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, 2006
OR
o
TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
The
Transition Period From ____________To_____________.
Commission
File number 0-11733
CITY
HOLDING COMPANY
(Exact
name of registrant as specified in its charter)
West
Virginia
|
55-0619957
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
25
Gatewater Road
|
|
Charleston,
West Virginia
|
25313
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(304)
769-1100
(Registrant’s
telephone number, including area code)
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
|
o
|
Accelerated
filer
|
x
|
Non-accelerated
filer
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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 - 17,560,399 shares as of November 3,
2006.
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. 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 provision for loan
losses due to negative credit quality trends in the future that may lead to
a
deterioration of asset quality; (2) the Company may incur increased charge-offs
in the future; (3) the Company may experience increases in the default rates
on
previously securitized loans that would result in impairment losses or lower
the
yield on such loans; (4) the Company may continue to benefit from strong
recovery efforts on previously securitized loans resulting in improved yields
on
this asset; (5) the Company could have adverse legal actions of a material
nature; (6) the Company may face competitive loss of customers; (7) the Company
may be unable to manage its expense levels; (8) the Company may have difficulty
retaining key employees; (9) 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; (10) changes in general
economic conditions and increased competition could adversely affect the
Company’s operating results; (11) 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; and (12) the Company may experience difficulties growing loan and
deposit balances. Forward-looking statements made herein reflect management’s
expectations as of the date such statements are made. Such information is
provided to assist stockholders and potential investors in understanding current
and anticipated financial operations of the Company and is included pursuant
to
the safe harbor provisions of the Private Securities Litigation Reform Act
of
1995. The Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances that arise after the date such
statements are made.
City
Holding Company and Subsidiaries
PART
I
|
Financial
Information
|
Pages
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited).
|
4-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
18-31
|
Item
3.
|
|
31
|
Item
4.
|
|
31
|
|
|
|
PART
II
|
Other
Information
|
|
|
|
|
Item
1.
|
|
32
|
Item
1A.
|
|
32
|
Item
2.
|
|
32
|
Item
3.
|
|
32
|
Item
4.
|
|
32
|
Item
5.
|
|
32
|
Item
6.
|
|
32
|
|
|
|
|
|
33
|
|
|
|
PART
I, ITEM 1 - FINANCIAL STATEMENTS
City
Holding Company and Subsidiaries
(in
thousands, except share and per share data)
|
|
September
30
|
|
December
31
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
(Note
A)
|
|
Assets
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
51,460
|
|
$
|
81,822
|
|
Interest-bearing
deposits in depository institutions
|
|
|
35,800
|
|
|
4,451
|
|
Federal
funds sold
|
|
|
15,000
|
|
|
-
|
|
Cash
and Cash Equivalents
|
|
|
102,260
|
|
|
86,273
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale, at fair value
|
|
|
465,752
|
|
|
549,966
|
|
Securities
held-to-maturity, at amortized cost (approximate fair value at September
30, 2006 and December 31, 2005 - $56,452 and $58,892)
|
|
|
53,791
|
|
|
55,397
|
|
Total
Securities
|
|
|
519,543
|
|
|
605,363
|
|
|
|
|
|
|
|
|
|
Gross
loans
|
|
|
1,697,201
|
|
|
1,612,827
|
|
Allowance
for loan losses
|
|
|
(15,557
|
)
|
|
(16,790
|
)
|
Net
Loans
|
|
|
1,681,644
|
|
|
1,596,037
|
|
|
|
|
|
|
|
|
|
Bank
owned life insurance
|
|
|
54,619
|
|
|
52,969
|
|
Premises
and equipment
|
|
|
43,545
|
|
|
42,542
|
|
Accrued
interest receivable
|
|
|
12,934
|
|
|
13,134
|
|
Net
deferred tax asset
|
|
|
26,308
|
|
|
27,929
|
|
Intangible
assets
|
|
|
59,038
|
|
|
59,559
|
|
Other
assets
|
|
|
27,665
|
|
|
18,791
|
|
Total
Assets
|
|
$
|
2,527,556
|
|
$
|
2,502,597
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
335,887
|
|
$
|
376,076
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
420,613
|
|
|
437,639
|
|
Savings
deposits
|
|
|
316,300
|
|
|
302,571
|
|
Time
deposits
|
|
|
907,025
|
|
|
812,134
|
|
Total
Deposits
|
|
|
1,979,825
|
|
|
1,928,420
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
135,960
|
|
|
152,255
|
|
Long-term
debt
|
|
|
76,669
|
|
|
98,425
|
|
Other
liabilities
|
|
|
36,775
|
|
|
31,356
|
|
Total
Liabilities
|
|
|
2,229,229
|
|
|
2,210,456
|
|
|
|
|
|
|
|
|
|
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; 18,499,282
shares issued and outstanding at September 30, 2006 and December
31, 2005,
less 938,883 and 395,465 shares in treasury, respectively
|
|
|
46,249
|
|
|
46,249
|
|
Capital
surplus
|
|
|
104,082
|
|
|
104,435
|
|
Retained
earnings
|
|
|
186,171
|
|
|
160,747
|
|
Cost
of common stock in treasury
|
|
|
(30,893
|
)
|
|
(11,278
|
)
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
|
(4,562
|
)
|
|
(4,839
|
)
|
Unrealized
gain on derivative instruments
|
|
|
453
|
|
|
-
|
|
Underfunded
pension liability
|
|
|
(3,173
|
)
|
|
(3,173
|
)
|
Total
Accumulated Other Comprehensive Loss
|
|
|
(7,282
|
)
|
|
(8,012
|
)
|
Total
Shareholders’ Equity
|
|
|
298,327
|
|
|
292,141
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
2,527,556
|
|
$
|
2,502,597
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands, except per share data)
|
|
Three
Months Ended September 30
|
|
Nine
Months Ended September 30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
31,774
|
|
$
|
28,083
|
|
$
|
91,788
|
|
$
|
74,796
|
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,870
|
|
|
7,288
|
|
|
21,618
|
|
|
22,616
|
|
Tax-exempt
|
|
|
437
|
|
|
508
|
|
|
1,359
|
|
|
1,390
|
|
Interest
on loans held for sale
|
|
|
122
|
|
|
-
|
|
|
322
|
|
|
-
|
|
Interest
on deposits in depository institutions
|
|
|
452
|
|
|
31
|
|
|
1,018
|
|
|
73
|
|
Interest
on federal funds sold
|
|
|
92
|
|
|
-
|
|
|
92
|
|
|
4
|
|
Total
Interest Income
|
|
|
39,747
|
|
|
35,910
|
|
|
116,197
|
|
|
98,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
11,782
|
|
|
7,763
|
|
|
31,503
|
|
|
20,236
|
|
Interest
on short-term borrowings
|
|
|
1,343
|
|
|
956
|
|
|
3,795
|
|
|
2,320
|
|
Interest
on long-term debt
|
|
|
1,108
|
|
|
1,571
|
|
|
3,607
|
|
|
4,818
|
|
Total
Interest Expense
|
|
|
14,233
|
|
|
10,290
|
|
|
38,905
|
|
|
27,374
|
|
Net
Interest Income
|
|
|
25,514
|
|
|
25,620
|
|
|
77,292
|
|
|
71,505
|
|
Provision
for loan losses
|
|
|
1,225
|
|
|
600
|
|
|
2,900
|
|
|
600
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
24,289
|
|
|
25,020
|
|
|
74,392
|
|
|
70,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities (losses) gains
|
|
|
(2,067
|
)
|
|
5
|
|
|
(2,067
|
)
|
|
26
|
|
Service
charges
|
|
|
10,833
|
|
|
10,433
|
|
|
31,597
|
|
|
28,561
|
|
Insurance
commissions
|
|
|
526
|
|
|
595
|
|
|
1,661
|
|
|
1,732
|
|
Trust
and investment management fee income
|
|
|
572
|
|
|
468
|
|
|
1,642
|
|
|
1,521
|
|
Bank
owned life insurance
|
|
|
561
|
|
|
552
|
|
|
1,776
|
|
|
2,088
|
|
Gain
on sale of credit card portfolio
|
|
|
3,563
|
|
|
-
|
|
|
3,563
|
|
|
-
|
|
Other
income
|
|
|
778
|
|
|
959
|
|
|
2,445
|
|
|
2,626
|
|
Total
Non-Interest Income
|
|
|
14,766
|
|
|
13,012
|
|
|
40,617
|
|
|
36,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
8,733
|
|
|
8,739
|
|
|
26,129
|
|
|
25,063
|
|
Occupancy
and equipment
|
|
|
1,602
|
|
|
1,687
|
|
|
4,825
|
|
|
4,726
|
|
Depreciation
|
|
|
1,061
|
|
|
1,096
|
|
|
3,182
|
|
|
3,034
|
|
Professional
fees and litigation expense
|
|
|
379
|
|
|
456
|
|
|
1,345
|
|
|
1,535
|
|
Postage,
delivery, and statement mailings
|
|
|
765
|
|
|
670
|
|
|
2,098
|
|
|
1,938
|
|
Advertising
|
|
|
810
|
|
|
764
|
|
|
2,339
|
|
|
2,231
|
|
Telecommunications
|
|
|
498
|
|
|
702
|
|
|
1,499
|
|
|
1,688
|
|
Bankcard
expenses
|
|
|
485
|
|
|
512
|
|
|
1,486
|
|
|
1,597
|
|
Insurance
and regulatory
|
|
|
384
|
|
|
385
|
|
|
1,153
|
|
|
1,116
|
|
Office
supplies
|
|
|
417
|
|
|
327
|
|
|
1,171
|
|
|
805
|
|
Repossessed
asset gains, net of expenses
|
|
|
20
|
|
|
(35
|
)
|
|
(105
|
)
|
|
(50
|
)
|
Loss
on repurchase of trust preferred securities
|
|
|
379
|
|
|
-
|
|
|
661
|
|
|
-
|
|
Other
expenses
|
|
|
2,600
|
|
|
2,619
|
|
|
7,402
|
|
|
7,091
|
|
Total
Non-Interest Expense
|
|
|
18,133
|
|
|
17,922
|
|
|
53,185
|
|
|
50,774
|
|
Income
Before Income Taxes
|
|
|
20,922
|
|
|
20,110
|
|
|
61,824
|
|
|
56,685
|
|
Income
tax expense
|
|
|
7,302
|
|
|
6,938
|
|
|
21,577
|
|
|
19,486
|
|
Net
Income
|
|
$
|
13,620
|
|
$
|
13,172
|
|
$
|
40,247
|
|
$
|
37,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.78
|
|
$
|
0.73
|
|
$
|
2.27
|
|
$
|
2.15
|
|
Diluted
earnings per common share
|
|
$
|
0.77
|
|
$
|
0.72
|
|
$
|
2.26
|
|
$
|
2.12
|
|
Dividends
declared per common share
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.84
|
|
$
|
0.75
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,557
|
|
|
18,052
|
|
|
17,759
|
|
|
17,314
|
|
Diluted
|
|
|
17,619
|
|
|
18,238
|
|
|
17,817
|
|
|
17,514
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
Nine
Months Ended September 30, 2006 and 2005
(in
thousands)
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
|
$
|
42,298
|
|
$
|
55,512
|
|
$
|
128,175
|
|
$
|
(8,761
|
)
|
$
|
(1,144
|
)
|
$
|
216,080
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
37,199
|
|
|
|
|
|
|
|
|
37,199
|
|
Other
comprehensive income, net of deferred income taxes of
$1,975:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on available-for-sale securities of $4,032, net
of taxes
and reclassification adjustment for gains included in net income
of
$26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,419
|
)
|
|
(2,419
|
)
|
Net
unrealized loss on interest rate floors of $905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(543
|
)
|
|
(543
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,237
|
|
Cash
dividends declared ($0.75 per share)
|
|
|
|
|
|
|
|
|
(13,194
|
)
|
|
|
|
|
|
|
|
(13,194
|
)
|
Issuance
of 1,580,034 shares for acquisition of Classic Bancshares, net 108,173
shares owned and transferred to treasury
|
|
|
3,951
|
|
|
53,739
|
|
|
|
|
|
(3,351
|
)
|
|
|
|
|
54,339
|
|
Issuance
of stock awards net
|
|
|
|
|
|
(403
|
)
|
|
|
|
|
550
|
|
|
|
|
|
147
|
|
Exercise
of 262,709 stock options
|
|
|
|
|
|
(3,851
|
)
|
|
|
|
|
8,506
|
|
|
|
|
|
4,655
|
|
Purchase
of 173,876 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
(5,832
|
)
|
|
|
|
|
(5,832
|
)
|
Balances
at September 30, 2005
|
|
$
|
46,249
|
|
$
|
104,997
|
|
$
|
152,180
|
|
$
|
(8,888
|
)
|
$
|
(4,106
|
)
|
$
|
290,432
|
|
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
$
|
46,249
|
|
$
|
104,435
|
|
$
|
160,747
|
|
$
|
(11,278
|
)
|
$
|
(8,012
|
)
|
$
|
292,141
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
40,247
|
|
|
|
|
|
|
|
|
40,247
|
|
Other
comprehensive gain, net of deferred income taxes of $487:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities of $462, net of taxes and
reclassification adjustment for losses included in net income of
$2,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
277
|
|
Net
unrealized gain on interest rate floors of $755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453
|
|
|
453
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,977
|
|
Cash
dividends declared ($0.84 per share)
|
|
|
|
|
|
|
|
|
(14,823
|
)
|
|
|
|
|
|
|
|
(14,823
|
)
|
Issuance
of stock awards net
|
|
|
|
|
|
227
|
|
|
|
|
|
244
|
|
|
|
|
|
471
|
|
Exercise
of 39,935 stock options
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
1,455
|
|
|
|
|
|
653
|
|
Excess
tax benefit on stock -based compensation
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Purchase
of 590,053 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
(21,314
|
)
|
|
|
|
|
(21,314
|
)
|
Balances
at September 30, 2006
|
|
$
|
46,249
|
|
$
|
104,082
|
|
$
|
186,171
|
|
$
|
(30,893
|
)
|
$
|
(7,282
|
)
|
$
|
298,327
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands)
|
|
Nine
Months Ended September 30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
Net
income
|
|
$
|
40,247
|
|
$
|
37,199
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Amortization
and accretion
|
|
|
(2,059
|
)
|
|
800
|
|
Provision
for loan losses
|
|
|
2,900
|
|
|
600
|
|
Depreciation
of premises and equipment
|
|
|
3,182
|
|
|
3,034
|
|
Deferred
income tax expense
|
|
|
1,027
|
|
|
2,683
|
|
Net
periodic employee benefit cost
|
|
|
184
|
|
|
37
|
|
Loss
on repurchase of trust preferred securities
|
|
|
661
|
|
|
-
|
|
Realized
investment securities losses (gains)
|
|
|
2,067
|
|
|
(26
|
)
|
Gain
on sale of credit card portfolio
|
|
|
(3,563
|
)
|
|
-
|
|
Loss
(gain) on sale of premises and equipment
|
|
|
15
|
|
|
(70
|
)
|
Proceeds
from bank-owned life insurance
|
|
|
126
|
|
|
910
|
|
Increase
in value of bank-owned life insurance
|
|
|
(1,776
|
)
|
|
(2,088
|
)
|
Decrease
(increase) in accrued interest receivable
|
|
|
200
|
|
|
(1,424
|
)
|
Increase
in other assets
|
|
|
(8,374
|
)
|
|
(2,442
|
)
|
Increase
(decrease) in other liabilities
|
|
|
5,400
|
|
|
(3,212
|
)
|
Net
Cash Provided by Operating Activities
|
|
|
40,237
|
|
|
36,001
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities held-to-maturity
|
|
|
1,437
|
|
|
3,072
|
|
Proceeds
from sale of money market and mutual fund securities available-for-sale
|
|
|
757,150
|
|
|
960,201
|
|
Purchases
of money market and mutual fund securities
available-for-sale
|
|
|
(754,842
|
)
|
|
(1,001,150
|
)
|
Proceeds
from sales of securities available-for-sale
|
|
|
33,219
|
|
|
2,527
|
|
Proceeds
from maturities and calls of securities available-for-sale
|
|
|
57,673
|
|
|
105,756
|
|
Purchases
of securities available-for-sale
|
|
|
(11,604
|
)
|
|
(12,285
|
)
|
Net
(increase) in loans
|
|
|
(81,230
|
)
|
|
(36,959
|
)
|
Sales
of premises and equipment
|
|
|
-
|
|
|
210
|
|
Purchases
of premises and equipment
|
|
|
(4,200
|
)
|
|
(3,456
|
)
|
Acquisition,
net cash received
|
|
|
-
|
|
|
(7,121
|
)
|
Net
Cash (Used in) Provided by Investing Activities
|
|
|
(2,397
|
)
|
|
10,795
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
Net
(decrease) in noninterest-bearing deposits
|
|
|
(40,189
|
)
|
|
(3,572
|
)
|
Net
increase (decrease) in interest-bearing deposits
|
|
|
91,691
|
|
|
(24,400
|
)
|
Net (decrease)
increase in short-term borrowings
|
|
|
(19,016
|
)
|
|
1,562
|
|
Repayment
of long-term debt
|
|
|
(12,991
|
)
|
|
(1,542
|
)
|
Redemption
of trust preferred securities
|
|
|
(6,477
|
)
|
|
-
|
|
Purchases
of treasury stock
|
|
|
(21,314
|
)
|
|
(5,832
|
)
|
Exercise
of stock options
|
|
|
653
|
|
|
2,232
|
|
Excess
tax benefits from stock-based compensation arrangements
|
|
|
222
|
|
|
-
|
|
Dividends
paid
|
|
|
(14,432
|
)
|
|
(12,301
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(21,853
|
)
|
|
(43,853
|
)
|
Increase
in Cash and Cash Equivalents
|
|
|
15,987
|
|
|
2,943
|
|
Cash
and cash equivalents at beginning of period
|
|
|
86,273
|
|
|
56,084
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
102,260
|
|
$
|
59,027
|
|
See
notes to consolidated financial statements.
September
30, 2006
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, 2006 are not necessarily indicative of the results of operations that can
be
expected for the year ending December 31, 2006. 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, 2005 has been extracted from
audited financial statements included in the Company’s 2005 Annual Report to
Stockholders. Certain information and footnote disclosures normally included
in
the annual financial statements prepared in accordance with U.S. generally
accepted accounting principles have been omitted. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the 2005 Annual Report of the Company.
Certain
amounts in the 2005 financial statements have been reclassified to conform
to
the 2006 presentation. Such reclassifications had no impact on net income or
shareholders’ equity.
Note
B -Previously Securitized Loans
Between
1997 and 1999, the Company completed six securitization transactions involving
approximately $760 million in 125% of fixed rate, junior-lien underlying
mortgages. The Company retained a financial interest in each of the
securitizations. Principal amounts owed to investors 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 in the
securitization transactions, or at the option of the Note insurer, on or after
the date on which the related Note balance 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. During 2003 and 2004, the outstanding Note
balances of the six securitizations declined below this 5% threshold and the
Company exercised its redemption options on each of those securitizations.
The
table below summarizes information regarding delinquencies, net credit
recoveries, and outstanding collateral balances of previously securitized loans
for the dates presented:
|
|
As
of and for the Nine
Months
Ended
|
|
As
of and for the Year Ended
|
|
|
|
September
30,
|
|
December
31,
|
|
(
in thousands)
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
Previously
Securitized Loans:
|
|
|
|
|
|
|
|
Total
principal amount of loans outstanding
|
|
$
|
36,291
|
|
$
|
53,320
|
|
$
|
48,061
|
|
Discount
|
|
|
(17,771
|
)
|
|
(17,721
|
)
|
|
(17,805
|
)
|
Net
book value
|
|
$
|
18,520
|
|
$
|
35,599
|
|
$
|
30,256
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount of loans between 30 and 89 days past due
|
|
$
|
827
|
|
$
|
1,843
|
|
$
|
1,848
|
|
Principal
amount of loans 90 days and above past due
|
|
|
387
|
|
|
381
|
|
|
268
|
|
Net
credit recoveries during the period
|
|
|
3,817
|
|
|
2,237
|
|
|
3,225
|
|
The
Company accounts for the difference between the carrying value and the total
expected cash flows from these loans as an adjustment of the yield earned on
the
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. An impairment charge on
previously securitized loans would be provided through the Company’s provision
for loan losses if the discounted present value of estimated future cash flows
declines below the recorded value of previously securitized loans. No such
impairment charges were recorded for the nine months ended September 30, 2006,
or for the year ending December 31, 2005.
As
of
September 30, 2006, the Company reported a book value of previously securitized
loans of $18.5 million whereas the actual contractual outstanding balance of
previously securitized loans at September 30, 2006, was $36.3 million. The
difference (“the discount”) between the book value and the expected total cash
flows from previously securitized loans is accreted into interest income over
the life of the loans.
During
the first nine months of 2006 and 2005, the Company recognized $7.4 million
and
$8.8 million, respectively, of interest income from its previously securitized
loans.
Note
C -Derivative Instruments
The
Company utilizes interest rate floors to mitigate exposure to interest rate
risk. As of September 30, 2006, the Company has entered into eight
interest rate floor contracts with a total notional amount of $600 million,
seven of which (total notional amount of $500 million) are designated as cash
flow hedges. The objective of these interest rate floors is to protect the
overall cash flows from the Company’s portfolio of $500 million of
variable-rate loans outstanding from the risk of a decrease in those cash
flows.
The
notional amounts and estimated fair values of interest rate floor derivative
positions outstanding at period end are presented in the following table. The
estimated fair values of the interest rate floors on variable-rate loans are
based on quoted market prices.
|
|
September
30, 2006
|
|
December
31, 2005
|
|
(in
thousands)
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Interest
rate floors on variable-rate loans
|
|
$
|
500,000
|
|
$
|
5,371
|
|
$
|
400,000
|
|
$
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average strike rates for interest rate floors outstanding
at
September 30, 2006 range from 6.00% to
8.00%.
|
Interest
rate contracts involve the risk of dealing with counterparties and their ability
to meet contractual terms. These counterparties must have an investment grade
credit rating and be approved by the Company’s Asset and Liability
Committee.
For
cash
flow hedges, the effective portion of the gain or loss on the derivative hedging
instrument is reported in other comprehensive income, while the ineffective
portion (indicated by the excess of the cumulative change in the fair value
of
the derivative over that which is necessary to offset the cumulative change
in
expected future cash flows on the hedge transaction) is recorded in current
earnings as other income or other expense. The Company recognized the increase
in fair value of $0.5 million, net of taxes, in Other Comprehensive Income
for
the nine months ending September 30, 2006 on these derivative
instruments.
During
the second quarter of 2006, the Company redesignated an interest rate floor
contract with a total notional amount of $100 million that had previously been
accounted for as a cash flow hedge as a freestanding derivative. The Company
recorded a $0.1 million charge to expense to reflect changes in fair value
of
this instrument during the second quarter of 2006. This interest rate floor
has
no fair value at September 30, 2006, matures in 20 months and has a strike
rate
of 6.00%.
Note
D - Short-term borrowings
The
components of short-term borrowings are summarized below:
(
in thousands)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Security
repurchase agreements
|
|
$
|
104,381
|
|
$
|
76,443
|
|
Short-term
FHLB advances
|
|
|
31,579
|
|
|
75,812
|
|
Total
short-term borrowings
|
|
$
|
135,960
|
|
$
|
152,255
|
|
Securities
sold under agreements 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.
Note
E - Long-Term Debt
The
components of long-term debt are summarized below:
(dollars
in thousands)
|
|
Maturity
|
|
September
30, 2006
|
|
Weighted
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
|
|
2008
|
|
$
|
46,349
|
|
|
3.55
|
%
|
FHLB
Advances
|
|
|
2010
|
|
|
3,000
|
|
|
6.05
|
%
|
FHLB
Advances
|
|
|
2011
|
|
|
1,000
|
|
|
5.98
|
%
|
FHLB
Advances
|
|
|
Thereafter
|
|
|
3,484
|
|
|
4.90
|
%
|
Junior
subordinated debentures owed
to City Holding Capital Trust
|
|
|
2028
(a
|
)
|
|
22,836
|
|
|
9.15
|
%
|
Total
long-term debt
|
|
|
|
|
$
|
76,669
|
|
|
|
|
(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.
The
Company formed a statutory business trust, City Holding Capital Trust (“the
Capital Trust”), under the laws of Delaware. The Capital Trust was created for
the exclusive purpose of (i) issuing trust-preferred capital securities
(“Capital Securities”), which represent preferred undivided beneficial interests
in the assets of the trust, (ii) using the proceeds from the sale of the
Capital Securities to acquire junior subordinated debentures (“Debentures”)
issued by the Company, and (iii) engaging in only those activities
necessary or incidental thereto. The trust is considered a variable interest
entity for which the Company is not the primary beneficiary. Accordingly, the
accounts of the trusts are not included in the Company’s consolidated financial
statements. During the nine months ended September 30, 2006, the Company
incurred a $0.7 million charge related to the early extinguishment of debt
through the repurchase of $6 million of its trust preferred securities.
The
Capital Securities issued by the statutory business trust qualify as Tier 1
capital for the Company under the Federal Reserve Board guidelines. In March
2005, the Federal Reserve Board issued a final rule that allows the inclusion
of
trust preferred securities issued by unconsolidated subsidiary trusts in Tier
1
capital, but with stricter limits. Under this ruling, after a five-year
transition period, the aggregate amount of trust preferred securities and
certain other capital elements would be limited to 25% of Tier 1 capital
elements, net of goodwill. The amount of trust preferred securities and certain
other elements in excess of the limit could be included in Tier 2 capital,
subject to restrictions. The Company expects to include all of its $22.0 million
in trust preferred securities in Tier 1 capital. The trust preferred securities
could be redeemed without penalty if they were no longer permitted to be
included in Tier 1 capital.
Note
F - Employee Benefit Plans
On
January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” which
is a revision of SFAS No. 123, “Accounting for Stock Issued for Employees.” SFAS
No. 123R establishes accounting requirements for share-based compensation to
employees and carries forward prior guidance on accounting for awards to
non-employees. Prior to the adoption of SFAS No. 123R, the Company reported
employee compensation expense under stock option plans only if options were
granted below market prices at grant date in accordance with the intrinsic
value
method of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations. In accordance with APB
No. 25, the Company reported no compensation expense on options granted as
the
exercise price of the options granted always equaled the market price of the
underlying stock on the date of grant. SFAS No. 123R eliminated the ability
to account for stock-based compensation using APB No. 25 and requires that
such transactions be recognized as compensation cost in the income statement
based on their fair values on the measurement date, which is generally the
date
of the grant.
The
Company transitioned to SFAS No. 123R using the modified prospective application
method ("modified prospective application"). As permitted under modified
prospective application, as it is applicable to the Company, SFAS No. 123R
applies to new awards and to awards modified, repurchased, or cancelled after
January 1, 2006. Additionally, compensation cost for non-vested awards that
were outstanding as of January 1, 2006 will be recognized as the remaining
requisite service is rendered during the period of and/or the periods after
the
adoption of SFAS No. 123R, adjusted for estimated forfeitures. The
recognition of compensation cost for those earlier awards is based on the same
method and on the same grant-date fair values previously determined for the
pro
forma disclosures reported by the Company for periods prior to January 1,
2006.
The
fair
value of the Company's employee stock options granted is estimated at the date
of grant using the Black-Scholes option-pricing model. This model requires
the
input of highly subjective assumptions, changes to which can materially affect
the fair value estimate. Additionally, there may be other factors that would
otherwise have a significant effect on the value of employee stock options
granted, but are not considered by the model. 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. The assumptions used in the
Black-Scholes option-pricing model are as follows:
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.93
|
%
|
|
3.71
|
%
|
Expected
dividend yield
|
|
|
2.98
|
%
|
|
3.11
|
%
|
Volatility
factor
|
|
|
0.384
|
|
|
0.388
|
|
Expected
life of option
|
|
|
5
years
|
|
|
5
years
|
|
As
the
Company has not issued any options during the nine months ended September 30,
2006, the factors for September 30, 2006 are consistent with amounts at December
31, 2005 reported in the Company’s 2005 Annual Report.
There
was
no material impact on the Company’s income before income taxes and net income
from the adoption of SFAS No. 123R. Prior to the adoption of SFAS No. 123R,
the
Company presented all tax benefits of deductions resulting from the exercise
of
stock options as operating cash flows in the Consolidated Statements of Cash
Flows. SFAS No. 123R requires the cash flows from the tax benefits resulting
from tax deductions in excess of the compensation expense recognized for those
options to be classified as financing cash flows. An excess tax benefit totaling
$0.2 million is classified as a financing cash inflow for the nine months
ended September 30, 2006.
Stock-based
compensation expense is recognized ratably over the requisite service period
for
all awards. Unrecognized stock-based compensation expense related to stock
options totaled $0.3 million at September 30, 2006. At September 30, 2006,
this unrecognized expense is expected to be recognized over 16 months based
on
the weighted average-life of the option.
The
following pro forma information presents net income, earnings per share, and
diluted earnings per share for the three and nine months ended September 30,
2005 as if the fair value method of SFAS No. 123R had been used to measure
compensation cost for stock-based compensation plans. For purposes of these
pro
forma disclosures, the estimated fair value of options is amortized to expense
over the options’ vesting periods.
|
|
For
the Three Months Ended September 30,
|
|
For
the
Nine
Months Ended September 30,
|
|
(in
thousands, except earnings per share data)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
13,172
|
|
$
|
37,199
|
|
Pro
forma stock-based employee compensation
expense,
net of tax
|
|
|
(133
|
)
|
|
(337
|
)
|
Net
income, pro forma
|
|
$
|
13,039
|
|
$
|
36,862
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share, as reported
|
|
$
|
0.73
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share, pro forma
|
|
$
|
0.72
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share, as reported
|
|
$
|
0.72
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share, pro forma
|
|
$
|
0.71
|
|
$
|
2.10
|
|
A
summary
of the Company’s stock option activity and related information is presented
below for the nine months ended September 30:
|
|
2006
|
|
2005
|
|
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
318,132
|
|
$
|
28.56
|
|
|
602,307
|
|
$
|
16.51
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
101,500
|
|
|
32.23
|
|
Exercised
|
|
|
(39,935
|
)
|
|
16.36
|
|
|
(262,709
|
)
|
|
8.50
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
(60,750
|
)
|
|
33.90
|
|
Outstanding
at September 30
|
|
|
278,197
|
|
$
|
30.32
|
|
|
380,348
|
|
$
|
23.46
|
|
Additional
information regarding stock options outstanding and exercisable at September
30,
2006, is provided in the following table:
Ranges
of Exercise Prices
|
|
No.
of Options Outstanding
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual Life (Months)
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
No.
of Options Currently Exercisable
|
|
Weighted-Average
Exercise Price of Options Currently Exercisable
|
|
Aggregate
Intrinsic Value of Options Currently Exercisable (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.30
|
|
|
24,100
|
|
$
|
13.30
|
|
|
64
|
|
$
|
640
|
|
|
24,100
|
|
$
|
13.30
|
|
$
|
640
|
|
$28.00
- $36.90
|
|
|
254,097
|
|
|
31.93
|
|
|
94
|
|
|
2,018
|
|
|
181,472
|
|
|
31.79
|
|
|
1,467
|
|
|
|
|
278,197
|
|
|
|
|
|
|
|
$
|
2,658
|
|
|
205,572
|
|
|
|
|
$
|
2,107
|
|
In
addition to stock options, the Company also grants restricted stock awards
to
certain officers and employees. The Company records compensation expense with
respect to such awards in an amount equal to the fair market value of the common
stock covered by each award on the date of grant. The restricted shares awarded
become fully vested after various periods of continued employment from the
respective dates of grant. The Company is entitled to an income tax deduction
in
an amount equal to the taxable income reported by the holders of the restricted
shares when the restrictions are released and the shares are issued.
Compensation is being charged to expense over the respective vesting periods.
Restricted shares are forfeited if officers and employees terminate prior to
the
lapsing of restrictions. The Company records forfeitures of restricted stock
as
treasury share repurchases and any compensation cost previously recognized
is
reversed in the period of forfeiture. Stock-based compensation expense
associated with stock awards, included in salaries and employee benefits, was
$0.1 million for the nine month period ended September 30, 2006. There was
no
expense associated with stock awards for the 2005 reporting period. Unrecognized
stock-based compensation expense related to non-vested stock awards was
$0.2 million at September 30, 2006. At September 30, 2006, this
unrecognized expense is expected to be recognized over 4 years based on the
weighted average-life of the options.
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 otherwise specifically
chosen, every employee is automatically enrolled in the 401(k) Plan and may
make
before-tax contributions of between 1% and 15% of eligible pay up to the dollar
limit imposed by Internal Revenue Service regulations. The first 6% of an
employee’s contribution is matched 50% 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 $0.4 million for both of the nine month
periods ended September 30, 2006 and September 30, 2005 and approximated $0.1
million for both of the three month periods ended September 30, 2006 and
September 30, 2005.
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 made contributions
to
the Defined Benefit Plan approximating $0.1 million for both of the nine month
periods ended September 30, 2006 and 2005.
The
following table presents the components of the net periodic pension cost of
the
Defined Benefit Plan:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic cost:
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
162
|
|
$
|
166
|
|
$
|
503
|
|
$
|
497
|
|
Expected
return on plan assets
|
|
|
(180
|
)
|
|
(190
|
)
|
|
(561
|
)
|
|
(571
|
)
|
Net
amortization and deferral
|
|
|
79
|
|
|
37
|
|
|
242
|
|
|
111
|
|
Net
Periodic Pension Cost
|
|
$
|
61
|
|
$
|
13
|
|
$
|
184
|
|
$
|
37
|
|
Note
G - Commitments and Contingencies
The
Company is a party to certain financial instruments with off-balance sheet
risk
in the normal course of business to meet the financing needs of its customers.
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. The Company also
provides overdraft protection to certain demand deposit customers that represent
an unfunded commitment. Overdraft protection commitments, which are included
with other commitments below, are uncollateralized and are paid at the Company’s
discretion. 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 funded
portion of these financial instruments is reflected in the Company’s balance
sheet, while the unfunded portion of these commitments is not reflected in
the
balance sheet. The table below presents a summary of the contractual obligations
of the Company resulting from significant commitments:
(
in thousands)
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
|
Home
equity lines
|
|
$
|
140,418
|
|
$
|
148,259
|
|
Credit
card lines
|
|
|
-
|
|
|
39,646
|
|
Commercial
real estate
|
|
|
45,904
|
|
|
65,966
|
|
Other
commitments
|
|
|
133,268
|
|
|
145,535
|
|
Standby
letters of credit
|
|
|
12,520
|
|
|
7,250
|
|
Commercial
letters of credit
|
|
|
614
|
|
|
312
|
|
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
H - Total Comprehensive Income
The
following table sets forth the computation of total comprehensive
income:
|
|
Nine
months ended September 30,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
Net
income
|
|
$
|
40,247
|
|
$
|
37,199
|
|
|
|
|
|
|
|
|
|
Unrealized
security (losses) arising during the period
|
|
|
(1,605
|
)
|
|
(4,006
|
)
|
Reclassification
adjustment for losses (gains) included in income
|
|
|
2,067
|
|
|
(26
|
)
|
|
|
|
462
|
|
|
(4,032
|
)
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on interest rate floors
|
|
|
755
|
|
|
(905
|
)
|
Other
comprehensive income before income taxes
|
|
|
1,217
|
|
|
(4,937
|
)
|
Tax
effect
|
|
|
(487
|
)
|
|
1,975
|
|
Total
comprehensive income
|
|
$
|
40,977
|
|
$
|
34,237
|
|
Note
I - Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
(in
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
13,620
|
|
$
|
13,172
|
|
$
|
40,247
|
|
$
|
37,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
17,557
|
|
|
18,052
|
|
|
17,759
|
|
|
17,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
62
|
|
|
186
|
|
|
58
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
for diluted earnings per share
|
|
|
17,619
|
|
|
18,238
|
|
|
17,817
|
|
|
17,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.78
|
|
$
|
0.73
|
|
$
|
2.27
|
|
$
|
2.15
|
|
Diluted
earnings per share
|
|
$
|
0.77
|
|
$
|
0.72
|
|
$
|
2.26
|
|
$
|
2.12
|
|
Options
to purchase 90,000 shares of common stock at exercise prices between $32.89
and
$33.90 per share were outstanding during the third quarter of 2005,
respectively, 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 would have been
anti-dilutive.
Note
J - Acquisitions
On
May
20, 2005, City completed the acquisition of Classic Bancshares (“Classic”) and
the merger of Classic’s subsidiary, Classic Bank, into City National Bank. On
May 20, 2005, Classic had total assets of $338 million, net loans of $254
million, deposits of $252 million, and $38 million of shareholders’ equity. The
acquisition was accounted for using the purchase accounting method and the
results of operations of Classic are included in City’s consolidated statement
of income from the date of acquisition forward.
Pro
forma
information regarding the acquisition has not been presented as the acquisition
is not deemed to be significant, and pro forma results assuming that the
acquisition had occurred at the beginning of 2005 would not be materially
different than the results reported herein.
Note
K - Disposition
On
August
4, 2006, the Company sold its credit card portfolio of approximately $11.5
million to Elan Financial Services (Elan), a wholly owned subsidiary of U.S.
Bancorp. As part of this agreement, the Company and Elan have entered into
an
agent marketing agreement that will enable the Company’s customers to continue
to receive credit card products, while allowing Elan the exclusive marketing
rights to the Company’s current and prospective customer base. This transaction
was completed during the third quarter of 2006 and resulted in a pre-tax gain
of
approximately $3.6 million for the Company. These loans were previously reported
as loans held for sale at June 30, 2006.
Note
L - Recent Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting and disclosure
for uncertain in tax positions, as defined. FIN 48 requires that a tax position
meet a "probable recognition threshold" for the benefit of the uncertain tax
position to be recognized in the financial statements. A tax position that
fails
to meet the probable recognition threshold will result in either reduction
of a
current or deferred tax asset or receivable, or recording a current or deferred
tax liability. FIN 48 also provides guidance on measurement, derecognition
of
tax benefits, classification, interim period accounting disclosure, and
transition requirements in accounting for uncertain tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is assessing the impact of adopting the new pronouncement and is
currently unable to estimate its impact, if any, on the Company's consolidated
financial statements.
In
September 2006, the FASB issued Statement No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (Statement 158), an
amendment of FASB Statements No. 87, 88, 106, and 132(R) Statement 158
requires recognition of the funded status (the difference between the fair
value
of the plan assets and the benefit obligation) of a benefit plan as an asset
or
liability in the employers’ financial statements, requires the measurement of
benefit plan assets and obligations as of the end of the employer's fiscal
year-end, and requires recognition of the funded status of a benefit plan in
other comprehensive income in the year in which the changes occur. Statement
158
is effective for fiscal years ending after December 15, 2006, and early
application is encouraged. The requirement to measure the plan assets and
benefit obligation as of the date of the employers’ fiscal year-end financial
statements is effective for fiscal years ending after December 15, 2008. The
Company does not anticipate that the adoption of this statement will have a
material effect on its financial statements.
Critical
Accounting Policies
The
accounting policies of the Company conform with U.S. generally accepted
accounting principles and require management to make estimates and develop
assumptions that affect the amounts reported in the financial statements and
related footnotes. 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 2005 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 2005 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, income taxes, and 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
25
- 29 of this Quarterly Report on Form 10-Q provide management’s analysis of the
Company’s allowance for loan losses and related provision. The allowance for
loan losses is maintained at a level that represents management’s best estimate
of 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.
The
Company is subject to federal and state income taxes in the jurisdictions in
which it conducts business. In computing the provision for income taxes,
management must make judgments regarding interpretation of laws in those
jurisdictions. Because the application of tax laws and regulations for many
types of transactions is susceptible to varying interpretations, amounts
reported in the financial statements could be changed at a later date upon
final
determinations by taxing authorities. On a quarterly basis, the Company
estimates its annual effective tax rate for the year and uses that rate to
provide for income taxes on a year-to-date basis.
Note
B,
beginning on page 8 of this Quarterly Report on Form 10-Q, and pages 29 and
30
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 carrying value of
previously securitized loans is determined using assumptions with regard to
loan
prepayment and default rates. Using cash flow modeling techniques that
incorporate these assumptions, the Company estimated total future cash
collections expected to be received from these loans and determined the yield
at
which the resulting discount would be accreted into income.
If,
upon
periodic 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 periodic evaluation, the discounted
present value of estimated future cash flows declines below the recorded value
of previously securitized loans, an impairment charge would be provided through
the Company’s provision for loan losses. Please refer to Note B of Notes to
Consolidated Financial Statements, on pages 8 - 9 for further discussion of
SOP
03-3.
Financial
Summary
Nine
Months Ended September 30, 2006 vs. 2005
The
Company reported consolidated net income of $40.2 million, or $2.26 per diluted
common share, for the nine months ended September 30, 2006, compared to $37.2
million, or $2.12 per diluted common share for the nine months ended September
30, 2005. Return on average assets (“ROA”) was 2.13% and return on average
equity (“ROE”) was 18.3% for the first nine months of 2006, compared to 2.09%
and 19.5%, respectively, for the first nine months of 2005.
Net
interest income increased $5.8 million from $71.5 million for the nine months
ended September 30, 2005, to $77.3 million for the nine months ended September
30, 2006 due to both internal growth and the acquisition of Classic that was
completed during the second quarter of 2005 (see Net
Interest Income).
For
the first nine months of 2006, the Company has recorded a provision for loan
losses of $2.9 million, compared to $0.6 million for the first nine months
of
2005 (see Allowance
and Provision for Loan Losses).
Primarily on the strength of increased service charge revenues, ($3.0 million
or
10.6%), non-interest income increased $4.1 million from the nine months ended
September 30, 2005 to the nine months ended September 30, 2006. Additionally,
the Company recognized a gain of $3.6 million from the sale of its credit card
portfolio, which was partially offset by $2.1 million of realized investment
losses (see Non-Interest
Income).
Non-interest expenses increased $2.4 million primarily due to the acquisition
of
Classic, which was completed during the second quarter of 2005.
Three
Months Ended September 30, 2006 vs. 2005
The
Company reported consolidated net income of $13.6 million, or $0.77 per diluted
common share, for the three months ended September 30, 2006, compared to $13.2
million, or $0.72 per diluted common share, for the third quarter of 2005.
Return on average assets (“ROA”) was 2.17% and return on average equity (“ROE”)
was 18.6% for the third quarter of 2006, compared to 2.09% and 18.2%,
respectively, for the third quarter of 2005.
The
Company’s tax equivalent net interest income was essentially flat from the third
quarter of 2005 to the third quarter of 2006 as increased yields on interest
earning assets were more than offset by increases in the rates paid on
interest-bearing liabilities. Compared to the third quarter of 2005, interest
income decreased $1.4 million due to volume (primarily related to previously
securitized loans) that was offset by an increase of $1.3 million due to rates
increases. The Company recorded a provision for loan losses of $1.2 million
for
the third quarter of 2006 while $0.6 million was recorded for the third quarter
of 2005 (see Allowance and Provision for Loan Losses). As further discussed
under the caption Non-Interest Income and Expense, non-interest income increased
$1.8 million from the quarter ended September 30, 2005, to the quarter ended
September 30, 2006. During the third quarter of 2006, a gain of $3.6 million
from the Company’s sale of its credit card portfolio was offset by $2.1 million
of realized investment losses. Non-interest expenses increased $0.2 million
principally due to a $0.4 million charge associated with the early
extinguishment of debt through the repurchase of $3.5 million of the Company’s
trust preferred securities.
Net
Interest Income
Nine
Months Ended September 30, 2006 vs. 2005
On
a tax
equivalent basis, net interest income increased $5.8 million, or 8.0%, from
$72.3 million in the first nine months of 2005 to $78.0 million in the first
nine months of 2006. This increase was primarily due to a widening of the
Company’s net interest margin that increased net interest income by $5.6 million
from the first nine months of 2005. Interest income from the Company’s loan
portfolio excluding Previously Securitized Loans increased $10.6 million from
the nine months ended September 30, 2005 as the yield on these loans increased
84 basis points. In addition to benefiting from increased yields on loans,
the
Company has also been able to increase the average balances of its traditional
loan portfolio (residential real estate, home equity, commercial and consumer
loans) due to both internal growth and the acquisition of Classic during the
second quarter of 2005. The increase in average balances of $179 million, or
12.5%, from the first nine months of 2005 increased interest income associated
with these loans by $5.2 million.
These
increases were partially offset by increased interest expenses associated with
higher rates paid on interest-bearing deposit accounts and increased balances
of
interest-bearing deposits. As a result of an increase of 74 basis points in
the
rate paid on interest-bearing deposits, interest expense increased $7.9 million
from the first nine months ended September 30, 2005. In addition, as a result
of
an increase in the average balances of interest-bearing deposits of $170
million, or 11.7%, interest expense increased $3.3 million from the first nine
months of 2005. The increase in the average balance of interest-bearing deposits
from the nine months ended September 30, 2005 is attributable to the Classic
acquisition and internal growth.
In
addition to increased deposit interest expense, the Company’s increase in
interest income was also partially offset by a decrease in interest income
from
Previously Securitized Loans of $1.4 million from the nine months ended
September 30, 2005. This decrease is due to a decrease in the average balances
of these loans of $22.1 million, or 48.0%, from $46.2 million for the nine
months ended September 30, 2005 to $24.1 million for the nine months ended
September 30, 2006. As a result of this decrease, interest income from
Previously Securitized Loans decreased $4.2 million from the nine months ended
September 30, 2005. This reduction was partially mitigated by an increase in
the
yield on these assets from 25.54% for the first nine months of 2005 to 41.19%
for the first nine months of 2006 (see Previously
Securitized Loans).
The
net
interest margin for the first nine months of 2006 of 4.60% represented a 14
basis point increase from the first nine months of 2005’s net interest margin of
4.46%. In order to offset the decreasing balances of high yielding previously
securitized loans and resultant lower levels of interest income from these
assets, the Company positioned its balance sheet to benefit from rising interest
rates by emphasizing variable rate loan products. Excluding the impact of
previously securitized loans and the Classic acquisition, the Company’s net
interest margin increased 28 basis points, or $4.6 million, for the nine months
ended September 30, 2005 when compared to the nine months ended September 30,
2006.
Three
Months Ended September 30, 2006 vs. 2005
The
Company’s tax equivalent net interest income was essentially flat from the third
quarter of 2005 to the third quarter of 2006 as increased yields on interest
earning assets were more than offset by increases in the rates paid on
interest-bearing liabilities. Compared to the third quarter of 2005, interest
income decreased $1.4 million due to volume (primarily related to previously
securitized loans) that was offset by an increase of $1.3 million due to rates
increases.
Interest
income on earning assets increased by $3.8 million, driven primarily by an
increase in interest income on loans of $3.7 million despite a decrease of
$0.7
million in interest income from previously securitized loans from the third
quarter of 2005. The decrease in interest income from previously securitized
loans was related to the continued decline in the average balance of these
loans
from $38.4 million for the quarter ended September 30, 2005, to $20.3 million
for the quarter ended September 30, 2006. However, this reduction in average
outstanding balances was partially mitigated as the yield on these loans rose
from an average of 30.1% for the third quarter of 2005 to 43.2% for the third
quarter of 2006 (see Previously Securitized Loans section for further
discussion). The yield for the immediately preceding quarter was 41.9%. Interest
income on all other loans (commercial, residential, home equity, and consumer)
increased by $4.4 million as the average yield on these loans increased by
80
basis points and the average balance on outstanding loans increased by $68.7
million (excluding previously securitized loans). Additionally, interest income
from loans was impacted by the sale of the Company’s credit card portfolio which
reduced interest income by $0.4 million from the third quarter of
2005.
Offsetting
the increase in interest income on earning assets was an increase in interest
expense on deposits of $3.3 million due primarily to an 87 basis point increase
in the rates paid on interest bearing deposits from the third quarter of 2005.
In addition, increases in average outstanding deposit balances of $87 million,
or 5.6%, drove up interest expense by $0.7 million. The increase in rates and
balances was primarily associated with time deposits, which experienced an
increase of 107 basis points while outstanding time deposit balances grew $105
million as compared to the third quarter of 2005.
The
net
interest margin was 4.51% for the quarters ended September 30, 2006 and 2005
and
4.58% during the quarter ended June 30, 2006. The decrease in the net interest
margin between the second quarter of 2006 and the third quarter of 2006 can
primarily be attributed to lower balances on previously securitized loans and
the sale of the credit card portfolio during the third quarter.
Table
One
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Nine
months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
597,223
|
|
$
|
25,630
|
|
|
5.74
|
%
|
$
|
528,420
|
|
$
|
22,205
|
|
|
5.62
|
%
|
Home
equity
|
|
|
309,007
|
|
|
17,945
|
|
|
7.76
|
|
|
306,047
|
|
|
13,770
|
|
|
6.02
|
|
Commercial
financial and agriculture
|
|
|
656,688
|
|
|
36,581
|
|
|
7.45
|
|
|
543,809
|
|
|
25,359
|
|
|
6.23
|
|
Installment
loans to individuals
|
|
|
49,381
|
|
|
4,211
|
|
|
11.40
|
|
|
54,695
|
|
|
4,630
|
|
|
11.32
|
|
Previously
securitized loans
|
|
|
24,090
|
|
|
7,422
|
|
|
41.19
|
|
|
46,232
|
|
|
8,832
|
|
|
25.54
|
|
Total
loans
|
|
|
1,636,389
|
|
|
91,789
|
|
|
7.50
|
|
|
1,479,203
|
|
|
74,796
|
|
|
6.76
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
554,884
|
|
|
21,618
|
|
|
5.21
|
|
|
637,413
|
|
|
22,616
|
|
|
4.74
|
|
Tax-exempt
(2)
|
|
|
42,823
|
|
|
2,091
|
|
|
6.53
|
|
|
42,450
|
|
|
2,138
|
|
|
6.73
|
|
Total
securities
|
|
|
597,707
|
|
|
23,709
|
|
|
5.30
|
|
|
679,863
|
|
|
24,754
|
|
|
4.87
|
|
Loans
held for sale
|
|
|
3,337
|
|
|
322
|
|
|
12.90
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Deposits
in depository institutions
|
|
|
28,208
|
|
|
1,018
|
|
|
4.83
|
|
|
4,415
|
|
|
73
|
|
|
2.21
|
|
Federal
funds sold
|
|
|
2,571
|
|
|
92
|
|
|
4.78
|
|
|
141
|
|
|
4
|
|
|
3.79
|
|
Total
interest-earning assets
|
|
|
2,268,212
|
|
|
116,930
|
|
|
6.89
|
|
|
2,163,622
|
|
|
99,627
|
|
|
6.16
|
|
Cash
and due from banks
|
|
|
51,077
|
|
|
|
|
|
|
|
|
47,124
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
42,787
|
|
|
|
|
|
|
|
|
37,989
|
|
|
|
|
|
|
|
Other
assets
|
|
|
170,710
|
|
|
|
|
|
|
|
|
138,319
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(16,135
|
)
|
|
|
|
|
|
|
|
(17,597
|
)
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,516,651
|
|
|
|
|
|
|
|
$
|
2,369,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
435,505
|
|
$
|
3,917
|
|
|
1.20
|
%
|
$
|
431,035
|
|
$
|
2,659
|
|
|
0.82
|
%
|
Savings
deposits
|
|
|
314,057
|
|
|
2,776
|
|
|
1.18
|
|
|
292,396
|
|
|
1,386
|
|
|
0.63
|
|
Time
deposits
|
|
|
864,972
|
|
|
24,810
|
|
|
3.83
|
|
|
721,582
|
|
|
16,191
|
|
|
3.00
|
|
Short-term
borrowings
|
|
|
149,858
|
|
|
3,795
|
|
|
3.39
|
|
|
156,617
|
|
|
2,320
|
|
|
1.98
|
|
Long-term
debt
|
|
|
89,834
|
|
|
3,607
|
|
|
5.37
|
|
|
145,006
|
|
|
4,818
|
|
|
4.44
|
|
Total
interest-bearing liabilities
|
|
|
1,854,226
|
|
|
38,905
|
|
|
2.81
|
|
|
1,746,636
|
|
|
27,374
|
|
|
2.10
|
|
Noninterest-bearing
demand deposits
|
|
|
338,994
|
|
|
|
|
|
|
|
|
339,884
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
29,393
|
|
|
|
|
|
|
|
|
28,612
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
294,038
|
|
|
|
|
|
|
|
|
254,325
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,516,651
|
|
|
|
|
|
|
|
$
|
2,369,457
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
78,025
|
|
|
|
|
|
|
|
$
|
72,253
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
4.60
|
%
|
|
|
|
|
|
|
|
4.46
|
%
|
(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%.
|
Table
Two
Rate
Volume Analysis of Changes in Interest Income and Interest
Expense
(in
thousands)
|
|
Nine
months ended September 30,
|
|
|
|
2006
vs. 2005
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
2,891
|
|
$
|
534
|
|
$
|
3,425
|
|
Home
equity
|
|
|
133
|
|
|
4,042
|
|
|
4,175
|
|
Commercial,
financial, and agriculture
|
|
|
5,264
|
|
|
5,958
|
|
|
11,222
|
|
Installment
loans to individuals
|
|
|
(450
|
)
|
|
31
|
|
|
(419
|
)
|
Previously
securitized loans
|
|
|
(4,230
|
)
|
|
2,820
|
|
|
(1,410
|
)
|
Total
loans
|
|
|
3,608
|
|
|
13,385
|
|
|
16,993
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(2,928
|
)
|
|
1,930
|
|
|
(998
|
)
|
Tax-exempt
(1)
|
|
|
19
|
|
|
(66
|
)
|
|
(47
|
)
|
Total
securities
|
|
|
(2,909
|
)
|
|
1,864
|
|
|
(1,045
|
)
|
Loans
held for sale
|
|
|
200
|
|
|
-
|
|
|
200
|
|
Deposits
in depository institutions
|
|
|
393
|
|
|
552
|
|
|
945
|
|
Federal
funds sold
|
|
|
69
|
|
|
19
|
|
|
88
|
|
Total
interest-earning assets
|
|
$
|
1,361
|
|
$
|
15,820
|
|
$
|
17,181
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$
|
28
|
|
$
|
1,230
|
|
$
|
1,258
|
|
Savings
deposits
|
|
|
103
|
|
|
1,287
|
|
|
1,390
|
|
Time
deposits
|
|
|
3,217
|
|
|
5,402
|
|
|
8,619
|
|
Short-term
borrowings
|
|
|
(100
|
)
|
|
1,575
|
|
|
1,475
|
|
Long-term
debt
|
|
|
(1,833
|
)
|
|
622
|
|
|
(1,211
|
)
|
Total
interest-bearing liabilities
|
|
$
|
1,415
|
|
$
|
10,116
|
|
$
|
11,531
|
|
Net
Interest Income
|
|
$
|
(54
|
)
|
$
|
5,704
|
|
$
|
5,650
|
|
(1)
Fully
federal taxable equivalent using a tax rate of 35%.
Table
Three
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Three
months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
601,686
|
|
$
|
8,766
|
|
|
5.78
|
%
|
$
|
594,233
|
|
$
|
8,396
|
|
|
5.61
|
%
|
Home
equity
|
|
|
315,341
|
|
|
6,389
|
|
|
8.04
|
|
|
307,302
|
|
|
4,894
|
|
|
6.32
|
|
Commercial
financial and agriculture
|
|
|
682,793
|
|
|
13,196
|
|
|
7.67
|
|
|
607,033
|
|
|
10,118
|
|
|
6.61
|
|
Installment
loans to individuals
|
|
|
42,848
|
|
|
1,219
|
|
|
11.29
|
|
|
65,408
|
|
|
1,760
|
|
|
10.68
|
|
Previously
securitized loans
|
|
|
20,261
|
|
|
2,205
|
|
|
43.18
|
|
|
38,368
|
|
|
2,915
|
|
|
30.14
|
|
Total
loans
|
|
|
1,662,929
|
|
|
31,775
|
|
|
7.58
|
|
|
1,612,344
|
|
|
28,083
|
|
|
6.91
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
512,083
|
|
|
6,870
|
|
|
5.32
|
|
|
610,142
|
|
|
7,288
|
|
|
4.74
|
|
Tax-exempt
(4)
|
|
|
40,815
|
|
|
673
|
|
|
6.54
|
|
|
48,709
|
|
|
781
|
|
|
6.36
|
|
Total
securities
|
|
|
552,898
|
|
|
7,543
|
|
|
5.41
|
|
|
658,851
|
|
|
8,069
|
|
|
4.86
|
|
Loans
held for sale
|
|
|
4,353
|
|
|
121
|
|
|
11.03
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Deposits
in depository institutions
|
|
|
35,524
|
|
|
452
|
|
|
5.05
|
|
|
4,460
|
|
|
31
|
|
|
2.76
|
|
Federal
funds sold
|
|
|
7,631
|
|
|
92
|
|
|
4.78
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
interest-earning assets
|
|
|
2,263,335
|
|
|
39,983
|
|
|
7.01
|
|
|
2,275,655
|
|
|
36,183
|
|
|
6.31
|
|
Cash
and due from banks
|
|
|
49,801
|
|
|
|
|
|
|
|
|
53,965
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
43,205
|
|
|
|
|
|
|
|
|
41,451
|
|
|
|
|
|
|
|
Other
assets
|
|
|
173,762
|
|
|
|
|
|
|
|
|
167,399
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(15,425
|
)
|
|
|
|
|
|
|
|
(17,818
|
)
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,514,678
|
|
|
|
|
|
|
|
$
|
2,520,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
423,762
|
|
$
|
1,329
|
|
|
1.24
|
%
|
$
|
450,767
|
|
$
|
1,098
|
|
|
0.97
|
%
|
Savings
deposits
|
|
|
317,038
|
|
|
1,118
|
|
|
1.40
|
|
|
308,361
|
|
|
563
|
|
|
0.72
|
|
Time
deposits
|
|
|
897,761
|
|
|
9,336
|
|
|
4.13
|
|
|
792,336
|
|
|
6,102
|
|
|
3.06
|
|
Short-term
borrowings
|
|
|
136,927
|
|
|
1,342
|
|
|
3.89
|
|
|
167,357
|
|
|
956
|
|
|
2.27
|
|
Long-term
debt
|
|
|
82,082
|
|
|
1,108
|
|
|
5.36
|
|
|
131,649
|
|
|
1,571
|
|
|
4.73
|
|
Total
interest-bearing liabilities
|
|
|
1,857,570
|
|
|
14,233
|
|
|
3.04
|
|
|
1,850,470
|
|
|
10,290
|
|
|
2.21
|
|
Noninterest-bearing
demand deposits
|
|
|
332,494
|
|
|
|
|
|
|
|
|
352,342
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
31,077
|
|
|
|
|
|
|
|
|
28,790
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
293,537
|
|
|
|
|
|
|
|
|
289,050
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,514,678
|
|
|
|
|
|
|
|
$
|
2,520,652
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
25,750
|
|
|
|
|
|
|
|
$
|
25,893
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
4.51
|
%
|
|
|
|
|
|
|
|
4.51
|
%
|
(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%.
|
Table
Four
Rate
Volume Analysis of Changes in Interest Income and Interest
Expense
(in
thousands)
|
|
Three
months ended September 30,
|
|
|
|
2006
vs. 2005
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
104
|
|
$
|
266
|
|
$
|
370
|
|
Home
equity
|
|
|
127
|
|
|
1,368
|
|
|
1,495
|
|
Commercial,
financial, and agriculture
|
|
|
1,249
|
|
|
1,829
|
|
|
3,078
|
|
Installment
loans to individuals
|
|
|
(600
|
)
|
|
59
|
|
|
(541
|
)
|
Previously
securitized loans
|
|
|
(1,361
|
)
|
|
651
|
|
|
(710
|
)
|
Total
loans
|
|
|
(481
|
)
|
|
4,173
|
|
|
3,692
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(1,159
|
)
|
|
741
|
|
|
(418
|
)
|
Tax-exempt
(1)
|
|
|
(125
|
)
|
|
17
|
|
|
(108
|
)
|
Total
securities
|
|
|
(1,284
|
)
|
|
758
|
|
|
(526
|
)
|
Loans
held for sale
|
|
|
200
|
|
|
-
|
|
|
200
|
|
Deposits
in depository institutions
|
|
|
214
|
|
|
207
|
|
|
421
|
|
Federal
funds sold
|
|
|
-
|
|
|
92
|
|
|
92
|
|
Total
interest-earning assets
|
|
$
|
(1,351
|
)
|
$
|
5,230
|
|
$
|
3,879
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$
|
(65
|
)
|
$
|
296
|
|
$
|
231
|
|
Savings
deposits
|
|
|
16
|
|
|
539
|
|
|
555
|
|
Time
deposits
|
|
|
803
|
|
|
2,431
|
|
|
3,234
|
|
Short-term
borrowings
|
|
|
(172
|
)
|
|
558
|
|
|
386
|
|
Long-term
debt
|
|
|
(585
|
)
|
|
122
|
|
|
(463
|
)
|
Total
interest-bearing liabilities
|
|
$
|
(3
|
)
|
$
|
3,946
|
|
$
|
3,943
|
|
Net
Interest Income
|
|
$
|
(1,348
|
)
|
$
|
1,284
|
|
$
|
(64
|
)
|
(1)
Fully
federal taxable equivalent using a tax rate of 35%.
Allowance
and Provision for Loan Losses
Management
systematically monitors the loan portfolio and the adequacy of the allowance
for
loan losses (“ALLL”) 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 loss 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 loss
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 adequacy of the allowance for loan losses is subjective in nature and
requires management to periodically reassess the validity of its assumptions.
Differences between actual losses and estimated losses are assessed such that
management can timely modify its evaluation model to ensure that adequate
provision has been made for risk in the total loan portfolio.
As
a
result of the Company’s quarterly analysis of the adequacy of the ALLL, the
Company recorded a provision for loan losses of $1.2 million in the third
quarter of 2006. The increase in the provision for loan losses from $0.7 million
in the second quarter of 2006 was due to recent trends in the Company’s
commercial portfolio and recent credit trends in the national housing market.
Changes in the amount of the provision and related allowance are based upon
City’s detailed methodology and are directionally consistent with changes in
quality of the Company’s loan portfolio.
The
Company had net charge-offs of $0.9 million for the third quarter of 2006,
with
overdraft depository accounts representing $0.6 million of this total. While
charge-offs on overdrafts of depository accounts are appropriately taken against
the ALLL, the revenue associated with overdraft of depository accounts is
reflected in service charges and has been steadily growing as the core base
of
checking accounts has grown. Net charge-offs on commercial and real estate
loans
were $0.2 million and $0.1 million, respectively, while installment loans
experienced no net charge-offs for the quarter ended September 30, 2006. Over
the last 5 quarters, the Company has experienced annualized net charge-offs
for
commercial loans, commercial real estate loans, consumer loans, home equity
loans, and residential mortgages of 0.08%; 0.07%; 0.13%; 0.28%; and 0.11%,
respectively.
At
September 30, 2006, non-performing assets as a percentage of loans and other
real estate owned were 0.25%. The ratio of non-performing assets as a percentage
of loans and OREO over the last five quarters has ranged from 0.23% and 0.27%.
Average non-performing assets as a percentage of loans and other real estate
owned for the Company’s peer group (bank holding companies with total assets
between $1 billion and $5 billion) for the most recently reported quarter ended
June 30, 2006, were 0.67%. A factor that has enabled the Company to maintain
its
allowance at lower levels than peers is the composition of the Company’s loan
portfolio, which is weighted more toward residential mortgage loans and less
toward non-real estate secured commercial loans than its’ peers. Additionally,
the Company sold its credit card portfolio of approximately $11.5 million to
Elan Financial Services (“Elan”), a wholly-owned subsidiary of U.S Bancorp
during the third quarter of 2006. As a result, the Company’s ALLL as a
percentage of loans outstanding is 0.92% at September 30, 2006, compared to
the
average of the Company’s peer group of 1.20% for the most recently reported
quarter. Excluding the amount attributable to the credit card portfolio, the
ALLL was 0.96% at December 31, 2005. The Company believes its methodology for
determining the adequacy of its ALLL adequately provides for probable losses
inherent in the loan portfolio and produces a provision for loan losses that
is
directionally consistent with changes in asset quality and loss
experience.
The
allowance allocated to the commercial loan portfolio (see Table Seven) increased
$0.8 million, or 9.8%, from $7.6 million at December 31, 2005 to $8.4 million
at
September 30, 2006. This increase was attributable to increases in commercial
balances, recent trends in the Company’s commercial portfolio, and recent credit
trends in the national housing market. From the quarter ended December 31,
2005
to the quarter ended September 30, 2006, average balances of commercial loans
have increased $56.5 million, or 9.0%.
The
allowance allocated to the residential real estate portfolio (see Table Seven)
decreased $0.2 million, or 3.8%, from $4.0 million at December 31, 2005 to
$3.8
million at September 30, 2006. Improvements in the asset quality of this
portfolio have been partially offset by increases in the average balances of
the
residential real estate portfolio (2.0% from the quarter ended December 31,
2005).
The
allowance allocated to the consumer loan portfolio (see Table Seven) decreased
$1.9 million, or 68.3%, from $2.8 million at December 31, 2005 to $0.9 million
at September 30, 2006. The decrease was primarily attributable to the allowance
related to the sale of the credit card portfolio during the third quarter of
2006. Excluding this reduction, the allowance allocated to the consumer loan
portfolio decreased $0.3 million from December 31, 2005. This reduction was
primarily due to a continued trend of decreasing consumer loan balances.
Excluding the credit card portfolio loans that were sold, consumer loans have
declined $5.9 million, or 10.1%, from December 31, 2005 to September 30, 2006.
Increased net charge-offs and increases in other inherent risk factors in this
portfolio have partially offset this decrease.
The
allowance allocated to overdraft deposit accounts (see Table Seven) increased
$0.1 million, or 4.2%, from $2.4 million at December 31, 2005 to $2.5 million
at
September 30, 2006. This increase was attributable to a slight increase in
the
balances of overdraft deposit accounts from December 31, 2005.
As
previously discussed, the carrying value of the previously securitized loans
incorporates an assumption for expected cash flows to be received over the
life
of these loans. To the extent that the present value of expected cash flows
is
less than the carrying value of these loans, the Company would provide for
such
losses through the provision for loan losses.
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,
2006,
is adequate to provide for probable losses inherent in the Company’s loan
portfolio. Future provisions for loan losses 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 of previously
charged-off loans, among other factors. The Company believes that its
methodology for determining its allowance for loan losses adequately provides
for probable losses inherent in the loan portfolio at September 30,
2006.
Table
Five
|
|
|
|
|
|
Analysis
of the Allowance for Loan Losses
|
|
|
|
|
|
Nine
months ended September 30,
|
|
Year
ended December 31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
16,790
|
|
$
|
17,815
|
|
$
|
17,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
from acquisition
|
|
|
-
|
|
|
3,265
|
|
|
3,265
|
|
Reduction
of allowance for loans held for sale
|
|
|
(1,368
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
(435
|
)
|
|
(1,146
|
)
|
|
(1,673
|
)
|
Real
estate-mortgage
|
|
|
(705
|
)
|
|
(1,189
|
)
|
|
(1,491
|
)
|
Installment
loans to individuals
|
|
|
(772
|
)
|
|
(1,047
|
)
|
|
(1,711
|
)
|
Overdraft
deposit accounts
|
|
|
(2,931
|
)
|
|
(2,588
|
)
|
|
(3,584
|
)
|
Total
charge-offs
|
|
|
(4,843
|
)
|
|
(5,970
|
)
|
|
(8,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
109
|
|
|
575
|
|
|
605
|
|
Real
estate-mortgage
|
|
|
225
|
|
|
115
|
|
|
303
|
|
Installment
loans to individuals
|
|
|
480
|
|
|
516
|
|
|
679
|
|
Overdraft
deposit accounts
|
|
|
1,264
|
|
|
852
|
|
|
1,182
|
|
Total
recoveries
|
|
|
2,078
|
|
|
2,058
|
|
|
2,769
|
|
Net
charge-offs
|
|
|
(2,765
|
)
|
|
(3,912
|
)
|
|
(5,690
|
)
|
Provision
for loan losses
|
|
|
2,900
|
|
|
600
|
|
|
1,400
|
|
Balance
at end of period
|
|
$
|
15,557
|
|
$
|
17,768
|
|
$
|
16,790
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percent of Average Total Loans:
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)
|
|
|
(0.23
|
)%
|
|
(0.35
|
)%
|
|
(0.38
|
)%
|
Provision
for loan losses (annualized)
|
|
|
0.24
|
%
|
|
0.05
|
%
|
|
0.09
|
%
|
As
a Percent of Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
408.43
|
%
|
|
487.50
|
%
|
|
401.96
|
%
|
Table
Six
|
|
|
|
|
|
Non-Performing
Assets
|
|
|
|
|
|
|
|
As
of September 30,
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$
|
3,359
|
|
$
|
2,468
|
|
$
|
2,785
|
|
Accruing
loans past due 90 days or more
|
|
|
328
|
|
|
1,003
|
|
|
1,124
|
|
Previously
securitized loans past due 90 days or more
|
|
|
122
|
|
|
174
|
|
|
268
|
|
Total
non-performing loans
|
|
|
3,809
|
|
|
3,645
|
|
|
4,177
|
|
Other
real estate, excluding property associated with previously
securitized loans
|
|
|
499
|
|
|
117
|
|
|
135
|
|
Other
real estate, associated with previously securitized
loans
|
|
|
20
|
|
|
-
|
|
|
-
|
|
Total
other real estate owned
|
|
|
519
|
|
|
117
|
|
|
135
|
|
Total
non-performing assets
|
|
$
|
4,328
|
|
$
|
3,762
|
|
$
|
4,312
|
|
Table
Seven
|
|
|
|
|
|
Allocation
of the Allowance For Loan Losses
|
|
|
|
|
|
As
of September 30,
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$
|
8,358
|
|
$
|
8,538
|
|
$
|
7,613
|
|
Real
estate - mortgage
|
|
|
3,824
|
|
|
4,098
|
|
|
3,977
|
|
Installment
loans to individuals
|
|
|
893
|
|
|
2,758
|
|
|
2,819
|
|
Overdraft
deposit accounts
|
|
|
2,482
|
|
|
2,374
|
|
|
2,381
|
|
Allowance
for Loan Losses
|
|
$
|
15,557
|
|
$
|
17,768
|
|
$
|
16,790
|
|
Previously
Securitized Loans
As
of
September 30, 2006, the Company reported a carrying value of previously
securitized loans of $18.5 million, while the actual outstanding contractual
balance of these loans was $36.3 million. The Company accounts for the
difference between the carrying value and the total expected cash flows of
previously securitized 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.
The Company evaluates the collectibility of previously securitized loans. If
upon evaluation of estimated collections and collections to date, the estimated
total amount of collections is reduced below the original value of the loans,
the loans will be considered impaired and subject to further
evaluation.
During
the nine months ended September 30, 2006 and for the year ending December 31,
2005, the Company has experienced net recoveries on these loans primarily due
to
increased collection efforts and the elimination of external servicing fees
as a
result of the Company assuming servicing of the loans. Subsequent to our
assumption of the servicing of these loans, the Company has averaged net
recoveries of approximately $0.4 million per month. The Company does not believe
that net recoveries can be sustained at this rate indefinitely. As a result
of
these net recoveries together with the improvements associated with lower
servicing costs, the Company now projects that the yield on these loans will
be
in the range of 44-46%, depending on defaults and prepayment rates experienced
on these loans in the future.
During
the first nine months of 2006 and 2005, the Company recognized $7.4 million
and
$8.8 million, respectively, of interest income on its previously securitized
loans. Cash receipts for the three and nine months ended September 30, 2006
and
2005 are summarized in the following table:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Principal
receipts
|
|
$
|
3,470
|
|
$
|
7,015
|
|
$
|
11,273
|
|
$
|
23,956
|
|
Interest
income receipts
|
|
|
1,208
|
|
|
2,015
|
|
|
4,211
|
|
|
7,457
|
|
Total
cash receipts
|
|
$
|
4,678
|
|
$
|
9,030
|
|
$
|
15,484
|
|
$
|
31,413
|
|
Based
on
current cash flow projections, the Company believes that the carrying value
of
previously securitized loans will approximate:
|
|
As
of:
|
Forecasted
Balance:
|
|
|
December
31, 2006
|
$17
million
|
December
31, 2007
|
12
million
|
December
31, 2008
|
9
million
|
December
31, 2009
|
7
million
|
Non-Interest
Income and Non-Interest Expense
Nine
Months Ended September 30, 2006 vs. 2005
Non-Interest
Income: Net
of
investment securities (losses) gains and the gain from the sale of the Company’s
credit card portfolio, non-interest income increased $2.6 million, or 7.1%,
from
$36.5 million for the first nine months of 2005 to $39.1 million in 2006. The
Company’s primary source of non-interest income is derived from service charges
from depository accounts. Service charges from depository accounts increased
$3.0 million, or 10.6%, from $28.6 million during the nine months ended
September 30, 2005 to $31.6 million during the nine months ended September
30,
2006. This increase is due to an increase in the utilization of services by
the
Company’s customer base and the acquisition of Classic Bancshares, Inc. during
the second quarter of 2005. The effect of this increase was partially mitigated
by a $0.3 million decrease in bank-owned life insurance revenues from the
settlement of an insured claim during the first nine months of
2005.
Non-Interest
Expense: Total
non-interest expense increased $2.4 million, or 4.8%, from $50.8 million in
the
first nine months of 2005 to $53.2 million in the first nine months of 2006.
This increase was primarily attributable to increased compensation expenses
and
other miscellaneous non-interest expenses related to the Company’s acquisition
of Classic Bancshares, Inc. during the second quarter of 2005 and to a $0.7
million charge related to the early extinguishment of debt through the
repurchase of $6 million of its trust preferred securities during the nine
months ended September 30, 2006.
Three
Months Ended September 30, 2006 vs. 2005
Non-Interest
Income: Net
of
investment securities losses, non-interest income increased $0.3 million, or
2.0%, to $13.3 million in the third quarter of 2006 as compared to $13.0 million
in the third quarter of 2005. The largest source of non-interest income is
service charges from depository accounts, which increased $0.4 million, or
3.8%,
from $10.4 million during the third quarter of 2005 to $10.8 million during
the
third quarter of 2006. This increase was due to an increase in the utilization
of services by the Company’s customer base.
Non-Interest
Expense: Non-interest
expenses increased $0.2 million from $17.9 million in the third quarter of
2005
to $18.1 million in the third quarter of 2006. The increase was primarily
attributable to a $0.4 million charge related to the early extinguishment of
debt through the repurchase of $3.5 million of the Company’s trust preferred
securities.
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 monthly 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 as a result 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 or
the economic value of equity of more than 15% within a 12-month period, assuming
an immediate parallel increase or decrease of 300 basis points. The Company
measures the long-term risk associated with sustained increases and decreases
in
rates through analysis of the impact to changes in rates on the economic value
of equity.
However,
it is important to understand that a parallel downward shift of 300 basis points
in interest rates from the current rate would result in both a 2.25% Fed Funds
rate and long-term interest rates on bank borrowings of approximately 2.00%
-
2.50%. While it is true that short-term interest rates such as the Fed Funds
rate have been at these low levels in the recent past, long-term interest rates
have not reached levels as low as would be associated with this “worst-case”
interest rate environment in well over 30 years. Based upon the Company’s belief
that the likelihood of an immediate 300 basis point decline in both long-term
and short-term interest rates from current levels is remote, the Company has
chosen to reflect only its risk to a decrease of 200 basis points from current
rates.
The
Company has entered into interest rate floors with a total notional value of
$600 million at September 30, 2006, with terms of 3, 4, and 5 years to
facilitate the management of its short-term interest rate risk. These derivative
instruments provide the Company protection against the impact declining interest
rates on future income streams from certain variable rate loans. Please refer
to
Note C on pages 9 - 10 for further discussion of the use and accounting for
such
derivative instruments.
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 that, in
the
analyses below, interest rates are assumed to have an immediate and sustained
parallel shock. 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 shown by
the following:
Immediate
Basis
Point Change
in
Interest Rates
|
|
Implied
Federal Funds Rate Associated with Change in Interest
Rates
|
|
Estimated
Increase
(Decrease)
in
Net
Income Over 12 Months
|
|
Estimated
Increase
(Decrease)
in
Economic
Value of
Equity
|
|
|
|
|
|
|
|
|
|
September
30, 2006:
|
|
|
|
|
|
|
|
+300
|
|
|
8.25
|
%
|
|
+5.1
|
%
|
|
+1.1
|
%
|
+200
|
|
|
7.25
|
|
|
+3.4
|
|
|
+0.8
|
|
+100
|
|
|
6.25
|
|
|
+1.6
|
|
|
+0.5
|
|
-100
|
|
|
4.25
|
|
|
(2.5
|
)
|
|
(2.4
|
)
|
-200
|
|
|
3.25
|
|
|
(5.5
|
)
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
7.25
|
%
|
|
+10.1
|
%
|
|
+2.2
|
%
|
+200
|
|
|
6.25
|
|
|
+8.1
|
|
|
+2.1
|
|
+100
|
|
|
5.25
|
|
|
+4.4
|
|
|
+1.4
|
|
-100
|
|
|
3.25
|
|
|
(6.7
|
)
|
|
(3.4
|
)
|
-200
|
|
|
2.25
|
|
|
(10.0
|
)
|
|
(4.9
|
)
|
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 2006 and beyond. The
results above do not necessarily imply that the Company will experience
increases in net income if market interest rates rise. The table above indicates
how the Company’s net income and the economic value of equity behave
relative
to an
increase or decrease in rates compared to what would otherwise occur if rates
remain stable. Based upon the current level of interest rates in the general
economy, the Company believes that its net interest margin will continue to
compress through 2007.
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 source of cash
is
dividends from City National. Dividends paid by City 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. Approval is also required if dividends
declared would cause City National’s regulatory capital to fall below specified
minimum levels. At September 30, 2006, City National could pay dividends up
to
$14.6 million plus an amount equal to its net profits for the remainder of
2006,
as defined by statute, up to the dividend declaration date without prior
regulatory approval.
The
Parent Company used cash obtained from the dividends received primarily to:
(1)
pay common dividends to shareholders, (2) remit interest payments on the
Company’s trust-preferred securities, and (3) fund repurchase of the Company’s
common shares.
Over
the
next 12 months, the Parent Company has an obligation to remit interest payments
approximating $2.0 million on the junior subordinated debentures held by City
Holding Capital Trust. Additionally, the Parent Company anticipates continuing
the payment of dividends, which are expected to approximate $19.7 million on
an
annualized basis over the next 12 months based on common shareholders of record
at September 30, 2006. 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. In addition to these anticipated
cash needs, the Parent Company has operating expenses and other contractual
obligations, which are estimated to require $0.6 million of additional cash
over
the next 12 months. As of September 30, 2006, the Parent Company reported a
cash
balance of $38.7 million and management believes that the Parent Company’s
available cash balance, together with cash dividends from City National will
be
adequate to satisfy its funding and cash needs over the next twelve
months.
Excluding
the interest and dividend payments discussed above, the Parent Company has
no
significant commitments or obligations in years after 2006 other than the
repayment of its $22.0 million obligation under the debentures held by City
Holding Capital Trust. However, this obligation does not mature until April
2028, or 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, 2006, 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, 2006, City National has the capacity to borrow
an additional $313.4 million from the FHLB and other financial institutions
under existing borrowing facilities. City National maintains a contingency
funding plan, 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 (90.6%
or
$516.6 million at September 30, 2006) of its investment securities portfolio
and
short-term investments (interest-bearing deposits in depository institutions
and
federal funds sold) in the highly liquid available-for-sale classification
and
in highly liquid short-term investments. Although it has no current intention
to
do so, 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 66.5% as
of September 30, 2006 and deposit balances fund 78.3% of 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
and short-term investment balances that totaled $570.3 million at September
30,
2006, and that greatly exceeded the Company’s non-deposit sources of borrowing
which totaled $249.4 million. Further, the Company’s deposit mix has a very high
proportion of transaction and savings accounts that fund 42.4% of the Company’s
total assets.
As
illustrated in the Consolidated Statements of Cash Flows, the Company generated
$43.8 million of cash from operating activities during the first nine months
of
2006, primarily from interest income received on loans and investments, net
of
interest expense paid on deposits and borrowings. The Company used $6.0 million
of cash in investing activities during the first nine months of 2006 primarily
for the purchase of money market and mutual fund securities, net of proceeds
from these securities and from maturities and calls of securities
available-for-sale. The Company used $21.9 million of cash in financing
activities during the first nine months of 2006, principally as a result of
a
decrease in noninterest bearing deposits of $40.2 million, treasury stock
purchases of $21.3 million, cash dividends paid to the Company’s common
stockholders of $14.4 million and a decrease in short and long term debt of
$32.0 million. These decreases were partially offset by an increase in
interest-bearing deposits of $91.7 million.
Capital
Resources
During
the first nine months of 2006, Shareholders’ Equity increased $6.2 million, or
2.1%, from $292.1 million at December 31, 2005 to $298.3 million at September
30, 2006. This increase was primarily due to reported net income of $40.2
million and a $0.7 million increase in accumulated other comprehensive income
which was partially offset by common stock purchases of $21.3 million and
dividends declared during the first nine months of 2006 of $14.8 million. The
increase in accumulated other comprehensive income during the nine months ended
September 30, 2006 was due to unrealized gains,
net of
taxes,
on the
Company’s available for sale investment securities of $0.3 million and
unrealized gains, net of taxes, on the Company’s derivative instruments of $0.4
million.
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 as authorized by the Company’s Board of Directors in June 2005. Since
the repurchase plan was adopted, the Company has purchased 795,153 shares of
its
common stock. There were 590,053 shares repurchased during the first nine months
of 2006 and there can be no assurance that the Company will continue to
reacquire its common shares or to what extent the repurchase program will be
successful. As of September 30, 2006, the Company may repurchase an additional
204,847 shares from time to time depending on market conditions under the
authorization.
Regulatory
guidelines require the Company to maintain a minimum total capital to
risk-adjusted assets ratio of 8.0%, with at least one-half of capital consisting
of tangible common stockholders’ equity and a minimum Tier I leverage ratio of
4.0%. 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 8.0%, 4.0%, and 4.0%, respectively. To be
classified as “well capitalized,” City National must maintain total capital,
Tier I capital, and leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
The
Company’s regulatory capital ratios remained strong for both City Holding and
City National as illustrated in the following table:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Well-
|
|
September
30,
|
|
December
31,
|
|
|
|
Minimum
|
|
Capitalized
|
|
2006
|
|
2005
|
|
City
Holding:
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0
|
%
|
|
10.0
|
%
|
|
15.9
|
%
|
|
16.4
|
%
|
Tier
I Risk-based
|
|
|
4.0
|
|
|
6.0
|
|
|
15.0
|
|
|
15.4
|
|
Tier
I Leverage
|
|
|
4.0
|
|
|
5.0
|
|
|
10.8
|
|
|
11.0
|
|
City
National:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0
|
%
|
|
10.0
|
%
|
|
13.5
|
%
|
|
14.0
|
%
|
Tier
I Risk-based
|
|
|
4.0
|
|
|
6.0
|
|
|
12.6
|
|
|
13.0
|
|
Tier
I Leverage
|
|
|
4.0
|
|
|
5.0
|
|
|
9.0
|
|
|
9.2
|
|
The
information called for by this item is provided under the caption “Risk
Management” under Item 2—Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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, 2006 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II - OTHER INFORMATION
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
1A.
|
|
|
|
There
have been no material changes to the factors disclosed in Item 1A.
Risk
Factors in our Annual Report on Form 10-K for the year ended December
31,
2005.
|
|
Item
2.
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1 - July 31, 2006
|
|
|
4,500
|
|
$
|
36.04
|
|
|
4,500
|
|
|
218,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1 - August 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
218,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1 - September 30, 2006
|
|
|
13,500
|
|
$
|
39.02
|
|
|
13,500
|
|
|
204,847
|
|
(a)
|
In
June 2005, the Company announced that the Board of Directors had
authorized the Company to buy back up to 1,000,000 shares of its
common
stock, in open market transactions at prices that are accretive to
continuing shareholders. No timetable was placed on the duration
of this
share repurchase program.
|
Item
3.
|
|
None.
|
Item
4.
|
|
None.
|
Item
5.
|
|
None.
|
Item
6.
|
|
|
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/
Charles R. Hageboeck
|
|
Charles
R. Hageboeck
|
President
and Chief Executive Officer
|
(Principal
Executive Officer)
|
|
|
|
/s/
David L. Bumgarner
|
|
David
L. Bumgarner
|
Senior
Vice President and Chief Financial Officer
|
(Principal
Financial Officer)
|
|
|
|
Date:
November 3, 2006
-33-