10-Q 1 d10q.htm FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2004 Form 10-Q for period ended September 30, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM              to             .

 

Commission File number 0-11733

 


 

CITY HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 


 

West Virginia   55-0619957

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

25 Gatewater Road

Charleston, West Virginia, 25313

(Address of principal executive offices)

 

(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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    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 Section 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 – 16,564,757 shares as of November 3, 2004.

 



Table of Contents

FORWARD-LOOKING STATEMENTS

 

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements in Management’s Discussion and Analysis of Financial Condition and Result of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company’s actual results differing from those projected in the forward-looking statements. Forward-looking statements can also be identified by the use of words such as “expected”, “projected”, “anticipated”, “forecasted” and similar words or expressions that refer to a future outlook. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to: (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality, or conversely, the Company may incur less, or even negative, loan loss provision due to positive credit quality trends in the future; (2) the Company may not continue to experience significant recoveries of previously charged-off loans and the Company may incur increased charge-offs in the future; (3) the Company may experience increases in the default rates on previously securitized loans causing the yields on these assets to decline; (4) the Company could have adverse legal actions of a material nature; (5) the Company may face competitive loss of customers; (6) the Company may be unable to manage its expense levels; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balance; and (11) the other factors described by the Company in its reports filed with the Securities and Exchange Commission. Forward-looking statements made herein reflect management’s reasonable expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

 

2


Table of Contents

Index

 

City Holding Company and Subsidiaries

 

Part I.

   Financial Information     
     Item 1.   

Financial Statements (Unaudited).

    
         

Consolidated Balance Sheets – September 30, 2004 and December 31, 2003.

   4
         

Consolidated Statements of Income – Nine months ended September 30, 2004 and 2003 and Three months ended September 30, 2004 and 2003.

   5-6
         

Consolidated Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2004 and 2003.

   7
         

Consolidated Statements of Cash Flows – Nine months ended September 30, 2004 and 2003.

   8
         

Notes to Consolidated Financial Statements – September 30, 2004.

   9
     Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

   19
     Item 3.   

Quantitative and Qualitative Disclosures about Market Risk.

   37
     Item 4.   

Controls and Procedures.

   38

Part II.

   Other Information     
     Item 1.   

Legal Proceedings.

   39
     Item 2.   

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

   39
     Item 3.   

Defaults Upon Senior Securities.

   39
     Item 4.   

Submission of Matters to a Vote of Security Holders.

   40
     Item 5.   

Other Information.

   40
     Item 6.   

Exhibits and Reports on Form 8-K.

   40

Signatures

   41

 

3


Table of Contents

PART I, ITEM 1 – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

CITY HOLDING COMPANY AND SUBSIDIARIES

(in thousands)

 

     September 30
2004


    December 31
2003


 
     (Unaudited)     (Note A)  

Assets

                

Cash and due from banks

   $ 44,745     $ 58,216  

Interest-bearing deposits in depository institutions

     3,855       5,122  
    


 


Cash and Cash Equivalents

     48,600       63,338  

Securities available for sale, at fair value

     641,577       645,663  

Securities held-to-maturity, at amortized cost (approximate fair value at September 30, 2004 and December 31, 2003 - $66,424 and $63,667)

     61,195       59,298  
    


 


Total Securities

     702,772       704,961  

Loans:

                

Residential real estate

     468,372       446,134  

Home equity

     304,934       282,481  

Commercial real estate

     377,742       351,284  

Other commercial

     70,745       76,167  

Installment

     20,221       33,651  

Indirect

     13,020       24,707  

Credit card

     17,893       18,979  

Previously securitized loans

     70,970       58,788  
    


 


Gross loans

     1,343,897       1,292,191  

Allowance for loan losses

     (18,537 )     (21,426 )
    


 


Net Loans

     1,325,360       1,270,765  

Retained interests

     —         34,320  

Bank owned life insurance

     50,961       49,214  

Premises and equipment

     34,705       35,338  

Accrued interest receivable

     10,088       10,216  

Net deferred tax asset

     22,740       29,339  

Other assets

     20,248       16,939  
    


 


Total Assets

   $ 2,215,474     $ 2,214,430  
    


 


Liabilities

                

Deposits:

                

Noninterest-bearing

   $ 299,293     $ 309,706  

Interest-bearing:

                

Demand deposits

     413,525       393,443  

Savings deposits

     278,928       278,117  

Time deposits

     660,313       655,496  
    


 


Total Deposits

     1,652,059       1,636,762  

Short-term borrowings

     133,480       168,403  

Long-term debt

     193,836       190,836  

Other liabilities

     25,814       27,739  
    


 


Total Liabilities

     2,005,189       2,023,740  

Shareholders’ Equity

                

Preferred stock, par value $25 per share: 500,000 shares authorized; none issued

     —         —    

Common stock, par value $2.50 per share: 50,000,000 shares authorized; 16,919,248 shares issued at September 30, 2004 and December 31, 2003, including 357,518 and 274,881 shares in treasury

     42,298       42,298  

Capital surplus

     55,652       57,364  

Retained earnings

     120,738       96,460  

Cost of common stock in treasury

     (9,548 )     (6,803 )

Accumulated other comprehensive income:

                

Unrealized gain on securities available-for-sale

     3,536       3,762  

Underfunded pension liability

     (2,391 )     (2,391 )
    


 


Total Accumulated Other Comprehensive Income

     1,145       1,371  
    


 


Total Shareholders’ Equity

     210,285       190,690  
    


 


Total Liabilities and Shareholders’ Equity

   $ 2,215,474     $ 2,214,430  
    


 


 

See notes to consolidated financial statements.

 

4


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

CITY HOLDING COMPANY AND SUBSIDIARIES

(in thousands, except earnings per share data)

 

    

Nine Months Ended

September 30


 
     2004

    2003

 

Interest Income

                

Interest and fees on loans

   $ 64,588     $ 59,965  

Interest on investment securities:

                

Taxable

     22,331       15,507  

Tax-exempt

     1,372       1,633  

Interest on retained interests

     808       10,465  

Interest on deposits in depository institutions

     36       103  

Interest on federal funds sold

     —         36  
    


 


Total Interest Income

     89,135       87,709  

Interest Expense

                

Interest on deposits

     17,274       16,884  

Interest on short-term borrowings

     658       659  

Interest on long-term debt

     5,826       6,745  
    


 


Total Interest Expense

     23,758       24,288  
    


 


Net Interest Income

     65,377       63,421  

Provision for (recovery of) loan losses

     —         (5,200 )
    


 


Net Interest Income After Provision for (Recovery of) Loan Losses

     65,377       68,621  

Non-Interest Income

                

Investment securities gains (losses)

     1,140       (435 )

Service charges

     23,931       20,660  

Insurance commissions

     1,979       1,957  

Trust fee income

     1,561       1,196  

Bank owned life insurance

     1,747       727  

Mortgage banking income

     212       457  

Net proceeds from litigation settlement

     5,453       1,600  

Other income

     2,144       2,375  
    


 


Total Non-Interest Income

     38,167       28,537  

Non-Interest Expense

                

Salaries and employee benefits

     24,667       23,154  

Occupancy and equipment

     4,425       4,465  

Depreciation

     2,951       3,355  

Professional fees and litigation expense

     2,694       2,337  

Postage, delivery, and statement mailings

     1,885       2,062  

Advertising

     1,766       1,762  

Telecommunications

     1,417       1,408  

Insurance and regulatory

     993       969  

Office supplies

     838       1,150  

Repossessed asset losses (gains) and expenses

     (45 )     (710 )

Loss on early extinguishment of debt

     263       142  

Other expenses

     7,349       6,537  
    


 


Total Non-Interest Expense

     49,203       46,631  
    


 


Income Before Income Taxes

     54,341       50,527  

Income tax expense

     19,084       17,505  
    


 


Net Income

   $ 35,257     $ 33,022  
    


 


Basic earnings per common share

   $ 2.12     $ 1.99  
    


 


Diluted earnings per common share

   $ 2.09     $ 1.95  
    


 


Dividends declared per common share

   $ 0.66     $ 0.60  
    


 


Average common shares outstanding:

                

Basic

     16,653       16,632  
    


 


Diluted

     16,906       16,942  
    


 


 

See notes to consolidated financial statements.

 

5


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

CITY HOLDING COMPANY AND SUBSIDIARIES

(in thousands, except earnings per share data)

 

     Three Months Ended
September 30


 
     2004

   2003

 

Interest Income

               

Interest and fees on loans

   $ 21,481    $ 20,086  

Interest on investment securities:

               

Taxable

     7,733      4,631  

Tax-exempt

     438      503  

Interest on retained interests

     —        3,100  

Interest on deposits in depository institutions

     15      21  
    

  


Total Interest Income

     29,667      28,341  

Interest Expense

               

Interest on deposits

     5,867      5,519  

Interest on short-term borrowings

     297      93  

Interest on long-term debt

     1,871      2,200  
    

  


Total Interest Expense

     8,035      7,812  
    

  


Net Interest Income

     21,632      20,529  

Provision for (recovery of) loan losses

     —        (1,900 )
    

  


Net Interest Income After Provision for (Recovery of) Loan Losses

     21,632      22,429  

Non-Interest Income

               

Investment securities gains (losses)

     4      (810 )

Service charges

     8,440      7,285  

Insurance commissions

     600      604  

Trust fee income

     446      493  

Bank owned life insurance

     575      414  

Mortgage banking income

     72      109  

Net proceeds from litigation settlement

     —        1,600  

Other income

     719      651  
    

  


Total Non-Interest Income

     10,856      10,346  

Non-Interest Expense

               

Salaries and employee benefits

     8,150      7,787  

Occupancy and equipment

     1,472      1,431  

Depreciation

     972      1,055  

Professional fees and litigation expense

     668      519  

Postage, delivery, and statement mailings

     601      538  

Advertising

     459      555  

Telecommunications

     488      485  

Insurance and regulatory

     342      318  

Office supplies

     252      310  

Repossessed asset losses and expenses

     5      28  

Other expenses

     2,374      2,086  
    

  


Total Non-Interest Expense

     15,783      15,112  
    

  


Income Before Income Taxes

     16,705      17,663  

Income tax expense

     5,749      6,130  
    

  


Net Income

   $ 10,956    $ 11,533  
    

  


Basic earnings per common share

   $ 0.66    $ 0.69  
    

  


Diluted earnings per common share

   $ 0.65    $ 0.68  
    

  


Dividends declared per common share

   $ 0.22    $ 0.20  
    

  


Average common shares outstanding:

               

Basic

     16,584      16,636  
    

  


Diluted

     16,810      16,953  
    

  


 

See notes to consolidated financial statements.

 

6


Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

CITY HOLDING COMPANY AND SUBSIDIARIES

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(in thousands)

 

     Common
Stock


   Capital
Surplus


    Retained
Earnings


    Treasury
Stock


    Accumulated
Other
Comprehensive
Income


    Total
Shareholders’
Equity


 

Balances at December 31, 2002

   $ 42,298    $ 59,029     $ 66,076     $ (6,426 )   $ 4,416     $ 165,393  

Comprehensive income:

                                               

Net income

                    33,022                       33,022  

Other comprehensive loss, net of deferred income taxes of $1,829:

                                               

Net unrealized loss on available-for-sale securities of $3,171, net of reclassification adjustment for losses included in net income of $428

                                    (2,743 )     (2,743 )
                                           


Total comprehensive income

                                            30,279  

Cash dividends declared ($0.60/share)

                    (9,982 )                     (9,982 )

Exercise of 99,982 stock options

            (1,710 )             2,741               1,031  

Purchase of 118,300 shares for treasury

                            (3,258 )             (3,258 )
    

  


 


 


 


 


Balances at September 30, 2003

   $ 42,298    $ 57,319     $ 89,116     $ (6,943 )   $ 1,673     $ 183,463  
    

  


 


 


 


 


 

     Common
Stock


   Capital
Surplus


    Retained
Earnings


    Treasury
Stock


    Accumulated
Other
Comprehensive
Income


    Total
Shareholders’
Equity


 

Balances at December 31, 2003

   $ 42,298    $ 57,364     $ 96,460     $ (6,803 )   $ 1,371     $ 190,690  

Comprehensive income:

                                               

Net income

                    35,257                       35,257  

Other comprehensive loss, net of deferred income taxes of $150:

                                               

Net unrealized gain on available-for-sale securities of $458, net of reclassification adjustment for gains included in net income of $684

                                    (226 )     (226 )
                                           


Total comprehensive income

                                            35,031  

Cash dividends declared ($0.66 per share)

                    (10,979 )                     (10,979 )

Exercise of 114,403 stock options

            (1,712 )             3,112               1,400  

Purchase of 197,040 shares for treasury

                            (5,857 )             (5,857 )
    

  


 


 


 


 


Balances at September 30, 2004

   $ 42,298    $ 55,652     $ 120,738     $ (9,548 )   $ 1,145     $ 210,285  
    

  


 


 


 


 


 

For the three-month period ended September 30, 2003, the Company reported total comprehensive income of $8.07 million.

 

For the three-month period ended September 30, 2004, the Company reported total comprehensive income of $18.56 million.

 

See notes to consolidated financial statements.

 

7


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

CITY HOLDING COMPANY AND SUBSIDIARIES

(in thousands)

 

     Nine Months Ended
September 30


 
     2004

    2003

 

Operating Activities

                

Net income

   $ 35,257     $ 33,022  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Net amortization

     797       2,903  

Provision for depreciation

     2,951       3,355  

(Recovery of) provision for loan losses

     —         (5,200 )

Deferred income tax expense

     6,749       6,077  

Realized investment securities (gains) losses

     (1,140 )     435  

Increase in retained interests

     (802 )     (4,372 )

Increase in value of bank owned life insurance

     (1,747 )     (727 )

Decrease in accrued interest receivable

     128       519  

Increase in other assets

     (3,312 )     (284 )

Decrease in other liabilities

     (2,240 )     (6,153 )
    


 


Net Cash Provided by Operating Activities

     36,641       29,575  

Investing Activities

                

Proceeds from sale of money market & mutual fund available for sale securities

     631,500       489,000  

Proceeds from sales of other available for sale securities

     7,962       32,058  

Proceeds from maturities and calls of securities available for sale

     126,762       177,262  

Purchases of money market & mutual fund available for sale securities

     (548,400 )     (446,100 )

Purchases of other available-for-sale securities

     (211,200 )     (271,342 )

Proceeds from maturities and calls of held-to-maturity securities

     —         10,822  

Purchases of held-to-maturity securities

     (5,701 )     (1,072 )

Net (increase) decrease in loans

     (5,677 )     3,567  

Redemption of retained interests

     (12,560 )     (9,534 )

Investment in bank owned life insurance

     —         (35,000 )

Purchases of premises and equipment

     (2,318 )     (1,549 )
    


 


Net Cash Used in Investing Activities

     (19,632 )     (51,788 )

Financing Activities

                

Net (decrease) increase in noninterest-bearing deposits

     (10,413 )     8,164  

Net increase in interest-bearing deposits

     25,710       19,406  

Net decrease in short-term borrowings

     (64,923 )     (53,098 )

Proceeds from long-term debt

     35,000       —    

Repayment of long-term debt

     (2,000 )     (10,000 )

Purchases of treasury stock

     (5,857 )     (3,258 )

Exercise of stock options

     1,400       1,031  

Cash dividends paid

     (10,664 )     (9,153 )
    


 


Net Cash Used in Financing Activities

     (31,747 )     (46,908 )
    


 


Decrease in Cash and Cash Equivalents

     (14,738 )     (69,121 )

Cash and cash equivalents at beginning of period

     63,338       129,318  
    


 


Cash and Cash Equivalents at End of Period

   $ 48,600     $ 60,197  
    


 


 

See notes to consolidated financial statements.

 

8


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

September 30, 2004

 

NOTE A – BASIS OF PRESENTATION

 

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding Company (“the Parent Company”) and its wholly-owned subsidiaries (collectively, “the Company”). 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, 2004 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2004. 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.

 

The consolidated balance sheet as of December 31, 2003 has been extracted from audited financial statements included in the Company’s 2003 Annual Report to Stockholders. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2003 Annual Report of the Company.

 

Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation. Such reclassifications had no impact on net income or shareholders’ equity.

 

NOTE B –RETAINED INTERESTS AND PREVIOUSLY SECURITIZED LOANS

 

Between 1997 and 1999, the Company completed six securitization transactions involving approximately $759.76 million of fixed rate, junior lien mortgage loans. The Company retained a financial interest in each of the securitizations. Principal amounts owed to investors are evidenced by securities (“Notes”). The Notes were subject to redemption, in whole but not in part, at the option of the Company, as owner of the retained interests in the securitization transactions, or at the option of the Note insurer, on or after the date on which the related Note balance has declined to 5% or less of the original Note balance. Once the Notes have been redeemed, the Company becomes the beneficial owner of the mortgage loans and records the loans as assets of the Company within the loan portfolio. During the first four months of 2004, the Company exercised its early redemption option for its 1998-1 and 1999-1 securitizations. As of April 30, 2004, each of the Company’s original six securitizations had been fully redeemed, with the retained interest assets converted to amounts reported as Previously Securitized Loans in the Consolidated Balance Sheets. The table below summarizes information regarding delinquencies, net credit losses, and outstanding collateral balances of securitized loans and previously securitized loans for the dates presented:

 

    

Nine Month Period Ended

September 30,


   

Year Ended
December 31,

2003


 
     2004

    2003

   
     (in thousands)  

Loans Underlying Retained Interests (a):

                        

Total principal amount of loans outstanding

   $ —       $ 105,084     $ 59,822  

Principal amount of loans between 30 and 89 days past due

     —         3,478       2,664  

Principal amount of loans between 90 and 119 days past due

     —         2,490       2,648  

Net credit losses during the period

     —         5,116       5,116  

Previously Securitized Loans:

                        

Total principal amount of loans outstanding

   $ 87,449     $ 44,421     $ 70,087  

Discount

     (16,479 )     (7,082 )     (11,299 )
    


 


 


Net book value

   $ 70,970     $ 37,339     $ 58,788  
    


 


 


Principal amount of loans between 30 and 89 days past due

     6,957       2,841       5,055  

Principal amount of loans between 90 and 119 days past due

     830       516       717  

Net credit losses during the period

     2,956       729       1,206  

(a) The outstanding balance of mortgage loans and the outstanding Note balances underlying the retained interests are not included in the Consolidated Balance Sheets of the Company.

 

9


Table of Contents

The Company is accounting for the difference between the carrying value and the outstanding balance of these loans as an adjustment of the yield earned on these loans over their remaining lives. The discount is accreted to income over the period during which payments are probable of collection and are reasonably estimable. Additionally, the collectibility of previously securitized loans is evaluated over the remaining lives of the loans. If, upon evaluation, the estimate of the total probable collections is increased or decreased but is still greater than the sum of the original carrying amount less subsequent collections plus the discount accreted to date, and it is probable that collection will occur, the amount of the discount to be accreted is adjusted accordingly and the amount of periodic accretion is adjusted over the remaining lives of the loans. If, upon evaluation, the estimate of amounts probable of collection is reduced and it is less than the original carrying value less collections plus the discount accreted to date, accretion would cease and an allowance for uncollectibility would be provided for through the allowance and provision for loan losses.

 

As the Company redeemed the outstanding Notes from its securitizations, no gain or loss was recognized in the Company’s financial statements and the remaining mortgage loans were recorded in the Company’s loan portfolio at the lower of carrying value or fair value. Because the book value of the mortgage loans incorporates assumptions for expected prepayment and default rates, the book value of the loans is generally less than the actual outstanding balance of the mortgage loans. As of September 30, 2004, the Company reported a book value of previously securitized loans of $70.97 million whereas the actual outstanding balance of previously securitized loans at September 30, 2004, was $87.45 million. The difference (“the discount”) between the book value and actual outstanding balance of previously securitized loans is accreted into interest income over the life of the loans. Net credit losses on previously securitized loans are, first, recorded against this discount and, therefore, could impact the yield earned on these assets. Should net credit losses exceed the reported balance of the discount over the life of the loans, credit losses would need to be provided for through the Company’s provision and allowance for loan losses.

 

10


Table of Contents

During the first nine months of 2004, the Company recognized $10.93 million of interest income, comprised of $9.69 million of interest income received from borrowers and $1.24 million of discount accretion, from its previously securitized loans. The Company also accrued $0.81 million of interest income on its retained interests asset during the first nine months of 2004.

 

NOTE C – SHORT-TERM BORROWINGS

 

The components of short-term borrowings are summarized below:

 

( in thousands)


  

September 30,

2004


  

December 31,

2003


Security repurchase agreements

   $ 67,880    $ 88,403

Federal funds borrowed

     15,600      60,000

FHLB Advances

     50,000      20,000
    

  

Total short-term borrowings

   $ 133,480    $ 168,403
    

  

 

Securities sold under agreement to repurchase were sold to corporate and government customers as an alternative to available deposit products. The underlying securities included in repurchase agreements remain under the Company’s control during the effective period of the agreements. Amounts reported as “Federal funds borrowed” generally mature within 30 days of the reporting date. Amounts reported as “FHLB Advances” represent borrowings from the Federal Home Loan Bank that mature within twelve months of the reporting date.

 

NOTE D – LONG-TERM DEBT

 

The components of long-term debt are summarized below:

 

(dollars in thousands)


   Maturity

   

September 30,

2004


  

Wtd.

Avg.
Interest
Rate


   

December 31,

2003


  

Wtd.

Avg.
Interest
Rate


 

FHLB Advances

   2005     $ 45,000    2.24 %   $ 75,000    2.09 %

FHLB Advances

   2006       65,000    2.60 %     50,000    2.65 %

FHLB Advances

   2007       20,000    3.41 %     20,000    3.41 %

FHLB Advances

   2008       35,000    3.98 %     15,000    5.07 %

Junior subordinated debentures owed to City Holding Capital Trust

   2028 (a)     28,836    9.15 %     30,836    9.15 %
          

        

      

Total long-term debt

         $ 193,836          $ 190,836       
          

        

      

(a) Junior Subordinated Debentures owed to City Holding Capital Trust are redeemable prior to maturity at the option of the Company (i) on or after April 1, 2008, in whole at any time or in part from time-to-time, at declining redemption prices ranging from 104.58% to 100.00% on April 1, 2018, and thereafter, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre-defined events.

 

During the second quarter of 2004, the Company remitted a $2.00 million principal payment to City Holding Capital Trust as partial repayment of the junior subordinated debentures. In turn, City Holding Capital Trust repurchased $2.00 million of its trust preferred securities in an open market transaction. As a result of these transactions, the Company incurred expense of approximately $0.26 million during the second quarter of 2004 for costs associated with the early extinguishment of debt.

 

11


Table of Contents

NOTE E – EMPLOYEE BENEFIT PLANS

 

Employees, directors and individuals who provide service to the Company (collectively “Plan Participants”) are eligible to participate in the Company’s 2003 Stock Incentive Plan (“the Plan”). Pursuant to the terms of the Plan, the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to Plan Participants. A maximum of 1,000,000 shares of the Company’s common stock may be issued upon the exercise of stock options and SARs and stock awards, but no more than 350,000 shares of common stock may be issued as stock awards. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split, or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices, and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardees. As of September 30, 2004, 107,500 stock options had been awarded pursuant to the terms of the Plan and no SARs or stock awards had been granted.

 

The Company follows the intrinsic value method in accounting for its employee stock options. Under the intrinsic value method, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

 

The alternative fair value method of accounting for stock-based compensation provided under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option valuation models, such as the Black-Scholes model, that were not developed for use in valuing employee stock options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded short-term options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options at the time of grant.

 

Pro forma information regarding net income and earnings per share, shown below, has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

     2004

    2003

 

Risk-free interest rate

   3.16 %   2.90 %

Expected dividend yield

   2.86 %   2.86 %

Volatility factor

   0.405     0.430  

Expected life of option

   5 years     5 years  

 

12


Table of Contents

For purposes of pro forma disclosures, the weighted average estimated fair value ($10.24/share and $8.93/share, in 2004 and 2003, respectively) of options is amortized to expense over the options’ estimated vesting period. Pro forma net income, basic earnings per share, and diluted earnings per share were as follows:

 

     For the Nine Months Ended
September 30,


    For the Three Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 
     (in thousands, except earnings per share data)  

Net income, as reported

   $ 35,257     $ 33,022     $ 10,956     $ 11,533  

Pro forma stock-based employee compensation expense, net of tax

     (559 )     (897 )     (189 )     (315 )
    


 


 


 


Net income, pro forma

   $ 34,698     $ 32,125     $ 10,767     $ 11,218  
    


 


 


 


Basic earnings per share, as reported

   $ 2.12     $ 1.99     $ 0.66     $ 0.69  

Pro forma stock-based employee compensation expense, net of tax

     (0.04 )     (0.05 )     (0.01 )     (0.02 )
    


 


 


 


Basic earnings per share, pro forma

   $ 2.08     $ 1.94     $ 0.65     $ 0.67  
    


 


 


 


Diluted earnings per share, as reported

   $ 2.09     $ 1.95     $ 0.65     $ 0.68  

Pro forma stock-based employee compensation expense, net of tax

     (0.04 )     (0.05 )     (0.01 )     (0.02 )
    


 


 


 


Diluted earnings per share, pro forma

   $ 2.05     $ 1.90     $ 0.64     $ 0.66  
    


 


 


 


 

A summary of the Company’s stock option activity and related information is presented below for the nine months ended September 30:

 

     2004

   2003

     Options

    Weighted-
Average
Exercise Price


   Options

    Weighted-
Average
Exercise Price


Outstanding at January 1

   650,671     $ 13.19    732,412     $ 13.55

Granted

   107,500       33.62    90,000       28.00

Exercised

   (114,403 )     12.25    (99,982 )     10.32

Forfeited

   (13,834 )     31.80    (58,292 )     42.09
    

 

  

 

Outstanding at September 30

   629,934     $ 16.44    663,938     $ 13.48
    

 

  

 

 

13


Table of Contents

Additional information regarding stock options outstanding and exercisable at September 30, 2004, is provided in the following table:

 

Ranges of

Exercise Prices


   No. of
Options
Outstanding


   Weighted-
Average
Exercise Price


   Weighted-
Average
Remaining
Contractual
Life (Months)


   No. of Options
Currently
Exercisable


   Weighted-Average
Exercise Price of
Options Currently
Exercisable


$5.75 - $8.63

   167,735    $ 5.78    76    167,735    $ 5.78

$8.65 - $12.98

   15,351      9.42    81    15,351      9.42

$13.30 - $19.95

   262,682      13.48    80    262,682      13.48

$28.00 - $33.90

   184,166      30.96    108    59,996      28.00
    
              
      
     629,934                505,764       
    
              
      

 

The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). Any employee who has attained age 21 is eligible to participate beginning the first day of the month following employment. Unless specifically chosen otherwise, every employee is automatically enrolled in the 401(k) Plan and may make before-tax contributions of between 1.00% to 15.00% of eligible pay up to the dollar limit imposed by Internal Revenue Service regulations. The first 6.00% of an employee’s contribution is matched 50.00% by the Company. The employer matching contribution is invested according to the investment elections chosen by the employee. Employees are 100% vested in both employee and employer contributions and the earnings they generate. The Company’s total expense associated with the retirement benefit plan approximated $0.37 million and $0.36 million for the nine month periods ended September 30, 2004 and 2003, respectively, and $0.12 million for each of the three month periods ended September 30, 2004 and 2003.

 

The Company also maintains a defined benefit pension plan (“the Defined Benefit Plan”) that covers approximately 300 current and former employees. The Defined Benefit Plan was frozen in 1999 subsequent to the Company’s acquisition of the plan sponsor. The Defined Benefit Plan maintains an October 31 year-end for purposes of computing its benefit obligations. The Company did not incur net periodic benefit costs during the nine months ended September 30, 2004 and recognized $0.12 million of net periodic benefit income during the nine months ended September 30, 2003. During the first nine months of 2004, the Company made contributions to the Defined Benefit Plan approximating $0.26 million.

 

14


Table of Contents

NOTE F – COMMITMENTS AND CONTINGENCIES

 

The Company has entered into agreements with its customers to extend credit or provide a conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The table below presents a summary of the contractual obligations of the Company resulting from significant commitments:

 

( in thousands)


  

September 30,

2004


  

December 31,

2003


Commitments to extend credit:

             

Home equity lines

   $ 136,789    $ 123,950

Credit card lines

     46,695      45,576

Commercial real estate

     42,978      32,947

Other commitments

     24,374      23,363

Standby letters of credit

     4,648      7,610

Commercial letters of credit

     1,529      1,763

 

Loan commitments and standby and commercial letters of credit have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company’s standard credit policies. Collateral is obtained based on management’s credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments.

 

NOTE G – NON-INTEREST INCOME AND NON-INTEREST EXPENSE

 

On December 28, 2001, the Company, its previous management team, and members of the Boards of Directors of both the Company and City National Bank of West Virginia (“City National”) were named in a derivative action filed by a shareholder seeking to recover damages on behalf of the Company. During the first quarter of 2004, the Company announced that a tentative settlement had been reached in this litigation. During the second quarter of 2004, the Circuit Court of Kanawha County, West Virginia approved the settlement and the Company received insurance proceeds approximating $5.45 million.

 

During the first nine months of 2004, the Company also recorded $0.92 million of legal expenses associated with the derivative action discussed above. Certain legal fees and related costs of approximately $1.20 million believed to be reimbursable by the Company’s insurer remain in dispute as of September 30, 2004. Resolution of this dispute could result in the reimbursement of such costs, or a portion thereof, in future periods.

 

During the third quarter of 2003, the Company received a net settlement of $1.60 million in resolution of its claim against the Federal Deposit Insurance Corporation (“FDIC”) in the FDIC’s capacity as receiver of The First National Bank of Keystone. The settlement resolved federal court litigation the Company brought against the FDIC. The Company alleged breach of contract by Keystone in connection with the Company’s purchase and servicing of sub-prime loans originated by Keystone. With this settlement, the Company’s claims arising out of its business relationship with the failed Keystone bank were resolved.

 

15


Table of Contents

NOTE H – EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share:

 

     Nine months ended
September 30,


   Three months ended
September 30,


     2004

   2003

   2004

   2003

     (in thousands, except per share data)

Numerator:

                           

Net income

   $ 35,257    $ 33,022    $ 10,956    $ 11,533
    

  

  

  

Denominator:

                           

Denominator for basic earnings per share:

                           

Average shares outstanding

     16,653      16,632      16,584      16,636

Effect of dilutive securities:

                           

Employee stock options

     254      310      226      317
    

  

  

  

Denominator for diluted earnings per share

     16,906      16,942      16,810      16,953
    

  

  

  

Basic earnings per share

   $ 2.12    $ 1.99    $ 0.66    $ 0.69
    

  

  

  

Diluted earnings per share

   $ 2.09    $ 1.95    $ 0.65    $ 0.68
    

  

  

  

 

Options to purchase 97,500 shares of common stock at exercise prices between $31.38 and $33.90 were outstanding during the third quarter of 2004, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and therefore, the effect of including those incremental shares would be antidilutive. Options to purchase 8,267 shares of common stock at an exercise prices of $42.75 per share were outstanding during the third quarter of 2003 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore, the effect of including those incremental shares would be antidilutive.

 

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS

 

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued its Exposure Draft, Share-Based Payment (“Statement 123R”), which is a proposed amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation. As proposed, Statement 123R would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Statement 123R proposes a “modified grant-date” approach in which the fair value of an equity award is estimated on the grant date without regard to service or performance vesting conditions and requires that the fair value of the award be recognized, generally as compensation expense, for all awards that vest over the vesting period. The FASB believes that the fair value of a stock option awarded to an employee generally must be estimated using an option-pricing model that takes into account a number of assumptions including the exercise price of the option, the expected term of the option, the current price of the underlying share, the expected volatility of the price underlying the share, the expected dividends on the underlying share, and a risk-free interest rate for the expected term of the option. On October 13, 2004, the FASB decided to postpone the effective date of Statement 123R, if approved, to

 

16


Table of Contents

interim or annual periods beginning after June 15, 2005, with early adoption permitted. However, Statement 123R has not yet been issued in its final form, which is currently expected to occur during the fourth quarter of 2004. The Company continues to evaluate the requirements of Statement 123R but does not believe, based on facts and circumstances as of September 30, 2004, that the adoption of Statement 123R, if approved, will have a material effect on the Company’s financial condition or results of operations. As disclosed in Note E, had the Company used the fair value method of accounting for stock-based compensation during the first nine months of 2004, basic and diluted earnings per share would have been reduced by $0.04/share.

 

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (“the SOP”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for differences between the contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP requires that the excess of expected cash flows over contractual cash flows generally should be recognized prospectively through adjustment to the yield over the remaining life of the loans. The SOP requires that decreases in cash flows expected to be collected should be recognized as an impairment loss in the period the impairment is determined. Current practice permits the yield to decrease below the initial yield and to fall ultimately to zero, thereby spreading the effect of the change in estimate over the remaining life of the loans. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. For loans acquired in fiscal years beginning on or before December 15, 2004, and within the scope of existing accounting principles, the impairment provisions of this SOP are to be applied prospectively for fiscal years beginning after December 15, 2004. The Company continues to evaluate the requirements of SOP 03-3 but does not believe, based on facts and circumstances as of September 30, 2004, that the adoption of this SOP will have a material effect on the Company’s financial condition or results of operations.

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve financial reporting of special purpose and other entities. FIN 46 provides guidance on how to identify a variable-interest entity (“VIE”) and determine when the assets, liabilities, and results of operations of a VIE are to be included in an entity’s consolidated financial statements. A VIE is a partnership, limited liability company, trust, or other legal entity that does not have sufficient equity to permit it to finance its activities without additional subordinated financial support from other parties, or whose investors lack certain characteristics associated with owning a controlling financial interest. Business enterprises that represent the primary beneficiary of a VIE must consolidate the VIE in its financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. The consolidation provisions of FIN 46 apply to VIEs entered into after January 31, 2003, and for pre-existing VIEs in the first interim reporting period after December 15, 2003. In December 2003, the FASB reissued FIN 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied.

 

17


Table of Contents

The Company applied the provisions of FIN 46 as of December 31, 2003, which resulted in the deconsolidation of City Holding Capital Trust from the Company’s Consolidated Balance Sheets. City Holding Capital Trust is a subsidiary trust of the Company that was formed exclusively for the purpose of issuing mandatorily redeemable trust-preferred capital securities. Management has evaluated the applicability of FIN 46 on various investments and other business interests and has determined that the adoption of FIN 46 has no additional implications other than the deconsolidation of City Holding Capital Trust.

 

18


Table of Contents

ITEM 2 – MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

The accounting policies of the Company conform with accounting principles generally accepted in the United States and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare the Company’s financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One to the audited financial statements included in the Company’s 2003 Annual Report to Stockholders. The information included in this Quarterly Report on Form 10-Q, including the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements and notes thereto included in the 2003 Annual Report of the Company.

 

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the accounting for its previously securitized loans to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available. Pages 27-29 of this Quarterly Report on Form 10-Q provide management’s analysis of the Company’s allowance for loan losses and related provision expense. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions, and other relevant factors. This determination is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

 

Note B, beginning on page 9 of this Quarterly Report on Form 10-Q, and pages 30 and 31 provide management’s analysis of the Company’s previously securitized loans. Amounts reported in the Consolidated Balance Sheets as “previously securitized loans” represent the carrying value of loans beneficially owned by the Company as a result of having fully redeemed the obligations owed to investors (“notes”) in certain of the Company’s securitization transactions. The loans were recorded at the lower of their carrying values or fair value, which were comprised of the carrying value of the related retained interest asset underlying the securitization plus amounts remitted by the Company to the noteholders to redeem the notes. Because the carrying value of the retained interests incorporated assumptions with regard to expected prepayment and default rates on the loans and also considered the expected timing and amount of cash flows to be received by the Company, the carrying value of the retained interests and the carrying value of the loans is less than the actual outstanding balance of the loans. However, no gain or loss was recognized in the Company’s financial statements upon recording the loans into the

 

19


Table of Contents

Company’s loan portfolio and, as a result, the loans are recorded at a discount to their actual outstanding balances. The Company is accounting for the difference between the carrying value and the outstanding balance of these loans as an adjustment of the yield earned on these loans over their remaining lives. The discount is accreted to income over the period during which payments are probable of collection and are reasonably estimable. Additionally, the collectibility of previously securitized loans is evaluated over the remaining lives of the loans. If, upon evaluation, the estimate of the total probable collections is increased or decreased but is still greater than the sum of the original carrying amount less subsequent collections plus the discount accreted to date, and it is probable that collection will occur, the amount of the discount to be accreted is adjusted accordingly and the amount of periodic accretion is adjusted over the remaining lives of the loans. If, upon evaluation, the estimate of amounts probable of collection is reduced and it is less than the original carrying value less collections plus the discount accreted to date, accretion would cease and an allowance for uncollectibility would be provided for through the allowance and provision for loan losses.

 

FINANCIAL SUMMARY

 

Nine Months Ended September 30, 2004 vs. 2003

 

The Company reported consolidated net income of $35.26 million, or $2.09 per diluted common share, for the nine months ended September 30, 2004, compared to $33.02 million, or $1.95 per diluted common share for the nine months ended September 30, 2003. Return on average assets (“ROA”) was 2.12% and return on average equity (“ROE”) was 23.12% for the first nine months of 2004, compared to 2.21% and 25.11%, respectively, for the first nine months of 2003.

 

As further discussed under the caption Net Interest Income, the Company experienced a $1.96 million, or 3.08%, increase in net interest income from $63.42 million for the nine months ended September 30, 2003 to $65.38 million for the nine months ended September 30, 2004. The Company also experienced significant growth in service charge revenues and income earned from the Company’s investment in bank-owned life insurance (“BOLI”) during the first nine months of 2004, as compared to the first nine months of 2003. Additionally, earnings for the first nine months of 2004 were positively affected by the receipt of $5.45 million associated with the settlement of litigation brought in December 2001 in a derivative action, seeking to recover alleged damages on behalf of the Company, against certain current and former directors and former executive officers of the Company. Non-interest expenses increased $2.57 million during the first nine months of 2004, primarily as a result of increases in salaries and benefits associated with higher health care costs and the costs of providing for executive severances. The Company’s earnings for the first nine months of 2003 were positively affected by the negative $5.20 million loan loss provision recorded during the year. No provision for loan losses was recorded though September 30, 2004.

 

Three Months Ended September 30, 2004 vs. 2003

 

The Company reported consolidated net income of $10.96 million, or $0.65 per diluted common share, for the three months ended September 30, 2004, compared to $11.53 million, or $0.68 per diluted common share for the three months ended September 30, 2003. ROA was 1.98% and ROE was 21.41% for the third quarter of 2004, compared to 2.31% and 25.04%, respectively, for the third quarter of 2003.

 

20


Table of Contents

As further discussed under the caption Net Interest Income, the Company experienced a $1.10 million, or 5.37% increase in net interest income, from $20.53 million in the third quarter of 2003 to $21.63 million in 2004. As compared to the third quarter of 2003, the Company’s third quarter 2004 earnings were also positively affected by growth in service charge revenues and income earned from the Company’s investment in BOLI. Non-interest expenses increased $0.67 million, or 4.44% during the third quarter of 2004, as compared to the third quarter of 2003, primarily as a result of increases in salaries and benefits due to higher health care costs. The Company’s earnings for the third quarter of 2003 were positively affected by a negative $1.90 million loan loss provision and the receipt of $1.60 million associated with the resolution of the Company’s claim against the Federal Deposit Insurance Corporation in the FDIC’s capacity as receiver of The First National Bank of Keystone. No provision for loan losses was recorded during the third quarter of 2004.

 

NET INTEREST INCOME

 

Nine Months Ended September 30, 2004 vs. 2003

 

On a tax equivalent basis, net interest income increased $1.82 million, or 2.82%, from $64.30 million for the nine months ended September 30, 2003 to $66.12 million for the nine months ended September 30, 2004. As compared to the same period of 2003, the Company’s net interest income for the nine months ended September 30, 2004 was positively impacted by the Company’s fourth quarter 2003 redemption of $57.50 million of 9.125% trust preferred securities. The redemption of these trust preferred securities led to lower funding costs for the Company in 2004, and a corresponding increase in net interest income. Also, the Company’s net interest income benefited from the implementation of an interest rate risk management strategy during the fourth quarter of 2003 whereby the Company utilized fixed-rate advances from the Federal Home Loan Bank to partially fund longer-term and higher-yielding investments in the Company’s securities portfolio.

 

Additionally, although recent increases in interest rates by the Federal Reserve have begun to favorably impact the Company’s net interest income and net interest margin, the rate increases thus far have been relatively moderate and the full impact of these rate increases has not yet been fully realized. As shown in Table Two, interest income earned on the Company’s loan portfolio declined approximately $4.47 million in the first nine months of 2004 as a result of the impact of interest rates earned on the portfolio. Current market interest rates remain below those in effect at the time that many of the Company’s fixed rate loans were originated. As a result, new fixed-rate loan production is being priced at rates that negatively impact the overall yield on the Company’s loan portfolio. However, the cost of interest-bearing deposits is not experiencing the same, or similar, decline in pricing because the cost of interest-bearing demand deposits was already 0.55% and the cost of savings deposits was 0.57% during the first nine months of 2003. As a result, the Company is limited in its opportunities to further reduce the cost of its interest-bearing deposit products. Therefore, as loan balances re-price downward and the cost of deposit products remains relatively unchanged, net interest margin continues to decline. Given the anticipated gradual rise in interest rates, the timing of when loans re-price, and projected run-off of previously securitized loans, the Company believes that if interest rates remain stable the Company’s net interest income may continue to decline from current levels.

 

Interest income earned on the Company’s investment in previously securitized loans and retained interests declined $0.29 million, or 2.37%, from $12.02 million for the nine months ended September 30, 2003 to $11.74 million

 

21


Table of Contents

for the nine months ended September 30, 2004. In the second quarter of 2003, the Company began redeeming the outstanding securities issued by the Company’s six securitization trusts. As the outstanding securities were redeemed, the Company became the beneficial owner of the mortgage loans underlying the trusts and realized increases in interest income earned on these assets. However, now that each of the Company’s six securitization trusts have been fully redeemed and the underlying mortgage loans continue to pay down, interest income earned from these assets has begun to decline and will continue to decrease in future periods as the loans are repaid. Because these assets had a yield of 17.18% during the nine months ended September 30, 2004, decreases in this asset have a disproportionate impact on net interest income, reinforcing the risk discussed above that net interest income and net interest margin may continue to decline in future periods.

 

Three Months Ended September 30, 2004 vs. 2003

 

On a tax equivalent basis, net interest income increased $1.07 million, or 5.13%, from $20.80 million in the third quarter of 2003 to $21.87 million in the third quarter of 2004. As discussed above, the Company’s redemption of $57.50 million of 9.125% trust preferred securities during the fourth quarter of 2003 and the redemption of $2.00 million of 9.15% trust preferred securities during the second quarter of 2004 lowered the Company’s overall funding costs and favorably impacted net interest income for the third quarter of 2004. Also, the Company’s implementation of an interest rate risk management strategy during the fourth quarter of 2003 has favorably impacted the Company’s net interest income in the third quarter of 2004. Primarily as a result of this strategy, interest income earned on the Company’s investment securities portfolio increased $3.00 million, or 55.54%, from $5.41 million in the third quarter of 2003 to $8.41 million in the third quarter of 2004. Although the increase in the investment portfolio was funded by increases in short-term and long-term borrowings, the additional borrowings were at lower interest rates, resulting in a favorable impact to net interest income in 2004. Offsetting these effects was a decline of $1.23 million in interest income on previously securitized loans and retained interests in securitized loans as these asset balances declined.

 

Additionally, and as described above, the Company’s net interest income and net interest margin were negatively impacted as loans continued to reprice from higher rates of interest to current market rates that prevailed during the third quarter of 2004. As shown in Table four, the impact of lower rates on loans was not offset by corresponding reductions in the rates paid on deposits. As noted above, the Federal Reserve has initiated increases in interest rates in recent months. Such increases have favorably impacted the Company’s net interest income and net interest margin as compared to what might have been expected had rates not increased. However, as discussed above, the level of current market rates is lower than the rates at which many of the Company’s fixed rate loans were originated and further compression in net interest income and net interest margin can be expected as new loans are originated to replace loan balances that are being repaid. Further, reductions in previously securitized loan balances will negatively impact net interest margin. Whether the Company’s net interest income and net interest margin will increase in future periods is dependent upon the magnitude of interest rate increases and the Company’s ability to generate loan and deposit growth, as further discussed in the section titled Market Risk Management.

 

22


Table of Contents

TABLE ONE

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(in thousands)

 

     Nine months ended September 30,

 
     2004

    2003

 
     Average
Balance


    Interest

   Yield/
Rate


    Average
Balance


    Interest

   Yield/
Rate


 

Assets

                                          

Loan portfolio (1):

                                          

Residential real estate

   $ 450,366     $ 20,223    5.99 %   $ 457,791     $ 23,456    6.83 %

Home equity

     295,678       10,038    4.53       242,170       8,159    4.49  

Commercial real estate

     361,222       15,043    5.55       292,220       13,664    6.23  

Other commercial

     74,171       2,897    5.21       86,714       3,931    6.04  

Loans to depository institutions

     4,087       35    1.14       6,228       78    1.67  

Installment

     27,081       2,291    11.28       50,709       4,285    11.27  

Indirect

     18,283       1,503    10.96       38,369       3,126    10.86  

Credit card

     18,085       1,630    12.02       18,971       1,710    12.02  

Previously securitized loans

     84,799       10,928    17.18       9,064       1,556    22.89  
    


 

  

 


 

  

Total loans

     1,333,772       64,588    6.46       1,202,236       59,965    6.65  

Securities:

                                          

Taxable

     670,339       22,331    4.44       513,654       15,507    4.03  

Tax-exempt (2)

     38,370       2,111    7.34       44,696       2,512    7.49  
    


 

  

 


 

  

Total securities

     708,709       24,442    4.60       558,350       18,019    4.30  

Retained interest in securitized loans

     4,408       808    24.44       75,551       10,465    18.47  

Deposits in depository institutions

     5,546       36    0.87       12,905       103    1.06  

Federal funds sold

     —         —      —         4,553       36    1.05  
    


 

  

 


 

  

Total interest-earning assets

     2,052,435       89,874    5.84       1,853,595       88,588    6.37  

Cash and due from banks

     43,850                    45,467               

Bank premises and equipment

     34,786                    36,448               

Other assets

     103,025                    83,802               

Less: allowance for loan losses

     (20,280 )                  (28,132 )             
    


              


            

Total assets

   $ 2,213,816                  $ 1,991,180               
    


              


            

Liabilities

                                          

Interest-bearing demand deposits

   $ 405,135     $ 1,924    0.63 %   $ 383,715     $ 1,591    0.55 %

Savings deposits

     280,315       1,094    0.52       289,890       1,231    0.57  

Time deposits

     662,383       14,256    2.87       621,064       14,062    3.02  

Short-term borrowings

     117,372       658    0.75       97,930       659    0.90  

Long-term debt

     210,047       5,826    3.70       108,178       6,745    8.31  
    


 

  

 


 

  

Total interest-bearing liabilities

     1,675,252       23,758    1.89       1,500,777       24,288    2.16  

Noninterest-bearing demand deposits

     310,786                    289,099               

Other liabilities

     24,483                    25,945               

Stockholders’ equity

     203,295                    175,359               
    


              


            

Total liabilities and stockholders’ equity

   $ 2,213,816                  $ 1,991,180               
    


              


            

Net interest income

           $ 66,116                  $ 64,300       
            

                

      

Net yield on earning assets

                  4.30 %                  4.63 %
                   

                


(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


Table of Contents

TABLE TWO

RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

(in thousands)

 

    

Nine months ended September 30,
2004 vs. 2003

Increase (Decrease)

Due to Change In:


 
     Volume

    Rate

    Net

 

Interest-earning assets:

                        

Loan portfolio

                        

Residential real estate

   $ (375 )   $ (2,858 )   $ (3,233 )

Home equity

     1,816       63       1,879  

Commercial real estate

     2,304       (925 )     1,379  

Other commercial

     (528 )     (506 )     (1,034 )

Loans to depository institutions

     (22 )     (21 )     (43 )

Installment

     (1,996 )     2       (1,994 )

Indirect

     (1,632 )     9       (1,623 )

Credit card

     (80 )     —         (80 )

Previously securitized loans

     9,603       (231 )     9,372  
    


 


 


Total loans

     9,090       (4,467 )     4,623  

Securities:

                        

Taxable

     5,096       1,728       6,824  

Tax-exempt (1)

     (349 )     (52 )     (401 )
    


 


 


Total securities

     4,747       1,676       6,423  

Retained interest in securitized loans

     (10,547 )     890       (9,657 )

Deposits in depository institutions

     (50 )     (17 )     (67 )

Federal funds sold

     (36 )     —         (36 )
    


 


 


Total interest-earning assets

   $ 3,204     $ (1,918 )   $ 1,286  
    


 


 


Interest-bearing liabilities:

                        

Demand deposits

   $ 92     $ 241     $ 333  

Savings deposits

     (40 )     (97 )     (137 )

Time deposits

     643       (449 )     194  

Short-term borrowings

     79       (80 )     (1 )

Long-term debt

     2,563       (3,482 )     (919 )
    


 


 


Total interest-bearing liabilities

   $ 3,337     $ (3,867 )   $ (530 )
    


 


 


Net Interest Income

   $ (133 )   $ 1,949     $ 1,816  
    


 


 



(1) Fully federal taxable equivalent using a tax rate of 35%.

 

THE CHANGE IN INTEREST DUE TO BOTH RATE AND VOLUME HAS BEEN ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH.

 

24


Table of Contents

TABLE THREE

AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(in thousands)

 

     Three months ended September 30,

 
     2004

    2003

 
     Average
Balance


    Interest

   Yield/
Rate


    Average
Balance


    Interest

   Yield/
Rate


 

Assets

                                          

Loan portfolio (1):

                                          

Residential real estate

   $ 459,439     $ 6,652    5.79 %   $ 450,184     $ 7,343    6.52 %

Home equity

     303,057       3,594    4.74       262,532       2,815    4.29  

Commercial real estate

     379,450       5,312    5.60       308,922       4,673    6.05  

Other commercial

     71,897       980    5.45       80,977       1,137    5.62  

Loans to depository institutions

     —         —      —         —         —      —    

Installment

     23,229       670    11.54       43,241       1,203    11.13  

Indirect

     14,485       400    11.05       31,887       878    11.01  

Credit card

     17,841       537    12.04       19,074       569    11.93  

Previously securitized loans

     78,867       3,336    16.92       25,195       1,468    23.31  
    


 

  

 


 

  

Total loans

     1,348,265       21,481    6.37       1,222,012       20,086    6.57  

Securities:

                                          

Taxable

     656,878       7,733    4.71       511,885       4,631    3.62  

Tax-exempt (2)

     37,050       674    7.28       41,506       774    7.46  
    


 

  

 


 

  

Total securities

     693,928       8,407    4.85       553,391       5,405    3.91  

Retained interest in securitized loans

     —         —      —         63,778       3,100    19.44  

Deposits in depository institutions

     5,531       15    1.08       10,150       21    0.83  
    


 

  

 


 

  

Total interest-earning assets

     2,047,724       29,903    5.84       1,849,331       28,612    6.19  

Cash and due from banks

     43,361                    43,464               

Bank premises and equipment

     34,766                    35,614               

Other assets

     104,027                    93,766               

Less: allowance for loan losses

     (19,573 )                  (25,937 )             
    


              


            

Total assets

   $ 2,210,305                  $ 1,996,238               
    


              


            

Liabilities

                                          

Interest-bearing demand deposits

   $ 412,051     $ 683    0.66 %   $ 388,179     $ 540    0.56 %

Savings deposits

     278,947       365    0.52       287,305       385    0.54  

Time deposits

     662,803       4,819    2.91       622,185       4,594    2.95  

Short-term borrowings

     122,301       297    0.97       91,518       93    0.41  

Long-term debt

     193,836       1,871    3.86       102,500       2,200    8.59  
    


 

  

 


 

  

Total interest-bearing liabilities

     1,669,938       8,035    1.92       1,491,687       7,812    2.09  

Noninterest-bearing demand deposits

     311,333                    297,195               

Other liabilities

     24,314                    23,090               

Stockholders’ equity

     204,720                    184,266               
    


              


            

Total liabilities and stockholders’ equity

   $ 2,210,305                  $ 1,996,238               
    


              


            

Net interest income

           $ 21,868                  $ 20,800       
            

                

      

Net yield on earning assets

                  4.27 %                  4.50 %
                   

                


(3) 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.
(4) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.

 

25


Table of Contents

TABLE FOUR

RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

(in thousands)

 

    

Three months ended September 30,

2004 vs. 2003

Increase (Decrease)

Due to Change In:


 
     Volume

    Rate

    Net

 

Interest-earning assets:

                        

Loan portfolio

                        

Residential real estate

   $ 148     $ (839 )   $ (691 )

Home equity

     462       317       779  

Commercial real estate

     1,007       (368 )     639  

Other commercial

     (125 )     (32 )     (157 )

Loans to depository institutions

     —         —         —    

Installment

     (576 )     43       (533 )

Indirect

     (481 )     3       (478 )

Credit card

     (37 )     5       (32 )

Previously securitized loans

     2,368       (500 )     1,868  
    


 


 


Total loans

     2,766       (1,371 )     1,395  

Securities:

                        

Taxable

     1,503       1,599       3,102  

Tax-exempt (1)

     (81 )     (19 )     (100 )
    


 


 


Total securities

     1,422       1,580       3,002  

Retained interest in securitized loans

     (1,550 )     (1,550 )     (3,100 )

Deposits in depository institutions

     (11 )     5       (6 )
    


 


 


Total interest-earning assets

   $ 2,627     $ (1,336 )   $ 1,291  
    


 


 


Interest-bearing liabilities:

                        

Demand deposits

   $ 35     $ 108     $ 143  

Savings deposits

     (11 )     (9 )     (20 )

Time deposits

     296       (71 )     225  

Short-term borrowings

     40       164       204  

Long-term debt

     1,293       (1,622 )     (329 )
    


 


 


Total interest-bearing liabilities

   $ 1,653     $ (1,430 )   $ 223  
    


 


 


Net Interest Income

   $ 974     $ 94     $ 1,068  
    


 


 



(1) Fully federal taxable equivalent using a tax rate of 35%.

 

THE CHANGE IN INTEREST DUE TO BOTH RATE AND VOLUME HAS BEEN ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH.

 

26


Table of Contents

ALLOWANCE AND PROVISION FOR LOAN LOSSES

 

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. 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 the potential impairment of certain credits and historical charge-off percentages, adjusted for general economic conditions and other inherent risk factors. 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 of each portfolio, adjusted for general economic conditions and other inherent risk factors.

 

In evaluating the adequacy of the allowance for loan losses, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, seasoning of the portfolio, and general economic conditions.

 

The allowance not specifically allocated to individual credits is generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Loans not individually evaluated for impairment are grouped by pools with similar risk characteristics and the related historical loss percentages are adjusted to reflect current inherent risk factors, such as unemployment, overall economic conditions, concentrations of credit, loan growth, classified and impaired loan trends, staffing, adherence to lending policies, and loss trends.

 

Determination of the allowance for loan losses is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between net charge-offs and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio.

 

The allowance allocated to the commercial loan portfolio (see Table Seven) declined $2.17 million, or 16.00%, from $13.55 million at December 31, 2003 to $11.39 million at September 30, 2004. The Company has experienced favorable trends in historical loss rates over the previous eight quarters within the commercial loan portfolio. The Company utilizes historical loss rates as a component of the determination of its loss rate in assessing the adequacy of the allowance for loan losses. Due in large part to the recent decline in historical loss rates, the loss rate utilized declined similarly, resulting in the overall decreased allocation of the allowance for loan losses to the commercial loan portfolio. Credit quality remained strong as of September 30, 2004 in the commercial loan portfolio. Loans on non-accrual status increased slightly from $1.03 million at December 31, 2003 to $1.04 million at September 30, 2004 and loans past due 30 days or greater declined from $0.30 million at December 31, 2003 to $0.13 million at September 30, 2004.

 

27


Table of Contents

The allowance allocated to the residential real estate portfolio (see Table Seven) increased $0.31 million, or 10.89%, from $2.87 million at December 31, 2003 to $3.19 million at September 30, 2004. This increase was primarily due to the continued growth of the Company’s home equity lending program, which experienced a 7.95% increase in outstanding balances during the first nine months of 2004. Within the residential real estate portfolio, loans on non-accrual status remained relatively unchanged ($0.84 million at December 31, 2003 and $0.85 million at September 30, 2004) and loans past due 90 days or greater declined from $0.93 million at December 31, 2003 to $0.62 million at September 30, 2004.

 

The allowance allocated to the consumer loan portfolio (see Table Seven) declined $0.76 million, or 21.39%, from $3.56 million at December 31, 2003 to $2.80 million at September 30, 2004. The outstanding balance of consumer loans, defined as installment, indirect, and credit card loans, has continued to decline significantly as the Company has intentionally reduced its lending efforts in loan products not secured by real estate. Continuing the trend of recent quarters, consumer loan balances declined $26.20 million, or 33.88%, from $77.34 million at December 31, 2003 to $51.13 million at September 30, 2004. Primarily as a result of the decline in outstanding loan balances, the Company has reduced the amount of the allowance for loan losses allocated to the consumer loan portfolio.

 

The allowance allocated to overdraft deposit accounts (see Table Seven) decreased $0.27 million, or 18.89%, from $1.44 million at December 31, 2003 to $1.17 million at September 30, 2004. The balance of overdraft deposit accounts, included in installment loans in the Consolidated Balance Sheets, declined $0.44 million, or 22.76%, from $1.94 million at December 31, 2003 to $1.50 million at September 30, 2004.

 

As noted previously, as the Company redeemed certain of its retained interests in loan securitizations, it added “previously securitized loans” to its loan portfolio. As discussed, the carrying value of the previously securitized loans incorporates an assumption for expected losses to be incurred over the life of these loans and, as a result, expected credit losses have already been provided for within the carrying value of these assets. Therefore, credit losses on previously securitized loans will first be applied against the carrying value of these loans and could adversely impact the yield earned on these loans. To the extent that credit losses exceed those amounts already provided for within the carrying value of these loans, the Company would then need to provide for such losses through the provision and allowance for loan losses. As of September 30, 2004, the Company believes that the credit losses provided for through the carrying value of previously securitized loans is adequate to provide for probable losses and an allocation of the allowance for loan losses to this segment of the portfolio is not required.

 

Based on the Company’s analysis of the adequacy of the allowance for loan losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for loan losses as of September 30, 2004, is adequate to provide for probable losses inherent in the Company’s loan portfolio. Amounts to be recorded for the provision for loan losses in future periods will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and potential recoveries on previously charged-off loans.

 

28


Table of Contents

TABLE FIVE

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

     Nine months ended September 30,

   

Year ended

December 31,

2003


 
     2004

    2003

   
     (in thousands)  

Allowance for Loan Losses

                        

Balance at beginning of period

   $ 21,426     $ 28,504     $ 28,504  

Charge-offs:

                        

Residential real estate

     (689 )     (1,097 )     (1,515 )

Home equity

     (304 )     (345 )     (363 )

Commercial real estate

     (1,519 )     (489 )     (619 )

Other commercial

     (402 )     (541 )     (570 )

Installment

     (1,613 )     (2,361 )     (3,076 )

Overdraft deposit accounts

     (2,028 )     (1,097 )     (1,680 )
    


 


 


Total charge-offs

     (6,555 )     (5,930 )     (7,823 )

Recoveries:

                        

Residential real estate

     433       1,614       1,749  

Home equity

     6       62       62  

Commercial real estate

     1,434       1,532       1,673  

Other commercial

     285       1,389       1,571  

Installment

     645       1,089       1,300  

Overdraft deposit accounts

     863       376       590  
    


 


 


Total recoveries

     3,666       6,062       6,945  
    


 


 


Net (charge-offs) recoveries

     (2,889 )     132       (878 )

(Recovery of) provision for loan losses

     —         (5,200 )     (6,200 )
    


 


 


Balance at end of period

   $ 18,537     $ 23,436     $ 21,426  
    


 


 


As a Percent of Average Total Loans:

                        

Net (charge-offs) recoveries (annualized)

     (0.29 )%     0.01 %     (0.07 )%

Provision for loan losses (annualized)

     —         (0.58 )     (0.51 )

As a Percent of Non-Performing Loans:

                        

Allowance for loan losses

     514.92 %     550.92 %     528.78 %

 

TABLE SIX

NON-PERFORMING ASSETS

 

     As of September 30,

  

As of

December 31,

2003


     2004

   2003

  

Summary of Non-performing Assets

                    

Non-accrual loans

   $ 1,924    $ 2,509    $ 2,140

Accruing loans past due 90 days or more

     800      1,229      1,195

Previously securitized loans past due 90 days or more

     876      516      717
    

  

  

Total non-performing loans

     3,600      4,254      4,052

Other real estate owned

     267      477      312
    

  

  

Total non-performing assets

   $ 3,867    $ 4,731    $ 4,364
    

  

  

 

29


Table of Contents

TABLE SEVEN

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

 

     As of September 30,

  

As of

December 31,

2003


(in thousands)


   2004

   2003

  

Commercial, financial and agricultural

   $ 11,385    $ 14,345    $ 13,554

Real estate – mortgage

     3,187      3,723      2,874

Installment loans to individuals

     2,797      3,678      3,558

Overdraft deposit accounts

     1,168      1,690      1,440
    

  

  

Allowance for Loan Losses

   $ 18,537    $ 23,436    $ 21,426
    

  

  

 

RETAINED INTERESTS AND PREVIOUSLY SECURITIZED LOANS

 

Overview: Between 1997 and 1999, the Company completed six securitization transactions involving approximately $759.76 million of fixed rate, junior lien mortgage loans. The Company retained a financial interest in the securitizations comprised of (1) the excess interest collected on the underlying collateral loans over the interest paid to third-party investors and administrative fees and (2) overcollateralization, or the excess principal balance of the underlying collateral loans over the principal balances payable to the third-party investors. Neither the outstanding balance of the collateral loans nor the outstanding principal owed to investors was included in the Company’s Consolidated Balance Sheets. Principal amounts owed to investors in the securitizations were evidenced by securities (“Notes”). The Notes were subject to redemption, in whole but not in part, at the option of the Company, as owner of the retained interests, or at the option of the Note insurer, on or after the date on which the related Note balance has declined to 5% or less of the original Note balance. Once the Notes were redeemed, the Company became the beneficial owner of the mortgage loans and recorded the loans as assets of the Company within the loan portfolio.

 

Retained Interests: During the first four months of 2004, the Company completed the redemption of its 1998-1 and 1999-1 securitizations, which resulted in the reclassification of $35.12 million (see Table Eight) from the retained interest asset to amounts reported in the Consolidated Balance Sheets as previously securitized loans. As a result, each of the Company’s original six securitizations has been fully redeemed and the Notes were fully repaid as of April 30, 2004.

 

Previously Securitized Loans: As the Company redeemed the outstanding Notes, no gain or loss was recognized in the Company’s financial statements and the remaining mortgage loans were recorded in the Company’s loan portfolio, classified as “previously securitized loans,” at the lower of carrying value or fair value. Because the carrying value of the mortgage loans incorporates assumptions for expected prepayment and default rates, the carrying value of the loans is generally less than the actual outstanding balance of the loans. As of September 30, 2004, the Company reported a carrying value of previously securitized loans of $70.97 million, while the actual outstanding balance of the loans was $87.45 million. The difference (“the discount”) between the carrying value and actual outstanding balance of previously securitized loans is being accreted into interest income over the life of the loans. Net credit losses on previously securitized loans are first recorded against this discount and, therefore, could impact the yield earned on these loans. Should net credit losses exceed the reported balance of the discount over the life of the loans, credit losses would then be provided for through the Company’s provision and allowance for loan losses.

 

30


Table of Contents

During the first nine months of 2004, the Company recognized $10.93 million of interest income on its previously securitized loans and received cash of $46.45 million, comprised of principal ($36.74 million) and interest ($9.71 million) payments received from the borrowers.

 

Summary: The following table summarizes the activity within the reported balance of retained interests and previously securitized loans during 2004 and illustrates the impact on these balances of converting the retained interest asset to loans:

 

TABLE EIGHT

PROGRESSION OF RETAINED INTERESTS AND PREVIOUSLY SECURITIZED LOANS

 

( in thousands)


   Retained Interests

    Previously
Securitized Loans


 

Balance at December 31, 2003

   $ 34,320     $ 58,788  

Increase in value resulting from interest

     802       —    

Reclassification due to redemption of outstanding Notes

     (35,122 )     35,122  

Cash remitted to Noteholders in redemption of outstanding Notes

     —         12,560  

Principal payments on mortgage loans received from borrowers

     —         (36,736 )

Discount accretion

     —         1,236  
    


 


Balance at September 30, 2004

   $ —       $ 70,970  
    


 


 

Based on current cash flow projections, the Company believes that the carrying value of previously securitized loans will approximate:

 

As of:


   Projected Balance:

December 31, 2004

   $ 64 million

December 31, 2005

     45 million

December 31, 2006

     33 million

December 31, 2007

     25 million

 

31


Table of Contents

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

 

Nine Months Ended September 30, 2004 vs. 2003

 

Non-Interest Income: Total non-interest income increased $9.63 million, or 33.75%, from $28.54 million for the first nine months of 2003 to $38.17 million for the first nine months of 2004. As a result of the Company’s continued focus on growing its retail banking franchise through customer growth and the addition of new products and services for its depository customers, the Company experienced a $3.27 million, or 15.83%, increase in service charge revenues in the first nine months of 2004, as compared to the first nine months of 2003. The average balance of the Company’s investment in Bank Owned Life Insurance (“BOLI”) increased $29.99 million, or 149%, from 2003 to 2004, which resulted in an increase in revenues of $1.02 million, or 140%, from $0.73 million in the first nine months of 2003 to $1.75 million in the first nine months of 2004.

 

Also included in non-interest income during the first nine months of 2004 is $5.45 million of income from the settlement of litigation brought in December 2001 against certain directors and former directors and executive officers of the Company and City National. For the period ended September 30, 2003, the Company recorded revenues of $1.60 million associated with the resolution of its claim against the Federal Deposit Insurance Corporation (“FDIC”) in the FDIC’s capacity as receiver of The First National Bank of Keystone.

 

Non-Interest Expense: Total non-interest expense increased $2.57 million, or 5.52%, from $46.63 million in the first nine months of 2003 to $49.20 million in the first nine months of 2004. This increase was primarily due to a $1.51 million, or 6.53%, increase in the cost of salaries and employee benefits in the first nine months of 2004, as compared to the nine-month period ended September 30, 2003. Increases in health care costs and expenses associated with providing for executive severances contributed to this increase. Also within the non-interest expense category, the Company recorded net gains of $0.71 million from the disposal of repossessed assets during the first nine months of 2003, compared to net gains of $0.05 million in the nine month period ended September 30, 2004. Professional fees and litigation expense increased $0.36 million in the first nine months of 2004, as compared to the first nine months of 2003, but included approximately $0.92 million of expense in the first nine months of 2004 associated with the derivative action discussed above. Other expenses increased $0.81 million, or 12.42%, primarily as a result of a $0.61 million increase in business franchise taxes incurred by the Company during the nine-month period ended September 30, 2004, as compared to the same period of 2003.

 

Three Months Ended September 30, 2004 vs. 2003

 

Non-Interest Income: Total non-interest income increased $0.51 million, or 4.93%, from $10.35 million for the third quarter of 2003 to $10.86 million in the comparable period of 2004. As discussed above, depository growth resulted in the Company experiencing a $1.16 million, or 15.85%, increase in service charge revenues in the third quarter of 2004, as compared to the third quarter of 2003. The average balance of the Company’s investment in BOLI increased $16.70 million, or 49.15%, from the third quarter of 2003 to the comparable period of 2004, which resulted in an increase in revenues of $0.16 million, or 38.89%, from $0.41 million in the third quarter of 2003 to $0.58 million in the comparable period of 2004. The Company’s earnings for the third quarter of 2003 included revenues of $1.60 million associated with the resolution of its claim against the Federal Deposit Insurance Corporation (“FDIC”) in the FDIC’s capacity as receiver of The First National Bank of Keystone.

 

32


Table of Contents

Non-Interest Expense: Total non-interest expense increased $0.67 million, or 4.44%, from $15.11 million in the third quarter of 2003 to $15.78 million in the third quarter of 2004. This increase was primarily due to an increase of $0.36 million, or 4.66%, in the cost of salaries and employee benefits in the third quarter of 2004, as compared to the third quarter of 2003 due primarily to increases in health care costs. Other expenses increased $0.29 million, or 13.81%, primarily as a result of a $0.23 million increase in business franchise taxes incurred by the Company during the third quarter of 2004, as compared to the third quarter of 2003.

 

MARKET RISK MANAGEMENT

 

Market risk is the risk of loss due to adverse changes in current and future cash flows, fair values, earnings or capital due to adverse movements in interest rates and other factors, including foreign exchange rates and commodity prices. Because the Company has no significant foreign exchange activities and holds no commodities, interest rate risk represents the primary risk factor affecting the Company’s balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in LIBOR interest rates, prime rates, and other benchmark interest rates that could affect the estimated fair value of the Company’s investment securities portfolio, interest paid on the Company’s short-term and long-term borrowings, interest earned on the Company’s loan portfolio and interest paid on its deposit accounts.

 

The Company’s Asset and Liability Committee (“ALCO”) has been delegated the responsibility of managing the Company’s interest-sensitive balance sheet accounts to maximize earnings while managing interest rate risk. ALCO, comprised of various members of executive and senior management, is also responsible for establishing policies to monitor and limit the Company’s exposure to interest rate risk and to manage the Company’s liquidity position. ALCO satisfies its responsibilities through periodic meetings during which product pricing issues, liquidity measures and interest sensitivity positions are monitored.

 

In order to measure and manage its interest rate risk, the Company uses an asset/liability management and simulation software model to periodically update the interest sensitivity position of the Company’s balance sheet. The model is also used to perform analyses that measure the impact on net interest income and capital of various changes in the interest rate environment. Such analyses quantify the effects of various interest rate scenarios on projected net interest income. The Company’s policy objective is to avoid negative fluctuations in net income of more than 15% within a 12-month period, assuming an immediate increase or decrease of 300 basis points as compared to the level of net income that is anticipated if rates remain constant. Due to the low level of market interest rates at September 30, 2004 (the fed funds target was 1.75%), the Company has chosen to reflect only its risk to a decrease of 100 basis points from current rates. Given the historically low level of rates at September 30, 2004, the Company believes that the probability of rate decreases of more than 100 basis points is remote. Also, the Company has chosen to reflect its risk to increases in rates as large as 500 basis points as this would imply a fed funds target of 6.75%, which is within historical norms. At September 30, 2004, the Company was in compliance with its policy and believes that it has positioned itself to benefit from increases in interest rates, should these occur.

 

The following table summarizes the sensitivity of the Company’s net income to various interest rate scenarios. The results of the sensitivity analyses presented below differ from the results used internally by ALCO in

 

33


Table of Contents

that, in the analyses below, interest rates are assumed to have an immediate and sustained parallel shock as of October 1, 2004. The Company recognizes that rates are volatile, but rarely move with immediate and parallel effects. Internally, the Company considers a variety of interest rate scenarios that are deemed to be possible while considering the level of risk it is willing to assume in “worst-case” scenarios such as those shown below.

 

Immediate

Basis Point

Change

In Interest Rates


  

Estimated
Increase

(Decrease) in

Net Income in
1-12 months


   

Estimated Increase

(Decrease) in

Net Income in 13-24

Months


 
+500    +10 %   +21 %
+300    +9 %   +15 %
+100    +4 %   +6 %
-100    (7 )%   (10 )%

 

These results are highly dependent upon assumptions made by management, including but not limited to, assumptions regarding the manner in which interest-bearing demand deposit and saving deposit accounts reprice in different interest rate scenarios, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the results above will be achieved in the event that interest rates increase or decrease during 2004 and beyond.

 

Based upon the results above, the Company believes that it’s net income is positively correlated with increasing rates as compared to the level of net income the Company would expect if interest rates remain flat. However, these results do not necessarily imply that the Company will experience increases in net income if market interest rates rise. In fact, the Company has significant exposure to a decrease in outstanding balances of previously securitized loans, as discussed in Note B and on pages 31-32. Between October 2004 and September 2006, based upon the Company’s projected reductions in outstanding balances of previously securitized loans, assuming that market interest rates remain unchanged, and assuming that other loan and deposit balances remain unchanged, the Company anticipates a reduction in net interest income of approximately 8% and a corresponding reduction in net income of approximately 10%. The table above demonstrates that increases in the level of market interest rates could partially or fully offset this impact. For example, an immediate increase in interest rates of approximately 200 basis points would increase net income by approximately 10% over a 24 month horizon, assuming that the Company’s assumptions regarding such things as pricing behavior of competitors are fulfilled. Alternatively, the Company believes that loan growth of approximately 10% annually could mitigate the anticipated reduction in net interest income associated with declining balances of previously securitized loans.

 

LIQUIDITY

 

The Company evaluates the adequacy of liquidity at both the Parent Company level and at City National. At the Parent Company level, the principal sources of cash are dividends from City National. Dividends paid by City

 

34


Table of Contents

National to the Parent Company are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. From January 1, 2003 through September 30, 2004, City National received regulatory approval to pay $112.6 million of cash dividends to the Parent Company, while generating net profits of $86.0 million. Therefore, City National will be required to obtain regulatory approval prior to declaring any cash dividends to the Parent Company through 2005. Although regulatory authorities have approved prior cash dividends, there can be no assurance that future dividend requests will be approved.

 

The Parent Company used cash obtained from the dividends received primarily to: (1) fully redeem the $57.50 million 9.125% trust-preferred securities issued by City Holding Capital Trust II, (2) repay $2.00 million of 9.125% long-term debt owed to City Holding Capital Trust, (3) pay common dividends to shareholders, (4) remit interest payments on the Company’s trust-preferred securities, and (5) fund repurchase of the Company’s common shares.

 

Over the next 12 months, the Parent Company has an obligation to remit interest payments approximating $2.56 million on the junior subordinated debentures held by City Holding Capital Trust. However, interest payments on the debentures can be deferred for up to five years under certain circumstances and dividends to shareholders can, if necessary, be suspended. Additionally, over the next year, the Parent Company anticipates continuing the payment of dividends, which are expected to approximate at least $14.57 million, to common shareholders. In addition to these anticipated cash needs, the Parent Company has operating expenses and other contractual obligations, which are estimated to require $0.70 million of additional cash over the next 12 months. As of September 30, 2004, the Parent Company reported a cash balance of $23.55 million and management believes that the Parent Company’s available cash balance, together with cash dividends from City National, if approved, are adequate to satisfy its funding and cash needs over the next 12 months.

 

Excluding the interest and dividend payments discussed above, the Parent Company has no significant commitments or obligations in years after 2004 other than the repayment of its $28.84 million obligation under the debentures held by City Holding Capital Trust. This obligation does not mature until April 2028; however, it can be repaid earlier at the option of the Parent Company. It is expected that the Parent Company will be able to obtain the necessary cash, either through dividends obtained from City National or the issuance of other debt, to fully repay the debentures at their maturity.

 

City National manages its liquidity position in an effort to effectively and economically satisfy the funding needs of its customers and to accommodate the scheduled repayment of borrowings. Funds are available to City National from a number of sources, including depository relationships, sales and maturities within the investment securities portfolio, and borrowings from the FHLB and other financial institutions. As of September 30, 2004, City National’s assets are significantly funded by deposits and capital. However, City National maintains borrowing facilities with the FHLB and other financial institutions that are accessed as necessary to fund operations and to provide contingency funding mechanisms. As of September 30, 2004, City National has the capacity to borrow an additional $482.13 million from the FHLB, $55.00 million from correspondent institutions, and $9.98 million from the Federal Reserve under existing borrowing facilities. City National maintains a contingency funding plan,

 

35


Table of Contents

incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systematic financial industry crisis. Additionally, City National maintains a significant percentage (91.29% or $641.58 million at September 30, 2004) of its investment securities portfolio in the highly liquid available-for-sale classification. As such, these securities could be liquidated, if necessary, to provide an additional funding source. City National also segregates certain mortgage loans, mortgage-backed securities, and other investment securities in a separate subsidiary so that it can separately monitor the asset quality of these primarily mortgage-related assets, which could be used to raise cash through securitization transactions or obtain additional equity or debt financing if necessary.

 

The Company manages its asset and liability mix to balance its desire to maximize net interest income against its desire to minimize risks associated with capitalization, interest rate volatility, and liquidity. With respect to liquidity, the Company has chosen a conservative posture and believes that its liquidity position is strong. The Company’s net loan to asset ratio is 59.82% as of September 30, 2004 and deposit balances fund 74.57% of total assets. Further, the Company’s deposit mix has a very high proportion of transaction and savings accounts that fund 44.76% of the Company’s total assets. The Company has obligations to extend credit, but these obligations are primarily associated with existing home equity loans that have predictable borrowing patterns across the portfolio. The Company has significant investment security balances that totaled $702.77 million at September 30, 2004, and that greatly exceeded the Company’s non-deposit sources of borrowing which totaled $353.13 million.

 

As reflected in the Consolidated Statement of Cash Flows, the Company generated $36.64 million of cash from Operating Activities during the first nine months of 2004, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings. Although the Company used $19.63 million of cash in Investing Activities during the first nine months of 2004, $12.56 million was used to complete the early redemption of the Company’s 1998-1 and 1999-1 securitizations. Since their redemptions, the Company has received $18.54 million in the form of principal and interest received from borrowers on those two loan pools. In total, previously securitized loans generated $46.45 million of cash for the Company during the first nine months of 2004. The Company used $31.75 million of cash in Financing Activities during the first nine months of 2004, $10.66 million of which was used to pay dividends to the Company’s common stockholders and $5.86 million of which was used to repurchase common shares pursuant to the Company’s stock repurchase program. Additionally, net short- and long-term borrowings declined $31.92 million during the first nine months of 2004.

 

CAPITAL RESOURCES

 

During the first nine months of 2004, Shareholders’ Equity increased $19.60 million, or 10.28%, from $190.69 million at December 31, 2003 to $210.29 million at September 30, 2004. Net of dividends declared on the Company’s common stock, Shareholders’ Equity increased $24.28 million during the first nine months of 2004 as a result of the Company’s 2004 earnings. This increase was partially offset, however, by the $5.86 million cost of share repurchases (see below).

 

As previously disclosed, the Company has authorization to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions, block transactions, private transactions, or otherwise at such times and prices as determined appropriate by management. During the first nine months of 2004, the Company

 

36


Table of Contents

repurchased 197,040 shares of its common stock at a weighted average price of $29.73 per share. Since the repurchase plan was adopted in June 2002, the Company has purchased 617,740 shares of its common stock. There can be no assurance that the Company will continue to reacquire its common shares in future periods or to what extent the repurchase program will be successful.

 

Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8%, with at least one-half of capital consisting of tangible common stockholders’ equity and a minimum Tier I leverage ratio of 4%. Similarly, City National is also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, City National is 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,” City National must maintain total capital, Tier I capital, and leverage ratios of 10.00%, 6.00%, and 5.00%, respectively.

 

The table below sets forth the Company’s and City National’s risk-adjusted capital ratios as of September 30, 2004 and December 31, 2003, along with the “minimum” and “well-capitalized” requirements established by regulatory agencies.

 

                 Actual

 
     Minimum

   

Well-

Capitalized


    September 30
2004


    December 31
2003


 

City Holding:

                        

Total

   8.00 %   10.00 %   16.43 %   13.17 %

Tier I Risk-based

   4.00     6.00     15.21     11.93  

Tier I Leverage

   4.00     5.00     10.47     10.04  

City National:

                        

Total

   8.00 %   10.00 %   14.84 %   11.95 %

Tier I Risk-based

   4.00     6.00     13.62     10.72  

Tier I Leverage

   4.00     5.00     9.36     9.19  

 

In accordance with regulations established by the Federal Reserve Board, the Company has included $28.00 million of capital securities issued by City Holding Capital Trust in regulatory capital as of September 30, 2004. Recently enacted accounting guidelines required the deconsolidation of City Holding Capital Trust from the Company’s consolidated financial statements. In response to the new accounting guidelines, the Federal Reserve Board is currently evaluating whether deconsolidation of such trusts would affect the qualification of the capital securities as regulatory capital. The Federal Reserve has proposed rules that would retain trust preferred securities in Tier I capital of bank holding companies, but with stricter quantitative limits and clearer qualitative standards. Under this proposal, the Company’s compliance with regulatory capital requirements would not be affected.

 

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’s Discussion and Analysis of Financial Condition and Results of Operations.

 

37


Table of Contents

ITEM 4 – CONTROLS AND PROCEDURES

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

38


Table of Contents

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

A derivative action was filed on December 31, 2001 in the Circuit Court for Kanawha County, West Virginia by a purported shareholder on behalf of the Company and City National seeking to recover, on behalf of the Company and City National, alleged damages caused by the purported breach of fiduciary duty, negligence, and breach of contract by certain directors and former directors and former executive officers of the Company and City National. In January 2004, the Company announced that a tentative settlement had been reached in this litigation. Subsequently, the Circuit Court of Kanawha County, West Virginia, approved the settlement and the Company received insurance proceeds approximating $5.45 million in April 2004.

 

In addition, the Company is engaged in various legal actions that it deems to be in the ordinary course of business. The Company believes that it has adequately provided for probable costs of current litigation. As these legal actions are resolved, however, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.

 

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table sets forth information regarding the Company’s common stock repurchases transacted during the quarter:

Period


  

Total
Number

of Shares
Purchased


   Average Price
Paid per Share


   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (a)


   Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs


7/1/04 – 7/31/04

   21,940    $ 29.25    551,940    448,060

8/1/04 – 8/31/04

   65,800    $ 30.19    617,740    382,260

9/1/04 – 9/30/04

   —      $ —      617,740    382,260

 


(a) In July 2002, the Company announced that its Board of Directors had approved a stock repurchase program relative to the Company’s outstanding common stock. Management has been authorized to purchase up to 1,000,000 shares of the Company’s common stock in open market purchases, block transactions, private transactions or otherwise at such times and at such prices as determined by management. The repurchase program does not contain an expiration date.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

39


Table of Contents

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits:

 

31 (a)   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Gerald R. Francis
31 (b)   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck
32 (a)   Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 for Gerald R. Francis
32 (b)   Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 for Charles R. Hageboeck

 

(b) Reports on Form 8-K:

 

On July 20, 2004, the Company filed a Current Report on Form 8-K, furnishing under Item 12 a news release announcing the Company’s second quarter 2004 earnings.

 

On September 28, 2004, the Company filed a Current Report on Form 8-K, furnishing under Section 7, Item 7.01, copies of a slide presentation discussing the Company’s financial performance delivered by Charles R. Hageboeck, Executive Vice President and Chief Financial Officer, to a group of analysts and investors at the RBC Capital Markets Financial Institutions Conference.

 

40


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

City Holding Company

(Registrant)

/s/ Gerald R. Francis


Gerald R. Francis

President, Chief Executive Officer and Chairman

(Principal Executive Officer)

/s/ Charles R. Hageboeck


Charles R. Hageboeck

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

Date: November 5, 2004

 

41