. The term of this Interim Employment Agreement ------------------ will commence on the date hereof and end on the date that the OCC gives notice of non-objection or notice of objection to Employer's employment of Employee. 3. Compensation. For services rendered by Employee to Employer herewith, ------------ Employee will be paid from the effective date hereof at the annual rate of $250,000, payable in accordance with the payroll practices of Employer applicable to its officers. Employee will be eligible to participate in the benefit programs described in Section 3 of the --------- Employment Agreement. 4. Stock Options. Effective January 31, 2001, Employer's Board of ------------- Directors granted Employee an option to purchase 200,000 shares of Employer Common Stock under Employer's 1993 Stock Incentive Plan, provided, that if the Employment Agreement is terminated pursuant to Section 6(h) ------------ thereof, Employee agrees to surrender such options unexercised. The exercise price shall be $5.75 per share, the stock's fair market value on the date of grant. 5. OCC Regulations. Employee is aware of and agrees to abide by the --------------- prohibition of the dissemination of non-public information as provided in 12 CFR, (S) 4.37(b)(1) and agrees not to use such non-public OCC information for any purpose other than to provide services to Employer and City National. 6. Termination. This Interim Employment Agreement will terminate and ----------- have no further force and effect (except for the provisions of Section 4, which will survive) when the OCC gives notice of non-objection or notice of objection to Employer's employment of Employee. If the OCC gives notice of non-objection, the Employment Agreement between Employer and Employee entered into on the date hereof will commence as of the date of such notice. If the OCC gives notice of objection of Employer's employment to Employee, the Employment Agreement, as provided in Section 6(h) thereof, will terminate and this Interim Agreement will terminate, all without any further obligation of either party to the other except as otherwise provided in each agreement. IN WITNESS WHEREOF, the parties have executed this Interim Employment Agreement effective the date and year first above written. CITY HOLDING COMPANY By: /s/ Philip L. McLaughlin -------------------------- Name: Philip L. McLaughlin Title: Chairman of the Board of Directors EMPLOYEE: /s/ Gerald R. Francis --------------------- Gerald R. Francis EX-10.J 4 0004.txt EMPLOYMENT AGREEMENT Exhibit 10(j) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") effective as of January 31, 2001, between CITY HOLDING COMPANY, a West Virginia corporation ("Employer"), and Gerald R. Francis ("Employee"), recites and provides. Recitals: - -------- A. Employer desires to employ Employee as its President and Chief Executive Officer and President and Chief Executive Officer of its subsidiary, City National Bank of West Virginia ("City National"). For purposes of this Agreement, "Employer" shall include City National where the context so requires. B. Employer is subject to a formal written agreement with the Office of the Comptroller of Currency ("OCC"). OCC regulations require issuance of a notice of non-objection of Employer's employing Employee as its President and Chief Executive Officer of Employer and City National and naming Employee as a Director of Employer and City National. Until such notice is received, Employer will be employed as a special assistant to the Board of Directors of Employer in accordance with an interim employment agreement being entered into on the date hereof. C. Employee is willing to make his services available to Employer on the terms and subject to the conditions set forth herein. Agreement: - --------- In consideration of the mutual covenants contained herein, the parties agree as follows: 1. Employment. Employee is employed as President and Chief Executive ---------- Officer of Employer and President and Chief Executive Officer of City National. Employee shall have such duties and responsibilities as are commensurate with such positions. Employee accepts and agrees to such employment, subject to the general supervision and pursuant to the orders, advice, and direction of Employer's boards of directors. Employee shall perform such duties as are customarily performed by one holding such positions in other same or similar businesses or enterprises as that engaged in by Employer, and shall also additionally render such other services and duties as may be reasonably assigned to him from time to time by Employer's board of directors, consistent with his positions. If Employer, without the written consent of Employee, assigns to Employee duties which Employee deems inconsistent with the title, position and 1 status of the office of Chief Executive Officer, such action, at Employee's option, to be exercised within 60 days of such change, shall constitute "Termination for Good Reason," with the effect provided for in Section 6(d). 2. Term of Employment. The term of this Agreement shall commence on the ------------------ date of the issuance of a notice of non-objection to Employee's employment as President and Chief Executive Officer by the OCC (the "OCC Non-objection Date") and shall terminate on the day next preceding the third anniversary of the OCC Non-objection Date, unless extended. On each monthly anniversary date starting the first month after the OCC Non-objection Date, this Agreement will be automatically extended for an additional month; provided, however, that on any one month anniversary date either Employer or Employee may serve notice to the other party to fix the term to a definite three year period from the date of such notice and, in such event, no further automatic extensions will occur. Notwithstanding the foregoing, this Agreement will not be extended beyond the first day of the month coincident with or next following the date on which Employee attains age 65. The term of this Agreement as it may be extended pursuant to this Section 2, or as it may be shortened in accordance with --------- Section 5 or Section 6, is referred to as the "Term." - --------- --------- 3. Compensation. ------------ (a) For all services rendered by Employee to Employer under this Agreement, Employer shall pay to Employee, beginning on the OCC Non-objection Date, a minimum annual salary at a rate not less than $250,000, payable in accordance with the payroll practices of Employer applicable to its officers. (b) Employee shall be paid a minimum bonus for Employer's fiscal year 2001 of $100,000.00. Employee shall be paid a bonus at the end of each of Employer's fiscal years after 2001 payable as follows: If Employer's Amount of Bonus Return on Equity is (as a Percentage of Annual Salary) ------------------- ---------------------------------- 10% 40% 11% 50% 12% 60% 13% 70% 14% 80% 15% 90% 16% 100% Any bonus shall be paid to Employee within 30 days of the issuance of Employer's audited financial statements for a specified fiscal year. "Return on Equity" shall be determined on a consolidated basis in accordance with generally accepted accounting principles before extraordinary items. Unless otherwise 2 approved in the discretion of the board of directors or its executive compensation committee, (i) no bonus shall be payable if return on equity is less than 10%, and (ii) the maximum bonus payable under this Subsection 3(b) --------------- shall be 100% of annual salary. (c) Effective January 31, 2001, Employer's Board of Directors granted Employee an option to purchase 200,000 shares of Employer Common Stock under Employer's 1993 Stock Incentive Plan, the terms of which are reflected in a separate stock option agreement. If this Agreement is terminated pursuant to Section 6(h), Employee agrees to surrender such options unexercised. - ------------ (d) Employee shall participate in the incentive plans of Employer for which he may become eligible and designated a participant. (e) Any salary increase payable to Employee shall be determined in accordance with Employer's annual salary plan, and be based on Employer's performance and the performance of Employee. (f) Except as otherwise specifically provided herein, for so long as Employee is employed by Employer, Employee also shall be paid, on the same basis as other officers of Employer, employee pension and welfare benefits and group employee benefits such as sick leave, vacation, group disability and health, life, and accident insurance and similar indirect compensation which Employer may from time to time extend to its officers; provided that Employee shall receive term life insurance coverage in an amount not less than $400,000. (g) If during the Term of the Agreement Employee becomes eligible for retirement under Employer's retirement plans and he retires, Employee may elect to continue receiving the health insurance coverage provided to Employee prior to retirement at a comparable rate and benefit available to other retired employees (or, if no such benefit is then made available to other retired employees, at the rate and benefit available to Employee at the time of retirement). (h) For so long as Employee is employed by Employer, Employer shall pay Employee's reasonable dues and expenses for membership in one country club. (i) For so long as Employee is employed by Employer, Employer shall furnish Employee with an automobile in accordance with the customary practices of Employer for executives at his level. (j) For so long as Employee is employed by Employer, Employer shall pay Employee's reasonable civic club dues. (k) Employer shall reimburse Employee for his family's 3 reasonable expenses incurred in relocating from Indianapolis, Indiana to Charleston, West Virginia. (l) Employer shall reimburse Employee for the reasonable fees and charges of Employee's legal counsel and tax advisor incurred in connection with the negotiation, implementation and exercise of his employment agreements and benefits from time to time. (m) In the event that Employer effects a distribution of purchase rights or warrants or other equity securities to holders of its Common Stock generally, including, without limitation, a rights offering for the purpose of raising capital, and the terms of any options or other equity compensation arrangements then held by Employee do not provide for an equitable adjustment for Employee's benefit to protect Employee from dilution of Employee's equity interest resulting therefrom, then Employer shall cause such amount of warrants, rights or securities to be issued or made available for purchase or exercise by Employee in the same amount and on the same terms and conditions as would be available to a shareholder holding the number of shares covered by the options or other equity compensation benefits then held by Employee. Without limiting the foregoing, if the provisions of Paragraph 11 of Employee's Stock Option Agreement of even date herewith are not permitted or are limited by the 1993 Stock Incentive Plan, or if there are insufficient shares available for issuance under such plan to provide for such adjustment, the Company shall pay to Employee such amount as may be necessary to hold Employee harmless in respect of its inability to provide Employee the full benefit of such provision. 4. Covenants of Employee. ---------------------- (a) Subject to the limitations provided in Subsections 4(b) and 4(d) ---------------- ---- (whichever may be applicable), upon termination of Employee's employment prior to the expiration of the Term, Employee will not, directly or indirectly, either as a principal, executive officer, employer, stockholder, co-partner or in any other individual or representative capacity whatsoever, engage in the consumer, savings or commercial banking business, the savings and loan business, or the mortgage banking business anywhere in the state of West Virginia or in any county outside of West Virginia contiguous to West Virginia, nor will Employee solicit, or assist any other person in so soliciting, any depositors or customers of Employer or its Affiliates or induce any then or former employee of Employer or its Affiliates to terminate their employment with Employer or its Affiliates; provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest in a business similar to Employer's business if such investment is limited to less than one percent of the capital stock or other securities of any corporation or similar organization whose stock or securities are publicly owned or are regularly traded on any public exchange. The term "Affiliate" as used in this Agreement means a Person that directly or indirectly 4 through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term "Person" as used in this Agreement means any person, partnership, corporation, group or other entity. (b) If Employee voluntarily terminates his employment with Employer and its Affiliates, Employee will be subject to the provisions of Subsection 4(a) for any period during which Employee receives compensation - ---------- pursuant to Subsection 6(e). --------------- (c) If Employee's employment is terminated by Employer or its Affiliates for Just Cause (as defined in Subsection 6(b)), Employee will not be --------------- subject to the provisions of Subsection 4(a) --------------- (d) If Employee's employment is terminated by Employer or its Affiliates for reasons other than Just Cause (as defined in Subsection 6(b)) at --------------- any time, Employee will be subject to the provisions of Subsection 4(a) until --------------- the later of: (i) the first anniversary of Employee's termination or (ii) the date as of which Employee is not entitled to payment of further compensation because of the last sentence of Subsection 6(c). --------------- (e) Notwithstanding any other provision of this Agreement to the contrary, if Employee voluntarily terminates his employment with Employer or its Affiliates in accordance with Subsection 6(d), Employee will not be subject to --------------- Subsection 4(a). - --------------- (f) During the Term of Employee's employment hereunder and thereafter, and except as required by any court, supervisory authority or administrative agency or as may be otherwise required by applicable law, Employee shall not, without the written consent of the Board of Directors of Employer or a person authorized thereby, disclose to any person, other than an employee of Employer or an Affiliate thereof or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by Employee of his duties as an employee of Employer or an Affiliate, any confidential information obtained by him while in the employ of Employer, unless such information has become a matter of public knowledge at the time of such disclosure. (g) The covenants contained in this Section 4 shall be construed and --------- interpreted in any judicial proceeding to permit their enforcement to the maximum extent permitted by law. Employee agrees that the restraints imposed herein are necessary for the reasonable and proper protection of Employer and its Affiliates and that each and every one of the restraints is reasonable in respect to such matter, length of time and the area proscribed. Employee further acknowledges that damages at law would not be a measurable or adequate remedy for breach of the covenants contained in this Section 4 and, --------- 5 accordingly, Employee agrees to submit to the equitable jurisdiction of any court of competent jurisdiction in Charleston, West Virginia in connection with any action to enjoin Employee from violating any such covenants. 5. Disability. If, by reason of physical or mental disability during the ---------- Term, Employee is unable to carry out the essential functions of his employment for 12 consecutive months, his services may be terminated by the Board of Directors determining so to do upon one month's notice to be given to Employee at any time after the period of 12 continuous months of disability and while such disability continues. If, prior to the expiration of the one month period after the giving of such notice, Employee shall recover from such disability and return to the full-time active discharge of his duties, then such notice shall be of no further force and effect and Employee's employment shall continue as if the same had been uninterrupted. If Employee shall not so recover from his disability and return to his duties, then his services shall terminate at the expiration date of such one month's notice with the same force and effect as if that date had been the date of termination originally provided for hereunder. During the first 12 months of the period of Employee's disability, Employee shall continue to earn all compensation (including bonuses and incentive compensation) to which Employee would have been entitled as if he had not been disabled, such compensation to be paid at the time, in the amounts, and in the manner provided in Subsection 3(a), and to be reduced by the amount of any --------------- compensation received pursuant to any applicable disability insurance plan of Employer. Thereafter, Employee shall receive compensation to which he is entitled under any applicable disability insurance plan. At that time Employee shall also be deemed to have voluntarily terminated his employment and shall be entitled to receive Termination Compensation as set forth in Subsection 6(e), --------------- reduced by the amount of any compensation received pursuant to any applicable disability insurance plan of Employer. If a dispute arises between Employee and Employer concerning Employee's physical or mental ability to continue or return to the performance of his duties as aforesaid, Employee shall submit to examination by a competent physician mutually agreeable to the parties, and his opinion as to Employee's capability to so perform will be final and binding. Upon termination of Employee's services by reason of disability, the Term shall end. 6. Termination. ----------- (a) If Employee shall die during the Term, this Agreement and the employment relationship hereunder will automatically terminate on the date of death, which date shall be the last date of the Term. Notwithstanding this Subsection 6(a), if Employee dies while employed by Employer, Employee's estate - --------------- shall receive annually sixty percent (60%) of the Termination Compensation (as defined below) for the Applicable Severance Period (defined below), but payments shall cease, if applicable, following the month in which Employee would have reached age 65. 6 "Termination Compensation" means the highest amount of cash compensation paid (or earned and payable whether or not deferred) to or for the benefit of Employee in respect of any of the three most recent calendar years ending prior to the date of termination, determined by reference to the annual cash compensation (salary and bonus) reflected in columns (c) and (d) of the summary compensation table set forth in Employer's proxy statement for such year, or, in the absence of such previously reported table, by reference to the amount of such compensation as would be reflected for such year in such a summary compensation table prepared in accordance with Item 402(b) of Regulation S-K of the Securities and Exchange Commission; provided that if termination occurs prior to March 31, 2002, such amount shall be $350,000. "Applicable Severance Period" means the period of time set forth below if termination occurs during the corresponding period indicated: Severance Period Termination Date ---------------- ----------------
1 year On or Before January 31, 2002 2 years Thereafter through January 31, 2003 3 years After January 31, 2003
In addition, as used in Subsections 6(a) and 6(e), if termination occurs after January 31, 2003, the "Applicable Severance Period" means the period of time set forth below if termination occurs during the corresponding period:
Severance Period Termination Date ---------------- ---------------- 3 years After January 31, 2003 through January 31, 2004 4 years Thereafter through January 31, 2005 5 years After January 31, 2005
(b) Employer shall have the right to terminate Employee's employment under this Agreement at any time for Just Cause, which termination shall be Effective immediately. Termination for "Just Cause" shall include termination for Employee's personal dishonesty, gross incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, unethical business practices in connection with Employer's business, misappropriation of Employer's assets (determined on a reasonable basis) or those of its Affiliates, or material breach of any other provision of this Agreement, provided that Employee has received written notice from Employer of such material breach and such 7 breach remains uncured 30 days after the delivery of such notice. In the event Employee's employment under this Agreement is terminated for Just Cause, Employee shall have no right to receive compensation or other benefits under this Agreement for any period after such termination. (c) Employer may terminate Employee's employment other than for "Just Cause," as described in Subsection 6(b), at any time upon written notice to --------------- Employee, which termination shall be Effective immediately. In the event Employer terminates Employee pursuant to this Subsection 6(c), Employee will --------------- nevertheless receive Termination Compensation for the Applicable Severance Period, provided, that if such termination occurs within six (6) months -------- preceding or within 24 months following a Change of Control (defined below), Employee shall be entitled instead, at his election, to receive in a lump sum (i) any compensation due but not yet paid through the date of termination and (ii) in lieu of any further salary payments from the date of termination to the end of the Term, an amount equal to the Termination Compensation times 2.99. Unless such lump sum payment is elected, such amounts shall be payable at the times such amounts would have been paid in accordance with Subsection 3(a). In --------------- addition, Employee shall continue to receive health insurance coverage from Employer on the same terms as were in effect prior to Employee's termination, either under Employer's plans or comparable coverage, for all periods Employee receives Termination Compensation. Notwithstanding anything in this Agreement to the contrary, if Employee breaches Subsection 4(a) or Subsection 4(d), ---------------------------------- Employee will not be entitled to receive any further compensation or benefits pursuant to this Subsection 6(c). --------------- (d) Employee may voluntarily terminate employment with Employer (i) pursuant to the last sentence of paragraph 1 or paragraph 8(g) hereof, or (ii) for "Good Reason". In either such event, Employee shall be entitled to receive in a lump sum (i) any compensation due but not yet paid through the date of termination and (ii) in lieu of any further salary payments from the date of termination to the end of the Term, an amount equal to the Termination Compensation times 2.99. "Good Reason" shall mean the occurrence of any of the following events without Employee's express written consent: (i) the assignment to Employee of duties inconsistent with the position and status of the offices and positions of Employee provided for herein; (ii) a reduction by Employer in Employee's pay grade or base salary as then in effect or the exclusion of Employee from participation in Employer's benefit plans in which he previously participated as in effect at the date hereof or as the same may be increased 8 from time to time during the term of this Agreement or Employer's failure to increase (within 12 months of Employee's last increase in base salary) Employee's base salary in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all executives entitled to participate in Employer's executive incentive plans for which Employee was eligible during the preceding 12 months; (iii) an involuntary relocation of Employee more than 50 miles from the location where Employee worked immediately following his most recent voluntary relocation or the breach by Employer of any other material provision of this Agreement; (iv) any purported termination of the employment of Employee by Employer which is not effected in accordance with this Agreement; or (v) the occurrence of a Change of Control within the period of 24 months preceding such termination. A "Change of Control" shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934) together with its affiliates, excluding employee benefit plans of Employer, is or becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of securities of Employer representing 20% or more of the combined voting power of Employer's then outstanding securities; or (ii) during the term of this Agreement as a result of a tender offer or exchange offer for the purchase of securities of Employer (other than such an offer by Employer for its own securities), or as a result of a proxy contest, merger, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who at the beginning of any two-year period during the term of this Agreement constitute Employer's Board of Directors, plus new directors whose election or nomination for election by Employer's shareholders is approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of such two-year period, cease for any reason during such two-year period to constitute at least two-thirds of the members of such Board of Directors; or (iii) the shareholders of Employer approve a merger or consolidation of Employer with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of Employer or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the shareholders of Employer approve a plan of complete liquidation or winding-up of Employer or an agreement for the sale or disposition by Employer 9 of all or substantially all of Employer's assets; or (v) any event which Employer's Board of Directors determines should constitute a Change of Control. (e) Notwithstanding any other provision of this Agreement to the contrary, in the event that Employee voluntarily terminates employment with Employer, Employee will be entitled to receive annually sixty percent (60%) of the Termination Compensation through the end of the Applicable Severance Period (so long as Employee complies with Subsection 4(a)) or, if earlier, through the --------------- date on which Employee reaches age 65. Such Termination Compensation shall be payable at the times such amounts would have been paid in accordance with Section 3(a). In addition, Employee shall continue to receive health insurance coverage from Employer on the same terms as were in effect prior to Employee's termination, either under the Employer's plans or comparable coverage, for all periods Employee receives Termination Compensation pursuant to this Subsection 6(e), so long as Employee complies with Subsection 4(a). If, at the - --------------- --------------- time of termination, circumstances exist which would permit Employee to terminate his employment and be entitled to the benefits provided for under paragraph 6(d), Employee may elect to terminate employment either pursuant to paragraph 6(d) or this paragraph 6(e). No voluntary termination of employment -- by Employee under this paragraph 6(e) shall be deemed to be made in connection with a Change of Control for any reason. (f) In receiving any payments pursuant to this Section 6, Employee --------- shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee hereunder, and such amounts shall not be reduced or terminated whether or not Employee obtains other employment. (g) In the event that Employer's independent public accountants or the Internal Revenue Service determine, at any time during or after expiration of this Agreement, that Employee has collected an amount arising from any and all sources of compensation from Employer (including, without limitation, by virtue of the immediately following sentence) exceeding the product of 2.99 and Employee's "base amount" as defined in Section 280G(b)(3) of the Code (the "Code (S) 280G Maximum"), notwithstanding any provision of this agreement or any plan or arrangement of Employer to the contrary, Employer shall pay Employee 147.5% of the federal excise taxes payable by Employee under Code (S) 4999. If, by virtue of any plan or arrangement of Employer, benefits to which Employee would otherwise be entitled would be curtailed or reduced because Employee may collect an amount exceeding the Code (S) 280G Maximum, Employer shall nevertheless pay to Employee an amount equal to 100% of the value by which such benefits are curtailed or reduced. (h) Notwithstanding anything in this Agreement to the contrary, if the OCC should not issue a notice of non-objection to employment of 10 Employee by Employer as its President and Chief Executive Officer as described in Recital B, this Agreement shall terminate without any further obligation under any of its provisions of Employer to Employee or of Employee to Employer, and from such date of non-approval this Agreement shall be null and void, except for Employee's covenant to surrender the stock options provided for in Subsection 3(c). - ---------- ---- 7. Other Employment. ---------------- Employee shall devote all of his business time, attention, knowledge and skills solely to the business and interest of Employer and its Affiliates, and Employer and its Affiliates shall be entitled to all of the benefits, profits and other emoluments arising from or incident to all work, services and advice of Employee, and Employee shall not, during the Term hereof, become interested directly or indirectly, in any manner, as partner, officer, director, stockholder, advisor, employee or in any other capacity in any other business similar to Employer's business; provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest in a business similar to Employer's business if such investment is limited to less than one percent of the capital stock or other securities of any corporation or similar organization whose stock or securities are publicly owned or are regularly traded on any public exchange. 8. Miscellaneous. ------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of West Virginia without regard to conflicts of law principles thereof. (b) This Agreement constitutes the entire Agreement between Employee and Employer, with respect to the subject matter hereof, and supersedes all prior agreements with respect thereto. Without limiting the foregoing, Employee agrees that this Agreement satisfies any rights he may have had under any prior agreement or understanding with Employer with respect to his employment by Employer. (c) This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same instrument. (d) Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered in person or by reliable overnight courier service or deposited in the mails, postage prepaid, return receipt requested, addressed as follows: 11 To Employer: City Holding Company 25 Gatewater Road Charleston, West Virginia 25313 (304) 769-1102 Attention: Corporate Secretary To Employee: Gerald R. Francis 3165 South Fletcher Avenue Unit 1 Fernandina Beach, Florida 32034 (904) 277-6543 Notices given in person or by overnight courier service shall be deemed given when delivered to the address required by this Subsection 8(d), and notices --------------- given by mail shall be deemed given three days after deposit in the mails. Any party hereto may designate by written notice to the other party in accordance herewith any other address to which notices addressed to him shall be sent. (e) The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. It is understood and agreed that no failure or delay by Employer or Employee in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. (f) In the event any dispute shall arise between Employee and Employer as to the terms or interpretations of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action taken by Employee to enforce the terms of this Agreement or in defending against any action taken by Employer, Employer shall reimburse Employee for all reasonable costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceeding or action, if Employee shall prevail in any action initiated by Employee or shall have acted reasonably and in good faith in defending against any action initiated by Employer. Such reimbursement shall be paid within 10 days of Employee furnishing to Employer written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by Employee. Any such request for reimbursement by Employee shall be made no more frequently than at 60 day intervals. (g) Should Employee die after termination of his employment 12 with Employer while any amounts are payable to him hereunder, this Agreement shall inure to the benefit of and be enforceable by Employee's executors, administrators, heirs, distributees, devisees and legatees and all amounts payable hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee or other designee or, if there is no such designee, to his estate. Employer shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Employer, by agreement in form and substance reasonably satisfactory to Employee to expressly assume and agree to perform this Agreement in the same manner and same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any such succession shall be deemed "Good Reason", permitting termination by Employee pursuant to paragraph 6(d). As used in this Agreement, "Employer" shall mean Employer as hereinbefore defined and any successor to its business or assets as aforesaid. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. CITY HOLDING COMPANY By: /s/ Philip L. McLaughlin -------------------------- Name: Philip L. McLaughlin Title: Chairman of the Board of Directors EMPLOYEE: /s/ Gerald R. Francis ----------------------- 13 EX-13 5 0005.txt ANNUAL REPORT Exhibit 13 Selected Financial Data =============================================================================================================================== Table One Five-Year Financial Summary (in thousands, except per share data) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------- Summary of Operations Total interest income $ 202,912 $ 195,553 $ 196,680 $ 173,166 $ 159,708 Total interest expense 113,756 97,133 93,337 76,012 68,334 Net interest income 89,156 98,420 103,343 97,154 91,374 Provision for loan losses 25,480 19,286 8,481 4,064 5,012 Total other income 41,033 59,535 72,423 32,613 16,473 Total other expenses 158,812 130,614 155,558 84,899 70,066 (Loss) income before income taxes (54,103) 8,055 11,727 40,804 32,769 Net (loss) income (38,373) 6,213 5,234 26,291 21,281 Per Share Data Net (loss) income (basic) $ (2.27) $ 0.37 $ 0.31 $ 1.60 $ 1.34 Net (loss) income (diluted) (2.27) 0.37 0.31 1.60 1.34 Cash dividends declared (1) 0.44 0.80 0.77 0.73 0.63 Book value per share 9.68 11.77 13.08 13.13 11.86 Selected Average Balances Total loans $1,969,785 $1,792,625 $1,676,828 $1,427,269 $1,286,868 Securities 370,247 390,839 377,834 409,713 419,974 Deposits 2,053,828 2,017,448 1,974,995 1,698,699 1,616,479 Long-term debt 69,508 110,592 95,926 46,129 24,666 Trust-preferred securities 87,500 87,500 32,452 - - Stockholders' equity 199,702 219,211 235,616 204,114 181,923 Total assets 2,777,019 2,718,732 2,566,099 2,180,460 2,021,988 Selected Year End Balances Net loans $1,927,532 $1,859,001 $1,698,319 $1,490,411 $1,315,078 Securities 385,462 381,112 395,722 378,330 412,586 Deposits 2,083,941 1,955,770 2,064,415 1,779,805 1,626,666 Long-term debt 34,832 116,000 102,719 75,502 34,250 Trust-preferred securities 87,500 87,500 87,500 - - Stockholders' equity 163,457 198,542 220,059 220,277 188,784 Total assets 2,671,500 2,792,490 2,706,004 2,286,424 1,995,878 Selected Ratios Return on average assets (1.38) % 0.23% 0.20% 1.21% 1.05% Return on average equity (19.22) 2.83 2.22 12.88 11.70 Average equity to average assets 7.19 8.06 9.18 9.36 9.00 Dividend payout ratio (1) N/A 216.22 248.39 35.96 34.81
(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. ================================================================================ 1 - Two Year Summary Of Common Stock Prices And Dividends Cash Dividends Market Value Per Share* Low High ---------------------------- 2000 Fourth Quarter $ .08 $ 4.875 $ 7.250 Third Quarter .08 6.000 9.875 Second Quarter .08 5.875 14.000 First Quarter .20 10.875 16.188 1999 Fourth Quarter $ .20 $ 12.500 $ 20.938 Third Quarter .20 17.500 30.875 Second Quarter .20 24.500 32.250 First Quarter .20 24.500 32.750 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 NASDAQ stock market. At December 31, 2000, there were 4,201 stockholders of record. *Cash dividends represent amounts declared by the Company and do not include cash dividends of acquired companies prior to the dates of acquisition. As more fully discussed under the captions Liquidity and Capital Resources in Management's Discussion and Analysis and in Note Fifteen of the Audited Consolidated Financial Statements, the Company's ability to pay dividends to its shareholders is dependent upon the ability of its banking subsidiaries to pay dividends to the Parent Company. Management's Discussion & Analysis Of Financial Condition And Results Of Operations Forward Looking Statements All statements other than statements of historical fact included in this Annual Report, including statements in the Letter to Shareholders and in Management's Discussion and Analysis of Financial Condition and Result of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company's actual results to differ from those projected in the forward-looking information. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include: (1) the Company may not complete the divestiture of its California operations; (2) other plans initiated by the Company to improve its long-term profitability may not be completed in a timely manner or may not have the anticipated impact on the Company's operating results; (3) current earnings from the Company's subsidiaries may not be sufficient to fund the cash needs of the Parent Company, including the payment of stockholders' dividends; (4) regulatory rulings affecting, among other things, the Company's and its banking subsidiaries' regulatory capital and required loan loss allocations may change, resulting in the need for increased capital levels or an increased allocation for loan losses, with a resulting adverse effect on expected earnings; (5) changes in the interest rate environment may have results on the Company's operating results materially different from those anticipated by the Company's market risk management functions; (6) changes in general economic conditions and increased competition could adversely affect the Company's operating results; and (7) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies could negatively impact the Company's operating results. Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 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 62 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. The Company operates three business segments: community banking, mortgage banking, and other financial services. These business segments are primarily identified by 2 - - Management's Discussion & Analysis Of Financial Condition And Results Of Operations the products or services offered and the channels through which the product or service is delivered. The community banking operations consist of community banks that offer customers traditional banking products and services, including deposit and loan products, trust services and others. 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. The Company also maintains a general corporate business segment that includes the parent company and other administrative areas of the Company. Financial Summary The Company reported a consolidated net loss for 2000 of $38.37 million or $2.27 per diluted common share, compared to net income of $6.21 million or $0.37 per share and $5.23 million or $0.31 per share in 1999 and 1998, respectively. Return on average assets, a measure of the effectiveness of asset utilization, was (1.38%) in 2000, compared to 0.23% and 0.20% in 1999 and 1998, respectively. Return on average equity, a measure of the return on stockholders' investment was (19.22%) in 2000, compared to 2.83% in 1999 and 2.22% in 1998. The 2000 net loss was primarily due to actions taken pursuant to the Company's strategic repositioning plan, which was designed to refocus on the Company's core community banking franchise. The plan, initially announced in July 2000, includes the following components: (a) completing an orderly exit from the Company's operations in California, (b) divesting of any operations that are not profitable, and (c) intensifying the Company's focus on its core West Virginia community banking franchise. As a result of this plan and as more fully discussed under the caption Goodwill Impairment, the Company recorded a charge against earnings of approximately $34.83 million in 2000 to write-off remaining balances of goodwill determined to be impaired as of December 31, 2000. Of this total charge, $13.64 million was recorded within the community banking segment, $15.18 million was recorded within the mortgage banking segment, and $6.01 million was recorded within the other financial services segment. As more fully discussed under the caption Allowance and Provision for Loan Losses, the community banking segment also reported a significant increase in its provision for loan losses in 2000. The community banking segment recorded a provision for loan losses of $25.48 million in 2000, compared to $19.29 million and $8.48 million in 1999 and 1998, respectively. In addition to the aforementioned charges against earnings, the Company's operating results in 2000 were negatively affected by the continued trend of a declining interest margin, which is further discussed under the caption Net Interest Income. Significant factors impacting 1999 operating results included a $9.90 million loss on investment securities transactions (see Investments), a $4.88 million decline, compared to 1998, in net interest income (see Net Interest Income), and a $10.81 million increase, compared to 1998, in the Company's loan loss provision (see Allowance and Provision for Loan Losses). Partially offsetting these declines in pre-tax income, the Company reported $8.80 million of gains realized from the sale of branch locations (see Other Income and Expenses). In 1998, the Company's operating results were affected primarily by $13.55 million of merger-related expenses associated with the merger of Horizon, a $2.93 million increase, compared to 1997, in the Company's loan loss provision, and $3.80 million of expenses related to conforming operating and accounting policies resulting from the merger of Horizon and the restructuring of the Company's specialty finance operations. Additionally, during 1998, the Company reported gains from the sale of loans of $14.24 million, an increase of $9.85 million compared to 1997. Goodwill Impairment As discussed previously, the Company recorded a charge against 2000 earnings of approximately $34.83 million to write off the remaining balance of goodwill associated with certain prior business combinations. Each of the business combinations discussed below was accounted for under the purchase method of accounting and resulted in goodwill being recorded at the date of acquisition representing the difference between the acquisition price and the assets acquired and liabilities assumed of the acquired company. The charge against earnings recorded in 2000 was based on a number of factors and affected each of the Company's primary business segments, as discussed below. Community banking segment. In 1998 and 1999, the Company acquired two banking franchises in southern California. In 2000, as part of its strategic repositioning plan, the Company announced that it intended to complete an orderly exit from its California operations, which would include divesting its ownership of these franchises. During the fourth quarter of 2000, the Company was advised that the expected pricing to be achieved to complete these divestitures would be significantly less than the Company's recorded investment. Based on an analysis provided to the Company by an independent investment banking firm, the Company recorded a charge against earnings of approximately $13.64 million to reduce its investment in these financial institutions to their values. The investment banking firm has 3 - Management's Discussion & Analysis Of Financial Condition And Results Of Operations been engaged by the Company to continue its efforts to complete the Company's divestiture of these operations. Mortgage banking segment. As a consequence of the Company's strategic repositioning plan, during the fourth quarter of 2000, the Company elected to discontinue its specialty finance loan origination operations. The Company had entered this division of the mortgage banking segment in 1997 with the acquisition of a loan origination company and its origination platform. With the decision to close its specialty finance loan origination divisions, the Company recorded a $15.18 million charge against earnings to write-off the remaining goodwill balance associated with these operations, as the goodwill was determined to be unrecoverable as of December 31, 2000. Other financial services segment. This segment includes the Internet service and direct mail divisions of the Company. Both divisions were acquired in 1998 as part of the Company's expansion of delivery channels to provide products and services to its customers. Based on 2000 operating results for these divisions, profitability projections, and the Company's strategic plan, the Company determined that an impairment analysis was necessary to determine the recoverability of the recorded goodwill balances. Utilizing an analysis of the undiscounted cash flows over the remaining goodwill amortization periods for each division, the Company concluded that the goodwill balances were unrecoverable and recorded a $6.01 million charge against earnings to write-off the remaining goodwill balances. Balance Sheet Analysis 2000 vs. 1999 Although the average balance of total assets reflected a minimal increase of $58.29 million or 2.14% in 2000, the average balance of the Company's loan portfolio, loans held for sale, and securities portfolio reflected sizable changes in 2000, as discussed below. Within the community banking segment, the average balance of the loan portfolio increased $177.16 million or 9.88%, from $1.79 billion in 1999 to $1.97 billion in 2000. The majority of this loan growth was attributable to the implementation of a new indirect automobile loan program during the second half of 1999. This new program resulted in an additional average balance of indirect automobile loans approximating $83.46 million in 2000. In part due to the volume of originations during the first half of 2000, the Company began to tighten the credit requirements for this program during the third quarter of 2000 and eventually terminated the program, effective December 31, 2000. The July 1999 acquisition of Frontier also contributed to the increase in average loan balances in 2000, since Frontier was included in the consolidated balances for the full year in 2000 and only six months in 1999. Within the mortgage banking segment, the average balance of loans held for sale decreased significantly, from $178.71 million in 1999 to $82.23 million in 2000. This decline of $96.48 million or 53.99% is consistent with the Company's declining participation in specialty finance loan originations. Loan volume of the specialty finance loan product was reduced in 1999 and continued throughout 2000, as the Company continued its efforts to reduce its reliance on this loan product. With the Company's closure of its California loan origination units in June 2000 and the recently announced closure of its remaining specialty finance loan origination units, the Company expects to experience a continued decline in its loans held for sale balances into 2001. The average balance of the securities portfolio declined $20.59 million or 5.27%, from $390.84 million in 1999 to $370.25 million in 2000. Of this decline, $10.00 million was attributable to the mortgage banking segment and the result of the Company's December 1999 write-off of its investment in Altiva Financial Corporation. The remaining $10.59 million of decline in the average balance was within the community banking segment and was due, in part, to the tightened liquidity position of City National Bank of West Virginia ("City National") during the first half of 2000. As necessary, City National utilized its securities portfolio to provide additional liquidity sources during the first six months of 2000. However, as City National's liquidity position improved during the second half of 2000, the Company began to reinvest funds into the securities portfolio, such that the balance as of December 31, 2000 reflects a small increase to $385.46 million, compared to $381.11 million as of December 31, 1999. The average balance of total interest bearing deposits increased $78.53 million or 4.55% from $1.73 billion in 1999 to $1.80 billion in 2000. This increase was primarily due to City National's increased reliance on brokered deposits as a source of liquidity during the year. As of December 31, 1999, the Company reported an outstanding balance of brokered deposits of $28.04 million. By July 2000, brokered deposits had increased to $212.31 million. Although the outstanding brokered deposits balance has since declined to $134.38 million as of December 31, 2000, City National utilized this funding source significantly during 2000, which resulted in the overall increase in the average balance of interest bearing deposits. Including non interest-bearing deposits, the Company's average core deposits actually declined approximately $89.50 million or 4.44%, due to the combined effect of branch sales transacted throughout 1999 and minimal deposit runoff experience during 2000. The average balance of short-term and long-term borrowings increased $38.19 million or 11.21%, from $340.65 million in 1999 to $378.84 million in 2000. To fund the loan growth discussed previously, the Company utilized its borrowing facilities with the Federal Home Loan Bank 4 - - Management's Discussion & Analysis Of Financial Condition And Results Of Operations resulting in the increased average balance of external borrowings. Within the average short-term and long-term classifications, short-term borrowings increased $79.27 million or 34.46%, while long-term debt declined $41.08 million or 37.15%. The fluctuation between these two classifications was primarily due to the increasing interest rate environment experienced during the second half of 1999 and throughout the first nine months of 2000. During the period of rising interest rates, the Company began to utilize its short-term borrowing facilities in anticipation of future interest rate declines. Additionally, the outstanding balance of the Parent Company's long term debt was reclassified to short-term borrowings in June 2000, consistent with the revised terms and conditions of the term loan agreement. As a result, $16.00 million was reclassified from long-term debt to short-term borrowings as of June 30, 2000. 1999 vs. 1998 Average total assets increased from $2.57 billion in 1998 to $2.72 billion in 1999, an increase of $152.63 million or 5.95%. To a lesser extent, average interest-bearing assets increased as well, from $2.36 billion in 1998 to $2.45 billion in 1999. This increase of $89.44 million or 3.79% was primarily the result of increases in the Company's loan portfolio. Additionally, the acquisition of Frontier in the third quarter of 1999 added to the growth within the 1999 balance sheet. Within interest-earning assets, the average balance of the Company's loan portfolio increased $115.80 million or 6.91% during 1999. The commercial loan portfolio grew approximately 15.69% during the year as City National continued to pursue additional commercial loan relationships. Additionally, the residential mortgage portfolio experienced 12.71% growth during 1999, primarily within its variable rate products. The average balance of loans held for sale, within the mortgage banking segment, declined $72.26 million or 28.79% from 1998 to 1999, reflecting the Company's significantly reduced participation in the junior lien mortgage loan program. The average balance of retained interests in securitized loan pools increased $57.99 million or 238.20% during 1999 as a result of the Company's one loan securitization in 1999 and the timing and increasing size of the four loan securitizations transacted during 1998. The decrease of $25.10 million in federal funds sold during 1999 was primarily attributable to the consolidation of the former Horizon banking operations into City National during the year. Funds previously invested in federal funds were reallocated during 1999 within the consolidated City National operations to fund loan growth. The average balance of other assets increased $27.26 million or 26.77% during 1999 as a result of City National's purchase of an additional $20.00 million of bank owned life insurance. Recorded in Other Assets within the Consolidated Balance Sheets, this asset yielded a tax-equivalent return of 7.65% during 1999. The income earned from this asset is included in non-interest income in the Consolidated Statements of Income. Although the Company experienced an overall decline in total deposits in 1999--from $2.06 billion at December 31, 1998 to $1.96 billion at December 31, 1999--the average balance of total deposits actually increased by approximately 2.15% from 1998 to 1999. The decline in actual deposits, year-to-year, was the result of branch sales representing $121.48 million of deposits and some reduction experienced in City National's core deposit customer base. However, due to the timing of those branch sales, the 1999 acquisition of Frontier, and the second quarter 1998 acquisition of Del Amo, the average balance of total deposits increased $42.45 million from 1998 to 1999. The minimal increase in average total deposits during 1999 was not sufficient to fund growth within the Company's loan portfolio. As a result, the Company increased its short and long term borrowings during the year. In addition to funding loan growth, $15.13 million of the increase in borrowings was related to the Company's acquisition of Frontier. The average balance of trust preferred securities increased $55.05 million during 1999 as a result of the timing of the issuance of those securities in 1998. Of the total $87.50 million outstanding balance of trust preferred securities at December 31, 1999 and 1998, $57.50 million was issued during the fourth quarter of 1998, thus having minimal impact on the 1998 average balance. 5 - Management's Discussion & Analysis Of Financial Condition And Results Of Operations ================================================================================ Table Two Average Balance Sheets and Net Interest Income (in thousands)
2000 1999 1998 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------- ASSETS Loan portfolio (1) $1,969,785 $171,473 8.71% $1,792,625 $152,320 8.50% $1,676,828 $147,536 8.80% Loans held for sale 82,228 9,040 10.99 178,711 16,406 9.18 250,968 23,013 9.17 Securities: Taxable 278,584 17,389 6.24 287,333 17,675 6.15 279,086 17,189 6.16 Tax exempt (2) 91,663 7,089 7.73 103,506 7,742 7.48 98,748 7,623 7.72 ------------------------------------------------------------------------------------- Total securities 370,247 24,478 6.61 390,839 25,417 6.50 377,834 24,812 6.57 Federal funds sold 3,755 217 5.78 5,093 244 4.79 30,191 1,672 5.54 Retained interests 76,958 185 0.24 82,337 3,876 4.71 24,346 2,315 9.51 ------------------------------------------------------------------------------------- Total interest earning assets 2,502,973 205,393 8.21 2,449,605 198,263 8.09 2,360,167 199,348 8.45 Cash and due from banks 73,282 89,515 58,750 Premises and equipment 64,003 69,710 63,991 Other assets 164,040 129,121 101,858 Less: allowance for possible loan losses (27,279) (19,219) (18,667) ------------------------------------------------------------------------------------- Total assets $2,777,019 $2,718,732 $2,566,099 ===================================================================================== LIABILITIES Demand deposits $ 408,681 $ 12,514 3.06% $ 378,645 $ 11,315 2.99% $ 299,543 $ 9,447 3.15% Savings deposits 312,940 10,792 3.45 322,856 10,586 3.28 411,886 12,026 2.92 Time deposits 1,083,228 59,450 5.49 1,024,823 49,563 4.84 987,170 52,959 5.36 Short term borrowings 309,330 18,996 6.14 230,060 11,436 4.97 187,140 9,677 5.17 Long term debt 69,508 3,987 5.74 110,592 6,219 5.62 95,926 6,223 6.49 Trust preferred securities 87,500 8,017 9.16 87,500 8,014 9.16 32,452 3,005 9.26 ------------------------------------------------------------------------------------- Total interest bearing liabilities 2,271,187 113,756 5.01 2,154,476 97,133 4.51 2,014,117 93,337 4.63 Demand deposits 248,979 291,124 276,396 Other liabilities 57,151 53,921 39,970 Stockholders' equity 199,702 219,211 235,616 ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,777,019 $2,718,732 $2,566,099 ===================================================================================== Net interest income $ 91,637 $101,130 $106,011 ===================================================================================== Net yield on earning assets 3.66% 4.13% 4.49% =====================================================================================
(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%. ================================================================================ NET INTEREST INCOME 2000 vs. 1999 On a tax equivalent basis, net interest income declined $9.49 million or 9.39%, from $101.13 million in 1999 to $91.64 million in 2000. Although interest income increased $7.13 million in 2000, as compared to 1999, interest expense increased $16.62 million over the same periods. Due primarily to volume increases within the community banking segment, interest income derived from the loan portfolio increased $19.15 million or 12.57% in 2000, as compared to 1999. However, the decline in the average balance of loans held for sale within the mortgage banking segment resulted in a $7.37 million reduction of interest income derived from these products. As the loans held for sale, which have higher interest rate balances, continue to decline, a continued deterioration in interest income is expected. Also within the mortgage banking segment, the Company's 6 - - Management's Discussion & Analysis Of Financial Condition And Results Of Operations suspension of accruing interest on its retained interests resulted in a $3.69 million or 95.23% decline in interest income for 2000, as compared to 1999. The accrual of interest income on the retained interests was suspended in mid 1999 due to the performance of the underlying collateral loans and revised forecasts associated with the timing of the receipt of cash flows. Interest income recognized during 2000 represents interest earned, and cash received, resulting from funds invested during the interim period between the receipt of cash from the borrowers and the subsequent payment of cash to noteholders. Of the $16.62 million or 14.61% increase in interest expense in 2000, as compared to 1999, $11.29 million was associated with interest expense on deposit accounts. Primarily as a result of the increased reliance on brokered deposits discussed previously, interest expense on time deposits increased $9.89 million or 19.95%, from $49.56 million in 1999 to $59.45 million in 2000. Interest expense associated with brokered deposits approximated $8.45 million in 2000 and $1.15 million in 1999. Additionally, City National utilized several higher priced deposit products during 2000 in an effort to maintain deposit customers and address liquidity issues, resulting in an increase in overall funding costs to the Company. Interest expense associated with short term and long term borrowings increased $5.33 million or 30.18%, from $17.66 million in 1999 to $22.98 million in 2000. During the rising interest rate environment experienced late in 1999 and into 2000, interest rate movements resulted in an increase in funding costs from external borrowings of approximately $3.19 million during 2000. Additionally, increased borrowings to fund asset growth resulted in an increase in interest expense of $2.14 million in 2000, as compared to 1999. With the Company's exit from its specialty finance loan origination operations, the termination of its indirect automobile lending program, and other efforts to slow loan growth, the Company has been able to reduce its reliance on higher costing funding sources during the fourth quarter of 2000 and anticipates being able to continue that trend into 2001. However, national trends experienced by financial institutions reflect a declining customer base for traditional core deposits. Through its asset/liability management functions, the Company continues to monitor its core deposit customer base and to institute product pricing changes as necessary. Such changes, however, could result in overall higher funding costs for the Company over the next several months. 1999 vs. 1998 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 1999 and 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. On a tax equivalent basis, net interest income declined $4.88 million, or 4.60%, during 1999 and the Company's net interest margin declined 36 basis points, from 4.49% in 1998 to 4.13% in 1999. Within the mortgage banking segment, interest earned on loans held for sale declined $6.61 million in 1999, primarily as a result of the Company's significantly reduced participation in the origination and acquisition of junior lien mortgage loans. Although the yield earned on this product remained stable, the significant decline in volume resulted in a lower average balance of loans held for sale and, therefore, the sizable decrease in interest income on these loans. Additionally, the yield earned on the Company's retained interests declined from 9.51% in 1998 to 4.71% in 1999. This decline, within the mortgage banking segment, was due to the actual performance of the underlying collateral loans and revised forecasts associated with the timing of the receipt of cash flows by the Company. As a result of these revisions, the accrual of income was suspended during the year. Income will be recognized in future periods unless any further decline in the anticipated performance of the underlying loan pools occur. Also within the mortgage banking operations, interest expense on trust preferred securities increased $5.01 million during 1999. This increase was due to the timing of the issuance of those securities in 1998, as previously discussed. 7 - Management's Discussion & Analysis Of Financial Condition And Results Of Operations ================================================================================ Table Three Rate/Volume Analysis Of Changes In Interest Income And Expense (in thousands)
2000 vs. 1999 1999 vs. 1998 Increase (Decrease) Increase (Decrease) Due to Change In: Due to Change In: Volume Rate Net Volume Rate Net --------------------------------------------------------------- Interest Earning Assets Loan portfolio $ 15,349 $ 3,804 $19,153 $ 9,955 $(5,171) $ 4,784 Loans held for sale (10,138) 2,772 (7,366) (6,633) 26 (6,607) Securities: Taxable (544) 258 (286) 507 (21) 486 Tax exempt (1) (909) 256 (653) 360 (241) 119 -------------------------------------------------------------- Total securities (1,453) 514 (939) 867 (262) 605 Federal funds sold (72) 45 (27) (1,229) (199) (1,428) Retained interest in securitized loans (238) (3,453) (3,691) 3,217 (1,656) 1,561 -------------------------------------------------------------- Total interest earning assets $ 3,448 $ 3,682 $ 7,130 $ 6,177 $(7,262) $(1,085) ============================================================== Interest Bearing Liabilities Demand deposits $ 914 $ 285 $ 1,199 $ 2,386 $ (518) $ 1,868 Savings deposits (331) 537 206 (2,803) 1,363 (1,440) Time deposits 2,938 6,949 9,887 1,964 (5,360) (3,396) Short term borrowings 4,491 3,069 7,560 2,146 (387) 1,759 Long term debt (2,354) 122 (2,232) 884 (888) (4) Trust preferred securities 3 3 5,042 (33) 5,009 -------------------------------------------------------------- Total interest bearing liabilities $ 5,658 $10,965 $16,623 $ 9,619 $(5,823) $ 3,796 ============================================================== Net interest income $ (2,210) $(7,283) $(9,493) $(3,442) $(1,439) $(4,881) ==============================================================
(1) Fully federal taxable equivalent using a tax rate of approximately 35%. 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. ================================================================================ Non-Interest Income And Expenses 2000 vs. 1999 Excluding investment securities transactions, non interest income declined $23.38 million or 33.68% from $69.43 million in 1999 to $46.05 million in 2000. Of this decline, gains recognized from the sale of branch locations in 1999 represented approximately $8.80 million, with the remaining $14.58 million attributable to changes made within the mortgage banking segment. Excluding investment securities transactions, non interest income within the mortgage banking segment declined $18.79 million or 57.79%, from $32.52 million in 1999 to $13.73 million in 2000, as discussed further below. The Company continued to reduce its junior lien mortgage loan production throughout 2000. The Company also terminated its loan securitization program after its May 1999 securitization transaction, which generated a $3.88 million pre tax gain in 1999. Additionally, the Company entered into several transactions during the second half of 2000 to sell remaining junior lien mortgage loans and recorded declines in the fair value of junior lien mortgage loans that were not sold. The combined effect of these events resulted in a decline in revenues from loan sales of $8.20 million. Net origination fees on junior lien mortgage loans also declined in 2000 due to the reduction of junior lien mortgage loan production throughout 2000. Although significant volume reductions had begun in 1999, the Company's reduced origination volume of the junior lien mortgage loan product in 2000 resulted in a $1.96 million, or 45.69%, decline in net origination fees in 2000, as compared to 1999. Also within the mortgage banking segment, mortgage loan servicing fees declined $5.11 million or 23.14%, from $22.07 million in 1999 to $16.96 million in 2000. This decrease was due to the decline in new loan originations, normal runoff within the portfolio, and the November 1, 2000 transfer of the right to service $229.74 million of loans to an independent third party, loan servicing fees declined significantly in 2000. As discussed further under the caption Loan Servicing, the sale of the Company's remaining mortgage loan servicing rights on December 18, 2000, will result in minimal loan servicing fees in future periods. Non interest expense increased $28.20 million or 21.59%, from $130.61 million in 1999 to $158.81 million in 2000. As discussed under the caption Goodwill Impairment, the Company recorded a charge against 2000 earnings of approximately $34.83 million that led to the increased non interest expense in 2000. Additionally, 8 - - Management's Discussion & Analysis Of Financial Condition And Results Of Operations Other Expenses increased $14.32 million or 37.11%, from $38.59 million in 1999 to $52.91 million in 2000. This increase was due, in part, to a loss on fixed asset disposals of $4.81 million associated with the discontinuance of the specialty finance loan origination operations. Within the mortgage banking segment, $3.87 million of this increase was attributable to advisory fees associated with the Company's loan production offices in Virginia, Maryland, and Georgia. The remaining increase in Other Expenses was due to various activities in 2000 including, additional professional and consulting fees associated with the development of the Company's strategic plan, formalizing and implementing the plan to complete an orderly exit from the Company's California operations, compliance with City National's formal agreement with the Office of the Comptroller of the Currency (the "OCC"), and similar 2000 events. Partially offsetting the increases within non interest expense, compensation costs declined $8.57 million or 15.17%, from $56.53 million in 1999 to $47.96 million in 2000. Compensation costs for 2000 include a charge of $2.51 million related to the termination and non competition agreements signed with certain former officers of the Company in June 2000. Excluding these severance related expenses, compensation costs declined $11.08 million or 19.60% in 2000, as compared to 1999. This decline corresponds to a 13.33% decline in the number of full time equivalents employed by the Company during these periods, resulting from the downsizing and eventual closure of the California loan origination divisions and the reorganization within the community banking segment. Occupancy related expenses declined $4.34 million or 38.16%, from $11.38 million in 1999 to $7.04 million in 2000, primarily due to the reduced number of branch locations in 2000 and the closure of the California loan origination divisions. Advertising expense declined $8.51 million or 69.20%, from $12.30 million in 1999 to $3.79 million in 2000, as a result of the reduced volume of nationwide, direct mail solicitation of junior lien mortgage loans in 2000, as compared to prior years. Other expenses increased $14.32 million or 37.11%, from $38.59 million in 1999 to $52.91 million in 2000. This increase was due to a loss on fixed asset disposals of $4.81 million associated with the discontinuance of the specialty finance loan origination operations and the aforementioned $3.87 million increase in advisory fees associated with the Company's loan production offices. 1999 vs. 1998 Non interest income declined in 1999 to $59.54 million from $72.42 million in 1998 primarily as a result of activity within the mortgage banking segment. This $12.88 million or 17.80% decline was attributable to a $9.90 million loss on investment securities transactions in 1999 and a $14.83 million decline in income from mortgage banking activities. Within the mortgage banking segment, the loss on investment securities transactions was the result of the Company's $10.00 million pre tax charge against earnings related to its investment in Altiva Financial Corporation ("Altiva"). During the fourth quarter of 1999, the Company determined that the decline in the estimated fair value of its investment in Altiva (formerly Mego Mortgage Corporation) could no longer be supported as "other than temporary". Due to the significant changes that occurred within the specialty finance industry during 1999 and the dilution in the Company's ownership position of Altiva in December 1999, the Company determined that this charge to earnings was necessary. The Company originally made its $10.00 million investment in Altiva as part of a total $87.50 million recapitalization of that company. Also within Other Income, revenues derived from mortgage banking operations declined from $47.79 million in 1998 to $32.96 million in 1999, a decrease of $14.83 million or 31.03%. Although mortgage loan servicing revenues increased $3.01 million during 1999, gains recognized from loan sales declined $7.64 million or 53.65% and net origination fees decreased $10.20 million or 70.38%. As the Company's volume of junior lien mortgage loan originations declined in 1999, fee income generated from the origination of those loans declined similarly. Additionally, with reduced volume and less favorable secondary market pricing for this product, gains recognized from the sale of these loans declined significantly during 1999. In addition to a reduced volume of loan sales for cash gains in 1999, the Company also reduced the number and total size of loan securitizations. During 1999, the Company completed one securitization resulting in a $3.88 million pre tax gain, compared to four securitizations completed in 1998 resulting in pre tax gains of $8.60 million. Subsequent to the May 1999 securitization, management effectively terminated its loan securitization program. Partially offsetting these declines in non interest income in 1999, the Company recognized $8.80 million of gains resulting from the sale of seven branch locations. Certain of the branch sales transacted during 1999 were necessary for the Company to comply with the conditional regulatory approvals obtained related to the Company's 1998 merger of Horizon. During 1999, as part of this overall restructuring of City National, the Company also merged the operating systems of each of its West Virginia banking locations, into City National. This merger of operating systems also included the conversion of the former Horizon banks from their external service bureau to City National's internally maintained data and items processing systems. The combination of these conversions and the branch sales discussed above, caused City National to experience significant reconcilement issues between subsidiary systems and the Company's financial accounting systems, some of which remained unresolved at December 31, 1999. At December 31, 1999, the Company assessed these remaining differences and recorded a loss reserve of approximately $2.70 million to provide for possible financial exposure as a result of these reconcilement issues. These reconcilement issues were 9 - Management's Discussion & Analysis Of Financial Condition And Results Of Operations resolved during 2000 with no significant additional loss recorded. Additionally, during 1999 the Company froze the Horizon defined benefit pension plan, which resulted in the termination of benefits for future services accruing under the plan. All future benefits were transferred to the Company's defined contribution plan. The financial impact of freezing the Horizon defined benefit plan was quantified during the fourth quarter of 1999 resulting in the Company recognizing a $3.67 million curtailment gain, representing the change in projected benefit obligation, less a $1.00 million charge off of prior service costs associated with the plan. Non interest expense declined $24.94 million or 16.04%, from $155.56 million in 1998 to $130.61 million in 1999. Of this decrease, advertising expense declined $15.53 million or 55.81% from 1998 to 1999. The majority of this decline occurred within the mortgage banking segment as a result of the Company's reduced nationwide solicitation and direct mail marketing of the junior lien mortgage product. Additionally, Other Expenses declined $8.16 million or 17.45%, from $46.75 million in 1998 to $38.59 million in 1999. In 1998, the Company recorded a number of charges against earnings related to its merger of Horizon. Within the general corporate segment, the Company recorded $4.61 million of non recurring professional fees associated with the Horizon merger. Within the community banking segment, the Company recorded a $2.50 million non recurring write down in the recorded value of goodwill determined to be impaired. Due to the nature of these non recurring charges, no similar items were recorded in 1999. Additionally, in 1998, the Company recorded a non recurring $2.00 million charge against earnings within its mortgage banking segment associated with the restructuring of its specialty finance divisions. Income Taxes As a result of the pre tax loss recorded in 2000, the Company recorded a $15.73 million income tax benefit for the year ended December 31, 2000. For the years ended December 31, 1999 and 1998, the Company recorded income tax expense of $1.84 million and $6.49 million, respectively. The Company's effective tax rates for 2000, 1999, and 1998 were 29.07%, 22.87%, and 55.37%, respectively. The Company's 2000 effective tax rate was increased due to the effect of nondeductible goodwill write offs discussed previously for the California banking franchises and the internet service and direct mail divisions. As a result of depressed pre tax income in 1999, non taxable interest income as a percentage of pre tax income increased significantly, resulting in the 1999 decline in the effective tax rate. In 1998, the Company's effective tax rate was significantly higher than 1999 as a result of non deductible merger related expenses associated with the merger of Horizon. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's net deferred tax asset increased from $28.90 million at December 31, 1999 to $44.65 million at December 31, 2000. The components of the Company's net deferred tax asset are disclosed in Note Sixteen. Realization of the most significant net deferred tax assets is primarily dependent on future events taking place that will reverse the current deferred tax asset. For example, realization of the deferred tax asset attributable to the allowance for loan losses is expected to occur as additional loan charge offs, which have already been provided for within the Company's financial statements, are realized. The deferred tax asset associated with the Company's retained interests is expected to be realized as income, derived from the retained interest, is recognized within the Company's financial statements. The deferred tax asset attributable to the goodwill amortization is expected to be substantially realized with the completion of the sale of the California banking franchises. The capital loss carryforward is expected to be realized over the next five years, based on a tax planning initiative implemented to generate capital gains which will be used to offset previously recorded capital losses. The Company believes that it is more likely than not that each of the net deferred tax assets will be realized and that no valuation allowance is necessary as of December 31, 2000. Market Risk Management Market risk is the risk of loss due to adverse changes in current and future cash flows, fair values, earnings or capital due to adverse movements in interest rates and other factors, including foreign exchange rates and commodity prices. Because the Company has no significant foreign exchange activities and holds no commodities, interest rate risk represents the primary risk factor affecting the Company's balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in LIBOR interest rates, prime rates, and other benchmark interest rates that could affect the estimated fair value of the Company's investment securities portfolio, interest paid on the Company's short term and long term borrowings, interest earned on the Company's loan portfolio and interest paid on its deposit accounts. The Company's Asset and Liability Committee ("the Committee") has been delegated the responsibility of managing the Company's interest sensitive balance sheet accounts to maximize earnings while managing interest rate risk. The Committee, comprised of various members of executive and senior management, is also responsible for establishing policies to monitor and limit the Company's exposure to interest rate risk and to manage the Company's liquidity position. The Committee satisfies its responsibilities 10 - -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations through monthly meetings during which product pricing issues, liquidity measures and interest sensitivity positions are monitored. During 2000, the Committee implemented significant modifications to its methodology and processes for managing the Company's interest rate risk. Most notably, the Company acquired and implemented an asset/liability management and simulation software model, which is used to periodically update the interest sensitivity position of the Company's balance sheet. The model is also used to perform analyses that measure the impact on net interest income and capital of various changes in the interest rate environment. Such analyses quantify the effects of various interest rate scenarios on projected net interest income. The Company's policy objective is to avoid negative fluctuations in net interest income of more than 10% within a twelve month period, assuming a ramped increase of 300 basis points and decrease in interest rates over a 24 month period. At December 31, 2000, the Company was in compliance with its policy as net interest income would have declined 0.47% in the declining interest rate environment and it would have declined 0.37% in a rising interest rate environment. The following table summarizes the sensitivity of the Company's net interest income to various interest rate scenarios. The results of the sensitivity analyses presented below differ from the results used by the Committee in that, in the analyses below, interest rates are assumed to have an immediate and sustained parallel shock (e.g., a 100 basis point change results in a 100 basis point change for all financial assets and liabilities). As noted above, in the quarterly analyses utilized by the Committee, changes in interest rates are projected to occur gradually over a 24 month period and the interest rates on all of the Company's financial assets and liabilities do not necessarily change uniformly. The Company believes that the type of modeling used to generate the table below does not take into account all strategies which management might adopt in response to a sudden and sustained change in interests rates. Further, the Company does not believe that an immediate and sustained change in interest rates of the magnitude described below is likely during the next 12 months. Estimated Increase Immediate Estimated Increase (Decrease) in Basis Point Change (Decrease) in Net Economic Value of in Interest Rates Interest Income Equity -------------------------------------------------------------- +300 (0.13)% (7.79)% +200 0.13 (6.54)% +100 0.17 (5.24) 100 (0.14) (3.51) 200 (0.54) (3.90) 300 (0.97) (4.86) Prior to 2000, the Company primarily managed its asset and liability positions through a "static gap" analysis of its balance sheet. Due to the significance of the change in the methodology and tools used to manage the Company's risk position, the Company has determined that re creating the analysis shown above for 1999 would be impractical. However, using the static gap analysis at December 31, 1999, coupled with a more subjective earnings sensitivity analysis, the Company had the following estimated earnings sensitivity at December 31, 1999: Basis Point Change Percentage Change in in Interest Rates Net Interest Income ----------------------------------------- ----- 200 point increase (13.32) % 100 point increase (7.86) 100 point decrease 2.74 200 point decrease 3.72 Liquidity The adequacy of the Company's liquidity position is evaluated at the subsidiary bank level and at the Parent Company level. Within the community banking segment, the Company manages its liquidity position to effectively and economically satisfy the funding needs of its customers, to accommodate the schedule repayment of borrowings, and to provide the funding necessary for asset growth. The focus of the Company's liquidity management function within the community banks is on deposit customers. The Company attempts to maintain a stable, yet increasing, core deposit base as its primary funding source. The Company also manages relationships with external funding sources, including the Federal Home Loan Bank, to provide the banking subsidiaries with a second source of liquidity. Additionally, City National has utilized the capital markets, including the issuance of brokered deposits, as another source of liquidity. Aside from funding sources, the community banks also seek to manage liquidity by maintaining a sufficient percentage of their total assets as liquid assets, for example the Company's securities portfolio, that could be sold if necessary to provide additional funding sources. As of December 31, 2000, the Company believes that the community banking subsidiaries maintained a sufficient liquidity position to satisfy their funding and cash needs. However, the Company believes that deficiencies exist at the Parent Company level related to the Parent Company's liquidity position at December 31, 2000. The primary sources of cash for the Parent Company are the payment of dividends from the subsidiary banks. Regulatory guidelines restrict the ability of the subsidiary banks to transfer funds to the Parent Company in the form of dividends. The approval of the banks' primary regulator is required prior to the payment of dividends by a subsidiary bank in excess of the bank's earnings retained in the current year plus retained net profits for the preceding 11 -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations two years. As a result of the net loss recorded in 2000 and depressed earnings at the bank level in 1999 and 1998, the subsidiary banks will be required to request and obtain regulatory approval prior to the payment of dividends to the Parent Company. City National requested and received approval from the OCC to pay a $2.69 million special dividend to the Parent Company in March 2001. These funds will primarily be used by the Parent Company to satisfy debt service requirements associated with the Parent Company's outstanding trust preferred securities. However, the OCC has broad discretionary authority as it considers any additional dividend requests to be submitted by City National. The recently received approval to pay a dividend to the Parent Company is not necessarily indicative of future OCC determinations. Although the sources of cash for the Parent Company are extremely limited, the cash needs of the Parent Company are significant. Interest payments are required in 2001 associated with the Company's two trust preferred issues, its third party term note and line of credit, and its line of credit maintained with City National. Additionally, both the term note and the line of credit maintained with the third party institution were scheduled to mature on March 31, 2001. The amounts outstanding on the term note and line of credit combined, approximate $26.53 million as of December 31, 2000. On March 28, 2001, both the term note and the line of credit were renegotiated to extend the maturity date to January 15, 2002. Scheduled interest payments on the Company's trust preferred securities in 2001 approximate $6.68 million, excluding the $1.31 million interest payment remitted in January 2001. The Company does have alternatives and has begun to implement them to address these cash needs. First, as long as City National continues to maintain adequate capital levels and, at a minimum a 10.00% Total Capital ratio, it will seek additional regulatory approvals to pay cash dividends to the Parent Company throughout 2001. If necessary, the Parent Company may elect to defer interest payments on its trust preferred securities for up to five years, so long as there has been no event of default, which includes bankruptcy, failure to pay principal payments when due, and other events as defined in the documents governing the issuances of these securities. Finally, as has been discussed herein, the Company is actively marketing its California banking franchises. If successful, the majority of the proceeds obtained from a sale would be used to repay a significant portion of the term note and line of credit. 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. Net cash provided from operating activities approximated $147.63 million in 2000, comprised primarily of $88.54 million provided from loans held for sale transactions and approximately $21.48 million cash provided upon the surrender of Bank Owned Life Insurance ("BOLI") during the year. In 1999, net proceeds from loans held for sale activity provided $134.86 million of cash to the Company, which was the primary reason operating activities provided $105.59 million of cash during the year. During 1998, loans held for sale transactions had the opposite effect, resulting in a net cash outflow of $85.62 million and Operating Activities utilizing $131.20 million of cash. Also within Operating Activities, the Company purchased $20.00 million of additional BOLI during 1999, which is included in the Other Assets portion of the Consolidated Statements of Cash Flows. Net cash used in investing activities during 2000 approximated $60.91 million and was directly attributable to growth within the loan portfolio. Net cash used in investing activities increased $76.84 million from 1998 to 1999, primarily as a result of $64.99 million of cash outflow related to the Company's sale of seven branch locations during 1999. Net cash used in financing activities during 2000 approximated $118.21 million, primarily due to reductions in both short term and long term borrowings of $238.95 million. Net principal reductions in borrowings were partially offset by an increase of $128.17 million in deposit balances during 2000, primarily from the issuances of brokered deposits. Cash provided by financing activities decreased from $280.46 million in 1998 to $135.60 million in 1999, a decline of $144.86 million or 51.65%. This decline was largely due to the $84.15 million of cash received during 1998 from the issuance of trust preferred securities, with no similar issuance during 1999. Additionally, deposit balances declined $52.50 million in 1999, primarily as a result of branch sales. This compares to a $182.04 million increase in deposit balances during 1998. As a short term replacement for declines in deposit balances and in preparation for Year 2000 related potential deposit runoff, the Company's short term borrowings increased $191.17 million from December 31, 1998 to December 31, 1999. 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, 2000, 1999, and 1998, investments in these securities represented 69%, 62%, and 75%, respectively, 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. In the fourth quarter of 2000, the Company determined that the decline in fair value of two equity investments could no longer be supported as "other than temporary". As a result, the 12 - -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations Company incurred a $5.12 million pre tax charge against earnings. Factors that were considered included the remote possibility of the public offering of stock by the two entities in which the Company had made these investments and the continued operating losses posted by these entities. This charge is included in Investment securities (losses) gains in the Consolidated Statements of Income. In the fourth quarter of 1999, the Company recognized a pre tax charge of $10.00 million as a result of its determination that the decline in fair value of its investment in Altiva could no longer be supported as "other than temporary". Factors that were considered included the significant changes that had occurred within the specialty finance industry during the fourth quarter of 1999 and the dilution in the Company's ownership position of Altiva as a result of a second recapitalization completed by Altiva in December 1999. The $10.00 million pre tax charge, reported within the mortgage banking segment, is included in Investment securities (losses) gains in the Consolidated Statements of Income.
==================================================================================================================================== Table Five Investment Portfolio (in thousands) Carrying Values as of December 31 2000 1999 1998 --------------------------------- Securities available -for- sale: U.S. Treasury and other U.S. government corporations and agencies $266,139 $235,230 $258,095 States and political subdivisions 92,817 99,143 69,002 Other 26,506 46,739 29,562 Securities held to maturity: States and political subdivisions - - 39,063 --------------------------------- Total $385,462 $381,112 $395,722 =================================
At December 31, 2000, 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 Years Within Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------------------- U.S. Treasury and other U.S. government corporations and agencies $28,240 5.93% $188,828 6.38% $ 44,045 7.66% $ 5,02 67.73% States and political subdivisions 8,067 7.91 37,688 7.66 33,844 7.33 13,21 87.32 Other 15,096 6.65 5,563 7.02 1,151 6.43 4,69 66.08 ---------------------------------------------------------------------------------- Total $51,403 6.45 $232,079 6.60 $ 79,040 7.50 $22,94 07.16 ================================================================================== 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%. ====================================================================================================================================
13 -- LOAN PORTFOLIO The composition of the Company's loan portfolio is presented in the following table:
=========================================================================================================== Table Six (in thousands) December 31 2000 1999 1998 1997 1996 ------------------------------------------------------------------ Commercial, financial and agricultural $ 637,870 $ 589,116 $ 509,214 $ 464,678 $ 442,981 Real estate mortgage 959,457 949,830 842,727 676,828 574,897 Installment loans to individuals 370,832 347,168 363,988 367,095 327,222 ------------------------------------------------------------------ Total loans $1,968,159 $1,886,114 $1,715,929 $1,508,601 $1,345,100 ================================================================== ===========================================================================================================
The total loan portfolio increased $82.05 million or 4.35%, from $1.89 billion at December 31, 1999, to $1.97 billion at December 31, 2000. As indicated in Table Six, above, the growth trend within the commercial loan portfolio was consistent with previous years as the Company continued to actively solicit commercial loan volume during the first half of 2000. Although the commercial loan portfolio has experienced significant growth over the past five years, the Company anticipates that this trend will slow and the size of the commercial loan portfolio will begin to stabilize in 2001. As more fully discussed under the caption Allowance and Provision for Loan Losses, growth within the commercial loan portfolio has been one of the leading factors in the recent increases in the Company's provision for loan losses. Consumer loans also experienced growth during 2000, increasing $23.66 million or 6.82% in 2000, as compared to 1999. The growth within the consumer loan portfolio was primarily due to the indirect automobile lending program implemented during the fourth quarter of 1999. The indirect lending program resulted in significant loan volume during the first six months of 2000 and offset declines in the other consumer loan classifications. As previously noted, however, loan volume derived from this program was reduced during the second half of 2000 and the program was terminated on December 31, 2000. The mortgage loan portfolio experienced minimal growth during 2000, increasing $9.63 million or 1.01% in 2000, as compared to 1999. Although loan growth was minimal within this segment of the portfolio, residential real estate loans still comprise approximately 49% of the December 31, 2000 loan portfolio, consistent with previous years. The following table shows the maturity of loans outstanding as of December 31, 2000:
Maturing After One Within But Within After One Year Five Years Five Years Total ------------------------------------------------------ Commercial, financial and agricultural $285,529 $ 297,517 $ 54,824 $ 637,870 Real estate mortgage 422,275 438,733 98,449 959,457 Installment loans to individuals 156,573 211,232 3,027 370,832 ------------------------------------------------------ Total loans $864,377 $ 947,482 $156,300 $ 1,968,159 ====================================================== Loans maturing after one year with: Fixed interest rates $ 526,319 Variable interest rates 577,463 ---------- Total $1,103,782 ==========
Allowance And Provision for Loan Losses Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly 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 14 - -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations 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. The allowance for loan losses increased $13.51 million or 49.84%, from $27.11 million at December 31, 1999 to $40.63 million at December 31, 2000. Similarly, the provision for loan losses increased $6.19 million or 32.12%, from $19.29 million for the year ended December 31, 1999 to $25.48 million for 2000. This increase in the allowance for loan losses and the provision during 2000 was due to an increase in the allowance allocated to the commercial and installment portfolios from 1999 to compensate for risk factors identified in these portfolios during 2000. The allowance allocated to the commercial loan portfolio increased by $8.93 million or 62.44%, from $14.31 million at December 31, 1999 to $23.24 million at December 31, 2000. This increase was a result of an increase in classified assets and other risk factors associated with the commercial loan portfolio. Internally classified high risk commercial loans increased by $29.51 million or 120.28%, from $24.53 million at December 31, 1999 to $54.04 million at December 31, 2000. Further, the Company noted risk factors from a slowing economy in certain markets. This resulted in an unfavorable impact on certain commercial loan customers and their borrowings, as evidenced by the increase in delinquent commercial loans at December 31, 2000. Commercial loans past due 30 days or greater increased by $4.72 million or 36.62%, from $12.89 million at December 31, 1999 to $17.61 million at December 31, 2000. Finally, the Company recognized charge offs of $5.08 million in 2000, representing an increase of $1.16 million or 29.45% as compared to 1999. To further identify and quantify the credit risks in the commercial loan portfolio, the Company engaged an independent third party in the fourth quarter of 2000 to perform additional detailed loan reviews for a portion of the Company's commercial loan portfolio. An additional provision of approximately $7 million was recorded based on the deterioration of credit quality and the risk factors identified associated with this portion of the commercial loans reviewed. The allowance allocated to installment loans increased by $4.91 million or 70.82%, from $6.93 million at December 31, 1999 to $11.84 million at December 31, 2000, as a result of increases in consumer loan charge offs and delinquencies. Consumer loan charge offs increased by $654,000 or 9.10% during 2000, as compared to 1999. In addition, consumer loans past due 30 days or greater increased by $1.22 million or 8.81%, from $13.85 million at December 31, 1999 to $15.07 million at December 31, 2000. The increases in charge offs and delinquencies were primarily attributable to the indirect lending portfolio, comprised of loans originated under the Company's new indirect automobile lending program implemented in 1999, and existing indirect loans originated under pre 1999 programs. Although the Company increased the credit standards related to the new program during 2000, the indirect lending portfolio continued to experience increased charge offs and delinquencies throughout 2000, especially during the fourth quarter of 2000. Another factor leading to the increased 2000 allowance for loan losses was the transfer of approximately $9.99 million of junior lien mortgage loans to the permanent portfolio on September 30, 2000. Although these loans were transferred to the permanent portfolio at their estimated fair market values, additional credit quality issues developed during the fourth quarter of 2000. During the fourth quarter, loans 60 days or more past due increased from $140,000 to $1.16 million. As a result, the Company recorded an additional loan loss provision of $3.00 million associated with these junior line mortgage loans. Due to the increase in the allowance for loan losses during 2000, the allowance for loan losses as a percentage of nonperforming and potential problem loans increased from 168.55% at December 31, 1999 to 199.88% at December 31, 2000. This increase is consistent with the increase in the allowance as a multiple of net charge offs as the ratio increased from 2.58 at December 31, 1999 to 3.40 at December 31, 2000. Based on the Company's analysis and consideration of the known factors utilized in computing the allowance for loan losses, management believes that the consolidated allowance for loan losses at December 31, 2000 is adequate to provide for losses inherent in the Company's loan portfolio. During 1999, the allowance for loan losses increased $9.50 million or 53.98%, from $17.61 million to $27.11 million at December 31, 1998 and 1999, respectively. A portion of this increase was attributable to a 9.88% increase in gross loans, from $1.72 billion to $1.89 billion at December 31, 1998 and 1999, respectively. However, the Company also experienced an 8.33% increase in "at risk" loans, as evidenced by Table Eight, from $14.85 million at December 31, 1998 to $16.09 15 -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations million at December 31, 1999. Additionally, the acquisition of Frontier resulted in a $738,000 or 4.19% increase in the allowance for loan losses. Furthermore, in connection with a routine examination of the Company's lead bank, City National, by the OCC, an additional loan loss reserve of $6 million was recorded as of December 31, 1999, for various qualitative and general economic factors and to bring City National's allowance for loan losses to a level more consistent with its peer group. The provision for loan losses in 1999 was $19.29 million, compared to $8.48 million in 1998. The increased provision in 1999 was due, in part, to the increase in the allowance of $6.00 million as a result of the aforementioned OCC exam and also due to a $783,000 or 6.83% increase in loans charged off during 1999 as compared to 1998. Additionally, during the fourth quarter of 1999, the Company determined that a significant increase in the provision for loan losses was necessary to provide for probable losses in the portfolio identified during a detailed review of policies and procedures throughout City National. As the Company continued to consolidate the operations of Horizon into the Company, including the merging of Horizon's five, previously separate banking operations into City National, the Company identified additional credit quality and credit administration issues which resulted in the increased fourth quarter 1999 loan loss provision. As the lending policies and credit culture of the Company were instituted throughout the newly consolidated City National, management determined that additional loss exposures existed within the loan portfolio. Such exposures were primarily centered in the commercial, indirect lending, and other consumer loan classifications. A detailed review of lending policies and procedures, credit administration programs, and specifically selected credit relationships was completed during the fourth quarter of 1999. As a result of this process and the results of the OCC exam, the Company recorded a fourth quarter 1999 provision for loan losses of $11.96 million, compared to a third quarter 1999 provision of $2.68 million. The percentage of the allowance for loan losses allocated to the commercial loan portfolio increased from 36% in 1998 to 53% in 1999. This increase is consistent with the increase in commercial loan charge offs experienced by the Company over the previous two years. Commercial loan charge offs increased 64.57%, from $2.39 million in 1998 to $3.93 million in 1999. From 1997 to 1998, commercial loan charge offs increased 163%, from $906,000 in 1997 to $2.39 million in 1998. These increases are attributable to both the recent growth within the commercial loan portfolio and the consistent application of credit administration policies throughout City National, as previously discussed. The decline in the percentage of the allowance for loan losses allocated to the residential mortgage and installment loan portfolios is due to declines in loan charge offs within those classifications. 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 2000 1999 1998 1997 1996 ---------------------------------------------------- Balance at beginning of year $ 27,113 $ 17,610 $ 18,190 $ 16,888 $ 15,088 Charge offs: Commercial, financial and agricultural (5,081) (3,925) (2,385) (906) (1,625) Real estate mortgage (1,703) (1,142) (1,375) (252) (323) Installment loans to individuals (7,839) (7,185) (7,709) (4,594) (3,063) ---------------------------------------------------- Totals (14,623) (12,252) (11,469) (5,752) (5,011) Recoveries: Commercial, financial and agricultural 890 81 297 1,219 794 Real estate mortgage 179 301 43 149 191 Installment loans to individuals 1,588 1,349 1,283 1,103 814 ---------------------------------------------------- Totals 2,657 1,731 1,623 2,471 1,799 ---------------------------------------------------- Net charge offs (11,966) (10,521) (9,846) (3,281) (3,212) Provision for loan losses 25,480 19,286 8,481 4,064 5,012 Balance of acquired institution -- 738 785 519 -- ---------------------------------------------------- Balance at end of year $ 40,627 $ 27,113 $ 17,610 $ 18,190 $ 16,888 ==================================================== As a Percent of Average Total Loans Net charge offs 0.61% 0.59% 0.58% 0.23% 0.25% Provision for loan losses 1.29 1.08 0.51 0.28 0.39 As a Percent of Nonperforming and Potential Problem Loans
16 - -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations
Allowance for loan losses 199.88% 168.55% 118.59% 136.97% 142.67% ================================================================================================================== ================================================================================================================== Table Eight Nonaccrual, Past Due And Restructured Loans (in thousands) December 31 2000 1999 1998 1997 1996 ------------------------------------------------------- Nonaccrual loans $16,676 $ 9,553 $ 8,844 $ 7,801 $ 5,200 Accruing loans past due 90 days or more 3,350 5,830 5,126 5,149 6,402 Restructured loans 300 703 879 331 235 ------------------------------------------------------ $20,326 $16,086 $14,849 $13,281 $11,837 ======================================================
During 2000 and 1999, the Company recognized approximately $1.01 million and $1.08 million of interest income received in cash on nonaccrual and restructured loans. Approximately $1.22 million and $1.99 million of interest income would have been recognized during 2000 and 1999, respectively, 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, 2000 and 1999. 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 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ----------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 23,240 32% $ 14,307 31% $ 6,270 29% $ 7,284 31% $ 6,549 33% Real estate mortgage 5,546 49 5,874 50 6,227 49 5,575 45 5,604 43 Installment loans to individuals 11,841 19 6,932 19 5,113 22 5,331 24 4,735 24 --------------------------------------------------------------------------------------- $ 40,627 100% $ 27,113 100% $ 17,610 100% $ 18,190 100% $ 16,888 100% =======================================================================================
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 At December 31, 2000 and 1999, loans held for sale were $17.90 million and $118.03 million, respectively. This decline of $100.13 million or 84.83% was primarily due to the decline in junior lien mortgage loans classified as held for sale. The balance of junior lien mortgage loans held for sale declined $82.69 million or 96.87%, from $85.36 million at December 31, 1999 to $2.67 million at December 31, 2000. During 2000, the Company closed its California specialty finance loan origination units, which significantly reduced new loan volume of the junior lien mortgage product. Remaining balances of junior lien mortgage loans held for sale as of December 31, 2000, were originated by the Company's operations in Reston, Virginia; Crofton, Maryland; and Atlanta, Georgia. Loans produced by these units were originated under pre-established 17 -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations purchase commitments from independent third parties. Once funded by the Company, these loans are expected to be sold to end investors within 60-90 days. As previously discussed, the Company has announced plans to exit its specialty finance loan origination operations. Traditional, fixed rate first lien mortgage loans are also originated by the Company with the intent to sell, servicing released, in the secondary market. As of December 31, 2000 and December 31, 1999, reported balances of loans held for sale included $15.23 million and $32.67 million, respectively, of traditional, first lien mortgage loans. During 2000, the Company originated $219.75 million and purchased $16.07 million in loans held for sale and sold $324.35 million during the same period. This compares to originations of $343 million, purchases of $229 million, and sales of $708 million during 1999. Retained Interests Amounts reported as Retained Interests in the Consolidated Balance Sheets represent the estimated fair value of future cash flows expected to be received by the Company resulting from the six securitizations of fixed rate, junior lien mortgage loans completed by the Company between 1997 and 1999. The estimated fair value of the retained interests is determined by performing cash flow modeling techniques that incorporate assumptions regarding prepayment and default rates expected to be experienced by the underlying collateral pools. Using these assumptions, the Company forecasts the expected amount and timing of cash flows it expects to receive and applies a selected interest rate to discount those anticipated cash flows to determine their estimated fair values. Key assumptions used in estimating the fair value of the Company's retained interests as of December 31, 2000 and 1999, were as follows: December 31 2000 1999 ------------------ Prepayment speed (CPR) 15%-21% 15%-21% Weighted average cumulative defaults 13.68% 13.61% Weighted average discount rate 14.00% 14.00% Using the aforementioned assumptions, the estimated fair values of the retained interests were $85.21 million and $76.96 million as of December 31, 2000 and 1999, respectively. The increase in the estimated fair value was recorded through the Other Comprehensive Income (Loss) section of Stockholders' Equity as a reversal of previously recorded declines in the fair value of the retained interests. Adjustments to the estimated fair value of the retained interests result from the actual performance of the underlying collateral loans in comparison to forecasted performance assumptions. Management monitors the actual default and prepayment rates of each securitized loan pool on a monthly basis and reforecasts expected cash flows on a quarterly basis. As necessary, modeling assumptions are revised to reflect actual performance and future expectations. In January 2001, the Emerging Issues Task Force ("EITF") clarified the intent of accounting guidance provided by the EITF in Issue 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Issue 99-20, which becomes effective for all financial statement periods beginning after March 15, 2001, sets forth the authoritative accounting guidance regarding the recognition of interest income and the recognition of impairment associated with retained interests. Upon implementation of Issue 99-20, the recorded balance of the Company's retained interests will be adjusted to its estimated fair value, with the amount of the adjustment recorded through the Company's income statement. As of December 31, 2000, the Company has a negative fair value adjustment of $10.94 million recorded within the Other Comprehensive Income (Loss) section of Stockholders' Equity, in accordance with current accounting guidance. Therefore, it is anticipated that the Company's 2001 operating results will be negatively impacted as a result of the initial adoption of this change in accounting principles. Loan Servicing On December 18, 2000, the Company announced the sale of its mortgage servicing rights associated with approximately $1.10 billion of junior lien and Title I mortgage loans. After considering certain exit and transaction costs, the financial statement impact of this transaction was not considered significant. The Company simultaneously entered into a sub servicing agreement with the purchaser to service these loans during an interim transition period, which is expected to end during the first quarter of 2001. Loans serviced for others, including those serviced during the transition period, are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $1.20 billion and $1.69 billion at December 31, 2000 and 1999, respectively. The recorded balance of mortgage loan servicing rights, included in Other Assets within the Consolidated Balance Sheets, was reduced to zero at December 31, 2000 as a result of the aforementioned sale. As of December 31, 1999, the Company had recorded mortgage loan servicing rights of $8.87 million at December 31, 1999 18 - -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations Certificates oF Deposit Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2000, are summarized as follows: ================================================================================ Table Ten (in thousands) Amounts Percentage ---------------------------- Three months or less $150,611 45% Over three months through six months 72,678 22 Over six months through twelve months 69,059 21 Over twelve months 42,795 12 ----------------------------- Total $335,143 100% ============================ ================================================================================ Regulatory Matters On July 12, 2000, the Company announced that its principal bank subsidiary, City National, had entered into a formal agreement with the OCC. The agreement required City National to adopt a three year comprehensive strategic plan, improve its loan portfolio management, and develop and adhere to a written plan for liquidity, including a formal asset and liability management policy. City National also agreed to incorporate liquidity planning in its financial management process, implement a satisfactory program to manage interest rates, and ensure full compliance of its securitization program with recent OCC regulations. Additionally, City National agreed to develop a plan to dispose of loans held for sale that are held in excess of 90 days, develop a three year capital plan, strengthen internal controls and its audit committee, and establish a program to maintain an adequate allowance for loan and lease losses. Additionally, as a consequence of entering into this agreement, City National became subject to certain FDIC restrictions regarding the issuance of brokered deposits. City National also agreed to maintain its regulatory Total Capital ratio above 10.00% and to establish a committee of its Board of Directors to oversee compliance with the agreement. Since the date of the agreement, City National has devoted significant time and resources to comply with the formal agreement. City National established a compliance oversight committee, which meets regularly to determine the status of compliance with the agreement. City National, and the Company, have adopted a three year comprehensive strategic plan and have formalized their policies and procedures related to asset and liability management, including liquidity and interest rate risk issues. City National has also disposed of substantially all of its loans held for sale that had been held in excess of 90 days and transferred the unsold loans to the permanent portfolio at estimated fair market value. City National continues to address the remaining issues identified in the formal agreement, including improving its loan portfolio management, managing its allowance for loan losses, and strengthening internal controls. Capital Resources During 2000, Stockholders' Equity decreased $35.09 million or 17.67%, from $198.54 million at December 31, 1999 to $163.46 million at December 31, 2000. This decline was due to the net loss of $38.37 million recorded in 2000 and the payment of $7.43 million in dividends to the Company's common stockholders. Offsetting the combined $45.80 million decrease resulting from these two events, the Company recognized a $10.52 million increase in unrealized gains within the Other Comprehensive Income (Loss) section of stockholders' equity. Unrealized gains in 2000 were attributable to a $5.56 million increase in the fair value of the securities portfolio and a $4.96 million increase in the fair value of retained interests during the year. During 1999, the Company's stockholders' equity decreased $21.52 million or 9.78%, from $220.06 million at December 31, 1998 to $198.54 million at December 31, 1999. This decline was primarily the result of a $15.20 million increase in Accumulated Other Comprehensive Losses during 1999. Additionally, the Company paid dividends to its shareholders of $13.47 million and recorded net income of $6.21 million, resulting in a $7.26 million decline in stockholders' equity. The increase in Accumulated Other Comprehensive Losses was attributable to a $12.41 million, after tax, write down in the fair value of retained interests recorded during 1999. Additionally, fair value adjustments within the Company's available-for-sale securities portfolio represented the remaining $2.79 million increase in Accumulated Other Comprehensive Losses in 1999. Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8%, with at least one-half of capital consisting of tangible common stockholders' equity and a minimum Tier I leverage ratio of 4%. At December 31, 2000, the Company's total capital to risk adjusted assets ratio was 11.61% and its Tier I capital ratio was 9.05%, compared to 10.97% and 9.28%, respectively, at December 31, 1999. The Company's leverage 19 -- Management's Discussion & Analysis Of Financial Condition And Results Of Operations ratio at December 31, 2000 and 1999 was 7.94% and 8.84%, 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. As previously discussed, City National entered into a formal agreement with the OCC during 2000. One of the provisions of the agreement requires City National to maintain its total capital ratio at least equal to 10.00%. 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, 2000, the Company's lead bank, City National, reported total capital, Tier I capital, and leverage ratios of 12.72%, 11.47%, and 10.10%, respectively. However, as a consequence of entering into the formal agreement with the OCC, City National cannot be categorized as "well capitalized" under the regulatory framework for prompt corrective action. Although City National's regulatory capital ratios exceed minimum ratios to be considered "well capitalized", any bank that has entered into a formal agreement such as that discussed above is precluded from being categorized as "well capitalized". As of December 31, 1999, City National, reported total capital, Tier I capital, and leverage ratios of 11.81%, 10.77%, and 10.13%, respectively. As evidenced by the capital ratios discussed above, both the Company and City National maintain a relatively strong capital base as of December 31, 2000. However, due to the net loss reported at both the consolidated and bank levels in 2000 and depressed earnings in 1999 and 1998, the Company has announced a suspension in the payment of dividends to its common stockholders. The dividend suspension is also due to the liquidity issues faced by the Parent Company, as discussed under the caption Liquidity. During the period dividends are suspended, net earnings generated by the Company will be retained and will have the effect of improving the Company's consolidated capital position. Additionally, the strategic repositioning of the Company is expected to have a positive effect on the overall earnings capabilities of the Company and City National. Combined with the Company's focus on restoring asset quality and effectively managing its risks, the Company anticipates experiencing an improved capital position over the long term. However, as the Company completes its restructuring during the first six months of 2001, continued deterioration of its capital base is expected. Inflation Since the assets and liabilities of the Company 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. 20 - -- 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Charleston, West Virginia February 9, 2001, except for Note Twelve as to which the date is March 28, 2001 21 -- Consolidated Balance Sheets City Holding Company And Subsidiaries
December 31 2000 1999 --------------------------- (in thousands) Assets Cash and due from banks $ 87,990 $ 120,122 Federal funds sold 2,638 1,990 --------------------------- Cash and Cash Equivalents 90,628 122,112 Investment securities available for sale, at fair value (amortized cost of $382,929 and $387,969 at December 31, 2000 and 1999, respectively) 385,462 381,112 Loans: Gross loans 1,968,159 1,886,114 Allowance for loan losses (40,627) (27,113) --------------------------- Net Loans 1,927,532 1,859,001 Loans held for sale 17,900 118,025 Retained interests 85,206 76,963 Premises and equipment 56,924 66,119 Accrued interest receivable 18,242 18,149 Other assets 89,606 151,009 --------------------------- Total Assets $2,671,500 $2,792,490 =========================== Liabilities Deposits: Noninterest-bearing $ 271,358 $ 246,555 Interest-bearing 1,812,583 1,709,215 --------------------------- Total Deposits 2,083,941 1,955,770 Short-term borrowings 248,766 386,719 Long-term debt 34,832 116,000 Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely subordinated debentures of City Holding Company 87,500 87,500 Other liabilities 53,004 47,959 --------------------------- Total Liabilities 2,508,043 2,593,948 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 at December 31, 2000 and 1999: 16,892,913 and 16,879,815 shares, including 4,979 and 9,646 shares in treasury, respectively 42,232 42,199 Capital surplus 59,174 59,164 Retained earnings 67,152 112,951 Cost of common stock in treasury (136) (285) Accumulated other comprehensive loss (4,965) (15,487) ---------------------------- Total Stockholders' Equity 163,457 198,542 ---------------------------- Total Liabilities and Stockholders' Equity $2,671,500 $2,792,490 ============================
See notes to consolidated financial statements. 22 - -- Consolidated Statements Of Income City Holding Company And Subsidiaries
Year Ended December 31 2000 1999 1998 ------------------------------------------- (in thousands, except per share data) Interest Income Interest and fees on loans $ 180,513 $ 168,726 $ 170,549 Interest on investment securities: Taxable 17,389 17,675 17,189 Tax-exempt 4,608 5,032 4,955 Other interest income 402 4,120 3,987 ----------------------------------------- Total Interest Income 202,912 195,553 196,680 Interest Expense Interest on deposits 82,756 71,464 74,432 Interest on short-term borrowings 18,996 11,436 9,677 Interest on long-term debt 3,987 6,219 6,223 Interest on trust-preferred securities 8,017 8,014 3,005 ----------------------------------------- Total Interest Expense 113,756 97,133 93,337 ----------------------------------------- Net Interest Income 89,156 98,420 103,343 Provision for loan losses 25,480 19,286 8,481 ----------------------------------------- Net Interest Income After Provision for Loan Losses 63,676 79,134 94,862 Non-Interest Income Investment securities (losses) gains (5,015) (9,897) 7 Service charges 10,778 10,074 9,738 Mortgage loan servicing fees 16,962 22,068 19,058 Net origination fees on junior lien mortgages 2,331 4,292 14,489 (Loss) gain on sale of loans (1,596) 6,600 14,238 Other income 17,573 26,398 14,893 ----------------------------------------- Total Other Income 41,033 59,535 72,423 Non-Interest Expenses Salaries and employee benefits 47,957 56,530 56,653 Occupancy, excluding depreciation 7,035 11,376 14,016 Depreciation 12,291 11,822 10,313 Advertising 3,788 12,297 27,827 Goodwill impairment 34,832 - - Other expenses 52,909 38,589 46,749 ----------------------------------------- Total Other Expenses 158,812 130,614 155,558 ----------------------------------------- (Loss) Income Before Income Taxes (54,103) 8,055 11,727 Income tax (benefit) expense (15,730) 1,842 6,493 ----------------------------------------- Net (Loss) Income $ (38,373) $ 6,213 $ 5,234 ========================================= Basic (loss) earnings per common share $ (2.27) $ 0.37 $ 0.31 ========================================= Diluted (loss) earnings per common share $ (2.27) $ 0.37 $ 0.31 Average common shares outstanding: Basic 16,882 16,841 16,799 ========================================= Diluted 16,882 16,841 16,885 =========================================
See notes to consolidated financial statements. 23 -- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CITY HOLDING COMPANY AND SUBSIDIARIES
Common Accumulated Stock Other Total (Par Capital Retained Comprehensive Treasury Stockholders' Value) Surplus Earnings Income (Loss) Stock Equity ---------------------------------------------------------------------------------- (in thousands) 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 adjustment for gains included in net income of $4 - - - (2,745) - (2,745) --------- Total comprehensive income 2,489 Cash dividends declared: City ($0.77 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 stock - - - - (4,873) (4,873) Purchase of shares of treasury stock by Horizon - - - - (2,114) (2,114) Common stock issued in acquisitions 807 14,965 - - - 15,772 Retirement of 108,396 shares of common stock held in treasury (271) (4,396) - - 4,667 - Retirement of shares of common stock held in treasury by Horizon (493) (4,630) - - 5,123 - -------------------------------------------------------------------------------- Balances at December 31, 1998 42,051 58,365 120,209 (292) (274) 220,059 Comprehensive loss: Net income - - 6,213 - - 6,213 Other comprehensive loss, net of deferred income taxes of $(10,082): - - - - - Unrealized loss on securities and retained interests of $15,257, net of reclassification adjustment for gains included in net income of $62 - - - (15,195) - (15,195) --------- Total comprehensive loss (8,982) Cash dividends declared ($0.80 a share) - - (13,471) - - (13,471) Exercise of 7,686 stock options 82 184 - - 255 521 Purchase of 11,999 shares of treasury stock - - - - (398) (398) Issuance of contingently issuable common stock 66 615 - - 132 813 -------------------------------------------------------------------------------- Balances at December 31, 1999 42,199 59,164 112,951 (15,487) (285) 198,542 Comprehensive loss: Net loss - - (38,373) - - (38,373) Other comprehensive loss, net of deferred income taxes of $(7,060): - - - - - - Unrealized gain on securities and retained interests of $10,513, net of reclassification adjustment for losses included in net income of $9 - - - 10,522 - 10,522 --------- Total comprehensive loss - - - - - (27,851) Cash dividends declared ($0.44 a share) - - (7,426) - - (7,426) Issuance of contingently issuable common stock 33 10 - - 149 192 -------------------------------------------------------------------------------- Balances at December 31, 2000 $ 42,232 $ 59,174 $ 67,152 $ (4,965) $ (136) $ 163,457 ================================================================================
See notes to consolidated financial statements. 24 - -- Consolidated Statements Of Cash Flows City Holding Company And Subsidiaries
Year Ended December 31 2000 1999 1998 ----------------------------------------------- (in thousands) Operating Activities Net (loss) income $(38,373) $ 6,213 $ 5,234 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net amortization and write-off of goodwill 40,837 5,674 2,647 Loss on fixed asset disposals 4,805 - - Provision for depreciation 12,291 11,822 10,313 Provision for loan losses 25,480 19,286 8,481 Deferred income tax benefit (22,802) (9,198) (3,011) Loans originated for sale (219,748) (343,755) (695,576) Purchases of loans held for sale (16,065) (229,148) (754,703) Proceeds from loans sold 324,354 707,765 1,364,657 Realized losses (gains) on loans sold 1,596 (6,600) (14,238) Increase in retained interests - (11,340) (61,260) Realized investment securities losses (gains) 5,015 9,897 (7) (Increase) decrease in accrued interest receivable (93) 1,310 (3,515) Decrease (increase) in other assets 25,287 (56,483) 3,230 Increase in other liabilities 5,045 145 6,547 ----------------------------------------------- Net Cash Provided by (Used in) Operating Activities 147,629 105,588 (131,201) Investing Activities Proceeds from maturities and calls of securities held to maturity - 27 3,390 Purchases of securities held to maturity - - (898) Proceeds from sales of securities available for sale 51,606 83,185 33,930 Proceeds from maturities and calls of securities available for sale 32,417 24,304 146,140 Purchases of securities available for sale (80,640) (105,785) (201,487) Net increase in loans (64,191) (175,061) (119,225) Net cash paid in branch sales - (56,104) - Realized gain on branch sales - (8,883) - Net cash acquired (paid) in acquisitions - 7,409 2,584 Purchases of premises and equipment (97) (7,944) (26,446) ----------------------------------------------- Net Cash Used in Investing Activities (60,905) (238,852) (162,012) Financing Activities Net increase (decrease) in noninterest-bearing deposits 24,803 (22,178) 52,960 Net increase (decrease) in interest-bearing deposits 103,368 (30,323) 129,083 Net (decrease) increase in short-term borrowings (153,953) 191,168 10,529 Proceeds from long-term debt - 57,999 87,917 Repayment of long term debt (85,000) (47,719) (65,700) Net proceeds from issuance of trust-preferred securities - - 84,148 Purchases of treasury stock - (398) (6,987) Exercise of stock options - 521 675 Cash dividends paid (7,426) (13,471) (12,167) ----------------------------------------------- Net Cash Provided by Financing Activities (118,208) 135,599 280,458 ----------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (31,484) 2,335 (12,755) Cash and cash equivalents at beginning of year 122,112 119,777 132,532 ----------------------------------------------- Cash and Cash Equivalents at End of Year $ 90,628 $122,112 $119,777 ===============================================
See notes to consolidated financial statements. 25 -- 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 accounting principles generally accepted in the United States 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 the consolidated financial statements. 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 comprehensive income. 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 that 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 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 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: When the Company sold certain receivables in securitizations of high loan-to-value loans, it retained a financial interest in the securitizations. The financial interest or retained interest is comprised of the estimated fair value of two components: (1) the excess cash flows between interest collected on the underlying collateral loans minus interest paid to third party investors plus fees paid for servicing, insurance and trustee costs, and (2) overcollateralization. Gains recognized on the sale of the receivables was based in part on the previous carrying amount of the loans sold, allocated between the assets sold and the retained interests based on their relative fair values at the date of the sale. Because quoted market prices are not readily available for retained interests, the Company estimates their fair values using cash flow modeling techniques that incorporate management's best estimates of key assumptions--loan default rates, loan prepayment rates and discount rates commensurate with the risks involved. 26 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries 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. Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb 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 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 10 to 15 years 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: As permitted, 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: Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. 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 common stock equivalents. Stock options and common stock equivalents had no effect on average shares outstanding for purposes of computing diluted earnings per share for 2000 and 1999. The incremental shares related to stock options were 77,000 in 1998, while other common stock equivalents were 9,000 in 1998. New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. 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. Statement No. 133 became effective for the Company on January 1, 2001. However, the adoption of the provisions of this Statement will not have a material impact on the Company's reported financial position or results of operations based on the interpretative guidance issued by the FASB to date. The FASB continues to issue interpretative guidance that could require changes in the future to the Company's application of the Statement. In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125. This Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The Company adopted the required disclosure provisions related to the securitization of financial assets as of December 31, 2000. The remaining provisions of this Statement are effective beginning the second quarter of 2001, however, the impact is not expected to have a material effect on the Company's financial position or results of operations. During 2000, the Emerging Issues Task Force ("EITF") released EITF Issue 99-20 ("EITF 99-20"), which provides accounting guidance for the recognition of interest income and impairment on purchased and retained interests in securitized financial assets. EITF 99-20 requires that the holder of such instruments recognize the excess of all cash flows attributable 27 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries to the beneficial interest using the effective yield method. In addition, EITF 99-20 provides a change in the determination of impairment, whereby if the fair value of the beneficial interest has declined below its carrying value, then an impairment analysis should be performed. If there has been an adverse change in the estimated cash flows from the previous cash flows projected, then the condition for an other-than-temporary impairment has been met and the beneficial interest should be written down to the estimated fair value. EITF 99-20 is effective beginning the second quarter of 2001. On the date of adoption, the beneficial interests determined to have an other than temporary impairment in accordance with EITF 99-20 will be written down to the estimated fair value, with the amount of the write down reported as a cumulative effect of a change in accounting principle on the Consolidated Statements of Income. The adoption of EITF 99-20 is expected to negatively impact the Company's financial position and results of operations. Statements of Cash Flows: Cash paid for interest, including interest paid long-term debt and trust preferred securities, was $106.72 million, $98.71 million, and $90.27 million in 2000, 1999, and 1998, respectively. Cash paid for income taxes was $6.01 million, $9.75 million, and $14.0 million in 2000, 1999, and 1998, respectively. Reclassifications: Certain amounts in the 1999 and 1998 financial statements have been reclassified toconform to the 2000 presentation. Such reclassifications had no impact on net income or stockholders' equity. - -------------------------------------------------------------------------------- Note Two Intangible Assets And Strategic Repositioning - -------------------------------------------------------------------------------- A comprehensive strategic repositioning plan, designed to refocus on the Company's core community banking franchise, was implemented during 2000. The plan, initially announced in July 2000, includes the following components: (a) completing an orderly exit from the Company's operations in California, (b) divesting of any operations which are not profitable, and (c) intensifying the Company's focus on it core, West Virginia community banking franchise, including brokerage activities and insurance sales. As a result of the Company's plan to exit its operations in California, the Company recorded a $13.64 million charge against earnings to reduce the carrying amount of its investment in its California banking operations to their estimated fair values as of December 31, 2000. The fair value of the California banking franchises, which is included in the community banking segment, was estimated based on independent valuations of California franchises of similar size and operations. At December 31, 2000, the California banking operations had a carrying value of $16.55 million and reported net income of $1.18 million for the year ended December 31, 2000, excluding the $13.64 million impairment charge. The Company plans to dispose of the California operations by December 31, 2001. As a consequence of the strategic repositioning plan, the Company elected to discontinue its specialty finance loan origination operations, which are included in the mortgage banking segment. Having sold its specialty finance loan servicing operations in December 2000, the closure of its specialty finance loan origination divisions effectively completes the Company's exit from any ongoing specialty finance operations. In conjunction with the closure of these divisions, the Company recorded a $15.18 million charge against earnings, representing the write-off of the remaining balance of goodwill associated with these operations. At December 31, 2000, the origination divisions had a carrying value of $9.06 million and reported a net loss of $5.66 million for the year ending December 31, 2000, excluding the $15.18 million impairment charge. The Company expects to dispose of the specialty finance loan origination divisions by June 30, 2001. Additionally, the carrying amount of goodwill balances associated with the Company's Internet service and direct mail divisions was reviewed for impairment as of December 31, 2000. Based on 2000 operating results, current profitability projections, and the Company's strategic plan, the Company determined that an impairment analysis was necessary to ascertain the recoverability of the goodwill balances for these divisions. Utilizing an analysis of undiscounted cash flows over the remaining goodwill amortization period for each division, the Company concluded that the goodwill balances were unrecoverable. As a result, the Company recorded a $6.01 million charge against earnings to write off the remaining goodwill balances associated with these divisions. Intangible assets arising from purchase business combinations consist primarily of goodwill and core deposits which have an aggregate unamortized balance at December 31, 2000 and 1999, of $8.24 million and $46.19 million, respectively, and are included in Other Assets within the Consolidated Balance Sheets. Excluding the write-off of impaired goodwill recorded in 2000 and 1998, amortization of goodwill and core deposits approximated $3.34 million, $3.12 million and $3.08 million during the years ended December 31, 2000, 1999, and 1998, respectively, and is included in Other Expenses within the Consolidated Statements of Income. 28 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ========================================= Note Three 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, 2000, was approximately $27.40 million. ========================================= Note Four Investments ========================================= During the fourth quarter of 2000, the Company determined that its investments in a small business investment corporation were unrecoverable and recorded a $5.12 million loss on securities transactions. In 1999, the Company determined that its investment in Altiva Financial Corporation was unrecoverable and recorded a $10.00 million loss on securities transactions. Included in the Company's investment portfolio are structured notes with an estimated fair value of $500,000 and $1.2 million at December 31, 2000 and 1999, 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 four 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. Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------ (in thousands) December 31, 2000 Available-for-sale securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $264,966 $2,162 $ (989) $266,139 Obligations of states and political subdivisions 91,586 1,491 (260) 92,817 Mortgage-backed securities 3,481 20 (11) 3,490 Other debt securities 5,663 57 (33) 5,687 --------------------------------------- Total Debt Securities 365,696 3,730 (1,293) 368,133 Equity securities 17,233 171 (75) 17,329 --------------------------------------- $382,929 $3,901 $(1,368) $385,462 ======================================= Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------ (in thousands) December 31, 1999 Available-for-sale securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $235,451 $ 48 $(5,968) $229,531 Obligations of states and political subdivisions 100,002 807 (1,666) 99,143 Mortgage-backed securities 5,732 37 (70) 5,699 Other debt securities 5,605 34 (44) 5,595 ----------------------------------------- Total Debt Securities 346,790 926 (7,748) 339,968 Equity securities 41,179 108 (143) 41,144 ----------------------------------------- $387,969 $1,034 $(7,891) $381,112 ========================================= The amortized cost and estimated fair value of debt securities at December 31, 2000, 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. Estimated Fair Cost Value -------------------- (in thousands) Available-for-Sale Due in one year or less $ 37,996 $ 37,973 Due after one year through five years 230,055 230,538 Due after five years through ten years 75,950 77,889 Due after ten years 18,214 18,244 ------------------- 362,215 364,644 Mortgage-backed securities 3,481 3,489 ------------------- $365,696 $368,133 =================== Gross gains of $105,000, $113,000, and $47,000 and gross losses of $5.12 million, $10.01 million, and $40,000 were realized on sales and calls of securities during 2000, 1999, and 1998, respectively. The book value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $332 million and $252 million at December 31, 2000 and 1999, respectively. ========================================= Note Five Loans ========================================= The loan portfolio is summarized as follows: December 31 2000 1999 ----------------------- (in thousands) Commercial, financial and agricultural $ 637,870 $ 589,116 Residential real estate 959,457 949,830 Installment loans to individuals 370,832 347,168 ----------------------- $1,968,159 $1,886,114 ======================= 29 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries 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 2000 and 1999: 2000 1999 -------------------- (in thousands) Balance at January 1 $ 42,303 $ 25,008 Loans made 7,830 32,104 Principal payments received (11,080) (14,809) Other changes (5,107) - -------------------- Balance at December 31 $ 33,946 $ 42,303 ==================== Amounts reported as other changes in the table above represent changes in the composition of the Company's Board of Directors and officers during 2000. ========================================= Note Six Allowance For Loan Losses ========================================= A summary of changes in the allowance for loan losses follows: 2000 1999 1998 -------------------------------- (in thousands) Balance at January 1 $ 27,113 $ 17,610 $ 18,190 Provision for possible loan losses 25,480 19,286 8,481 Charge-offs (14,623) (12,252) (11,469) Recoveries 2,657 1,731 1,623 Balance of acquired institution - 738 785 ------------------------------ Balance at December 31 $ 40,627 $ 27,113 $ 17,610 ============================== The recorded investment in loans that were considered impaired was $20.33 million and $14.38 million at December 31, 2000 and 1999, respectively. Included in these amounts at December 31, 2000 and 1999, are $6.70 million and $4.86 million, respectively, of impaired loans for which the related allowance for loan losses is and $3.63 million and $755,000, respectively, and $13.63 million and $9.52 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, 2000, 1999 and 1998, were approximately $16.44 million, $11.32 million, and $9.39 million, respectively. ========================================= Note Seven Loans Held For Sale ========================================= As of December 31, 2000, the Company reported approximately $17.90 million of loans held for sale, compared to $118.03 million of loans held for sale at December 31, 1999. At December 31, 2000 and 1999, $2.67 million and $85.36 million, respectively, of total loans held for sale represented junior lien and similar mortgage loans. The remaining $15.23 million and $32.67 million at December 31, 2000 and 1999, respectively, represented conventional, fixed-rate mortgage loans. The Company recorded a net loss on its loan sales of $1.60 million during 2000, compared to gains (excluding securitization gains) of $2.72 million and $5.64 million in 1999 and 1998, respectively. The loss recorded in 2000 includes the adverse change of approximately $4.40 million in the valuation allowance for loans held for sale. The gains on loan sales recorded in 1999 and 1998 were recorded net of the adverse change in the valuation allowance, which approximated $2.11 million and $4.70 million, respectively. ========================================= Note Eight Securitizations And Retained Interests ========================================= In 1999, the Company sold $261.51 million of junior lien mortgage loans in one securitization transaction. In 1998, the Company sold $463.13 million of junior lien mortgage loans in four securitization transactions. During 1999, cash proceeds from the securitization of junior lien mortgage loans totaled $238.16 million, with a pre-tax gain of approximately $3.88 million recognized. During 1998, cash proceeds from securitizations of junior lien mortgage loans totaled $430.03 million, with pre tax gains of $8.60 million recognized. As of December 31, 2000 and 1999, the Company reported retained interests in its securitizations of approximately $85.21 million and $76.96 million, respectively. The value of the retained interests is determined using cash flow modeling techniques that incorporate key assumptions related to default, prepayment, and discount rates. During 2000, the Company recorded adjustments to the recorded value of its retained interests, which increased the estimated fair value of these assets by approximately $8.24 million. Adjustments to the estimated fair value of retained interests are primarily the result of the actual performance of the underlying collateral 30 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries pools and changes in the expected future performance of those loans. Key assumptions used in estimating the fair value of the Company's retained interests as of December 31, 2000 and 1999, were as follows: December 31 2000 1999 -------------------- Prepayment speed (CPR) 15%-21% 15%-21% Weighted average cumulative defaults 13.68% 13.61% Weighted average discount rate 14.00% 14.00% At December 31, 2000, the sensitivity of the current estimated fair value of retained interests to immediate 10% and 20% adverse changes were as follows: Book value at December 31, 2000 $85,206 Prepayment curve: Impact on fair value of 10% increase in prepayment curve 794 Impact on fair value of 20% increase in prepayment curve 1,578 Default curve: Impact on fair value of 10% increase in default curve (9,343) Impact on fair value of 20% increase in default curve (16,170) Discount rate: Impact on fair value of 10% increase in discount rate (5,945) Impact on fair value of 20% increase in discount rate (11,292) These sensitivity analyses are hypothetical. As these figures indicate, any change in estimated fair value based on a 10% variation in assumptions cannot be extrapolated because the relationship of the change in assumption to the change in fair value is not linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated independent from any change in another assumption; in reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities. The Company's securitization program, which was terminated during the second quarter of 1999, only included fixed rate, junior lien residential mortgage loans. The table below summarizes information regarding delinquencies, net credit losses, and outstanding collateral balances of securitized loans for the dates presented: December 31 2000 1999 ------------------------ Total principal amount of loans outstanding $533,009 $651,617 Principal amount of loans 60 days or more past due 12,263 10,544 Net credit losses during the year 55,778 32,133 The principal amount of loans outstanding is not included in the Consolidated Balance Sheets of the Company. ========================================= Note Nine Loan Servicing ========================================= On December 18, 2000, the Company announced the sale of its mortgage servicing rights associated with approximately $1.10 billion of junior lien and Title I mortgage loans. The Company simultaneously entered into a sub servicing agreement with the purchaser to service these loans during an interim transition period, which is expected to end during the first quarter of 2001. Loans serviced for others, including those serviced during the transition period, are not included in the accompanying Consolidated Balance Sheets. The unpaid principal balances of loans serviced for others were $1.20 billion and $1.69 billion at December 31, 2000 and 1999, respectively. The recorded balance of mortgage loan servicing rights included in Other Assets within the Company's consolidated balance sheets was reduced to zero as of December 31, 2000, as a result of the aforementioned sale. As of December 31, 1999, the Company had recorded approximately $9.84 million associated with its mortgage loan servicing rights. Amortization of mortgage loan servicing rights approximated $2.73 million, $2.44 million, and $765,000 during the years ended December 31, 2000, 1999, and 1998, respectively. ========================================= Note Ten Premises And Equipment ========================================= A summary of premises and equipment and related accumulated depreciation are summarized as follows: December 31 2000 1999 ----------------------- (in thousands) Land, buildings, and improvements $ 63,948 $ 62,176 Furniture, fixtures, and equipment 57,715 62,561 ---------------------- 121,663 124,737 Less allowance for depreciation (64,739) (58,618) ---------------------- $ 56,924 $ 66,119 ====================== 31 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ================================================================================ 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, 2000 and 1999, are summarized as follows: 2000 1999 ---------------------------- (in thousands) Within one year $ 292,348 $ 169,093 Over one through two years 31,644 37,488 Over two through three years 5,067 10,513 Over three through four years 1,839 2,359 Over four through five years 4,077 3,472 Over five years 168 - ---------------------------- Total $ 335,143 $ 222,925 ============================ The Company's lead bank, City National, has periodically issued brokered deposits to fund loan growth and satisfy liquidity needs. City National can issue brokered deposits with maturities of up to five years at rates equal to a comparable treasury rate at the time of issuance, plus a market based spread. Generally, brokered deposits are issued in increments of $100,000 and are included in the amounts reported in the table above. City National is not committed to issuing a pre determined amount of brokered deposits and is limited to $190.75 as the maximum balance of brokered deposits it can have issued at any one time. At December 31, 2000 and 1999, $134.38 million and $28.04 million, respectively, of certificates of deposit had been sold under these agreements at an average interest rate of 6.68% and 5.72%, respectively. The average remaining term of the issued brokered deposits was two months and six months at December 31, 2000 and 1999, respectively. ================================================================================ Note Twelve Short Term Borrowings ================================================================================ Short term borrowings include $131.73 million and $140.25 million as of December 31, 2000 and 1999, respectively, of 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. Advances obtained from the Federal Home Loan Bank ("FHLB") of $90.50 million and $235.00 million are also included in short term borrowings as of December 31, 2000 and 1999, respectively. A summary of these short term borrowings is set forth below. (in thousands) 2000: - ---- Average amount outstanding during the year $ 309,330 Maximum amount outstanding at any month end 357,293 Weighted average interest rate: During the year 6.14% End of the year 6.01% 1999: - ---- Average amount outstanding during the year $ 230,060 Maximum amount outstanding at any month end 375,251 Weighted average interest rate: During the year 4.97% End of the year 5.18% 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% At December 31, 2000, short term borrowings also include a $26.53 million obligation of the Parent Company pursuant to debt agreements maintained with an unrelated third party. Of the obligation, $12.13 million is outstanding under a line of credit agreement and $14.40 million is outstanding under a term loan agreement. Effective June 21, 2000, the term loan agreement was amended to provide for revised terms and conditions, including modification of the original maturity date from October 1, 2009 to March 31, 2001. As a result, the outstanding balance was reclassified from Long term debt to Short term borrowings within the Consolidated Balance Sheets. The line of credit also has a maturity date of March 31, 2001. On March 28, 2001, both the term note and the line of credit were renegotiated to extend the maturity date to January 15, 2002. Both agreements require interest payments quarterly and have variable interest rates (8.27875% at December 31, 2000). As scheduled, the Company remitted a $1.60 million principal payment on the term loan agreement during 2000. The Company has pledged the common stock of City National Bank, Del Amo Savings Bank, and Frontier Bancorp as collateral for both the term loan and the line of credit. Both the term loan and the line of credit contain identical restrictive provisions applicable to the Parent Company and its subsidiaries. Such provisions include minimum tangible capital requirements, minimum loan loss reserve coverage ratios, maximum non performing loan ratios, minimum net worth requirements, and limitations on additional debt. Additionally, City National Bank must maintain regulatory capital sufficient to be considered as "well capitalized" by its primary regulators. At December 31, 2000, the Company was in violation of the minimum net worth loan covenant under the term loan and line of credit agreement that was scheduled to mature on March 31, 2001. Subsequent to year end, the Company received a waiver of the covenant violation and has modified the financial covenants in the new term loan and line of credit agreement that mature on January 15, 2002. 32 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ================================================================================ Note Thirteen Long-Term Debt ================================================================================ The Company, through its banking subsidiaries, maintains long term financing from the FHLB as follows: December 31, 2000 ------------------------------ Amount Amount Available Outstanding Interest Rate Maturity Date - ----------------------------------------------------------- (in thousands) $ 5,000 $ 5,000 5.48% February 2008 10,000 10,000 4.86 October 2008 -------------- $ 15,000 ============== The Company has purchased, through its banking subsidiaries, 87,500 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, 2000, collateral pledged to the FHLB included approximately $54.92 million in investment securities and $186.79 million in residential real estate loans. The Company also has a $19.83 million fully collateralized obligation outstanding with Freddie Mac as of December 31, 2000. Collateral for this obligation includes a pool of qualifying, first lien mortgage loans that were sold to Freddie Mac with full recourse. The outstanding balance of this financing will decline as the principal balances of the underlying loans are repaid. Because the loans were sold with full recourse, the outstanding principal balance of the underlying loan pool is included in the Company's loan portfolio. In addition to the short term (see Note Twelve) and long term financing discussed above, at December 31, 2000, the Company's banking subsidiaries had an additional $194.50 million available from unused portions of lines of credit with the FHLB. ================================================================================ Note Fourteen Trust Preferred Securities ================================================================================ The Company has formed two statutory business trusts under the laws of the state of Delaware. The trusts are 100% owned financing subsidiaries of the Company and exist for the exclusive purpose of (i) issuing trust preferred capital securities ("Capital Securities"), which represent preferred undivided beneficial interests in the assets of the trusts, (ii) using the proceeds from the sale of the Capital Securities to acquire junior subordinated debentures ("Debentures") issued by the Company, and (iii) engaging in only those activities necessary or incidental thereto. The Debentures are the sole assets of the trusts and the Company's payments under the Debentures are the sole source of revenue of the trusts. The Debentures and the related income statement effects are eliminated in the Company's consolidated financial statements. The Company has irrevocably and unconditionally guaranteed the obligations of the trusts, but only to the extent of funds held by the trusts. Distributions on the Capital Securities are cumulative. The Company has the option to defer payment of the distributions for an extended period up to five years, so long as the Company is not in default as to the terms of the Debentures. The Capital Securities are subject to mandatory redemption to the extent of any early redemption of the Debentures and upon maturity of the Debentures, as outlined below. The following table summarizes the Company's two trusts: Liquidation Stated Payment Value per Issuance Maturity Trust Amount Rate Frequency Share Date Date - -------------------------------------------------------------------------------- City Holding $ 30,000 9.150 Semi- $1,000 March April Capital Trust annually 1998 2028 (April) City Holding 57,500 9.125 Quarterly 25 October October Capital Trust II ---------- $ 87,500 ========== (a) Redeemable prior to maturity at the option of the Company (i) on or after April, 1, 2008, in whole at any time or in part from time to time, at declining redemption prices ranging from 104.58% to 100.00% on April 1, 2018 and thereafter, (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre defined events. (b) Redeemable prior to maturity at the option of the Company (i) on or after October 31, 2003, in whole at any time or in part from time to time, or (ii) prior to October 31, 2003, in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre defined events. The obligations outstanding under the aforementioned trusts are classified as "Corporation obligated mandatorily redeemable preferred securities of subsidiary trusts 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. ================================================================================ Note Fifteen 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' 33 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries 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 2001, the subsidiary banks will be required to request and obtain the approval of their primary regulators prior to the payment of dividends to the Parent Company. City National requested and received permission from the Office of the Comptroller of the Currency ("OCC") to pay a $2.69 million special dividend to the Parent Company in March 2001. These funds will primarily be used by the Parent Company to satisfy debt service requirements associated with the Parent Company's outstanding trust preferred securities. However, the OCC has broad discretionary authority as it considers any additional dividend requests to be submitted by City National. The recently received approval to pay a dividend to the Parent Company is not necessarily indicative of future OCC determinations. As previously noted, the Company has the option to defer payment of its debt service requirements on the trust preferred securities for an extended period up to five years, so long as there has been no event of default, which includes bankruptcy, failure to pay principal when due and other events as defined in the documents governing the issuances of these securities. ================================================================================ Note Sixteen 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 2000 1999 -------------------- (in thousands) Deferred tax assets: Allowance for loan losses $16,124 $11,906 Retained interests 9,552 3,161 Gain on sale of assets 2,404 - Goodwill amortization 7,119 - Restructuring charges 1,631 - Loans held for sale 1,642 2,251 Deferred compensation payable 1,658 2,360 Unrealized losses 3,438 10,498 Capital loss carryforward 5,367 4,033 Other 1,061 1,322 -------------------- Total Deferred Tax Assets 49,996 35,531 Deferred tax liabilities: Premises and equipment 1,425 1,879 Core deposit intangible 532 759 Deferred loan fees 1,925 1,275 Originated mortgage servicing rights - 2,365 Other 1,468 349 -------------------- Total Deferred Tax Liabilities 5,350 6,627 -------------------- Net Deferred Tax Assets $44,646 $28,904 ==================== During 2000, net deferred tax assets increased due to the additional income recognized for income tax purposes associated with the retained interests in excess of income recorded for financial reporting purposes. In addition, deferred tax assets were recorded in 2000 for the impairment charges discussed in Note Two associated with goodwill that will be deductible for income tax purposes when the assets are disposed of. Deferred taxes were also recorded in 2000 related to expenses incurred from the sale of servicing rights, discussed in Note Ten, and other restructuring charges, as these items are not deductible for income tax purposes until the associated expenses are paid. Significant components of the provision for income taxes are as follows: 2000 1999 1998 ------------------------------ (in thousands) Federal: Current $ 6,320 $10,072 $ 9,261 Deferred (22,802) (9,198) (3,011) ------------------------------ (16,482) 874 6,250 State 752 968 243 ------------------------------ Total $(15,730) $ 1,842 $ 6,493 ============================== Current income tax expense attributable to investment securities transactions approximated $41,000 in 2000; $53,000 in 1999; and $3,000 in 1998. As of December 31, 2000, the Company has approximately $1.0 million of federal net operating loss carryforwards, obtained via a previous acquisition, that expire in 2006. Reconciliation between income taxes as reported and the amount computed by applying the statutory federal income tax rate to income before income taxes follows: 2000 1999 1998 ---------------------------- (in thousands) Computed federal taxes and statutory rate $(18,936) $ 2,819 $ 4,104 State income taxes, net of federal tax benefit (1,590) 630 159 Tax effects of: Nontaxable interest income (1,669) (1,703) (1,601) Non deductible merger charges - - 1,716 Non deductible goodwill 6,237 427 1,110 Other items, net 228 (331) 1,005 ---------------------------- $(15,730) $ 1,842 $ 6,493 ============================ 34 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ================================================================================ Note Seventeen Employee Benefit Plans ================================================================================ The Company's 1993 Stock Incentive Plan (the "Plan"), as amended, provides for the grant of options to key employees of the Company and persons who provide services to the Company who have or can be expected to contribute significantly to the profits or growth of the Company, including Directors of the Company or its subsidiaries. The Plan, as amended, has authorized the grant of options for up to 1,300,000 shares of the Company's common stock, adjusted for changes in the capital structure of the Company since the Plan's inception. As of December 31, 2000, there are 1,399,300 options authorized for grant and 856,754 options available for future awards. Specific terms of options awarded, including vesting periods, exercise prices and expiration periods are determined at the date of grant and are evidenced by agreements between the Company and the awardee. Pro forma 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 5.90%, and 5.37% for 1999 and 1998, respectively; an expected dividend yield of 5.25%, and 2.04% for 1999 and 1998, respectively; a volatility factor of .293, and .255 for 1999 and 1998, 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 (loss) income for the years ended December 31, 2000, 1999, and 1998 were $(38.39) million or $(2.27) per basic and diluted common share; $6.21 million or $0.37 per basic and diluted common share; and $3.40 million or $0.20 per basic and diluted common share, respectively. A summary of the Company's stock option activity and related information is presented below for the years ended December 31:
2000 1999 1998 ------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------- Outstanding at January 1 561,967 $27.19 380,781 $32.26 177,169 $21.73 Granted - - 238,250 15.25 249,438 40.62 Exercised - - (30,461) 17.11 (36,768) 18.43 Forfeited (95,217) 29.51 (26,603) 31.74 (9,058) 33.31 ------- -------- ------- Outstanding at December 31 466,750 $26.72 561,967 $27.19 380,781 $32.26 ======= ======= Exercisable at end of year 288,092 $29.51 313,300 $31.74 271,934 $31.35 Weighted average fair value of options $ - $ 3.06 $ 10.44 granted during the year
Additional information regarding stock options outstanding and exercisable at December 31, 2000, is provided in the following table:
Weighted Weighted Average Average Weighted Remaining No. of Exercise Price Ranges of No. of Average Contractual Options of Options Exercise Options Exercise Life Currently Currently Prices Outstanding Price (Months) Exercisable Exercisable - ------------------------------------------------------------------------------------------------------- $12.83 - $19.25 231,136 $15.37 46 97,548 $15.47 $19.84 - $29.76 50,914 24.76 18 50,914 24.76 $33.00 - $49.50 184,700 41.46 26 139,630 41.04 ----------- ---------- 466,750 288,092 =========== ==========
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. 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. In June 2000, the Company suspended contributions to the Money Purchase account. Contributions to the Stock Bonus account are discretionary, as determined by the Company's Board of Directors. During 2000 and 1999, the 35 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries Company did not make any contributions to the Stock Bonus account. The Company's total expense associated with the Plan and the ESOP (collectively, the benefit plans) approximated $630,000, $5.39 million, and $2.28 million in 2000, 1999, and 1998, respectively. The total number of shares of the Company's common stock held by the benefit plans is 756,616. Other than the benefit plans, the Company offers no postretirement benefits. Prior to its merger with the Company, Horizon maintained a defined benefit pension plan covering substantially all of its employees. During 1999, the Company froze the Horizon defined benefit plan and the accrual for the future service of the employees covered by this defined benefit plan was transferred to the Company's defined contribution plan. As a result of freezing the Horizon plan, the accrual of defined benefits for future services was eliminated resulting in the Company recognizing a $3.67 million curtailment gain, representing the change in projected benefit obligations, less $1.00 million charge off of prior service costs associated with the plan. The following table summarizes the plan's benefit obligation and asset activity: Pension Benefits 2000 1999 ---------------------- (in thousands) Change in fair value of plan assets: Balance at beginning of measurement period $ 9,614 $ 9,351 Actual return on plan assets 531 460 Employer contribution - 118 Benefits paid (365) (315) ---------------------- Balance at end of measurement period 9,780 9,614 Change in benefit obligation: Balance at beginning of measurement period (7,129) (12,034) Curtailment - 3,699 Service cost - (331) Interest cost (578) (524) Actuarial loss gain (loss) (113) 1,746 Benefits paid 365 315 ---------------------- Balance at end of measurement period (7,455) (7,129) ---------------------- Funded status 2,325 2,485 Unrecognized net actuarial gain (1,155) (1,568) Unrecognized net obligation (225) (256) ---------------------- Prepaid Benefit Cost $ 945 $ 661 ====================== Weighted-average assumptions as of December 31: Discount rate 8.00% 8.00% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 5.00% 5.00% 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 2000 1999 1998 ------------------------------- (in thousands) Components of net periodic benefit cost: Service cost $ - $ 331 $1,018 Interest cost 578 524 718 Expected return on plan assets (805) (766) (680) Net amortization and deferral (58) (58) 103 Curtailment - (3,699) - Prior service cost recognized - 1,008 - ------------------------------- Benefit Cost $ (285) $(2,660) $1,159 =============================== The Company maintains 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 $282,000, $425,000, and $449,000 during 2000, 1999, and 1998. The liability for such agreements approximated $2.81 million and $2.76 million at December 31, 2000 and 1999, and is included in other liabilities in the accompanying consolidated balance sheets. To assist in funding the above liabilities, the Company has insured the lives of certain directors and officers. The Company is the owner and beneficiary of the insurance policies with a cash surrender value approximating $3.64 million and $3.46 million at December 31, 2000 and 1999, included in other assets in the accompanying consolidated balance sheets. ================================================================================ Note Eighteen Other Income and Expenses ================================================================================ The following table summarizes significant items included in Other Income for the periods indicated: 2000 1999 1998 ------------------------------ (in thousands) Internet service fees $3,443 $2,514 $1,313 Insurance commissions 2,482 2,834 2,354 Gains from branch sales - 8,883 - The following table summarizes significant items included in Other Expense, excluding amortization of intangible assets, for the periods indicated: 2000 1999 1998 ------------------------------ (in thousands) Telecommunications $5,049 $4,756 $4,317 Professional fees 4,901 4,325 9,671 Loss on fixed asset disposals 4,805 - - Equipment and other maintenance 3,165 3,600 1,906 Loan production office advisory fees 4,021 147 - Office supplies 3,975 3,994 3,558 36 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ================================================================================ Note Nineteen 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, 2000 and 1999, commitments outstanding to extend credit totaled approximately $237.97 million and $299.44 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 events occur. Amounts outstanding pursuant to such standby letters of credit were $9.03 million and $35.60 million as of December 31, 2000 and 1999, respectively. Historically, substantially all standby letters of credit have expired unfunded. Loan commitments and standby letters of credit 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 Twenty 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, 2000, no such shares are 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 One Regulatory Matters ================================================================================ On July 12, 2000, the Company announced that its principal bank subsidiary, City National, had entered into a formal agreement with the OCC. The agreement required City National to adopt a three- year comprehensive strategic plan, improve its loan portfolio management, and develop and adhere to a written plan for liquidity, including a formal asset and liability management policy. City National also agreed to incorporate liquidity planning in its financial management process, implement a satisfactory program to manage interest rates, and ensure full compliance of its securitization program with recent OCC regulations. Additionally, City National agreed to develop a plan to dispose of loans held for sale that were held in excess of 90 days, develop a three year capital plan, strengthen internal controls and its audit committee, and establish a program to maintain an adequate allowance for loan and lease losses. Additionally, as a consequence of entering into this agreement, City National became subject to certain FDIC restrictions regarding the issuance of brokered deposits. City National also agreed to maintain its regulatory Total Capital ratio above 10.00% and to establish a committee of its Board of Directors to oversee compliance with the agreement. Since the date of the agreement, City National has devoted significant time and resources to comply with the formal agreement. City National established a compliance oversight committee, which meets regularly to determine the status of compliance with the agreement. City National, and the Company, have adopted a three-year comprehensive strategic plan and have formalized their policies and procedures related to asset and liability management, including liquidity and interest rate risk issues. City National has also disposed of substantially all of its loans held for sale that had been held in excess of 90 days and transferred the unsold loans to the permanent portfolio at estimated fair market value. City National continues to address the remaining issues identified in the formal agreement, including improving its loan portfolio management, managing its allowance for loan losses, and strengthening internal controls. 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 37 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries 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, 2000, that the Company and its banking subsidiaries met all capital adequacy requirements to which they were subject. As a consequence of entering into the formal agreement with the OCC, City National cannot be categorized as "well capitalized" under the regulatory framework for prompt corrective action. Although City National's regulatory capital ratios exceed minimum ratios to be considered "well capitalized," any bank that has entered into a formal agreement such as that discussed above is precluded from being categorized as "well capitalized". The Company's and its significant banking subsidiary's actual capital amounts and ratios are presented in the following table. Well 2000 1999 Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio ------------------------------------------------------------ (in thousands) Total Capital (to Risk Weighted Assets): Consolidated $277,700 11.6% $281,465 11.0% 10% 8% City National 285,319 12.7 285,722 11.8 10 8 Tier I Capital (to Risk Weighted Assets): Consolidated 216,314 9.1 238,188 9.3 6 4 City National 257,156 11.5 260,404 10.8 6 4 Tier I Capital (to Average Assets): Consolidated 216,314 7.9 238,188 8.8 5 4 City National 257,156 10.1 260,404 10.1 5 4 ================================================================================ Note Twenty-Two 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. Statement 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 2000 1999 ------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------- (in thousands) Assets: Cash and due from banks $ 87,990 $ 87,990 $ 122,112 $ 122,112 Securities 385,462 385,462 381,112 381,112 Net loans 1,927,532 1,914,802 1,859,001 1,842,184 Loans held for sale 17,900 17,900 118,025 118,025 Retained interests 85,206 85,206 76,963 76,963 Liabilities: Deposits 2,083,941 1,961,645 1,955,770 1,845,147 Short-term borrowing 248,766 248,766 386,719 386,719 Long-term debt 34,832 34,304 116,000 110,389 Trust preferred securities 89,061 92,428 89,061 85,333 The following methods and assumptions were used in estimating fair value amounts for financial instruments: The fair value of the loan portfolio is 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 value of accrued interest approximates its fair value. The fair value of the retained interests is determined using cash flow modeling techniques that incorporate key assumptions related to default, prepayment, and discount rates. The fair values of demand deposits (e.g., interest and noninterest-bearing checking, regular savings, and other money market demand accounts) are, by definition, equal to their carrying values. 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 value of long-term borrowings is 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 trust preferred securities is estimated using a discounted cash flow calculation that applies interest rates that would be currently offered on such securities. Both the carrying amount and estimated fair value of trust preferred 38 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries securities includes interest accrued on those securities as of December 31, 2000 and 1999. 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, 2000 and 1999. ================================================================================ Note Twenty-Three City Holding Company (Parent Company Only) Financial Information ================================================================================ Condensed Balance Sheets December 31 2000 1999 ---------------------- (in thousands) Assets Cash $ 334 $ 3,386 Securities available for sale 2,366 2,234 Investment in subsidiaries 280,256 308,998 Fixed assets 476 1,039 Other assets 7,217 6,176 ---------------------- Total Assets $ 290,649 $ 321,833 ====================== Liabilities Short-term borrowings $ 26,534 $ 12,134 Long-term debt - 16,000 Junior subordinated debentures 90,114 90,114 Advances from affiliates 934 934 Other liabilities 9,610 4,109 ---------------------- Total Liabilities 127,192 123,291 Stockholders' Equity 163,457 198,542 ---------------------- Total Liabilities and Stockholders' Equity $ 290,649 $ 321,833 ====================== 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 investment securities owned by the Parent Company. Interest is due quarterly at prime with principal due at maturity in 2001. Junior subordinated debentures, which eliminate for purposes of the Company's consolidated financial statements, represent the Parent Company's amounts owed to City Holding Capital Trust II and City Holding Capital Trust (see Note Fourteen). Condensed Statements of Income Year Ended December 31 2000 1999 1998 ---------------------------------- (in thousands) Income Dividends from bank subsidiaries $ 12,500 $ 20,000 $ 17,879 Administrative fees 3,816 1,743 6,239 Other income - 703 286 ---------------------------------- 16,316 22,446 24,404 Expenses Interest expense 10,248 9,606 4,799 Other expenses 9,345 10,322 27,232 ---------------------------------- 19,593 19,928 32,031 ---------------------------------- (Loss) Income Before Income Tax Benefit and (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries (3,277) 2,518 (7,627) Income tax benefit (6,083) (6,945) (7,795) ---------------------------------- Income Before (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries 2,806 9,463 168 (Excess dividends) equity in undistributed net income of subsidiaries (41,179) (3,250) 5,066 ---------------------------------- Net (Loss) Income $(38,373) $ 6,213 $ 5,234 ================================== Condensed Statements of Cash Flows
Year Ended December 31 2000 1999 1998 --------------------------------------- (in thousands) Operating Activities Net (loss) income $(38,373) $ 6,213 $ 5,234 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Provision for depreciation 287 897 2,687 Increase in other assets 1,265 2,356 7,278 Increase (decrease) in other liabilities 3,788 (6,513) 2,945 Excess dividends of subsidiaries (equity in undistributed net income) 38,679 3,250 (5,066) --------------------------------------- Net Cash Provided by Operating Activities 5,646 6,203 13,078 Investing Activities Cash paid in acquisition - (15,134) - Proceeds from sales of securities - 1,599 769 Purchases of investment securities - (558) (2,132) Net change in loans - 46 - Cash invested in subsidiaries - - (50,399) Proceeds from sale of net assets to City National 328 6,731 - Purchases of premises and equipment - (1,392) (733) --------------------------------------- Net Cash Provided by (Used in) Investing Activities 328 (8,708) (52,495) Financing Activities Proceeds from long-term debt - 23,134 43,800 Principal repayments on long-term debt (1,600) (10,000) (69,200) (Decrease) increase in advance from affiliates - (257) 257 Net proceeds from issuance of junior subordinated debentures - - 86,762 Cash dividends paid (7,426) (13,471) (12,167) Purchases of treasury stock - (398) (6,987) Exercise of stock options - 521 675 --------------------------------------- Net Cash (Used in) Provided by Financing Activities (9,026) (471) 43,140 --------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (3,052) (2,976) 3,723 Cash and cash equivalents at beginning of year 3,386 6,362 2,639 --------------------------------------- Cash and Cash Equivalents at End of Year $ 334 $ 3,386 $ 6,362 =======================================
39 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries =============================================================================== Note Twenty Four 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. To more effectively evaluate and manage the operating performance of each of the Company's business lines, effective April 1, 1999, internal warehouse funding was established for each division within the mortgage banking and other financial services segments. Prior to April 1, 1999, the community banking segment provided necessary funding to the divisions within the mortgage banking and other financial services segments with no associated interest cost. Beginning April 1, 1999, any division that has obtained financing from the community banking segment is charged a cost of funds, at market interest rates, on the amount of funds borrowed from the community banking segment. Management has determined that the internal warehouse funding policy provides a "fully costed" assessment of the operating performance of each division and that instituting such policy provides a more accurate analysis of the performance of each division and business segment. Financial information presented in the following tables has been presented reflecting the actual internal policy in place during each respective period. 40 - -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries 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 ---------------------------------------------------------------------------- 2000 - ---- Net interest income (expense) $ 102,916 $ (11,302) $ (289) $ (2,169) $ - $ 89,156 Provision for loan losses 25,480 - - - - 25,480 ---------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses 77,436 (11,302) (289) (2,169) - 63,676 Other income 12,421 13,729 12,921 3,629 (8,136) 34,564 Other expenses 91,369 40,668 19,536 8,906 (8,136) 152,343 ---------------------------------------------------------------------------- Loss before income taxes (1,512) (38,241) (6,904) (7,446) - (54,103) Income tax expense (benefit) 1,643 (15,283) (285) (1,805) - (15,730) ---------------------------------------------------------------------------- Net Loss $ (3,155) $ (22,958) $ (6,619) $ (5,641) $ - $ (38,373) ============================================================================ Average assets $2,732,085 $ 176,111 $ 13,085 $ 9,583 $ (153,845) $2,777,019 ============================================================================ 1999 - ---- Net interest income (expense) $ 105,381 $ (5,273) $ (171) $ (1,517) $ - $ 98,420 Provision for loan losses 19,286 - - - - 19,286 ---------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses 86,095 (5,273) (171) (1,517) - 79,134 Other income 29,850 22,523 12,495 64 (5,397) 59,535 Other expenses 80,387 33,528 14,792 7,304 (5,397) 130,614 ---------------------------------------------------------------------------- Income before income taxes 35,558 (16,278) (2,468) (8,757) - 8,055 Income tax expense (benefit) 12,920 (5,995) (808) (4,275) - 1,842 ---------------------------------------------------------------------------- Net Income $ 22,638 $ (10,283) $ (1,660) $ (4,482) $ - $ 6,213 ============================================================================ Average assets $2,572,162 $ 306,819 $ 13,381 $ 12,697 $ (186,327) $2,718,732 ============================================================================ 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 (expense) 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 $ 12,968 $ - $2,566,099 ============================================================================
Internal warehouse funding between the community banking segment and the mortgage banking and other financial services segments is eliminated in the Consolidated Balance Sheets. Services provided to the banking segments by the direct mail, insurance, and Internet service provider divisions are eliminated in the Consolidated Statements of Income. 41 -- Notes To Consolidated Financial Statements City Holding Company And Subsidiaries ================================================================================ Note Twenty Five Summarized Quarterly Financial Information (Unaudited) ================================================================================ A summary of selected quarterly financial information for 2000 and 1999 follows: First Second Third Fourth Quarter Quarter Quarter Quarter (in thousands, except common share data) ----------------------------------------- 2000 - ---- Interest income $49,317 $52,246 $51,556 $ 49,793 Interest expense 26,281 28,796 29,524 29,155 Net interest income 23,036 23,450 22,032 20,638 Provision for possible loan losses 2,085 2,085 4,280 17,030 Investment securities gains (losses) - 2 - (5,017) Net income (loss) 4,019 295 (921) (41,766) Basic earnings per common share 0.24 0.02 (0.05) (2.47) Diluted earnings per common share 0.24 0.02 (0.05) (2.47) Average common shares outstanding: Basic 16,875 16,878 16,888 16,888 Diluted 16,875 16,878 16,888 16,888 1999 - ---- Interest income $50,595 $48,073 $47,868 $ 49,017 Interest expense 24,196 23,718 23,986 25,233 Net interest income 26,399 24,355 23,882 23,784 Provision for possible loan losses 2,414 2,229 2,684 11,959 Investment securities gains (losses) 42 6 4 (9,949) Net income (loss) 5,245 6,994 2,318 (8,344) Basic earnings per common share 0.31 0.42 0.14 (0.49) Diluted earnings per common share 0.31 0.42 0.14 (0.49) Average common shares outstanding: Basic 16,820 16,820 16,857 16,867 Diluted 16,820 16,820 16,857 16,867 ================================================================================ Note Twenty Six Earnings Per Share ================================================================================ The following table sets forth the computation of basic and diluted earnings per share: 2000 1999 1998 ------------------------------------- (in thousands, except per share data) Numerator: Net (loss) income $(38,373) $ 6,213 $ 5,234 ================================== Denominator: Denominator for basic (loss) earnings per share: Average shares outstanding 16,882 16,841 16,799 Effect of dilutive securities: Employee stock options - - 77 Contingently issuable stock - - 9 ---------------------------------- Dilutive potential common shares - - 86 ---------------------------------- Denominator for diluted (loss)earnings per share 16,882 16,841 16,885 ================================== Basic (loss) earnings per share $ (2.27) $ 0.37 $ 0.31 ================================== Diluted (loss) earnings per share $ (2.27) $ 0.37 $ 0.31 ================================== 42 -- EX-21 6 0006.txt SUBSIDIARES OF THE COMPANY Exhibit 21 Subsidiaries of City Holding Company - ------------------------------------ As of December 31, 2000, the subsidiaries, each wholly-owned, of City Holding Company included: City National Bank of West Virginia 3601 MacCorkle Avenue S.E. Insured Depository Charleston, West Virginia National Banking Association Institution Del Amo Savings Bank, FSB 3422 Carson Street Insured Depository Torrance, California Federally-chartered Thrift Institution Frontier Bancorp 2233 Artesia Boulevard Redondo Beach, California California Corporation Bank Holding Company City Financial Corporation Securities Brokerage and 3601 MacCorkle Avenue S.E. Investment Advisory Charleston, West Virginia West Virginia Corporation Company City Mortgage Corporation Inactive Mortgage Banking Pittsburgh, Pennsylvania Pennsylvania Corporation Company City Holding Capital Trust 25 Gatewater Road Special-purpose Statutory Charleston, West Virginia Delaware Business Trust Trust City Holding Capital Trust II 25 Gatewater Road Special-purpose Statutory Charleston, West Virginia Delaware Business Trust Trust
EX-23 7 0007.txt CONSENT OF INDEPENDENT AUDITORS 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 9, 2001 (except Note Twelve, as to which the date is March 28, 2001), included in the 2000 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 9, 2001, 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, 2000. /s/ Ernst & Young LLP Charleston, West Virginia March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----