CHCO Form 10-Q, 1st Quarter 2007
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 March 31, 2007
OR
[
] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
The
Transition Period From ____________To_____________.
Commission
File number 0-11733
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
|
[
]
|
Accelerated
filer
|
[X]
|
Non-accelerated
filer
|
[
]
|
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 - 17,155,787 shares as of May 2, 2007.
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
|
|
Pages
|
|
|
|
Item
1.
|
|
4-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
17-29
|
Item
3.
|
|
30
|
Item
4.
|
|
30
|
|
|
|
PART
II
|
|
|
|
|
|
Item
1.
|
|
31
|
Item
1A.
|
|
31
|
Item
2.
|
|
31
|
Item
3.
|
|
31
|
Item
4.
|
|
31
|
Item
5.
|
|
31
|
Item
6.
|
|
31
|
|
|
|
|
|
32
|
|
|
|
City
Holding Company and Subsidiaries
(in
thousands)
|
|
March
31
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
(Note
A)
|
|
Assets
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
53,011
|
|
$
|
58,014
|
|
Interest-bearing
deposits in depository institutions
|
|
|
6,041
|
|
|
27,434
|
|
Federal
funds sold
|
|
|
20,000
|
|
|
25,000
|
|
Cash
and Cash Equivalents
|
|
|
79,052
|
|
|
110,448
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale, at fair value
|
|
|
540,261
|
|
|
472,398
|
|
Investment
securities held-to-maturity, at amortized cost (approximate fair
value at
March 31, 2007 and December 31, 2006 - $48,458 and
$49,955)
|
|
|
46,396
|
|
|
47,500
|
|
Total
Securities
|
|
|
586,657
|
|
|
519,898
|
|
|
|
|
|
|
|
|
|
Gross
loans
|
|
|
1,691,748
|
|
|
1,677,469
|
|
Allowance
for loan losses
|
|
|
(16,082
|
)
|
|
(15,405
|
)
|
Net
Loans
|
|
|
1,675,666
|
|
|
1,662,064
|
|
|
|
|
|
|
|
|
|
Bank
owned life insurance
|
|
|
55,687
|
|
|
55,195
|
|
Premises
and equipment
|
|
|
45,190
|
|
|
44,689
|
|
Accrued
interest receivable
|
|
|
12,371
|
|
|
12,337
|
|
Net
deferred tax asset
|
|
|
23,551
|
|
|
23,652
|
|
Intangible
assets
|
|
|
58,681
|
|
|
58,857
|
|
Other
assets
|
|
|
22,157
|
|
|
20,667
|
|
Total
Assets
|
|
$
|
2,559,012
|
|
$
|
2,507,807
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
338,332
|
|
$
|
321,038
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
435,069
|
|
|
422,925
|
|
Savings
deposits
|
|
|
343,366
|
|
|
321,075
|
|
Time
deposits
|
|
|
922,384
|
|
|
920,179
|
|
Total
Deposits
|
|
|
2,039,151
|
|
|
1,985,217
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
156,062
|
|
|
136,570
|
|
Long-term
debt
|
|
|
21,940
|
|
|
48,069
|
|
Other
liabilities
|
|
|
38,505
|
|
|
32,644
|
|
Total
Liabilities
|
|
|
2,255,658
|
|
|
2,202,500
|
|
|
|
|
|
|
|
|
|
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 March 31, 2007 and December 31,
2006,
less 1,278,095 and 1,009,095 shares in treasury,
respectively
|
|
|
46,249
|
|
|
46,249
|
|
Capital
surplus
|
|
|
103,373
|
|
|
104,043
|
|
Retained
earnings
|
|
|
201,977
|
|
|
194,213
|
|
Cost
of common stock in treasury
|
|
|
(43,561
|
)
|
|
(33,669
|
)
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
|
(1,926
|
)
|
|
(2,649
|
)
|
Unrealized
loss on derivative instruments
|
|
|
(88
|
)
|
|
(210
|
)
|
Underfunded
pension liability
|
|
|
(2,670
|
)
|
|
(2,670
|
)
|
Total
Accumulated Other Comprehensive Loss
|
|
|
(4,684
|
)
|
|
(5,529
|
)
|
Total
Shareholders’ Equity
|
|
|
303,354
|
|
|
305,307
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
2,559,012
|
|
$
|
2,507,807
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands, except earnings per share data)
|
|
Three
Months Ended March 31
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
31,464
|
|
$
|
29,564
|
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,933
|
|
|
7,260
|
|
Tax-exempt
|
|
|
427
|
|
|
467
|
|
Interest
on deposits in depository institutions
|
|
|
117
|
|
|
150
|
|
Interest
on federal funds sold
|
|
|
257
|
|
|
-
|
|
Total
Interest Income
|
|
|
39,198
|
|
|
37,441
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
12,712
|
|
|
9,201
|
|
Interest
on short-term borrowings
|
|
|
1,513
|
|
|
1,127
|
|
Interest
on long-term debt
|
|
|
531
|
|
|
1,260
|
|
Total
Interest Expense
|
|
|
14,756
|
|
|
11,588
|
|
Net
Interest Income
|
|
|
24,442
|
|
|
25,853
|
|
Provision
for loan losses
|
|
|
900
|
|
|
1,000
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
23,542
|
|
|
24,853
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
Investment
securities gains (losses)
|
|
|
-
|
|
|
-
|
|
Service
charges
|
|
|
10,063
|
|
|
9,862
|
|
Insurance
commissions
|
|
|
1,012
|
|
|
614
|
|
Trust
and investment management fee income
|
|
|
568
|
|
|
566
|
|
Bank
owned life insurance
|
|
|
696
|
|
|
537
|
|
Gain
on sale of credit card merchant agreements
|
|
|
1,500
|
|
|
-
|
|
Other
income
|
|
|
532
|
|
|
810
|
|
Total
Non-interest Income
|
|
|
14,371
|
|
|
12,389
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
9,057
|
|
|
8,632
|
|
Occupancy
and equipment
|
|
|
1,637
|
|
|
1,599
|
|
Depreciation
|
|
|
1,070
|
|
|
1,050
|
|
Professional
fees
|
|
|
403
|
|
|
395
|
|
Postage,
delivery, and statement mailings
|
|
|
777
|
|
|
644
|
|
Advertising
|
|
|
852
|
|
|
774
|
|
Telecommunications
|
|
|
455
|
|
|
476
|
|
Bankcard
expenses
|
|
|
518
|
|
|
543
|
|
Insurance
and regulatory
|
|
|
385
|
|
|
388
|
|
Office
supplies
|
|
|
455
|
|
|
383
|
|
Repossessed
asset (gains) losses, net of expenses
|
|
|
(14
|
)
|
|
4
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
282
|
|
Other
expenses
|
|
|
2,021
|
|
|
2,327
|
|
Total
Non-interest Expense
|
|
|
17,616
|
|
|
17,497
|
|
Income
Before Income Taxes
|
|
|
20,297
|
|
|
19,745
|
|
Income
tax expense
|
|
|
7,066
|
|
|
6,879
|
|
Net
Income
|
|
|
13,231
|
|
$
|
12,866
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.76
|
|
$
|
0.71
|
|
Diluted
earnings per common share
|
|
$
|
0.76
|
|
$
|
0.71
|
|
Dividends
declared per common share
|
|
$
|
0.31
|
|
$
|
0.28
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
17,369
|
|
|
18,006
|
|
Diluted
|
|
|
17,424
|
|
|
18,067
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
Three
Months Ended March 31, 2007 and 2006
(in
thousands)
|
|
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
|
|
|
|
|
|
|
|
|
12,866
|
|
|
|
|
|
|
|
|
12,866
|
|
Other
comprehensive loss, net of deferred income taxes of $950:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities of $1,528, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(917
|
)
|
|
(917
|
)
|
Net
unrealized loss on interest rate floors of $848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509
|
)
|
|
(509
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,440
|
|
Cash
dividends declared ($0.28 per share)
|
|
|
|
|
|
|
|
|
(4,988
|
)
|
|
|
|
|
|
|
|
(4,988
|
)
|
Issuance
of stock awards, net
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
245
|
|
|
|
|
|
167
|
|
Exercise
of 26,875 stock options
|
|
|
|
|
|
(630
|
)
|
|
|
|
|
987
|
|
|
|
|
|
357
|
|
Excess
tax benefit on stock -based compensation
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Purchase
of 300,572 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
(10,914
|
)
|
|
|
|
|
(10,914
|
)
|
Balances
at March 31, 2006
|
|
$
|
46,249
|
|
$
|
103,900
|
|
$
|
168,625
|
|
$
|
(20,960
|
)
|
$
|
(9,438
|
)
|
$
|
288,376
|
|
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$
|
46,249
|
|
$
|
104,043
|
|
$
|
194,213
|
|
$
|
(33,669
|
)
|
$
|
(5,529
|
)
|
$
|
305,307
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adopting FIN 48
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
(125
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
13,231
|
|
|
|
|
|
|
|
|
13,231
|
|
Other
comprehensive loss, net of deferred income taxes of $563:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities of $1,205, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
723
|
|
Net
unrealized loss on interest rate floors of $203, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
122
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,076
|
|
Cash
dividends declared ($0.31 per share)
|
|
|
|
|
|
|
|
|
(5,342
|
)
|
|
|
|
|
|
|
|
(5,342
|
)
|
Issuance
of stock awards, net
|
|
|
|
|
|
(536
|
)
|
|
|
|
|
800
|
|
|
|
|
|
264
|
|
Exercise
of 5,300 stock options
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
216
|
|
|
|
|
|
82
|
|
Purchase
of 274,300 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
(10,908
|
)
|
|
|
|
|
(10,908
|
)
|
Balances
at March 31, 2007
|
|
$
|
46,249
|
|
$
|
103,373
|
|
$
|
201,977
|
|
$
|
(43,561
|
)
|
$
|
(4,684
|
)
|
$
|
303,354
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands)
|
|
Three
Months Ended March 31
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
Net
income
|
|
$
|
13,231
|
|
$
|
12,866
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
Amortization
and accretion
|
|
|
(428
|
)
|
|
(786
|
)
|
Provision
for loan losses
|
|
|
900
|
|
|
1,000
|
|
Depreciation
of premises and equipment
|
|
|
1,071
|
|
|
1,050
|
|
Deferred
income tax (benefit) expense
|
|
|
(462
|
)
|
|
550
|
|
Net
periodic employee benefit cost
|
|
|
59
|
|
|
46
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
282
|
|
Gain
on sale of credit card merchant agreements
|
|
|
(1,500
|
)
|
|
-
|
|
Loss
on disposal of premises and equipment
|
|
|
-
|
|
|
7
|
|
Proceeds
from bank-owned life insurance
|
|
|
204
|
|
|
-
|
|
Increase
in value of bank-owned life insurance
|
|
|
(696
|
)
|
|
(537
|
)
|
(Increase)
decrease in accrued interest receivable
|
|
|
(34
|
)
|
|
1,139
|
|
Increase
in other assets
|
|
|
(1,344
|
)
|
|
(135
|
)
|
Increase
in other liabilities
|
|
|
5,497
|
|
|
2,756
|
|
Net
Cash Provided by Operating Activities
|
|
|
16,498
|
|
|
18,238
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities held-to-maturity
|
|
|
1,058
|
|
|
253
|
|
Proceeds
from sale of money market and mutual fund securities available-for-sale
|
|
|
261,385
|
|
|
254,900
|
|
Purchases
of money market and mutual fund securities
available-for-sale
|
|
|
(357,702
|
)
|
|
(307,007
|
)
|
Proceeds
from sales of securities available-for-sale
|
|
|
989
|
|
|
613
|
|
Proceeds
from maturities and calls of securities available-for-sale
|
|
|
29,694
|
|
|
19,874
|
|
Purchases
of securities available-for-sale
|
|
|
(1,198
|
)
|
|
(800
|
)
|
Net
increase in loans
|
|
|
(13,787
|
)
|
|
(9,957
|
)
|
Purchases
of premises and equipment
|
|
|
(1,572
|
)
|
|
(727
|
)
|
Proceeds
from sale of credit card merchant agreements
|
|
|
1,650
|
|
|
-
|
|
Net
Cash Used in Investing Activities
|
|
|
(79,483
|
)
|
|
(42,851
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
Net
increase (decrease) in noninterest-bearing deposits
|
|
|
17,294
|
|
|
(20,551
|
)
|
Net
increase in interest-bearing deposits
|
|
|
36,640
|
|
|
55,985
|
|
Net
(decrease) increase in short-term borrowings
|
|
|
(6,542
|
)
|
|
2,977
|
|
Repayment
of long-term debt
|
|
|
(79
|
)
|
|
(826
|
)
|
Redemption
of trust preferred securities
|
|
|
-
|
|
|
(2,705
|
)
|
Purchases
of treasury stock
|
|
|
(10,908
|
)
|
|
(10,914
|
)
|
Exercise
of stock options
|
|
|
82
|
|
|
357
|
|
Excess
tax benefits from stock-based compensation arrangements
|
|
|
-
|
|
|
173
|
|
Dividends
paid
|
|
|
(4,898
|
)
|
|
(4,520
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
31,589
|
|
|
19,976
|
|
Decrease
in Cash and Cash Equivalents
|
|
|
(31,396
|
)
|
|
(4,637
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
110,448
|
|
|
86,273
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
79,052
|
|
$
|
81,636
|
|
See
notes to consolidated financial statements.
March
31, 2007
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 three months ended March
31,
2007 are not necessarily indicative of the results of operations that can be
expected for the year ending December 31, 2007. 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, 2006 has been extracted from
audited financial statements included in the Company’s 2006 Annual Report to
Stockholders. Certain information and footnote disclosures normally included
in
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 2006 Annual Report of the Company.
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 until 2004. Principal amounts owed to investors were evidenced
by securities (“Notes”). During 2003 and 2004, the Company exercised its early
redemption options on each of those securitizations. 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. 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 Three
Months
Ended
|
|
As
of and for the Year Ended
|
|
|
|
March
31,
|
|
December
31,
|
|
(
in thousands)
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
(in
thousands)
|
|
Previously
Securitized Loans:
|
|
|
|
|
|
|
|
Total
principal amount of loans outstanding
|
|
$
|
30,880
|
|
$
|
43,493
|
|
$
|
33,334
|
|
Discount
|
|
|
(18,136
|
)
|
|
(17,575
|
)
|
|
(17,737
|
)
|
Net
book value
|
|
$
|
12,744
|
|
$
|
25,918
|
|
$
|
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount of loans between 30 and 89 days past due
|
|
$
|
596
|
|
$
|
1,217
|
|
$
|
1,062
|
|
Principal
amount of loans 90 days and above past due
|
|
|
-
|
|
|
202
|
|
|
48
|
|
Net
credit recoveries during the period
|
|
|
1,108
|
|
|
973
|
|
|
4,124
|
|
|
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 three months ended March 31, 2007,
or
for the year ending December 31, 2006.
As
of
March 31, 2007, the Company reported a book value of previously securitized
loans of $12.7 million whereas the actual contractual outstanding balance of
previously securitized loans at March 31, 2007 was $30.9 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 three months of 2007 and 2006, the Company recognized $1.8 million
and
$2.7 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 March 31, 2007, 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.
|
|
March
31, 2007
|
|
December
31, 2006
|
|
(in
thousands)
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Interest
rate floors on variable-rate loans
|
|
$
|
500,000
|
|
$
|
4,384
|
|
$
|
500,000
|
|
$
|
4,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average strike rates for interest rate floors outstanding
at
March 31, 2007 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 market value of $0.1 million, net of taxes, in Other Comprehensive Income
for
the three months ending March 31, 2007 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 freestanding derivative. This interest rate floor has no
fair
value at March 31, 2007, matures in 14 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)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Security
repurchase agreements
|
|
$
|
109,858
|
|
$
|
115,675
|
|
Short-term
FHLB advances
|
|
|
46,204
|
|
|
20,895
|
|
Total
short-term borrowings
|
|
$
|
156,062
|
|
$
|
136,570
|
|
Securities
sold under agreement to repurchase were sold to corporate and government
customers as an alternative to available deposit products. The underlying
securities included in repurchase agreements remain under the Company’s control
during the effective period of the agreements.
Note
E - Long-Term Debt
The
components of long-term debt are summarized below:
(dollars
in thousands)
|
|
Maturity
|
|
March
31, 2007
|
|
Weighted
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
|
|
2009
|
|
$
|
415
|
|
|
7.03
|
%
|
FHLB
Advances
|
|
|
2010
|
|
|
4,000
|
|
|
6.03
|
%
|
FHLB
Advances
|
|
|
2011
|
|
|
689
|
|
|
4.48
|
%
|
Junior
subordinated debentures owed
to City Holding Capital Trust
|
|
|
2028
(a)
|
|
|
16,836
|
|
|
9.15
|
%
|
Total
long-term debt
|
|
|
|
|
$
|
21,940
|
|
|
|
|
(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.
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 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 $16 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
The
Company accounts for share-based compensation in accordance with SFAS No. 123R,
“Share-Based Payment.” The Company transitioned to SFAS No. 123R on January 1,
2006, using the modified prospective application method.
A
summary
of the Company’s stock option activity and related information is presented
below for the three months ended March 31:
|
|
2007
|
|
2006
|
|
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
Options
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
271,709
|
|
$
|
30.51
|
|
|
318,132
|
|
$
|
28.56
|
|
Granted
|
|
|
47,500
|
|
|
39.34
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(5,300
|
)
|
|
15.53
|
|
|
(26,875
|
)
|
|
13.30
|
|
Forfeited
|
|
|
(3,000
|
)
|
|
34.45
|
|
|
-
|
|
|
-
|
|
Outstanding
at March 31
|
|
|
310,909
|
|
$
|
32.08
|
|
|
291,257
|
|
$
|
29.97
|
|
Additional
information regarding stock options outstanding and exercisable at March 31,
2007, 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
|
|
Weighted-Average
Remaining Contractual Life (Months)
|
|
Aggregate
Intrinsic Value of Options Currently Exercisable (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.30
|
|
|
16,800
|
|
$
|
13.30
|
|
|
58
|
|
$
|
446
|
|
|
16,800
|
|
$
|
13.30
|
|
|
58
|
|
$
|
446
|
|
$28.00
- $36.90
|
|
|
294,109
|
|
|
33.14
|
|
|
93
|
|
|
1,978
|
|
|
191,984
|
|
|
31.94
|
|
|
86
|
|
|
1,522
|
|
|
|
|
310,909
|
|
|
|
|
|
|
|
$
|
2,424
|
|
|
208,784
|
|
|
|
|
|
|
|
$
|
1,968
|
|
Proceeds
from stock option exercises totaled $0.1 million and $0.4 million
during the three months ended March 31, 2007 and March 31, 2006, respectively.
Shares issued in connection with stock option exercises are issued from
available treasury shares. If no treasury shares are available, new shares
are
issued from available authorized shares. During the three months ended March
31,
2007 and March 31, 2006 all shares issued in connection with stock option
exercises and restricted stock awards were issued from available treasury
stock.
The
total
intrinsic value of stock options exercised was $0.1 million and $0.6
million during the three months ended March 31, 2007 and March 31, 2006,
respectively.
Stock-based
compensation expense totaled $0.1 million for both the three months ended
March 31, 2007 and March 31, 2006. Unrecognized stock-based compensation expense
related to stock options totaled $0.7 million at March 31, 2007. At
such date, the weighted-average period over which this unrecognized expense
was
expected to be recognized was 1.7 years.
The
fair
value of the options is estimated at the date of grant using a Black-Scholes
option-pricing model. The following weighted average assumptions were used
to
estimate the fair value of options granted during the three months ended March
31, 2007:
Risk-free
interest rate
|
4.38%
|
Expected
dividend yield
|
3.15%
|
Volatility
factor
|
39.06%
|
Expected
life of option
|
5.8
years
|
No
options were granted during the three months ended March 31, 2006.
The
Company
records compensation expense with respect to restricted shares 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. Recipients of restricted shares do not pay any cash
consideration to the Company for the shares, have the right to vote all shares
subject to such grant and receive all dividends with respect to such shares,
whether or not the shares have vested. Unrecognized stock-based compensation
expense related to non-vested restricted shares was $0.8 million at March
31, 2007. At March 31, 2007, this unrecognized expense is expected to be
recognized over 4.3 years based on the weighted average-life of the restricted
shares.
A
summary
of the Company’s restricted shares activity and related information is presented
below for the three months ended March 31:
|
|
2007
|
|
2006
|
|
|
|
Options
|
|
Average
Market Price at Grant
|
|
Options
|
|
Average
Market Price at Grant
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
15,600
|
|
|
|
|
|
14,000
|
|
|
|
|
Granted
|
|
|
15,500
|
|
$
|
39.51
|
|
|
1,700
|
|
$
|
36.17
|
|
Forfeited/Vested
|
|
|
(666
|
)
|
|
|
|
|
-
|
|
|
|
|
Outstanding
at March 31
|
|
|
30,434
|
|
|
|
|
|
15,700
|
|
|
|
|
The
Company provides retirement benefits to its employees through the City Holding
Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be
compliant with Employee Retirement Income Security Act (ERISA) section 404(c).
Any employee who has attained age 21 is eligible to participate beginning the
first day of the month following employment. Unless specifically chosen
otherwise, every employee is automatically enrolled in the 401(k) Plan and
may
make before-tax contributions of between 1% 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 $0.1 million for the three month periods
ended March 31, 2007 and March 31, 2006.
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 a contribution
of $0.2 million to the Defined Benefit Plan during the three months ended March
31, 2007, while no such contribution was made during the three months ended
March 31, 2006.
The
following table presents the components of the net periodic pension cost of
the
Defined Benefit Plan:
|
|
Three
months ended
March
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Components
of net periodic cost:
|
|
|
|
|
|
Interest
cost
|
|
$
|
164
|
|
$
|
129
|
|
Expected
return on plan assets
|
|
|
(185
|
)
|
|
(144
|
)
|
Net
amortization and deferral
|
|
|
80
|
|
|
61
|
|
Net
Periodic Pension Cost
|
|
$
|
59
|
|
$
|
46
|
|
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)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
|
Home
equity lines
|
|
$
|
138,165
|
|
$
|
140,479
|
|
Commercial
real estate
|
|
|
39,625
|
|
|
48,489
|
|
Other
commitments
|
|
|
143,824
|
|
|
131,428
|
|
Standby
letters of credit
|
|
|
12,513
|
|
|
12,735
|
|
Commercial
letters of credit
|
|
|
385
|
|
|
617
|
|
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:
|
|
Three
months ended March 31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
Net
income
|
|
$
|
13,231
|
|
$
|
12,866
|
|
|
|
|
|
|
|
|
|
Unrealized
security gains arising during the period
|
|
|
1,205
|
|
|
(1,528
|
)
|
Reclassification
adjustment for gains included in income
|
|
|
-
|
|
|
-
|
|
|
|
|
1,205
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
Unrealized
gains on interest rate floors
|
|
|
203
|
|
|
(848
|
)
|
Other
comprehensive income before income taxes
|
|
|
14,699
|
|
|
10,490
|
|
Tax
effect
|
|
|
(563
|
)
|
|
950
|
|
Total
comprehensive income
|
|
$
|
14,076
|
|
$
|
11,440
|
|
Note
I - Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended March 31,
|
|
(in
thousands, except per share data)
|
|
2007
|
|
2006
|
|
|
|
|
|
Net
income
|
|
$
|
13,231
|
|
$
|
12,866
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
17,369
|
|
|
18,006
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
55
|
|
|
61
|
|
|
|
|
|
|
|
|
|
Shares
for diluted earnings per share
|
|
|
17,424
|
|
|
18,067
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.76
|
|
$
|
0.71
|
|
Diluted
earnings per share
|
|
$
|
0.76
|
|
$
|
0.71
|
|
Options
to purchase 41,750 shares of common stock at an exercise price of $36.90 were
outstanding during the first quarter of 2006, but were not included in the
computation of diluted earnings per share because the exercise price was greater
that the average market price of the common shares and therefore, the effect
would have been anti-dilutive.
Note
J - Recent Accounting Pronouncements
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the
accounting and disclosure for uncertain tax positions by requiring 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. The cumulative
effect of adopting FIN 48 was an increase in tax reserves and a decrease of
$0.1
million to the January 1, 2007 retained earnings balance. Upon adoption,
the liability for income taxes associated with uncertain tax positions at
January 1, 2007 was $1.6 million. This amount, if recognized, would favorably
affect the Company’s effective tax rate. The Company does not expect that
the amounts of unrecognized tax positions will change significantly within
the
next 12 months.
Interest
and penalties related to income tax liabilities are included in income tax
expense. The balance of accrued interest and penalties recorded in the
Consolidated Balance Sheet at January 1, 2007 was $0.5 million.
The
Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for the years ending December 31, 2003 through
2006. The Company and its subsidiaries state income tax returns are open to
audit under the statute of limitations for the years ended December 31,
2003 through 2006.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(SFAS No. 157). SFAS No. 157 replaces various definitions of fair value in
existing accounting literature with a single definition, establishes a framework
for measuring fair value in generally accepted accounting principles, and
requires additional disclosures about fair value measurements. SFAS No. 157
does
not expand the use of fair value to any new circumstances. SFAS No. 157 is
effective for fiscal years ending after November 15, 2007, and early application
is encouraged. The Company does not anticipate that the adoption of this
statement will have a material effect on its financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard
No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115.”
SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected
are
reported in earnings at each subsequent reporting date. The fair value option
(i) is applicable on an instrument by instrument basis, with certain
exceptions, (ii) is irrevocable (unless a new election date occurs) and
(iii) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective for the Company on January 1, 2008 and
is not expected to have a significant impact on the Company's 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 2006 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 2006 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
20
- 24 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 24 and
25
provide management’s analysis of the Company’s previously securitized loans. 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.
Financial
Summary
The
Company reported consolidated net income of $13.2 million, or $0.76 per diluted
common share, for the three months ended March 31, 2007, compared to $12.9
million, or $0.71 per diluted common share for the first quarter of 2006. Return
on average assets (“ROA”) was 2.10% and return on average equity (“ROE”) was
17.1% for the first quarter of 2007, compared to 2.06% and 17.4%, respectively,
for the first three months of 2006.
The
Company’s net interest income for the first quarter of 2007 decreased $1.4
million compared to the first quarter of 2006 (see Net
Interest Income).
The
Company recorded a provision for loan losses of $0.9 million for the first
quarter of 2007 while $1.0 million was recorded for the first quarter of 2006
(see Allowance
and Provision for Loan Losses).
As
further discussed under the caption Non-Interest Income and Expense,
non-interest income increased $ 2.0 million from the quarter ended March 31,
2006, to the quarter ended March 31, 2007. During the first quarter of 2007,
the
Company recognized a gain of $1.5 million from the sale of its existing merchant
processing agreements.
Net
Interest Income
The
Company’s tax equivalent net interest income decreased $1.4 million, or 5.5%,
from the first quarter of 2006 to the first quarter of 2007 as increased yields
on interest earning assets were more than offset by increases in the rates
paid
on interest-bearing liabilities. Compared to the first quarter of 2006, interest
income increased $1.7 million while interest expenses paid on interest bearing
liabilities increased $3.2 million due to rate increases.
Interest
income on earning assets increased by $1.7 million, driven primarily by an
increase in interest income on loans of $1.9 million despite a decrease of
$0.9
million in interest income from previously securitized loans from the first
quarter of 2006. The decrease in interest income from previously securitized
loans was related to the continued decline in the average balance of these
loans
of 48.7% from $28.1 million for the quarter ended March 31, 2006, to $14.4
million for the quarter ended March 31, 2007. However, this reduction in average
outstanding balances was partially mitigated as the yield on these loans rose
from an average of 39.1% for the first quarter of 2006 to 49.5% for the first
quarter of 2007 (see Previously Securitized Loans section for further
discussion). The yield for the fourth quarter of 2006 was 46.6%. In addition,
interest income from loans was impacted by the sale of the Company’s credit card
portfolio during the third quarter of 2006, which resulted in a decrease of
$0.5
million in interest income from the first quarter of 2006. Interest income
on
all other loans (commercial, residential, home equity, and consumer) increased
by $3.3 million as the average yield on these loans increased by 38 basis points
and the average balance on outstanding loans increased by $103.9 million
(excluding previously securitized loans and credit card loans).
These
increases were more than offset by an increase in interest expense on interest
bearing liabilities of $3.2 million due primarily to a 71 basis point increase
in the rates paid on interest bearing deposits from the first quarter of 2006.
In addition, increases in average outstanding deposit balances of $101 million,
or 6.4%, increased interest expense by $0.8 million. The increase in rates
and
balances was primarily associated with time deposits that experienced an
increase of 91 basis points while outstanding time deposit balances grew $91
million as compared to the first quarter of 2006.
The
net
interest margin was 4.41% for the quarter ended March 31, 2007 as compared
to
4.71% for the quarter ended March 31, 2006. The decline in the net interest
margin can primarily be attributed to lower interest income from previously
securitized loans and the sale of the retail credit card portfolio during the
third quarter of 2006. Excluding these items, the Company’s net interest margin
decreased 15 basis points from 4.33% during the first quarter of 2006 to 4.18%
for the first quarter of 2007. This compression is due to increased rates paid
on interest bearing liabilities, primarily time deposits.
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
594,504
|
|
$
|
8,854
|
|
|
6.04
|
%
|
$
|
593,131
|
|
$
|
8,380
|
|
|
5.73
|
%
|
Home
equity
|
|
|
322,647
|
|
|
6,242
|
|
|
7.85
|
|
|
302,265
|
|
|
5,594
|
|
|
7.51
|
|
Commercial
financial and agriculture
|
|
|
716,517
|
|
|
13,343
|
|
|
7.55
|
|
|
635,249
|
|
|
11,293
|
|
|
7.21
|
|
Installment
loans to individuals
|
|
|
42,903
|
|
|
1,269
|
|
|
12.00
|
|
|
56,546
|
|
|
1,593
|
|
|
11.43
|
|
Previously
securitized loans
|
|
|
14,375
|
|
|
1,756
|
|
|
49.54
|
|
|
28,051
|
|
|
2,704
|
|
|
39.09
|
|
Total
loans
|
|
|
1,690,946
|
|
|
31,464
|
|
|
7.55
|
|
|
1,615,242
|
|
|
29,564
|
|
|
7.42
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
505,585
|
|
|
6,933
|
|
|
5.56
|
|
|
574,195
|
|
|
7,260
|
|
|
5.13
|
|
Tax-exempt
(2)
|
|
|
40,413
|
|
|
658
|
|
|
6.60
|
|
|
44,303
|
|
|
719
|
|
|
6.58
|
|
Total
securities
|
|
|
545,998
|
|
|
7,591
|
|
|
5.64
|
|
|
618,498
|
|
|
7,979
|
|
|
5.23
|
|
Deposits
in depository institutions
|
|
|
13,033
|
|
|
117
|
|
|
3.64
|
|
|
14,888
|
|
|
150
|
|
|
4.09
|
|
Federal
funds sold
|
|
|
19,533
|
|
|
256
|
|
|
5.32
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
interest-earning assets
|
|
|
2,269,510
|
|
|
39,428
|
|
|
7.05
|
|
|
2,248,628
|
|
|
37,693
|
|
|
6.80
|
|
Cash
and due from banks
|
|
|
50,129
|
|
|
|
|
|
|
|
|
53,252
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
44,968
|
|
|
|
|
|
|
|
|
42,529
|
|
|
|
|
|
|
|
Other
assets
|
|
|
169,046
|
|
|
|
|
|
|
|
|
168,035
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(15,636
|
)
|
|
|
|
|
|
|
|
(16,851
|
)
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,518,017
|
|
|
|
|
|
|
|
$
|
2,495,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
430,201
|
|
$
|
1,332
|
|
|
1.26
|
%
|
$
|
444,126
|
|
$
|
1,259
|
|
|
1.15
|
%
|
Savings
deposits
|
|
|
330,023
|
|
|
1,307
|
|
|
1.61
|
|
|
306,314
|
|
|
732
|
|
|
0.97
|
|
Time
deposits
|
|
|
921,937
|
|
|
10,074
|
|
|
4.43
|
|
|
830,866
|
|
|
7,210
|
|
|
3.52
|
|
Short-term
borrowings
|
|
|
146,455
|
|
|
1,512
|
|
|
4.19
|
|
|
151,728
|
|
|
1,127
|
|
|
3.01
|
|
Long-term
debt
|
|
|
32,434
|
|
|
532
|
|
|
6.65
|
|
|
95,296
|
|
|
1,260
|
|
|
5.36
|
|
Total
interest-bearing liabilities
|
|
|
1,861,050
|
|
|
14,757
|
|
|
3.22
|
|
|
1,828,330
|
|
|
11,588
|
|
|
2.57
|
|
Noninterest-bearing
demand deposits
|
|
|
316,716
|
|
|
|
|
|
|
|
|
342,482
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
31,234
|
|
|
|
|
|
|
|
|
28,564
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
309,017
|
|
|
|
|
|
|
|
|
296,217
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,518,017
|
|
|
|
|
|
|
|
$
|
2,495,593
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
24,671
|
|
|
|
|
|
|
|
$
|
26,105
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
4.41
|
%
|
|
|
|
|
|
|
|
4.71
|
%
|
(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)
|
|
Three
months ended March 31,
|
|
|
|
2007
vs. 2006
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
19
|
|
$
|
455
|
|
$
|
474
|
|
Home
equity
|
|
|
377
|
|
|
271
|
|
|
648
|
|
Commercial,
financial, and agriculture
|
|
|
1,445
|
|
|
605
|
|
|
2,050
|
|
Installment
loans to individuals
|
|
|
(384
|
)
|
|
60
|
|
|
(324
|
)
|
Previously
securitized loans
|
|
|
(1,318
|
)
|
|
370
|
|
|
(948
|
)
|
Total
loans
|
|
|
139
|
|
|
1,761
|
|
|
1,900
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(867
|
)
|
|
540
|
|
|
(327
|
)
|
Tax-exempt
(1)
|
|
|
(63
|
)
|
|
2
|
|
|
(61
|
)
|
Total
securities
|
|
|
(930
|
)
|
|
542
|
|
|
(388
|
)
|
Deposits
in depository institutions
|
|
|
19
|
|
|
(14
|
)
|
|
(33
|
)
|
Federal
funds sold
|
|
|
-
|
|
|
256
|
|
|
256
|
|
Total
interest-earning assets
|
|
$
|
(810
|
)
|
$
|
2,545
|
|
$
|
1,735
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$
|
(39
|
)
|
$
|
112
|
|
$
|
73
|
|
Savings
deposits
|
|
|
57
|
|
|
518
|
|
|
575
|
|
Time
deposits
|
|
|
790
|
|
|
2,074
|
|
|
2,864
|
|
Short-term
borrowings
|
|
|
(39
|
)
|
|
424
|
|
|
385
|
|
Long-term
debt
|
|
|
(831
|
)
|
|
103
|
|
|
(728
|
)
|
Total
interest-bearing liabilities
|
|
$
|
(
62
|
)
|
$
|
3,231
|
|
$
|
3,169
|
|
Net
Interest Income
|
|
$
|
(748
|
)
|
$
|
(686
|
)
|
$
|
(1,434
|
)
|
(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 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 $0.9 million in the first
quarter of 2007 and in the fourth quarter of 2006. The quality of the Company’s
loan portfolio has continued to improve. Total past due loans have declined
43%
from $10.5 million at December 31, 2006 to $6.0 million at March 31, 2007.
This
improvement has been primarily associated with residential real estate loans
(down $2.9 million or 46%) and commercial loans (down $0.9 million or 43%)
from
December 31, 2006. Changes in the amount of the provision and related allowance
are based on the Company’s detailed methodology and are directionally consistent
with growth and changes in the composition and quality of the Company’s loan
portfolio.
The
Company had net charge-offs of $0.2 million for the first quarter of 2007,
with
overdraft depository accounts representing $0.3 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 real estate loans were $0.1
million, while commercial loans experienced net recoveries of $0.1 million
during the quarter ended March 31, 2007.
Due
to a
number of strategic initiatives to strengthen the loan portfolio implemented
by
management in recent years, including tightening credit standards, changing
the
overall mix of the portfolio to include a higher proportion of real estate
secured loans, and identifying and charging off or resolving problem loans,
the
quality of the Company’s loan portfolio remains solid. At March 31, 2007,
non-performing assets as a percentage of loans and other real estate owned
were
0.44 %. 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 December 31, 2006, was 0.81%. Another contributing 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. As a result, the Company’s ALLL as a percentage of loans
outstanding is 0.95% at March 31, 2007. 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 Five) increased
$1.1 million, or 12.8%, from $8.3 million at December 31, 2006 to $9.4 million
at March 31, 2007. This increase was attributable to recent trends in the
Company’s commercial portfolio.
The
allowance allocated to the residential real estate portfolio (see Table Five)
decreased $0.1 million, or 1.1%, from $4.0 million at December 31, 2006 to
$3.9
million at March 31, 2007. This decrease was primarily due to changes in loss
experience during the first quarter of 2007.
The
allowance allocated to the consumer loan portfolio (see Table Five) decreased
$0.2 million, or 27.2%, from $0.8 million at December 31, 2006 to $0.6 million
at March 31, 2007. This decrease was attributable to changes in loss experience
during the quarter ended March 31, 2007.
The
allowance allocated to overdraft deposit accounts (see Table Five) declined
$0.1million, or 5.5%, from $2.3 million at December 31, 2006 to $2.2 million
at
March 31, 2007. This decline was attributable to a slight decline in the loss
experience attributable to these balances.
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 March 31, 2007,
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 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 March 31, 2007.
Table
Three
|
|
|
|
|
|
Analysis
of the Allowance for Loan Losses
|
|
|
|
|
|
Three
months ended March 31,
|
|
Year
ended December 31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
15,405
|
|
$
|
16,790
|
|
$
|
16,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
of allowance for loans sold
|
|
|
-
|
|
|
-
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
(35
|
)
|
|
(185
|
)
|
|
(1,279
|
)
|
Real
estate-mortgage
|
|
|
(111
|
)
|
|
(296
|
)
|
|
(935
|
)
|
Installment
loans to individuals
|
|
|
(84
|
)
|
|
(368
|
)
|
|
(898
|
)
|
Overdraft
deposit accounts
|
|
|
(860
|
)
|
|
(958
|
)
|
|
(3,823
|
)
|
Total
charge-offs
|
|
|
(1,090
|
)
|
|
(1,807
|
)
|
|
(6,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
148
|
|
|
32
|
|
|
210
|
|
Real
estate-mortgage
|
|
|
15
|
|
|
105
|
|
|
575
|
|
Installment
loans to individuals
|
|
|
132
|
|
|
198
|
|
|
598
|
|
Overdraft
deposit accounts
|
|
|
573
|
|
|
500
|
|
|
1,734
|
|
Total
recoveries
|
|
|
868
|
|
|
835
|
|
|
3,117
|
|
Net
charge-offs
|
|
|
(222
|
) |
|
(972
|
)
|
|
(3,818
|
)
|
Provision
for loan losses
|
|
|
900
|
|
|
1,000
|
|
|
3,801
|
|
Balance
at end of period
|
|
$
|
16,083
|
|
$
|
16,818
|
|
$
|
15,405
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percent of Average Total Loans:
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)
|
|
|
(0.05
|
)%
|
|
(0.24
|
)%
|
|
0.23
|
%
|
Provision
for loan losses (annualized)
|
|
|
0.21
|
%
|
|
0.25
|
%
|
|
0.23
|
%
|
As
a Percent of Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
235.75
|
%
|
|
503.5
|
%
|
|
384.93
|
%
|
Table
Four
|
|
|
|
|
|
Non-Performing
Assets
|
|
|
|
|
|
|
|
As
of March 31,
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$
|
6,714
|
|
$
|
2,743
|
|
$
|
3,319
|
|
Accruing
loans past due 90 days or more
|
|
|
108
|
|
|
512
|
|
|
635
|
|
Previously
securitized loans past due 90 days or more
|
|
|
-
|
|
|
85
|
|
|
48
|
|
Total
non-performing loans
|
|
|
6,822
|
|
|
3,340
|
|
|
4,002
|
|
Other
real estate, excluding property associated with previously
securitized loans
|
|
|
290
|
|
|
403
|
|
|
181
|
|
Other
real estate, associated with previously securitized
loans
|
|
|
252
|
|
|
306
|
|
|
-
|
|
Total
other real estate owned
|
|
|
542
|
|
|
709
|
|
|
181
|
|
Total
non-performing assets
|
|
$
|
7,364
|
|
$
|
4,049
|
|
$
|
4,183
|
|
Table
Five
|
|
|
|
|
|
Allocation
of the Allowance For Loan Losses
|
|
|
|
|
|
As
of March 31,
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$
|
9,394
|
|
$
|
7,307
|
|
$
|
8,330
|
|
Real
estate - mortgage
|
|
|
3,937
|
|
|
4,304
|
|
|
3,981
|
|
Installment
loans to individuals
|
|
|
583
|
|
|
2,913
|
|
|
801
|
|
Overdraft
deposit accounts
|
|
|
2,168
|
|
|
2,294
|
|
|
2,293
|
|
Allowance
for Loan Losses
|
|
$
|
16,082
|
|
$
|
16,818
|
|
$
|
15,405
|
|
Previously
Securitized Loans
As
of
March 31, 2007, the Company reported a carrying value of previously securitized
loans of $ 12.7 million, while the actual outstanding contractual balance of
these loans was $30.9 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 first quarter of 2007 and for the year ended December 31, 2006, 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 but does
not
believe that continued net recoveries can be sustained indefinitely.
During
the first quarter of 2007 and 2006, the Company recognized $1.8 million and
$2.7
million, respectively, of interest income on its previously securitized loans.
Cash receipts for the three months ended March 31, 2007 and 2006 are summarized
in the following table:
|
|
Three
months ended March 31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
Principal
receipts
|
|
$
|
3,542
|
|
$
|
4,330
|
|
Interest
income receipts
|
|
|
1,109
|
|
|
1,563
|
|
Total
cash receipts
|
|
$
|
4,651
|
|
$
|
5,893
|
|
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, 2007
|
$10
million
|
December
31, 2008
|
8 million
|
December
31, 2009
|
7 million
|
December
31, 2010
|
6 million
|
Non-Interest
Income and Non-Interest Expense
Non-Interest
Income: Net
of
the gain from the sale of the Company’s merchant credit card agreements,
non-interest income increased $0.5 million to $12.9 million in the first quarter
of 2007 as compared to $12.4 million in the first quarter of 2006. The largest
source of non-interest income is from service charges on depository accounts,
which increased $0.2 million, or 2.0%, from $9.9 million during the first
quarter of 2006 to $10.1 million during the first quarter of 2007. Insurance
commission revenues increased $0.4 million, or 64.8%, due to the hiring of
additional staff by City Insurance to provide worker’s compensation insurance to
West Virginia businesses. Partially off-setting these increases was a decrease
in other income of $0.3 million due to lower credit card fee income due to
the
sale of the retail credit card portfolio during the third quarter of 2006 and
the sale of the merchant credit card portfolio during the first quarter of
2007.
Non-Interest
Expense: Non-interest
expenses increased $0.1 million from $17.5 million in the first quarter of
2006
to $17.6 million in the first quarter of 2007. Salaries and employee benefits
increased $0.4 million, or 4.9%, from the first quarter of 2006 due in part
to
additional staffing for new retail locations and insurance personnel to support
the introduction of worker’s compensation insurance. This increase was partially
offset by a $0.3 million charge in the first quarter of 2006 related to the
redemption of $2.5 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 of approximately a 2.00%. 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 March 31, 2007, 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
|
|
|
|
|
|
|
|
|
|
March
31, 2007:
|
|
|
|
|
|
|
|
+300
|
|
|
8.25
|
%
|
|
+7.2
|
%
|
|
+0.5
|
%
|
+200
|
|
|
7.25
|
|
|
+4.8
|
|
|
+1.1
|
|
+100
|
|
|
6.25
|
|
|
+2.5
|
|
|
+0.8
|
|
-100
|
|
|
4.25
|
|
|
(2.4
|
)
|
|
(2.5
|
)
|
-200
|
|
|
3.25
|
|
|
(5.4
|
)
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
8.25
|
%
|
|
+5.2
|
%
|
|
+4.2
|
%
|
+200
|
|
|
7.25
|
|
|
+4.3
|
|
|
+0.2
|
|
+100
|
|
|
6.25
|
|
|
+1.6
|
|
|
+0.4
|
|
-100
|
|
|
4.25
|
|
|
(2.3
|
)
|
|
(2.5
|
)
|
-200
|
|
|
3.25
|
|
|
(5.2
|
)
|
|
(5.1
|
)
|
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 2007 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. During 2005 and 2006, City National received
regulatory approval to pay $144.8 million of cash dividends to the Parent
Company, while generating net profits of $106.6 million. Therefore, City
National will be required to obtain regulatory approval prior to declaring
any
cash dividends to the Parent Company during 2007. Although regulatory
authorities have approved prior cash dividends, there can be no assurance that
future dividend requests will be approved.
The
Parent Company used cash obtained from the dividends received primarily to:
(1)
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 $1.5 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 $21.4 million on
an
annualized basis over the next 12 months based on common shareholders of record
at March 31, 2007. 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 $0.4 million of additional cash over the next
12
months. As of March 31, 2007, the Parent Company reported a cash balance of
$36.6 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 2007 other than the
repayment of its $16.8 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 March 31, 2007, 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 March 31, 2007, City National has the capacity to borrow
an
additional $273.2 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 (92.1%, or $540.3
million at March 31, 2007) of its investment securities portfolio in the highly
liquid available-for-sale classification. 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 65.5% as
of March 31, 2007 and deposit balances fund 79.7% 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 balances that
totaled $586.7 million at March 31, 2007, and that greatly exceeded the
Company’s non-deposit sources of borrowing which totaled $216.5 million.
Further, the Company’s deposit mix has a very high proportion of transaction and
savings accounts that fund 43.6% of the Company’s total assets.
As
illustrated in the Consolidated Statements of Cash Flows, the Company generated
$16.5 million of cash from operating activities during the first quarter of
2007, primarily from interest income received on loans and investments, net
of
interest expense paid on deposits and borrowings. The Company used $79.5 million
of cash in investing activities during the first quarter of 2007 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 generated $31.6 million of cash in financing activities during
the
first quarter of 2007, principally as a result of increasing its interest and
non-interest bearing deposits by $53.9 million which was partially offset by
treasury stock purchases of $10.9 million, repayments of short-term borrowings
of $6.5 million, and cash dividends paid to the Company’s common stockholders of
$4.9 million.
Capital
Resources
During
the first quarter of 2007, Shareholders’ Equity decreased $2.0 million, or 0.6%,
from $305.3 million at December 31, 2006 to $303.3 million at March 31, 2007.
This decrease was primarily due to common stock purchases of $10.9 million
and
dividends declared during the quarter of $5.3 million which were partially
offset by reported net income of $13.2 million and a $0.8 million increase
in
accumulated other comprehensive income. The increase in accumulated other
comprehensive income during the quarter was due to unrealized gains,
net of
taxes,
on the
Company’s available for sale investment securities of $0.7 million and
unrealized gains, net of taxes, on the Company’s derivative instruments of $0.1
million.
During
December 2006, the Board of Directors authorized the Company to buy back up
to
1,000,000 shares of its common shares (approximately 5% of outstanding shares)
in open market transactions at prices that are accretive to the earnings per
share of continuing shareholders. No time limit was placed on the duration
of
the share repurchase program. There were 274,300 shares repurchased during
the
first quarter of 2007 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 March 31, 2007, the Company may repurchase an
additional 691,700 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-
|
|
March
31,
|
|
December
31,
|
|
|
|
Minimum
|
|
Capitalized
|
|
2007
|
|
2006
|
|
City
Holding:
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0
|
%
|
|
10.0
|
%
|
|
16.3
|
%
|
|
16.2
|
%
|
Tier
I Risk-based
|
|
|
4.0
|
|
|
6.0
|
|
|
15.3
|
|
|
15.3
|
|
Tier
I Leverage
|
|
|
4.0
|
|
|
5.0
|
|
|
10.7
|
|
|
10.8
|
|
City
National:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0
|
%
|
|
10.0
|
%
|
|
13.5
|
%
|
|
13.4
|
%
|
Tier
I Risk-based
|
|
|
4.0
|
|
|
6.0
|
|
|
12.6
|
|
|
12.5
|
|
Tier
I Leverage
|
|
|
4.0
|
|
|
5.0
|
|
|
8.8
|
|
|
8.8
|
|
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 March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
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,
2006.
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1 - Janaury 31, 2007
|
|
|
72,000
|
|
$
|
39.42
|
|
|
72,000
|
|
|
894,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1 - February 28, 2007
|
|
|
63,900
|
|
$
|
40.13
|
|
|
63,900
|
|
|
830,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 - March 31, 2007
|
|
|
138,400
|
|
$
|
39.77
|
|
|
138,400
|
|
|
691,700
|
|
(a)
|
In
December 2006, 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:
May
3, 2007
-32-