-----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, C6yEtq0wJyhX1s/ARhHQEHkABJEzg+fvGfqz1c9dspko69VuKt50BqQ2SSez7u8j wtWKSsrjf1EqHbn1FAL5JA== 0000916641-99-000896.txt : 19991117 0000916641-99-000896.hdr.sgml : 19991117 ACCESSION NUMBER: 0000916641-99-000896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITY HOLDING CO CENTRAL INDEX KEY: 0000726854 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 550619957 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11733 FILM NUMBER: 99754563 BUSINESS ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 BUSINESS PHONE: 3047691102 MAIL ADDRESS: STREET 1: 25 GATEWATER ROAD STREET 2: P O BOX 7520 CITY: CHARLESTON STATE: WV ZIP: 25313 10-Q 1 CITY HOLDINGS 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED September 30, 1999 OR [ ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________to____________. Commission File number 0-1173 CITY HOLDING COMPANY (Exact name of registrant as specified in its charter) West Virginia 55-0619957 ------------- ---------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 25 Gatewater Road Charleston, West Virginia, 25313 (Address of principal executive officers) (304) 769-1100 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes [ ]No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, $2.50 Par Value - 16,863,948 shares as of November 12, 1999. 1 FORWARD-LOOKING STATEMENTS This Form 10-Q may include forward-looking financial information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking information is identified by phrases such as the Company expects or anticipates and words of similar effect. The Company's actual results achieved may differ materially from those projected in the forward-looking information. Factors that could cause such a difference include, among others: the joint venture transactions discussed in Note K are subject to a number of conditions and may not be completed; revenues following the joint venture transactions discussed in Note K, the recognized gain and the principal amount of the notes resulting from the transactions may be lower than expected or operating costs or customer loss and business disruption following the transaction may be greater than expected; changes in interest rates and economic and other market conditions generally and in the Company's principal markets; integration of operations issues resulting from mergers and acquisitions; competition for origination and servicing of mortgage loans, and changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policy. The forward-looking financial information is provided to assist investors and Company stockholders in understanding anticipated future financial operations of the Company and are included pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Further, the Company disclaims any intent or obligation to update this forward-looking financial information. 2 Index City Holding Company and Subsidiaries Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 Consolidated Statements of Income - Nine months ended September 30, 1999 and 1998 and Three months ended September 30, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity - Nine months ended September 30, 1999 and 1998 Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998 Notes to Consolidated Financial Statements - September 30, 1999 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature 3 PART I, ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands)
September 30 December 31 1999 1998 ------------------------------------------ (Unaudited) ASSETS Cash and due from banks $ 100,105 $ 87,866 Federal funds sold 1,617 31,911 ------------------------------------------ Cash and cash equivalents 101,722 119,777 Securities available for sale, at fair value 389,700 356,659 Securities held-to-maturity (approximate fair value at December 31, 1998 - $40,539) - 39,063 Loans: Gross loans 1,821,401 1,715,929 Allowance for loan losses (20,652) (17,610) ------------------------------------------ NET LOANS 1,800,749 1,698,319 Loans held for sale 113,442 246,287 Premises and equipment 69,497 71,094 Accrued interest receivable 24,438 21,660 Other assets 224,939 153,145 ------------------------------------------ TOTAL ASSETS $2,724,487 $2,706,004 ========================================== LIABILITIES Deposits: Noninterest-bearing $ 253,439 $ 303,421 Interest-bearing 1,719,155 1,760,994 ------------------------------------------ TOTAL DEPOSITS 1,972,594 2,064,415 Short-term borrowings 288,763 183,418 Long-term debt 106,634 102,719 Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely subordinated debentures of City Holding Company 87,500 87,500 Other liabilities 53,141 47,893 ------------------------------------------ TOTAL LIABILITIES 2,508,632 2,485,945 STOCKHOLDERS' EQUITY Preferred stock, par value $25 per share: authorized - 500,000 shares: none issued Common stock, par value $2.50 per share: 50,000,000 shares authorized; 16,879,815 and 16,820,276 shares issued and outstanding at September 30, 1999 and December 31, 1998, including 15,867 and 10,000 shares, respectively, in treasury 42,199 42,051 Capital surplus 59,291 58,365 Retained earnings 124,668 120,209 Cost of common stock in treasury (491) (274) Accumulated other comprehensive loss (9,812) (292) ------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 215,855 220,059 ------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,724,487 $2,706,004 ==========================================
See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands, except earnings per share data)
Nine Months Ended September 30 1999 1998 --------------------------------------- INTEREST INCOME Interest and fees on loans $126,121 $126,401 Interest on investment securities: Taxable 12,835 13,018 Tax-exempt 3,785 3,638 Other interest income 3,795 2,367 --------------------------------------- TOTAL INTEREST INCOME 146,536 145,424 INTEREST EXPENSE Interest on deposits 54,142 55,198 Interest on short-term borrowings 7,278 7,252 Interest on long-term debt 4,470 3,680 Interest on trust preferred securities 6,010 1,383 --------------------------------------- TOTAL INTEREST EXPENSE 71,900 67,513 --------------------------------------- NET INTEREST INCOME 74,636 77,911 Provision for loan losses 7,327 4,416 --------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 67,309 73,495 OTHER INCOME Investment securities gains 52 5 Service charges 7,301 7,082 Mortgage loan servicing fees 17,013 12,255 Net origination fees on junior-lien mortgages 4,493 11,486 Gain on sale of loans 5,805 12,811 Other income 20,934 11,265 --------------------------------------- TOTAL OTHER INCOME 55,598 54,904 OTHER EXPENSES Salaries and employee benefits 42,793 39,358 Occupancy, excluding depreciation 8,428 6,338 Depreciation 8,578 7,301 Advertising 10,939 16,353 Other expenses 29,150 28,424 --------------------------------------- TOTAL OTHER EXPENSES 99,888 97,774 --------------------------------------- INCOME BEFORE INCOME TAXES 23,019 30,625 INCOME TAXES 8,462 10,314 --------------------------------------- NET INCOME $14,557 $20,311 ======================================= Basic earnings per common share $ 0.86 $ 1.21 ======================================= Diluted earnings per common share $ 0.86 $ 1.20 ======================================= Average common shares outstanding: Basic 16,833 16,791 ======================================= Diluted 16,833 16,912 =======================================
See notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands, except earnings per share data)
Three Months Ended September 30 1999 1998 --------------------------------------- INTEREST INCOME Interest and fees on loans $41,317 $43,483 Interest on investment securities: Taxable 4,305 4,081 Tax-exempt 1,234 1,229 Other interest income 1,012 877 --------------------------------------- TOTAL INTEREST INCOME 47,868 49,670 INTEREST EXPENSE Interest on deposits 17,772 18,939 Interest on short-term borrowings 2,729 2,691 Interest on long-term debt 1,471 965 Interest on trust preferred securities 2,014 689 --------------------------------------- TOTAL INTEREST EXPENSE 23,986 23,284 --------------------------------------- NET INTEREST INCOME 23,882 26,386 Provision for loan losses 2,684 1,949 --------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,198 24,437 OTHER INCOME Investment securities gains 4 11 Service charges 2,794 2,541 Mortgage loan servicing fees 5,711 4,246 Net origination fees on junior-lien mortgages 462 5,269 Gain on sale of loans 216 5,478 Other income 4,281 3,635 --------------------------------------- TOTAL OTHER INCOME 13,468 21,180 OTHER EXPENSES Salaries and employee benefits 13,802 13,486 Occupancy, excluding depreciation 1,777 2,401 Depreciation 2,959 2,716 Advertising 1,586 7,072 Other expenses 11,010 10,543 --------------------------------------- TOTAL OTHER EXPENSES 31,134 36,218 --------------------------------------- INCOME BEFORE INCOME TAXES 3,532 9,399 INCOME TAXES 1,214 2,824 --------------------------------------- NET INCOME $2,318 $6,575 ======================================= Basic earnings per common share $ 0.14 $ 0.39 ======================================= Diluted earnings per common share $ 0.14 $ 0.39 ======================================= Average common shares outstanding: Basic 16,857 16,850 ======================================= Diluted 16,857 16,995 =======================================
See notes to consolidated financial statements. 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) CITY HOLDING COMPANY AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (in thousands)
Accumulated Other Total Common Capital Retained Treasury Comprehensive Stockholders' Stock Surplus Earnings Stock Loss Equity ---------- ---------- ----------- ----------- --------------- --------------- Balances at December 31, 1998 $42,051 $58,365 $120,209 $(274) $(292) $220,059 Comprehensive income: Net income 14,557 14,557 Other comprehensive income: Unrealized loss on securities of $9,553, net of reclassification adjustment for gains included in net (9,520) (9,520) income of $33 --------------- Total comprehensive income 5,037 Cash dividends declared ($.60/share) (10,098) (10,098) Purchase of 11,999 shares of treasury stock (398) (398) Exercise of 24,240 stock options 82 311 49 442 Issuance of contingently-issuable shares of common stock 66 615 132 813 ---------- ---------- ----------- ----------- --------------- --------------- Balances at September 30, 1999 $42,199 $59,291 $124,668 $(491) $(9,812) $215,855 ========== ========== =========== =========== =============== ===============
Accumulated Other Total Common Capital Retained Treasury Comprehensive Stockholders' Stock Surplus Earnings Stock Income Equity ---------- ---------- ----------- ----------- --------------- --------------- Balances at December 31, 1997 $41,926 $52,004 $127,142 $(3,248) $2,453 $220,277 Comprehensive income: Net income 20,311 20,311 Other comprehensive income: Unrealized loss on securities of $310, net of reclassification adjustment for gains included in net (307) (307) income of $3 --------------- Total comprehensive income 20,004 Cash dividends declared City ($.57 a share) (3,776) (3,776) Horizon (5,211) (5,211) Exercise of stock options 7 (59) 156 104 Purchase of shares of treasury stock by City (3,552) (3,552) Purchase of shares of treasury stock by Horizon (2,114) (2,114) Common stock issued in acquisitions 807 14,965 15,772 ---------- ---------- ----------- ----------- --------------- --------------- Balances at September 30, 1998 $42,740 $66,910 $138,466 $(8,758) $2,146 $241,504 ========== ========== =========== =========== =============== ===============
7 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) CITY HOLDING COMPANY AND SUBSIDIARIES (in thousands)
Nine Months Ended September 30 1999 1998 --------------------------------------- OPERATING ACTIVITIES Net income $ 14,557 $ 20,311 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net amortization 4,607 3,199 Provision for depreciation 8,578 7,301 Provision for loan losses 7,327 4,416 Loans originated for sale (291,284) (429,316) Purchases of loans held for sale (167,762) (621,527) Proceeds from loans sold 597,696 931,101 Realized gains on loans sold (5,805) (12,811) Realized investment securities gains (52) (5) Increase in accrued interest receivable (2,677) (6,687) Increase in other assets (66,683) (44,717) Increase in other liabilities 5,309 3,757 --------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 103,811 (144,978) INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity 27 2,070 Proceeds from sales of securities available for sale 17,330 23,693 Proceeds from maturities and calls of securities available for sale 64,650 110,125 Purchases of securities available for sale (81,780) (130,593) Net increase in loans (104,402) (96,182) Net cash paid in branch sales (52,094) - Realized gain on branch sales (8,681) - Net cash acquired in acquisitions 7,409 2,584 Purchases of premises and equipment (7,497) (21,187) --------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (165,038) (109,490) FINANCING ACTIVITIES Net (decrease) increase in noninterest-bearing deposits (20,517) 25,862 Net (decrease) increase in interest-bearing deposits (20,383) 128,239 Net increase in short-term borrowings 105,345 19,177 Proceeds from long-term debt 8,000 57,532 Repayment of long-term debt (19,219) (30,700) Net proceeds from issuance of trust preferred securities - 29,158 Purchases of treasury stock (398) (5,666) Exercise of stock options 442 104 Cash dividends paid (10,098) (8,987) --------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 43,172 214,719 --------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (18,055) (39,749) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 119,777 132,532 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,722 $ 92,783 =======================================
8 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements, which are unaudited, include all the accounts of City Holding Company ("the Parent Company") and its wholly-owned subsidiaries (collectively, "the Company"). On December 31, 1998, the Company's merger of Horizon Bancorp, Inc. became effective. The transaction was accounted for under the pooling-of-interests method of accounting. As such, the Company's historical financial information has been restated to include the operations of Horizon for all periods presented. All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 1999, are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 1999. The Company's accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management's estimates. Certain amounts in the unaudited consolidated financial statements have been reclassified. Such reclassifications had no impact on net income or stockholders' equity in any period presented. For further information, refer to the consolidated financial statements and footnotes thereto incorporated by reference in the City Holding Company Annual Report on Form 10-K for the year ended December 31, 1998. NOTE B - ACQUISITIONS Effective July 1, 1999, the Company acquired Frontier Bancorp and its wholly-owned subsidiary, Frontier State Bank (collectively, "Frontier"). Frontier, headquartered in Redondo Beach, California, reported total assets and total deposits of approximately $88 million and $71 million, respectively, at June 30, 1999. Pursuant to the merger agreement, the Company paid approximately $15.13 million cash for 100% of the outstanding common stock of Frontier Bancorp. This transaction was accounted for under the purchase method of accounting. Due to the immaterial impact on the Company's consolidated financial statements, no pro-forma information has been presented. 9 On September 20, 1999, the Company announced the signing of a definitive acquisition agreement to acquire Summit State Bank ("Summit"). Summit, a state-chartered bank headquartered in Rohnert Park, California, operates three full service locations in a high-growth California market north of San Francisco. The merger entails a fixed exchange of 0.55 shares of City Holding common stock for each share of Summit's common stock, including shares under option. The transaction, subject to the approval of Summit shareholders and regulatory authorities, is expected to close during the first quarter of 2000 and will be accounted for as a pooling of interests. As of September 30, 1999, Summit reported total assets and total deposits of $188.67 million and $149.83 million, respectively. NOTE C - INVESTMENT SECURITIES Included in Securities Available for Sale in the Consolidated Balance Sheets is a $10.00 million convertible preferred stock investment in Altiva Financial Corporation ("Altiva"). As the market value of the underlying common stock of Altiva has declined over the past fifteen months, the Company has adjusted the carrying value of its investment in Altiva through the Accumulated Other Comprehensive Income/Loss section within Stockholders' Equity. As of September 30, 1999, the Company has written down the value of its investment in Altiva to $3.00 million in this manner. In doing so, management has considered the decline in the estimated market value of Altiva to be temporary in nature. Should Altiva not achieve its remaining 1999 business goals set forth in its stated strategic plan, this investment has the potential to become a permanent loss in value for the Company. Horizon Bancorp, Inc., which was acquired December 31, 1998, maintained selected debt securities in a held-to-maturity classification based on its management's intent and Horizon's ability to hold such securities to maturity. On April 1, 1999, the Company reclassified those securities from held to maturity to available for sale. This transfer is consistent with the Company's Investment Portfolio accounting policies and provides management with additional liquidity alternatives and more flexibility in managing the Company's interest rate risk. At the date of transfer, the amortized cost of those securities was $39.04 million and the unrealized gain on those securities was $1.26 million. 10 NOTE D - LOAN SECURITIZATIONS In May 1999, the Company completed a securitization of approximately $261.51 million of junior lien mortgage loans. To date, this represents the only securitization transacted by the Company during 1999, and brings the total number of securitizations in which the Company maintains a retained interest to six. As of September 30, 1999, the Company reported retained interests, included in Other Assets in the Consolidated Balance Sheets, in the securitized loan pools of approximately $92.25 million, including accrued interest. At December 31, 1998, the Company reported total retained interests approximating $65.62 million, including accrued interest. As a result of re-forecasting anticipated cash flows to be derived from the Company's retained interests, the estimated fair value of the total retained interests has been reduced by approximately $4.63 million during the nine months ended September 30, 1999. Such fair value decline, deemed to be temporary, has been recorded through the Other Comprehensive Income section within Stockholders' Equity. Adjustments to the estimated fair value of the retained interests are the result of both actual performance of the underlying collateral pools and revised expected timing of the receipt of cash flows by the Company. Although a fair value reduction has been recorded, re-forecasted cash flows as of September 30, 1999 indicate total expected undiscounted cash flows to be received by the Company are 1.89 times the total retained interest values, before fair value adjustments, recorded in the Company's consolidated balance sheet. Significant assumptions used to estimate the value of the retained interests include: prepayment rates of 18-21% CPR, default rates approximating 10.79% cumulative losses, and a weighted average discount rate of 12.87%. NOTE E - BRANCH SALES Regulatory agencies approved the merger of Horizon Bancorp into the Company subject to the Company's eventual divesting of certain branch facilities in those locations where the combined entity would maintain an excessive percentage of deposit market share. In complying with regulatory requirements, and as part of the Company's overall post-merger reorganization, the Company completed the sale of six (6) branch locations during the second quarter of 1999. As a result of those sales, the Company sold approximately $116.26 million of deposits and $54.38 million of loans to independent third parties resulting in gains realized by the Company of approximately $8.68 million. 11 NOTE F - TRUST PREFERRED SECURITIES On October 27, 1998, City Holding Capital Trust II (Capital Trust II), a special-purpose statutory trust subsidiary of the Company sold via public offering $57.5 million of 9.125% trust preferred capital securities (the Capital Securities II) and issued $1.8 million of common securities to the Company. Distributions on the Capital Securities II are payable quarterly and each Capital Security II has a stated liquidation value of $25. To fund Capital Trust II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior Subordinated Debentures (the Debentures II) with a stated maturity date of October 31, 2028. The sole assets of Capital Trust II are the Debentures II. Cash distributions on the Capital Securities II in Capital Trust II are made to the extent interest on the Debentures II is received by Capital Trust II. The Company, through various agreements, has irrevocably and unconditionally guaranteed all of Capital Trust II's obligations under the Capital Securities II regarding payment of distributions and payment on liquidation or redemption of the Capital Securities II, but only to the extent of funds held by Capital Trust II. The Capital Securities II are subject to mandatory redemption (i) in whole, but not in part, at the Stated Maturity upon repayment of the Debentures II, (ii) prior to October 31, 2003, in whole, but not in part, contemporaneously with the optional redemption at any time by the Company of the Debentures II at any time within 90 days following an event of certain changes or amendments to regulatory requirements or federal income tax rules and (iii) in whole or in part, at any time on or after October 31, 2003, contemporaneously with the optional redemption by the Company of the Debentures II at a redemption price equal to the aggregate liquidation amount of the Capital Securities II, plus accumulated but unpaid distributions thereon. After deducting expenses incurred in the issuance, the Company received proceeds of $55.34 million from the Capital Securities II offering. On March 31, 1998, City Holding Capital Trust (the Trust), a special-purpose statutory trust subsidiary of the Company, issued $30 million in 9.15% trust preferred capital securities (the Capital Securities) to certain qualified institutional investors and $928,000 of common securities (the Common Securities) to the Company. Distributions on the Capital Securities are payable semi-annually, and each Capital Security has a stated liquidation amount of $1,000. To fund the Trust, the Company sold to the Trust $30.9 million in 9.15% Junior Subordinated Debentures (the Debentures) with a stated maturity date of April 1, 2028. The sole assets of the Trust are the Debentures. Cash 12 distributions on the Capital Securities are made to the extent interest on the Debentures is received by the Trust. The Company, through various agreements, has irrevocably and unconditionally guaranteed all of the Trust's obligations under the Capital Securities regarding payment of distributions and payment on liquidation or redemption of the Capital Securities, but only to the extent of funds held by the Trust. In the event of certain changes or amendments to regulatory requirements or federal income tax rules, the Capital Securities are redeemable in whole at par or, if greater, a make-whole amount. Otherwise, the Capital Securities are generally redeemable in whole or in part on or after April 1, 2008, at a declining redemption price ranging from 104.58% to 100% of the liquidation amount. On or after April 1, 2018, the Capital Securities may be redeemed at 100% of the liquidation amount. After deducting expenses incurred in the issuance, the Company received proceeds of $29.2 million from the Capital Securities offering. The obligations outstanding under Capital Trust II and the Capital Trust are classified as "Corporation-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of City Holding Company" in the liabilities section of the consolidated balance sheets. Distributions on the Capital Securities and Capital Securities II are recorded in the consolidated statements of income as interest expense. The Company's interest payments on the Debentures and the Debentures II are fully tax deductible. NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, certain financial products are offered by the Company to accommodate the financial needs of its customers. Loan commitments (lines of credit) represent the principal off-balance sheet financial product offered by the Company. At September 30, 1999, commitments outstanding to extend credit totaled approximately $283.99 million. To a much lesser extent, the Company offers standby letters of credit, which require payments to be made on behalf of customers when certain specified future events occur. Amounts outstanding pursuant to such standby letters of credit were $11.10 million as of September 30, 1999. Substantially all standby letters of credit have historically expired unfunded. 13 Both of the above arrangements have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company's standard credit policies. Collateral is obtained based on management's credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments. NOTE H - NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet and allows hedge accounting when specific criteria are met. The provisions of this statement, as amended, become effective for quarterly and annual reporting beginning January 1, 2001. The impact of adopting the provisions of this statement on the Company's financial position or results of operations subsequent to the effective date is not currently estimable and will depend on the financial position of the Company and the nature and purpose of the derivative instruments in use by management at that time. NOTE I - LONG TERM DEBT At September 30, 1999, long-term debt included an obligation of the Parent Company consisting of a $35 million revolving credit loan facility with an unrelated party. At September 30, 1999, $28.13 million was outstanding. The loan has a variable rate (6.275% at September 30, 1999) with interest payments due quarterly and principal due at maturity on October 30, 1999. On October 19, 1999, the Parent Company completed the restructuring of its long-term debt by entering into a $16.00 million term loan agreement (the "Loan") and a $24.00 million revolving credit facility (the "Line of Credit"). As a result, the Parent Company transferred $16.00 million from the previously existing line of credit to the fully-amortizing Loan and transferred the remaining $12.13 million to the new Line of Credit. The Loan is to be repaid over a ten-year term, with interest payable quarterly and annual principal reductions. The Line of Credit, renewable annually, is to be repaid with interest quarterly and principal due at maturity. Both the Loan and the Line of Credit maintain a variable rate of interest. Both the Loan and the Line of Credit agreements contain certain restrictive provisions applicable to the Parent Company including limitations on additional long-term debt and requiring the maintenance of certain pre-defined ratios relative to Return on Average Assets, Equity to Assets, Loan Loss Reserve and Non-performing Assets to Loans. The Parent Company has pledged the common stock of its lead bank, City National Bank of West Virginia ("City National"), as collateral for both credit facilities. 14 The Company, through its banking subsidiaries, maintains long-term financing from the FHLB as follows:
Amount Available Amount Outstanding Interest Rate Maturity Date --------------------------------------------------------------------------------------------- (in thousands) $2,000 $ 2,000 6.58% June 2000 10,000 10,000 5.60 July 2002 25,000 25,000 5.47 September 2002 1,500 1,500 6.94 June 2005 25,000 25,000 4.89 January 2008 5,000 5,000 5.48 February 2008 10,000 10,000 4.86 October 2008
In addition to the financing discussed above, the community-banking subsidiaries of the Company have unused lines of credit available with the FHLB approximating $338.62 million. NOTE J - SEGMENT INFORMATION The Company operates three business segments: community banking, mortgage banking, and other financial services. These business segments are primarily identified by the products or services offered and the channels through which the product or service is offered. The community banking operations consists of various community banks that offer customers traditional banking products and services through various delivery channels. The mortgage banking operations include the origination, acquisition, servicing, and sale of mortgage loans. The other financial services business segment consists of nontraditional services offered to customers, such as investment advisory, insurance, and internet technology products. Another defined business segment of the Company is corporate support, which includes the parent company and other support needs. To more effectively evaluate and manage the operating performance of each of the Company's business lines, effective April 1, 1999 internal warehouse funding was established for each division within the mortgage-banking and other financial services segments. Prior to April 1, 1999, the community-banking segment provided necessary funding to the divisions within the mortgage-banking and other financial services segments with no associated interest charged to those divisions. Beginning April 1, 1999, any division that has obtained financing from the community-banking segment is charged a cost of funds, at market interest rates, on the amount of funds borrowed from the community-banking segment. Management has determined that the internal warehouse funding policy provides a "fully-costed" assessment of the operating performance of each division and that instituting such policy provides a more accurate 15 analysis of the performance of each division and business segment. Financial information presented in the following tables has been presented reflecting the actual internal policy in place during each respective period. 16 The accounting policies for each of the business segments are the same as those of the Company. Services provided to the banking segments by the divisions within the other financial services segment are eliminated in consolidation. Selected segment information is included in the following tables:
Other Community Mortgage Financial General (in thousands) Banking Banking Services Corporate Eliminations Consolidated ------------------------------------------------------------------------------ For the nine months ended September 30, 1999 Net interest income (expense) $ 78,056 $ (2,286) $ (98) $ (1,036) $ - $ 74,636 Provision for loan losses 7,327 - - - - 7,327 ------------------------------------------------------------------------------ Net interest income after provision for loan losses 70,729 (2,286) (98) (1,036) - 67,309 Other income 24,117 26,396 9,316 63 (4,294) 55,598 Other expenses 59,797 27,779 11,456 5,150 (4,294) 99,888 ------------------------------------------------------------------------------ Income before income taxes 35,049 (3,669) (2,238) (6,123) - 23,019 Income tax expense (benefit) 12,922 (1,350) (737) (2,373) - 8,462 ------------------------------------------------------------------------------ NET INCOME (LOSS) $ 22,127 $ (2,319) $ (1,501) $ (3,750) $ - $ 14,557 ============================================================================== Average assets $2,600,565 $214,326 $ 12,989 $ 11,924 $(122,029) $2,717,775 ============================================================================== For the nine months ended September 30, 1998 Net interest income (expense) $ 74,620 $ 4,753 $ 48 $ (1,510) $ - $ 77,911 Provision for loan losses 4,416 - - - - 4,416 ------------------------------------------------------------------------------ Net interest income after provision for loan losses 70,204 4,753 48 (1,510) - 73,495 Other income 13,649 37,259 7,018 168 (3,190) 54,904 Other expenses 53,810 32,745 7,243 7,166 (3,190) 97,774 ------------------------------------------------------------------------------ Income before income taxes 30,043 9,267 (177) (8,508) - 30,625 Income tax expense (benefit) 9,538 3,393 (10) (2,607) - 10,314 ------------------------------------------------------------------------------ NET INCOME (LOSS) $ 20,505 $ 5,874 $ (167) $ (5,901) $ - $ 20,311 ============================================================================== Average assets $2,200,968 $ 270,213 $ 13,227 $ 14,340 $ - $2,498,848 ==============================================================================
17
Other Community Mortgage Financial General (in thousands) Banking Banking Services Corporate Eliminations Consolidated ------------------------------------------------------------------------------ For the three months ended September 30, 1999 Net interest income (expense) $ 26,007 $ (1,799) $ 102 $ (428) $ - $ 23,882 Provision for loan losses 2,684 - - - - 2,684 ------------------------------------------------------------------------------ Net interest income after provision for loan losses 23,323 (1,799) 102 (428) - 21,198 Other income 5,535 6,105 2,374 61 (607) 13,468 Other expenses 19,281 7,529 3,191 1,740 (607) 31,134 ------------------------------------------------------------------------------ Income before income taxes 9,577 (3,223) (715) (2,107) - 3,532 Income tax expense (benefit) 3,472 (1,209) (244) (805) - 1,214 ------------------------------------------------------------------------------ NET INCOME (LOSS) $ 6,105 $ (2,014) $ (471) $ (1,302) $ - $ 2,318 ============================================================================== Average assets $2,715,081 $ 193,391 $ 13,437 $12,317 $(188,218) $2,746,008 ============================================================================== For the three months ended September 30, 1998 Net interest income (expense) $ 28,281 $ (2,151) $ 10 $ 246 $ - $ 26,386 Provision for loan losses 1,949 - - - - 1,949 ------------------------------------------------------------------------------ Net interest income after provision for loan losses 26,332 (2,151) 10 246 - 24,437 Other income 3,380 16,273 2,770 336 (1,579) 21,180 Other expenses 18,460 12,437 2,968 3,932 (1,579) 36,218 ------------------------------------------------------------------------------ Income before income taxes 11,252 1,685 (188) (3,350) - 9,399 Income tax expense (benefit) 3,075 449 (61) (639) - 2,824 ------------------------------------------------------------------------------ NET INCOME (LOSS) $ 8,177 $ 1,236 $ (127) $ (2,711) $ - $ 6,575 ============================================================================== Average assets $2,318,882 $ 284,859 $13,953 $ 15,006 $ - $2,632,700 ==============================================================================
NOTE K -SUBSEQUENT EVENT On November 12, 1999, the Company announced that City National had signed a definitive agreement to form a residential mortgage loan servicing joint venture with an affiliate of Pacific Financial Group, Inc. ("Pacific"), a wholly-owned subsidiary of Pacific USA Holdings Corp. Pursuant to the definitive agreement, City National will contribute approximately $1.85 billion in mortgage loans serviced for others and will own a 20% equity interest in the newly formed corporation. Additionally, City National will hold two promissory notes granted by the new corporation which are expected to have a total principal amount of approximately $28 million. Both promissory notes are expected to be insured, and will be secured by certain assets of the new corporation, and guaranteed to a limited extent by an affiliate of Pacific. This transaction, expected to be consummated within sixty days, is subject to the approval of applicable regulatory authorities and the satisfaction of certain other conditions. 18 As part of its strategy to further lessen its involvement in the specialty finance industry, particularly high loan-to-value products, City National has also signed a non-binding letter of intent to form a residential mortgage loan origination joint venture with Pacific. If consummated, City National would contribute its retail and broker loan origination divisions to a newly formed entity. This anticipated transaction is separate and distinct from the aforementioned loan servicing joint venture and its specific terms are being negotiated. 19 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL SUMMARY Nine Months Ended September 30, 1999 vs. 1998 Consolidated net income for the nine months ended September 30, 1999 was $14.56 million or $0.86 per diluted common share, compared to $20.31 million or $1.20 per diluted common share for the nine months ended September 30, 1998. Return on average assets ("ROA") was 0.71% and return on average equity ("ROE") was 8.81% for the nine months ended September 30, 1999. ROA and ROE were 1.08% and 11.51%, respectively, for the same period in 1998. The decline in net income, ROA, and ROE for the nine months ended September 30, 1999, as compared to the same period in 1998, is due to operating results within both the community-banking and mortgage-banking segments. Within the community-banking segment, a declining interest margin coupled with a $2.91 million increase in the provision for loan losses has resulted in lower core earnings during the nine months ended September 30, 1999. Within the mortgage-banking segment, which is also experiencing a declining interest margin, a $4.76 million increase in mortgage loan servicing fees during the period was offset by a $14.00 million decline in combined net origination fees and gains realized from the sale of loans. Other income increased $9.67 million during the nine months ended September 30, 1999, primarily due to $8.68 million in gains realized by the Company associated with its sales of six branch locations as part of the Company's continued reorganization following its acquisition of Horizon Bancorp. Three Months Ended September 30, 1999 vs. 1998 Consolidated net income for the three months ended September 30, 1999 was $2.32 million or $0.14 per diluted common share, compared to $6.58 million or $0.39 per diluted common share for the three months ended September 30, 1998. ROA was 0.34% and ROE was 4.27% for the three months ended September 30, 1999. ROA and ROE were 1.00% and 10.95%, respectively, for the same period in 1998. 20 In comparing the three months ended September 30, 1999 to the same period in 1998, declines in net interest margins during 1999 in both the community-banking and mortgage-banking segments resulted in a $2.50 million decline in net interest income from 1998 to 1999. Additionally, within the community-banking segment, the provision for loan losses increased approximately $735,000 from $1.95 million during the three months ended September 30, 1998 to $2.68 million during the same period in 1999. Consistent with the Company's significantly reduced involvement in the junior lien mortgage loan product, income derived from origination fees and gains realized on the sale of loans declined dramatically in the third quarter of 1999 as compared to the same period of 1998. Income generated from these activities decreased from $10.75 million during the three months ended September 30, 1998 to $678,000 for the same period in 1999. Directly associated with this restructuring, advertising expense also declined significantly, quarter-to-quarter, from $7.07 million during the three months ended September 30, 1998 to $1.59 million during the same period in 1999. Excluding the decline in advertising expense, non-interest expenses remained relatively unchanged on a quarter-to-quarter comparison. NET INTEREST INCOME Nine Months Ended September 30, 1999 vs. 1998 On a tax equivalent basis, net interest income declined approximately $3.20 million or 4.00% from $79.87 million to $76.67 million during the nine-month periods ended September 30, 1998 and 1999, respectively. Factors within both the community banking and mortgage banking segments have significantly contributed to the overall decline in net interest margin. With the community banking operations, although the average cost of total deposits (interest and non-interest bearing) has declined 31 basis points, the yield earned on the core loan portfolio has declined 42 basis points, comparing the nine months ended September 30, 1999 and 1998. Within the mortgage banking segment, the yield earned on loans held for sale declined 67 basis points from 9.87% for the nine months ended September 30, 1998 to 9.20% for the same period in 1999. This decline, in part, is due to the amortization of $1.50 million of premium, recorded during the second quarter of 1999, associated with the wholesale acquisition of high loan-to-value loans. With the Company's reduced involvement in this business line, any future premium amortization is expected to be minimal. Also within the mortgage banking operations, the yield earned on the Company's retained interests in securitized loan pools has declined from 10.02% for the nine months ended September 30, 1998 to 6.05% for the same period in 1999. This decline is due primarily to the actual performance of the underlying collateral pools and revised expected timing of the receipt of cash flows by the Company. 21 Three Months Ended September 30, 1999 vs. 1998 For the three months ended September 30, 1999, the Company reported $24.55 million net interest income (tax equivalent basis) compared to $27.05 million for the same period in 1998. This decline, $2.50 million on a quarter-to-quarter basis, was the result of factors within both the community banking and mortgage banking segments. Within the community banking operations, the yield earned on the core loan portfolio decreased 51 basis points while the cost of total deposits (interest and non-interest bearing) declined only 24 basis points, from 3.67% to 3.43% for the three months ended September 30, 1998 and 1999, respectively. Additionally, the total cost of borrowed funds increased 83 basis points from 4.59% for the three months ended September 30, 1998 to 5.42% for the same period in 1999. Within the mortgage banking segment, although the yield earned on loans held for sale rose to 11.20% for the three months ended September 30, 1999, the yield earned on the Company's retained interests in securitized loan pools fell to 3.96% during the period. The increase in the loans held for sale yield is primarily due to significantly reduced premium amortization associated with purchased loans. The reduced yield earned on retained interests is due to declines in the performance of the underlying collateral loans and revised expected timing of the receipt of cash flows by the Company. 22 INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Nine months ended September 30, 1999 1998 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------------------------------------------------------------- INTEREST-EARNING ASSETS Loan portfolio (1) $1,767,447 $112,288 8.47% $1,627,841 $108,498 8.89% Loans held for sale 200,498 13,833 9.20 241,895 17,903 9.87 Securities: Taxable 284,846 12,835 6.01 282,877 13,018 6.14 Tax-exempt (2) 104,450 5,823 7.43 96,699 5,597 7.72 ---------------------------------------------------------------- Total securities 389,296 18,658 6.39 379,576 18,615 6.54 Retained interest in securitized 78,999 3,583 6.05 15,637 1,175 10.02 loans Federal funds sold 5,956 212 4.75 29,342 1,192 5.42 ---------------------------------------------------------------- Total earning assets 2,442,196 $148,574 8.11% 2,294,291 $147,383 8.57% Cash and due from banks 90,207 67,647 Bank premises and equipment 70,139 63,435 Other assets 133,928 92,307 Less: allowance for possible loan losses (18,695) (18,832) ---------------------------------------------------------------- Total assets $2,717,775 $2,498,848 ================================================================ INTEREST-BEARING LIABILITIES Demand deposits $ 383,645 $ 8,572 2.98% $ 320,084 $ 7,394 3.08% Savings deposits 327,120 8,020 3.27 391,634 11,137 3.79 Time deposits 1,038,359 37,550 4.82 937,644 36,667 5.21 Short-term borrowings 205,060 7,278 4.73 192,969 7,252 5.01 Long-term debt 106,238 4,470 5.61 89,881 3,680 5.46 Trust preferred securities 87,500 6,010 9.16 20,220 1,383 9.12 ---------------------------------------------------------------- Total interest-bearing 2,147,922 71,900 4.46 1,952,432 67,513 4.61 liabilities Demand deposits 294,968 266,945 Other liabilities 54,659 44,307 Stockholders' equity 220,226 235,164 ---------------------------------------------------------------- Total liabilities and stockholders' equity $2,717,775 $2,498,848 ================================================================ Net interest income $76,674 $79,870 ================================================================ Net yield on earning assets 4.19% 4.64% ================================================================
(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%. 23 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)
Nine months ended September 30, 1999 vs. 1998 Increase (Decrease) Due to Change In: Volume Rate Net ----------------------------------------- INTEREST INCOME FROM Loan portfolio $11,214 $ (7,424) $ 3,790 Loans held for sale (2,915) (1,155) (4,070) Securities: Taxable 135 (318) (183) Tax-exempt (1) 531 (305) 226 ----------------------------------------- Total securities 666 (623) 43 Retained interest in securitized loans 3,325 (917) 2,408 Federal funds sold (848) (132) (980) ----------------------------------------- Total interest-earning assets $11,442 $(10,251) $ 1,191 ========================================= INTEREST EXPENSE ON Demand deposits $ 1,566 $ (388) $ 1,178 Savings deposits (1,697) (1,420) (3,117) Time deposits 4,846 (3,963) 883 Short-term borrowings 583 (557) 26 Long-term debt 686 104 790 Trust preferred securities 4,621 6 4,627 ----------------------------------------- Total interest-bearing liabilities $10,605 $ (6,218) $ 4,387 ========================================= NET INTEREST INCOME $ 837 $ (4,033) $(3,196) =========================================
(1) Fully federal taxable equivalent using a tax rate of 35% in 1999 and 1998. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 24 INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES (in thousands)
Three months ended September 30, 1999 1998 Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ---------------------------------------------------------------- INTEREST-EARNING ASSETS Loan portfolio (1) $1,841,436 $38,225 8.30% $1,691,925 $37,278 8.81% Loans held for sale 110,385 3,092 11.20 290,911 6,205 8.53 Securities: Taxable 282,046 4,305 6.11 290,599 4,081 5.62 Tax-exempt (2) 103,424 1,898 7.34 95,405 1,891 7.93 ---------------------------------------------------------------- Total securities 385,470 6,203 6.44 386,004 5,972 6.19 Retained interest in securitized 91,956 910 3.96 26,157 616 9.42 loans Federal funds sold 7,977 102 5.11 26,382 261 3.96 ---------------------------------------------------------------- Total earning assets 2,437,224 $48,532 7.97% 2,421,379 $50,332 8.31% Cash and due from banks 101,033 66,421 Bank premises and equipment 70,691 68,093 Other assets 156,989 95,831 Less: allowance for possible loan losses (19,929) (19,024) ---------------------------------------------------------------- Total assets $2,746,008 $2,632,700 ================================================================ INTEREST-BEARING LIABILITIES Demand deposits $ 420,232 $ 3,061 2.91% $ 337,417 $ 2,459 2.92% Savings deposits 319,338 3,009 3.77 398,204 3,142 3.16 Time deposits 1,031,722 11,702 4.54 982,395 13,338 5.43 Short-term borrowings 203,728 2,729 5.36 227,510 2,691 4.73 Long-term debt 106,447 1,471 5.53 91,339 965 4.23 Trust preferred securities 87,500 2,014 9.21 30,000 689 9.19 ---------------------------------------------------------------- Total interest-bearing 2,168,967 23,986 4.42 2,066,865 23,284 4.51 liabilities Demand deposits 298,877 278,737 Other liabilities 61,266 46,839 Stockholders' equity 216,898 240,259 ---------------------------------------------------------------- Total liabilities and stockholders' equity $2,746,008 $2,632,700 ================================================================ Net interest income $24,546 $27,048 ================================================================ Net yield on earning assets 4.03% 4.47% ================================================================
(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income. (2) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%. 25 RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)
Three months ended September 30, 1999 vs. 1998 Increase (Decrease) Due to Change In: Volume Rate Net ----------------------------------------- INTEREST INCOME FROM Loan portfolio $ 10,999 $(10,052) $ 947 Loans held for sale (12,402) 9,289 (3,113) Securities: Taxable (661) 885 224 Tax-exempt (1) 600 (593) 7 ----------------------------------------- Total securities 61 292 231 Retained interest in securitized loans 2,561 (2,267) 294 Federal funds sold (542) 383 (159) ----------------------------------------- Total interest-earning assets $ 555 $(2,355) $(1,800) ========================================= INTEREST EXPENSE ON Demand deposits $ 611 $ (9) $ 602 Savings deposits (2,532) 2,399 (133) Time deposits 3,723 (5,359) (1,636) Short-term borrowings (1,241) 1,279 38 Long-term debt 177 329 506 Trust preferred securities 1,323 2 1,325 ----------------------------------------- Total interest-bearing liabilities $ 2,061 $(1,359) $ 702 ========================================= NET INTEREST INCOME $(1,506) $(996) $(2,502) =========================================
(1) Fully federal taxable equivalent using a tax rate of 35% in 1999 and 1998. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 26 LOAN PORTFOLIO The composition of the Company's loan portfolio as of September 30, 1999 and December 31, 1998, is presented in the following table:
September 30, December 31, 1999 1998 ------------------------------------------- (in thousands) Commercial, financial and agricultural $ 479,152 $ 509,214 Real estate-mortgage 982,405 842,727 Installment loans to individuals 359,844 363,988 ------------------------------------------- Total loans $ 1,821,401 $ 1,715,929 -------------------------------------------
The loan portfolio has experienced an increase of 6.15% during the first nine months of 1999, from $1.72 billion at December 31, 1998, to $1.82 billion at September 30, 1999. Of this $105.47 million increase, the acquisition of Frontier represented $59.74 million. Allowance And Provision for Loan Losses Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a monthly basis to provide for losses inherent in the portfolio. Through the Company's internal loan review department, management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors. Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to historical charge-off percentages and general economic conditions. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior charge-off history and general economic conditions, with less emphasis placed on specifically reviewing individual credits, unless circumstances suggest that specific reviews are necessary. In these categories, specific loan reviews would be conducted on higher balance and higher risk loans. In evaluating the adequacy of the allowance, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, 27 seasoning of the portfolio, and general economic conditions. Reserves not specifically allocated to individual credits are generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Determination of such reserves is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between net charge-offs and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio. At September 30, 1999, the allowance for loan losses was $20.65 million or 1.13% of total period-end loans compared to $17.61 million or 1.03% as of December 31, 1998. As of September 30, 1999, management is of the opinion that the consolidated allowance for loan losses is adequate to provide for losses on existing loans within the portfolio. As management continues to aggressively collect problem credits and restructure the Company's post-merger loan portfolio, the Company's provision for loan losses increased from $4.42 million to $7.33 million for the nine months ended September 30, 1998 and 1999, respectively. During the first nine months of 1999, the Company recorded loan charge-offs of approximately $6.20 million and recorded recoveries of $1.18 million resulting in net charge-offs of $5.02 million. This represents an increase of $174,000 or 3.59% from net charge-offs of $4.85 million recorded during the nine months ended September 30, 1998. 28
Nine months ended Year ended December September 30, 31, Allowance for Loan Losses 1999 1998 ------------------------------------------ (in thousands) Balance at beginning of year $17,610 $18,190 Charge-offs: Commercial, financial and agricultural (1,512) (2,385) Real estate-mortgage (444) (1,375) Installment loans to individuals (4,242) (7,709) ------------------------------------------ Total charge-offs (6,198) (11,469) Recoveries: Commercial, financial and agricultural 77 297 Real estate-mortgage 164 43 Installment loans to individuals 932 1,283 ------------------------------------------ Total recoveries 1,175 1,623 ------------------------------------------ Net charge-offs (5,023) (9,846) Provision for loan losses 7,327 8,481 Balance of acquired institution 738 785 ========================================== Balance at end of period $20,652 $17,610 ========================================== As a Percent of Average Total Loans: Net charge-offs .38% .58% Provision for loan losses .55 .51 As a Percent of Non-performing Loans: Allowance for loan losses 106.35% 118.59%
29
Summary of Non-performing Assets Non-accrual loans $11,290 $8,844 Accruing loans past due 90 days or more 7,419 5,126 Restructured loans 710 879 --------------------------- --------------- Total non-performing loans 19,419 14,849 Other real estate owned 3,092 2,626 =========================== =============== Total non-performing assets $22,511 $17,475 =========================== ===============
LOANS HELD FOR SALE Loans held for sale represent mortgage loans the Company has either purchased or originated with the intent to sell and includes traditional fixed-rate and junior lien mortgage loans. Both the composition and the balance of Loans Held for Sale have changed significantly since December 31, 1998. As of September 30, 1999, the Company held approximately $66 million of junior lien mortgage loans for sale, compared to $201 million held for sale as of December 31, 1998. Associated with this decline, the percentage of conventional mortgage loans held for sale comprising the total reported balance of Loans Held for Sale has increased from 18.27% at December 31, 1998 to 26.93% at September 30, 1999. These changes also reflect the impact of the Company's overall restructuring of its mortgage banking operation. Substantially all mortgage loan products purchased or originated by the Company's retail and broker divisions are intended to be included in cash sales to independent third parties. Although the Company has securitized a portion of previous balances of Loans Held for Sale, future securitization transactions are not anticipated at this time. Loans obtained by the retail and broker divisions are generally obtained from borrowers outside of the Company's community banking market areas. As such, management believes that the geographic diversification of the loan pool reduces the risks associated with downturns in specific local economies. Because the retail and broker divisions originate and acquire these loans on a nationwide basis, the Company's risk related to geographic concentration is significantly reduced. In addition to concentration risk, there are other risks associated with the junior lien mortgage pool. Such risks include credit risk related to the quality of the underlying loan and the borrower's financial capability to repay the loan, market risk related to the continued attractiveness of the loan product to both borrowers and end-investors, and interest rate risk related to potential changes in interest rates and the resulting repricing of both financial assets and liabilities. The Company manages this risk by continuously improving policies and procedures designed to reduce the risk of loss to a level commensurate with the return being earned on the Company's investment in this program. 30 The Company has established formal underwriting guidelines and quality control procedures which emphasize the creditworthiness of the borrower, with less focus placed on the value of the underlying collateral. Factors such as credit scores, debt-to-income ratios, mortgage credit history and others are factored into the lending decision for these loans. Additionally, property appraisals, in varying degrees, are required for certain loans. Other risk-reducing factors include the broker division's pre-approved list of lenders from whom loans may be acquired. Approval of lenders is based on due diligence procedures performed on each lender and continued evaluation of the performance of loans purchased from each lender. During the first nine months of 1999, the Company originated $291.28 million and purchased $167.76 million of loans held for sale and sold $597.70 million during the same period. This compares to originations of $429.32 million, purchases of $621.53 million and sales of $931.10 million during the first nine months of 1998. LOAN SECURITIZATIONS One of the methods previously utilized by management to mitigate the risk of loss related to the origination and acquisition of junior lien mortgage loans is the securitization of these loans. By securitizing originated and purchased junior lien mortgage loans, the Company effectively removes these loans from its balance sheet by creating an investment security or securities, supported by the cash flows generated by these loans, and selling the resulting investment security or securities to independent third parties. As part of this process, the Company provides credit enhancement, in the form of overcollateralization, with respect to the investment security created. As a result, the Company does maintain a certain level of credit, prepayment and interest rate risk related to these loans. The risk maintained by the Company, however, is less than that which would be maintained had the Company held these loans on its balance sheet until the loans matured. In return for this risk exposure, the Company expects to receive on-going income from each securitization that is determined as a function of the "excess spread" derived from the securitized loans. The "excess spread", generally, is calculated as the difference between (A) the interest at the stated rate paid by borrowers and (B) the sum of pass-through interest paid to third-party investors and various fees, including trustee, insurance, servicing, and other similar costs. The "excess spread" represents income to be recognized by the Company over the life of the securitized loan pool. 31 As of September 30, 1999 and 1998, the Company reported retained interests in its securitized loan pools of approximately $92.25 million and $41.46 million, respectively, including accrued interest. Because the retained interests are uncertificated, the Company has included the recorded value of its retained interests in Other Assets in the Consolidated Balance Sheets. Management monitors the actual default and prepayment rates of each securitized pool on a monthly basis, in addition to the outstanding pool balance, to ensure the rates used to estimate the retained interest are reasonable. Each of the securitized pools is serviced by the Company's mortgage loan servicing division. As discussed previously, management does not anticipate securitizing additional junior lien mortgage loans at this time. LOAN SERVICING As of September 30, 1999, City Mortgage Services (a division of City National Bank) maintained a servicing portfolio of $1.85 billion. Loans serviced for others are not included in the Consolidated Balance Sheets of the Company. The Company has recorded mortgage loan servicing rights of $10.58 million in Other Assets at September 30, 1999, associated with the right to service mortgage loans for others. The recorded value of mortgage servicing rights is assessed quarterly to determine if the value of those rights has become impaired during the period. In doing so, management estimates the present value of future net cash flows to be derived from its servicing activities. Factors included in the impairment analysis include anticipated servicing income, costs associated with servicing the portfolio, discount rates, and loan prepayment and default rates. As of September 30, 1999, management has determined, based on this analysis, that there is no impairment in the recorded value. OTHER ASSETS As of September 30, 1999, Other Assets (as reported in the Consolidated Balance Sheets) had increased approximately $71.79 million, from $153.15 million at December 31, 1998 to $224.94 million. Of this increase, $29.16 million is associated with the retained interest recorded resulting from the Company's second quarter securitization of junior lien mortgage loans, City National's purchase of an additional $20.00 million of bank owned life insurance ("BOLI"), and $9.90 million associated with the inclusion of Frontier State Bank in the September 30, 1999 reported balances. 32 REORGANIZATION OF MORTGAGE-BANKING SEGMENT As disclosed in the 1998 Annual Report to Shareholders, the Company initiated an overall restructuring of the retail and wholesale loan origination divisions during the fourth quarter of 1998. The reorganization of this business segment has continued through the first nine months of 1999, during which time the Company has consolidated its retail origination platforms into one operation and consolidated its wholesale and broker divisions. Additionally, the Company has diversified its product mix to include home equity and other mortgage-related products while reducing its reliance on high loan-to-value loans. Management has implemented significant workforce reductions within this segment and has curtailed the wholesale acquisition of junior lien mortgage loans. Management has also reduced the Company's level of nationwide direct mail solicitation of potential borrowers. As previously discussed herein, the impact of this restructuring is evidenced by the declines in the reported balance of loans held for sale, net origination fees, gains on loan sales, and advertising expense, among others. MARKET RISK MANAGEMENT Market risk to the Company is the risk of loss arising from changes in current and future cash flows, fair values, earnings, or capital due to adverse movements in interest rates. The Company seeks to reduce interest rate risk through asset and liability management, where the goal is to optimize the balance between earnings and interest rate risk. The Company's asset and liability management function is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. Management measures interest rate risk through an interest sensitivity gap analysis and through performing earnings sensitivity analyses. In management's opinion, there have been no significant changes in the Company's market risk since December 31, 1998. The Company manages its liquidity position to provide necessary funding for asset growth and to ensure that the funding needs of its customers can be satisfied promptly. Liquidity management is accomplished by maintaining a significant portion of the Company's investment portfolio classified as available-for-sale, maintaining sufficient borrowing capacity with the Company's lenders and providing consistent growth in the core deposit base of its banking subsidiaries. The Company also utilizes its access to the capital markets as a tool for managing its liquidity position. 33 During 1998, through the issuances of asset-backed and trust preferred securities, the Company successfully utilized the capital markets to diversify its available funding sources. Additionally, the Company has entered into agreements with three investment banking firms to issue over $100 million of the Company's certificates of deposit. The certificates of deposit can be issued in maturities of up to five years at rates equal to a comparable Treasury instrument at the time of issuance plus a market-based spread. The Company is not committed to issuing a pre-determined amount of its certificates of deposit under these agreements, the use of which is at the sole discretion of the Company. At September 30, 1999, $12.00 million of certificates of deposit had been sold under these agreements at an average interest rate of 5.41%. The average remaining term of the issued certificates of deposit was approximately 12 months at September 30, 1999. An additional source of liquidity includes the Parent Company's revolving loan agreement. At September 30, 1999, the Parent Company maintained a $35.00 million line of credit with an unrelated third party against which $28.13 million was outstanding. In October 1999, the Parent Company restructured its long-term debt and entered into a $16.00 million term loan agreement and a $24.00 million revolving credit facility. As a result, the Parent Company transferred $16.00 million of its existing long term debt to the term loan and transferred the remaining $12.13 million to the new revolving line of credit. As necessary, the Parent Company has used funds available from its line of credit to provide additional capital to its subsidiaries, to finance merger and acquisition activity, and to fund internal growth and expansion. The Company's cash and cash equivalents, represented by cash, due from banks, and federal funds sold, are a product of its operating, investing and financing activities as set forth in the Consolidated Statements of Cash Flows included herein. Primarily the result of junior lien mortgage loan sales exceeding purchases and originations of those loans, operating activities provided $103.81 million of cash during the nine months ended September 30, 1999. Conversely, during the nine months ended September 30, 1998, junior lien mortgage loan purchases and originations exceeded sales of those loans by approximately $119.74 million, resulting in cash used in operating activities during the period of $144.98 million. 34 In conjunction with the Company's sales of six branch locations during the second quarter of 1999, the Company transferred $52.09 million of cash to the entities that acquired the branches. As a result, net cash used in investing activities increased $55.55 million from $109.49 million in 1998 to $165.04 million for the nine months ended September 30, 1999. With less cash used in operating and investing activities, the Company needed less cash through financing activities during the first nine months of 1999. During the first nine months of 1998, cash was provided by net increases in core deposits ($154.10 million), proceeds from long term debt ($57.53 million), and the issuance of trust preferred securities ($29.16 million). During the first nine months of 1999, net deposits decreased $40.90 million and total borrowed funds increased $94.13 million. CAPITAL RESOURCES During the first nine months of 1999, the Company's consolidated stockholders' equity decreased approximately $4.20 million, from $220.06 million at December 31, 1998 to $215.86 million at September 30, 1999. During the first nine months of 1999, the Company reported net income of $14.56 million, which was partially offset by the payment of dividends of approximately $10.10 million. Additionally, the Company reported a $9.52 million decline in Other Comprehensive Income during the first nine months of 1999. Of this $9.52 million decline, approximately $4.63 million is attributable to the net decline in the estimated fair value of the Company's retained interests in its securitized loan pools. The remaining $4.89 million decline is due to declines in the estimated fair value of the available-for-sale securities portfolio. Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8 percent, with at least one-half of capital consisting of tangible common stockholders' equity and a minimum Tier I leverage ratio of 4 percent. At September 30, 1999, the Company's total capital to risk-adjusted assets ratio was 11.14%, its Tier I capital ratio was 9.80%, and its leverage ratio was 9.23%. Similarly, the Company's banking subsidiaries are also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, the banking subsidiaries are required to maintain minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and 4.00%, respectively. To be classified as "well capitalized," the banking subsidiaries must maintain total capital, Tier I capital, and leverage ratios of 10.00%, 6.00%, and 5.00%, respectively. As of September 30, 1999, the Company's lead bank, City National, reported total capital, Tier I capital, and leverage ratios of 11.87%, 11.08%, and 10.37%, respectively. 35 Continued improvement in operating results, effective management of risks affecting the Company, and a focus on high asset quality have been, and will remain, the key elements in maintaining the Company's present capital position. Earnings from bank operations are expected to remain adequate to fund payment of stockholders' dividends and internal growth. In management's opinion, the subsidiary banks have the capability to upstream sufficient dividends to meet the anticipated cash requirements of the Company. IMPACT OF THE YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Based on management's assessment of this issue, the Company determined that it would be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with the modifications that were implemented to existing software and conversions to new hardware, the Year 2000 issue will not pose significant operational problems. The Company's plan to resolve the Year 2000 issue is sponsored and closely monitored by both senior and executive level management. The Federal Financial Institutions Examination Council recommended that all systems reprogramming efforts be completed by December 31, 1998 to allow for sufficient testing and implementation. Management is of the opinion that the Company has complied with this recommendation. Year 2000 plan components have been executed in accordance with guidelines that were mandated by the Office of the Comptroller of the Currency. The Company's approach to Year 2000 compliance involves five industry standard phases: 36 1. Awareness Phase 2. Assessment Phase 3. Renovation Phase 4. Validation Phase 5. Implementation Phase Each of these phases has been fully completed. A sixth phase, "post implementation" was also adopted by the Company and is currently on-going and involves further testing of systems, vendor and supplier monitoring, and contingency plan assessments. The Company has developed a contingency plan for certain critical applications. This plan includes the development of crisis management procedures, manual back-up options, and the adjustment of staffing strategies. The Company has historically updated systems, replaced software and hardware, and made other systematic investments in technology on a regular basis. As a result, the Company's costs associated with Year 2000 remediation efforts have not been significant. Where necessary, the Company has utilized both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications, and will continue to do so. However, due to the Company's technology plan of hardware, software, and systems maintenance, the sum of the costs incurred to-date and the estimated costs remaining to be incurred is not material to the consolidated financial statements. Based on the results, to date, of implementing the Company's strategic plan, management believes that the risks affecting the Company associated with the Year 2000 issue should be minimal. Accordingly, management does not believe that the Year 2000 presents a material exposure as it relates to the Company's products and services. In addition, the Company has gathered information about the Year 2000 compliance status of its significant vendors, suppliers, and customers and continues to monitor their compliance. To date, the Company's management is not aware of any such party with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that such parties will be Year 2000 ready. The inability of such parties to complete their Year 2000 remediation process in a timely manner could materially impact the Company. The effect of non-compliance by such parties is not determinable. 37 The recent merger of Horizon Bancorp, Inc. into the Company does not significantly impact the Company's Year 2000 readiness. The Company has historically converted each of its acquired financial institutions to its internal data processing environment. With the merger of Horizon, all significant data processing systems would have been converted to the Company's operating systems, regardless of the Year 2000 issue. Therefore, Year 2000 readiness has not necessarily accelerated the Company's replacement of equipment and systems within the Horizon banks. All significant data processing applications of the Horizon banks were converted to the Company's in-house data processing systems as of April 30, 1999. Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner and in accordance with the guidelines set forth by its regulatory authorities. As noted above, the Company is in its final post-implementation phase of further testing. If final testing identifies previously unknown Year 2000 exposures and those exposures cannot be timely addressed, the Company could experience significant difficulties in processing daily operating activities. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, or failure to properly date business records. The amount of potential liability and lost income cannot be reasonably estimated at this time. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The information called for by this item is provided under the caption "Market Risk Management" under Item 2--Management Discussion and Analysis of Financial Condition and Results of Operations. 2
PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities On July 22, 1999, the Company issued 26,764 shares of its common stock to three individuals pursuant to a Supplemental Purchase Agreement entered into on April 15, 1998, between City National Bank of West Virginia, a subsidiary of the Company, and the previous owners of MarCom, Inc. The Company's common stock issued in this transaction was not registered under the Securities Act of 1933, in reliance on Section 4(2) of such Act, as a transaction not involving any public offering. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders: None Item 5. Other Information On November 12, 1999, the Company announced that its wholly-owned banking subsidiary, City National Bank of West Virginia ("City National") had signed a definitive agreement to form a residential mortgage servicing joint venture with an affiliate of Pacific Financial Group, Inc. ("Pacific)", a wholly-owned subsidiary of Pacific USA Holdings Corp. Under the Agreement, City National and Pacific will contribute their loan servicing operations to a new entity in exchange for ownership interests and additional consideration. The News Release in its entirety in included herein as Exhibit 99. Item 6. Exhibits and Reports on Form 8-K: Exhibit 11 - Computation of Earnings per Share Exhibit 27 - Financial Data Schedule for the nine months ended September 30, 1999 Exhibit 27(a) - Restated Financial Data Schedule for the nine months ended September 30, 1998 Exhibit 99 - Press release, dated November 12, 1999 announcing City Holding Company and Pacific Financial Group, Inc. Servicing Joint Venture. Filings of Form 8-K - On September 14, 1999, the Company filed a Current Report on Form 8-K, attaching a report to shareholders of City Holding Company for the quarter ended June 30, 1999, together with a letter from the Company's President and Chief Executive Officer, Steven J. Day.
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITY HOLDING COMPANY Date: November 15, 1999 By:/s/ Michael D. Dean ------------------------ Michael D. Dean Senior Vice President - Finance, Chief Accounting Officer and Duly Authorized Officer 39 EX-11 2 EXHIBIT 11 EXHIBIT 11 - STATEMENT Re: COMPUTATION OF EARNINGS PER SHARE
Nine months ended September 30, 1999 1998 ---------------------------------------------- (in thousands, except per share data) Basic: Net income $ 14,557 $ 20,311 Average shares outstanding 16,833 16,791 ---------------------------------------------- Basic EPS $ 0.86 $ 1.21 ============================================== Diluted: Net income $ 14,557 $ 20,311 Average shares outstanding 16,833 16,791 Effect of dilutive securities: Employee stock options - 119 Contingently issuable stock - 2 ---------------------------------------------- Totals 16,833 16,912 ---------------------------------------------- Diluted EPS $ 0.86 $ 1.20 ============================================== Three months ended September 30, 1999 1998 ---------------------------------------------- (in thousands, except per share data) Basic: Net income $ 2,318 $ 6,575 Average shares outstanding 16,857 16,850 ---------------------------------------------- Basic EPS $ 0.14 $ 0.39 ============================================== Diluted: Net income $ 2,318 $ 6,575 Average shares outstanding 16,857 16,850 Effect of dilutive securities: Employee stock options - 142 Contingently issuable stock - 3 ---------------------------------------------- Totals 16,857 16,995 ---------------------------------------------- Diluted EPS $ 0.14 $ 0.39 ==============================================
40 EX-27 3 EXHIBIT 27
9 1,000 9-MOS DEC-31-1999 SEP-30-1999 100,105 0 1,617 0 389,700 0 0 1,821,401 20,652 2,724,487 1,972,594 288,763 53,141 194,134 42,199 0 0 173,656 2,724,487 126,121 16,620 3,795 146,536 54,142 71,900 74,636 7,327 52 99,888 23,019 0 0 0 14,557 0.86 0.86 4.19 11,290 7,419 710 0 17,610 6,198 1,175 20,652 20,652 0 0
EX-27 4 EXHIBIT 27--RESTATED FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 SEP-30-1998 62,529 0 30,254 0 335,525 40,415 41,911 1,709,320 18,542 2,651,458 2,036,474 192,066 44,080 137,334 42,740 0 0 198,764 2,651,458 126,401 16,656 2,367 145,424 55,198 67,513 77,911 4,416 5 97,774 30,625 0 0 0 20,311 1.21 1.20 4.64 10,409 7,025 1,582 0 18,190 6,104 1,255 18,542 18,542 0 0
EX-99 5 EXHIBIT 99 Exhibit 99 NEWS RELEASE - -------------------------------------------------------------------------------- For Immediate Release November 12, 1999 For Further Information Contact: Steven J. Day, President & CEO (304) 769-1101 CITY HOLDING COMPANY AND PACIFIC FINANCIAL GROUP, INC. ANNOUNCE SERVICING JOINT VENTURE Charleston, West Virginia - Charleston-based City Holding Company (NASDAQ-NMS: "CHCO") ("City Holding") announced today that its wholly-owned banking subsidiary, City National Bank of West Virginia ("City National"), has signed a definitive agreement to form a residential mortgage servicing joint venture with an affiliate of Pacific Financial Group, Inc. ("Pacific"), a wholly owned subsidiary of Pacific USA Holdings Corp. Under the Agreement, City National and Pacific will contribute their loan servicing operations to a new entity in exchange for ownership interests and additional consideration. City National expects to recognize a gain of approximately $12 million from this transaction, although the exact amount will not be determined until a post closing adjustment is made shortly after closing. Under the definitive agreement, City National will contribute approximately $1.85 billion in servicing assets and Pacific will contribute approximately $860 million in servicing assets. Pacific will hold an 80% equity interest in the new corporation and City National will own the remaining 20%. City National will also hold two promissory notes granted by the new corporation, which are expected to have a total principal amount of approximately $28 million. Both promissory notes are expected to be insured, and will be secured by certain of the assets of the new corporation, and guaranteed to a limited extent by an affiliate of Pacific. "We look forward to our new relationship with Pacific. They have been a significant player in the consumer specialty finance business for years and have a top notch servicing operation, similar to ours. Jointly, we expect this new venture to be a profitable leader in the alternative mortgage servicing industry", stated Steven J. Day, President and Chief Executive Officer of City Holding Company. "City and Pacific are working towards a similar concept with our loan origination units. Pacific is one of the few origination companies that weathered the market upheaval in August 1998 and we think they are better suited to manage that end of the business than we, as commercial bankers, are. These joint venture concepts will allow our management team to focus more clearly on the community banking segment of our Company", Mr. Day stated. "We are excited about the possibilities of this new joint venture with City Holding. By joining our servicing operations we create a major servicing business with an outstanding management team", stated Larry Horner, Chairman of Pacific USA Holdings Corp. The joint venture transaction is subject to the approval of applicable regulatory authorities and the satisfaction of certain other conditions and is expected to close within approximately sixty (60) days. City Holding Company is the parent company of City National Bank of West Virginia, Del Amo Savings Bank, FSB, Frontier State Bank, and City Financial Corporation. City National Bank, in addition to its banking divisions, operates: City Mortgage Services, a retail originator, wholesaler and servicer of mortgage loans; RMI, ltd., an insurance agency offering a full range of insurance products and services; Jarrett/Aim Communications, a printing and direct mail service provider; and Citynet, an internet service provider and web-site development firm. Pacific Financial Group, Inc., headquartered in Dallas, Texas, is a specialty consumer finance company engaged in loan servicing, mortgage banking, automobile financing and credit card collection services. This news release contains certain forward-looking statements relating to City Holding's proposed contribution of its servicing assets that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain risks and uncertainties, including a variety of factors that may cause the actual results of City Holding or the Joint Venture to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) the transaction is subject to a number of conditions and may not be completed; (2) revenues following the transaction, the recognized gain from the transaction and the principal amount of the notes may be lower than expected, or operating costs or customer loss and business disruption following the transaction may be greater than expected; (3) competitive pressures may increase significantly; (4) costs or difficulties related to the integration of the business of the companies may be greater than expected; (5) changes in the interest rate environment may reduce margins; (6) general economic or business conditions, either nationally or in the states or regions in which the companies do business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; (7) legislative or regulatory changes may adversely affect the businesses in which the companies are engaged; and (8) changes may occur in the securities markets. -----END PRIVACY-ENHANCED MESSAGE-----