form10-q.htm
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 June 30, 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 – 16,810,787 shares as of August 7, 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 or decreased prepayments 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.
|
|
4-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
17-34
|
Item
3.
|
|
34
|
Item
4.
|
|
34
|
|
|
|
PART
II
|
|
|
|
|
|
Item
1.
|
|
35
|
Item
1A.
|
|
35
|
Item
2.
|
|
35
|
Item
3.
|
|
35
|
Item
4.
|
|
36
|
Item
5.
|
|
36
|
Item
6.
|
|
36
|
|
|
|
|
|
37
|
City
Holding Company and Subsidiaries
(in
thousands)
|
|
June
30
|
|
|
December
31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Note
A)
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
60,163
|
|
|
$ |
58,014
|
|
Interest-bearing
deposits in depository institutions
|
|
|
14,507
|
|
|
|
27,434
|
|
Federal
funds sold
|
|
|
20,000
|
|
|
|
25,000
|
|
Cash
and Cash Equivalents
|
|
|
94,670
|
|
|
|
110,448
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale, at fair value
|
|
|
453,721
|
|
|
|
472,398
|
|
Investment
securities held-to-maturity, at amortized cost (approximate fair
value
at June 30, 2007 and December 31, 2006 - $43,706
and $49,955)
|
|
|
41,711
|
|
|
|
47,500
|
|
Total
Investment Securities
|
|
|
495,432
|
|
|
|
519,898
|
|
|
|
|
|
|
|
|
|
|
Gross
loans
|
|
|
1,730,354
|
|
|
|
1,677,469
|
|
Allowance
for loan losses
|
|
|
(16,616 |
) |
|
|
(15,405 |
) |
Net
Loans
|
|
|
1,713,738
|
|
|
|
1,662,064
|
|
|
|
|
|
|
|
|
|
|
Bank
owned life insurance
|
|
|
56,272
|
|
|
|
55,195
|
|
Premises
and equipment
|
|
|
48,923
|
|
|
|
44,689
|
|
Accrued
interest receivable
|
|
|
11,596
|
|
|
|
12,337
|
|
Net
deferred tax asset
|
|
|
26,424
|
|
|
|
23,652
|
|
Intangible
assets
|
|
|
58,504
|
|
|
|
58,857
|
|
Other
assets
|
|
|
20,179
|
|
|
|
20,667
|
|
Total
Assets
|
|
$ |
2,525,738
|
|
|
$ |
2,507,807
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
329,772
|
|
|
$ |
321,038
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
416,331
|
|
|
|
422,925
|
|
Savings
deposits
|
|
|
346,413
|
|
|
|
321,075
|
|
Time
deposits
|
|
|
921,172
|
|
|
|
920,179
|
|
Total
Deposits
|
|
|
2,013,688
|
|
|
|
1,985,217
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
164,545
|
|
|
|
136,570
|
|
Long-term
debt
|
|
|
21,897
|
|
|
|
48,069
|
|
Other
liabilities
|
|
|
30,825
|
|
|
|
32,644
|
|
Total
Liabilities
|
|
|
2,230,955
|
|
|
|
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 June 30, 2007 and December 31, 2006,
less
1,562,095 and 1,009,095 shares in treasury, respectively
|
|
|
46,249
|
|
|
|
46,249
|
|
Capital
surplus
|
|
|
103,422
|
|
|
|
104,043
|
|
Retained
earnings
|
|
|
209,043
|
|
|
|
194,213
|
|
Cost
of common stock in treasury
|
|
|
(55,284 |
) |
|
|
(33,669 |
) |
Accumulated
other comprehensive (loss):
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
|
(4,767 |
) |
|
|
(2,649 |
) |
Unrealized
loss on derivative instruments
|
|
|
(1,210 |
) |
|
|
(210 |
) |
Underfunded
pension liability
|
|
|
(2,670 |
) |
|
|
(2,670 |
) |
Total
Accumulated Other Comprehensive (Loss)
|
|
|
(8,647 |
) |
|
|
(5,529 |
) |
Total
Shareholders’ Equity
|
|
|
294,783
|
|
|
|
305,307
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,525,738
|
|
|
$ |
2,507,807
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands, except earnings per share data)
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
31,947
|
|
|
$ |
30,451
|
|
|
$ |
63,411
|
|
|
$ |
60,014
|
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,752
|
|
|
|
7,489
|
|
|
|
13,686
|
|
|
|
14,748
|
|
Tax-exempt
|
|
|
427
|
|
|
|
455
|
|
|
|
855
|
|
|
|
922
|
|
Interest
on loans held for sale
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
200
|
|
Interest
on deposits in depository institutions
|
|
|
113
|
|
|
|
415
|
|
|
|
230
|
|
|
|
566
|
|
Interest
on federal funds sold
|
|
|
291
|
|
|
|
-
|
|
|
|
547
|
|
|
|
-
|
|
Total
Interest Income
|
|
|
39,530
|
|
|
|
39,010
|
|
|
|
78,729
|
|
|
|
76,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
13,077
|
|
|
|
10,520
|
|
|
|
25,788
|
|
|
|
19,721
|
|
Interest
on short-term borrowings
|
|
|
1,694
|
|
|
|
1,326
|
|
|
|
3,207
|
|
|
|
2,452
|
|
Interest
on long-term debt
|
|
|
425
|
|
|
|
1,239
|
|
|
|
957
|
|
|
|
2,499
|
|
Total
Interest Expense
|
|
|
15,196
|
|
|
|
13,085
|
|
|
|
29,952
|
|
|
|
24,672
|
|
Net
Interest Income
|
|
|
24,334
|
|
|
|
25,925
|
|
|
|
48,777
|
|
|
|
51,778
|
|
Provision
for loan losses
|
|
|
1,600
|
|
|
|
675
|
|
|
|
2,500
|
|
|
|
1,675
|
|
Net
Interest Income After Provision for Loan Losses
|
|
|
22,734
|
|
|
|
25,250
|
|
|
|
46,277
|
|
|
|
50,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities gains
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
Service
charges
|
|
|
11,426
|
|
|
|
10,903
|
|
|
|
21,489
|
|
|
|
20,764
|
|
Insurance
commissions
|
|
|
832
|
|
|
|
521
|
|
|
|
1,844
|
|
|
|
1,135
|
|
Trust
and investment management fee income
|
|
|
437
|
|
|
|
504
|
|
|
|
1,005
|
|
|
|
1,070
|
|
Bank
owned life insurance
|
|
|
585
|
|
|
|
678
|
|
|
|
1,281
|
|
|
|
1,215
|
|
Gain
on sale of credit card merchant agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500
|
|
|
|
-
|
|
Other
income
|
|
|
364
|
|
|
|
857
|
|
|
|
877
|
|
|
|
1,667
|
|
Total
Non-interest Income
|
|
|
13,689
|
|
|
|
13,463
|
|
|
|
28,041
|
|
|
|
25,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
8,912
|
|
|
|
8,764
|
|
|
|
17,969
|
|
|
|
17,396
|
|
Occupancy
and equipment
|
|
|
1,525
|
|
|
|
1,624
|
|
|
|
3,162
|
|
|
|
3,223
|
|
Depreciation
|
|
|
1,109
|
|
|
|
1,071
|
|
|
|
2,179
|
|
|
|
2,121
|
|
Professional
fees
|
|
|
385
|
|
|
|
571
|
|
|
|
788
|
|
|
|
966
|
|
Postage,
delivery, and statement mailings
|
|
|
569
|
|
|
|
689
|
|
|
|
1,346
|
|
|
|
1,333
|
|
Advertising
|
|
|
880
|
|
|
|
755
|
|
|
|
1,732
|
|
|
|
1,529
|
|
Telecommunications
|
|
|
460
|
|
|
|
525
|
|
|
|
915
|
|
|
|
1,001
|
|
Bankcard
expenses
|
|
|
597
|
|
|
|
458
|
|
|
|
1,115
|
|
|
|
1,001
|
|
Insurance
and regulatory
|
|
|
383
|
|
|
|
381
|
|
|
|
768
|
|
|
|
769
|
|
Office
supplies
|
|
|
442
|
|
|
|
372
|
|
|
|
897
|
|
|
|
754
|
|
Repossessed
asset losses (gains), net of expenses
|
|
|
9
|
|
|
|
(129 |
) |
|
|
(5 |
) |
|
|
(125 |
) |
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
282
|
|
Other
expenses
|
|
|
2,254
|
|
|
|
2,474
|
|
|
|
4,256
|
|
|
|
4,802
|
|
Total
Non-interest Expense
|
|
|
17,525
|
|
|
|
17,555
|
|
|
|
35,122
|
|
|
|
35,052
|
|
Income
Before Income Taxes
|
|
|
18,898
|
|
|
|
21,158
|
|
|
|
39,196
|
|
|
|
40,902
|
|
Income
tax expense
|
|
|
6,576
|
|
|
|
7,397
|
|
|
|
13,643
|
|
|
|
14,275
|
|
Net
Income
|
|
|
12,322
|
|
|
|
13,761
|
|
|
$ |
25,553
|
|
|
$ |
26,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.72
|
|
|
$ |
0.78
|
|
|
$ |
1.48
|
|
|
$ |
1.49
|
|
Diluted
earnings per common share
|
|
$ |
0.72
|
|
|
$ |
0.77
|
|
|
$ |
1.48
|
|
|
$ |
1.49
|
|
Dividends
declared per common share
|
|
$ |
0.31
|
|
|
$ |
0.28
|
|
|
$ |
0.62
|
|
|
$ |
0.56
|
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,100
|
|
|
|
17,719
|
|
|
|
17,230
|
|
|
|
17,860
|
|
Diluted
|
|
|
17,158
|
|
|
|
17,772
|
|
|
|
17,292
|
|
|
|
17,917
|
|
See
notes to consolidated financial
statements.
City
Holding Company and Subsidiaries
Six
Months Ended June 30, 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
|
|
|
|
|
|
|
|
|
|
|
26,627
|
|
|
|
|
|
|
|
|
|
|
|
26,627
|
|
Other
comprehensive loss, net of deferred income taxes of
$3,282:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities of $6,518, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,911 |
) |
|
|
(3,911 |
) |
Net
unrealized loss on interest rate floors of $1,687, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,012 |
) |
|
|
(1,012 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,704
|
|
Cash
dividends declared ($0.56 per share)
|
|
|
|
|
|
|
|
|
|
|
(9,907 |
) |
|
|
|
|
|
|
|
|
|
|
(9,907 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
187
|
|
Exercise
of 32,007 stock options
|
|
|
|
|
|
|
(747 |
) |
|
|
|
|
|
|
1,172
|
|
|
|
|
|
|
|
425
|
|
Excess
tax benefit on stock –basedcompensation
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
Purchase
of 572,053 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,625 |
) |
|
|
|
|
|
|
(20,625 |
) |
Balances
at June 30, 2006
|
|
$ |
46,249
|
|
|
$ |
103,825
|
|
|
$ |
177,467
|
|
|
$ |
(30,486 |
) |
|
$ |
(12,935 |
) |
|
$ |
284,120
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
25,553
|
|
|
|
|
|
|
|
|
|
|
|
25,553
|
|
Other
comprehensive loss, net of deferred income taxes of
$2,079:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities of $3,530, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,118 |
) |
|
|
(2,118 |
) |
Net
unrealized loss on interest rate floors of $1,667, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
|
(1,000 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,435
|
|
Cash
dividends declared ($0.62 per share)
|
|
|
|
|
|
|
|
|
|
|
(10,598 |
) |
|
|
|
|
|
|
|
|
|
|
(10,598 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(483 |
) |
|
|
|
|
|
|
801
|
|
|
|
|
|
|
|
318
|
|
Exercise
of 7,300 stock options
|
|
|
|
|
|
|
(141 |
) |
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
154
|
|
Excess
tax benefit on stock-based compensation
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Purchase
of 580,200 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,711 |
) |
|
|
|
|
|
|
(22,711 |
) |
Balances
at June 30, 2007
|
|
$ |
46,249
|
|
|
$ |
103,422
|
|
|
$ |
209,043
|
|
|
$ |
(55,284 |
) |
|
$ |
(8,647 |
) |
|
$ |
294,783
|
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands)
|
|
Six
Months Ended June 30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,553
|
|
|
$ |
26,627
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
and accretion
|
|
|
(1,027 |
) |
|
|
(1,453 |
) |
Provision
for loan losses
|
|
|
2,500
|
|
|
|
1,675
|
|
Depreciation
of premises and equipment
|
|
|
2,179
|
|
|
|
2,121
|
|
Deferred
income tax (benefit) expense
|
|
|
(693 |
) |
|
|
1,010
|
|
Net
periodic employee benefit cost
|
|
|
118
|
|
|
|
123
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
|
282
|
|
Gain
on sale of credit card merchant agreements
|
|
|
(1,500 |
) |
|
|
-
|
|
Loss
on disposal of premises and equipment
|
|
|
-
|
|
|
|
15
|
|
Realized
investment securities (gains)
|
|
|
(45 |
) |
|
|
-
|
|
Proceeds
from bank-owned life insurance
|
|
|
204
|
|
|
|
125
|
|
Increase
in value of bank-owned life insurance
|
|
|
(1,281 |
) |
|
|
(1,214 |
) |
Decrease in
accrued interest receivable
|
|
|
741
|
|
|
|
1,863
|
|
(Decrease)
in other assets
|
|
|
(1,341 |
) |
|
|
(3,523 |
) |
(Decrease
) increase in other liabilities
|
|
|
(2,097 |
) |
|
|
820
|
|
Net
Cash Provided by Operating Activities
|
|
|
23,311
|
|
|
|
28,471
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities held-to-maturity
|
|
|
5,707
|
|
|
|
909
|
|
Proceeds
from sale of money market and mutual fund securities
available-for-sale
|
|
|
533,960
|
|
|
|
500,250
|
|
Purchases
of money market and mutual fund securities
available-for-sale
|
|
|
(571,557 |
) |
|
|
(509,516 |
) |
Proceeds
from sales of securities available-for-sale
|
|
|
1,034
|
|
|
|
3,223
|
|
Proceeds
from maturities and calls of securities available-for-sale
|
|
|
53,322
|
|
|
|
39,320
|
|
Purchases
of securities available-for-sale
|
|
|
(1,925 |
) |
|
|
(3,018 |
) |
Net
(increase) in loans
|
|
|
(52,374 |
) |
|
|
(45,337 |
) |
Purchases
of premises and equipment
|
|
|
(6,413 |
) |
|
|
(2,688 |
) |
Proceeds
from sale of credit card merchant agreements
|
|
|
1,650
|
|
|
|
-
|
|
Net
Cash Used in Investing Activities
|
|
|
(36,596 |
) |
|
|
(16,857 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in noninterest-bearing deposits
|
|
|
8,734
|
|
|
|
(30,869 |
) |
Net
increase in interest-bearing deposits
|
|
|
19,737
|
|
|
|
75,016
|
|
Net
increase (decrease) in short-term borrowings
|
|
|
1,941
|
|
|
|
(12,410 |
) |
Repayment
of long-term debt
|
|
|
(106 |
) |
|
|
(2,731 |
) |
Redemption
of trust preferred securities
|
|
|
-
|
|
|
|
(2,705 |
) |
Purchases
of treasury stock
|
|
|
(22,711 |
) |
|
|
(20,625 |
) |
Exercise
of stock options
|
|
|
154
|
|
|
|
425
|
|
Excess
tax benefits from stock-based compensation arrangements
|
|
|
3
|
|
|
|
195
|
|
Dividends
paid
|
|
|
(10,245 |
) |
|
|
(9,513 |
) |
Net
Cash Used in Financing Activities
|
|
|
(2,493 |
) |
|
|
(3,217 |
) |
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
(15,778 |
) |
|
|
8,397
|
|
Cash
and cash equivalents at beginning of period
|
|
|
110,448
|
|
|
|
86,273
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
94,670
|
|
|
$ |
94,670
|
|
See
notes to consolidated financial
statements.
June
30, 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 six months ended June 30,
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 derived from audited
financial statements included in the Company’s 2006 Annual Report to
Shareholders. Certain information and footnote disclosures normally included
in
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 2006 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 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 Six
Months
Ended
|
|
|
As
of and for the Year Ended
|
|
|
|
June
30,
|
|
|
December
31,
|
|
(
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
Previously
Securitized Loans:
|
|
|
|
|
|
|
|
|
|
Total
principal amount of loans outstanding
|
|
$ |
28,375
|
|
|
$ |
39,976
|
|
|
$ |
33,334
|
|
Discount
|
|
|
(18,054 |
) |
|
|
(17,723 |
) |
|
|
(17,737 |
) |
Net
book value
|
|
$ |
10,321
|
|
|
$ |
22,253
|
|
|
$ |
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount of loans between 30 and 89 days past due
|
|
$ |
754
|
|
|
$ |
866
|
|
|
$ |
1,062
|
|
Principal
amount of loans 90 days and above past due
|
|
|
45
|
|
|
|
277
|
|
|
|
48
|
|
Net
credit recoveries during the period
|
|
|
1,916
|
|
|
|
2,552
|
|
|
|
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 and six months ended June
30, 2007 and 2006, or for the year ending December 31, 2006.
As
of
June 30, 2007, the Company reported a book value of previously securitized
loans
of $10.3 million whereas the actual contractual outstanding balance of
previously securitized loans at June 30, 2007 was $28.4 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.
For
the
three months ended June 30, 2007 and 2006, the Company recognized $1.9 million
and $2.5 million, respectively, of interest income from its previously
securitized loans. During the first six months of 2007 and 2006, the
Company recognized $3.6 million and $5.2 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 June 30, 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.
|
|
June
30, 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
|
|
|
$ |
2,410
|
|
|
$ |
500,000
|
|
|
$ |
4,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average strike rates for interest rate floors outstanding
at June
30, 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
decrease in market value of $1.0 million, net of taxes, in Other Comprehensive
Income for the six months ending June 30, 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 June 30, 2007, matures in 11 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)
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Security
repurchase agreements
|
|
$ |
118,685
|
|
|
$ |
115,675
|
|
Short-term
FHLB advances
|
|
|
45,860
|
|
|
|
20,895
|
|
Total
short-term borrowings
|
|
$ |
164,545
|
|
|
$ |
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
|
|
June
30, 2007
|
|
|
Weighted
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
2009
|
|
$ |
3,391
|
|
|
|
6.00 |
% |
FHLB
Advances
|
2010
|
|
|
1,000
|
|
|
|
5.98 |
% |
FHLB
Advances
|
2011
|
|
|
670
|
|
|
|
4.47 |
% |
Junior
subordinated debentures owed to City Holding Capital
Trust
|
2028
(a)
|
|
|
16,836
|
|
|
|
9.15 |
% |
Total
long-term debt
|
|
|
$ |
21,897
|
|
|
|
|
|
(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 continue 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.” A summary of the Company’s stock option
activity and related information is presented below for the six months ended
June 30:
|
|
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
|
|
|
(7,300 |
) |
|
|
21.17
|
|
|
|
(32,007 |
) |
|
|
13.30
|
|
Forfeited
|
|
|
(3,000 |
) |
|
|
34.45
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at June 30
|
|
|
308,909
|
|
|
$ |
32.05
|
|
|
|
286,125
|
|
|
$ |
30.27
|
|
Additional
information regarding stock
options outstanding and exercisable at June 30, 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
|
|
|
|
55
|
|
|
$ |
421
|
|
|
|
16,800
|
|
|
$ |
13.30
|
|
|
|
55
|
|
|
$ |
421
|
|
$ |
28.00
- $39.34
|
|
|
|
292,109
|
|
|
|
33.12
|
|
|
|
90
|
|
|
|
1,569
|
|
|
|
191,984
|
|
|
|
31.94
|
|
|
|
83
|
|
|
|
1,226
|
|
|
|
|
|
|
308,909
|
|
|
|
|
|
|
|
|
|
|
$ |
1,990
|
|
|
|
208,784
|
|
|
|
|
|
|
|
|
|
|
$ |
1,647
|
|
Proceeds
from stock option exercises totaled $0.2 million and $0.4 million
during the six months ended June 30, 2007 and June 30, 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 six months ended June 30,
2007 and June 30, 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 $0.8 million during the six months
ended June 30, 2007 and June 30, 2006, respectively.
Stock-based
compensation expense
totaled $0.1 million for both the six months ended June 30, 2007 and June
30, 2006. Unrecognized stock-based compensation expense related to
stock options totaled $0.8 million at June 30, 2007. At such date, the
weighted-average period over which this unrecognized expense was expected to
be
recognized was 2.0 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
six months ended June 30, 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 six
months ended June 30, 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 June 30, 2007. At June 30, 2007, this unrecognized expense
is expected to be recognized over 4.1 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 six months
ended June 30:
|
|
2007
|
|
|
2006
|
|
|
|
Options
|
|
|
Average
Market Price at Grant
|
|
|
Options
|
|
|
Average
Market Price at Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
15,600
|
|
|
|
|
|
|
14,000
|
|
|
|
|
Granted
|
|
|
16,150
|
|
|
$ |
39.53
|
|
|
|
1,700
|
|
|
$ |
36.17
|
|
Forfeited/Vested
|
|
|
(1,266 |
) |
|
|
|
|
|
|
-
|
|
|
|
|
|
Outstanding
at June 30
|
|
|
30,484
|
|
|
|
|
|
|
|
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 $0.3 million for the six month periods
ended June 30, 2007 and June 30, 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 $0.4 million and $0.1 million
to
the Defined Benefit Plan during the six months ended June 30, 2007 and June
30,
2006, respectively.
The
following table presents the components of the net periodic pension cost of
the
Defined Benefit Plan:
|
|
|
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
164
|
|
|
$ |
213
|
|
|
$ |
328
|
|
|
$ |
341
|
|
Expected
return on plan assets
|
|
|
(185 |
) |
|
|
(238 |
) |
|
|
(370 |
) |
|
|
(382 |
) |
Net
amortization and deferral
|
|
|
80
|
|
|
|
102
|
|
|
|
160
|
|
|
|
164
|
|
Net
Periodic Pension Cost
|
|
$ |
59
|
|
|
$ |
77
|
|
|
$ |
118
|
|
|
$ |
123
|
|
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)
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
|
|
Home
equity lines
|
|
$ |
134,795
|
|
|
$ |
140,479
|
|
Commercial
real estate
|
|
|
39,587
|
|
|
|
48,489
|
|
Other
commitments
|
|
|
143,863
|
|
|
|
131,428
|
|
Standby
letters of credit
|
|
|
12,578
|
|
|
|
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:
|
|
Six
months ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Net
income
|
|
$ |
25,553
|
|
|
$ |
26,627
|
|
|
|
|
|
|
|
|
|
|
Unrealized
security (losses) arising during the period
|
|
|
(3,530 |
) |
|
|
(6,518 |
) |
Reclassification
adjustment for gains included in income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(3,530 |
) |
|
|
(6,518 |
) |
|
|
|
|
|
|
|
|
|
Unrealized
(losses) on interest rate floors
|
|
|
(1,667 |
) |
|
|
(1,687 |
) |
Other
comprehensive income before income taxes
|
|
|
(5,197 |
) |
|
|
(8,205 |
) |
Tax
effect
|
|
|
2,079
|
|
|
|
3,282
|
|
Total
comprehensive income
|
|
$ |
22,435
|
|
|
$ |
21,704
|
|
Note
I – Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
(in
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,322
|
|
|
$ |
13,761
|
|
|
$ |
25,553
|
|
|
$ |
26,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
17,100
|
|
|
|
17,719
|
|
|
|
17,230
|
|
|
|
17,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
58
|
|
|
|
53
|
|
|
|
62
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
for diluted earnings per share
|
|
|
17,158
|
|
|
|
17,772
|
|
|
|
17,292
|
|
|
|
17,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.72
|
|
|
$ |
0.78
|
|
|
$ |
1.48
|
|
|
$ |
1.49
|
|
Diluted
earnings per share
|
|
$ |
0.72
|
|
|
$ |
0.77
|
|
|
$ |
1.48
|
|
|
$ |
1.49
|
|
Options
to purchase 47,500 shares of common stock at an exercise price of $39.34 and
43,750 shares of common stock at exercise prices between $36.25 and $36.90
per
share were outstanding during the second quarter of 2007 and 2006, 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 – 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 ended 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 is currently evaluating SFAS No. 157 and has
not determined the impact it will have on our 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. The Company is currently evaluating
SFAS No. 159 and has not determined the impact it will have on our 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 significantly 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 Shareholders. 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
24
- 28 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 28 and
29
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
Six
Months Ended June 30, 2007 vs. 2006
The
Company reported consolidated net income of $25.5 million, or $1.48 per diluted
common share, for the six months ended June 30, 2007, compared to $26.6 million,
or $1.49 per diluted common share for the first six months of 2006. Return
on
average assets (“ROA”) was 2.02% and return on average equity (“ROE”) was 16.6%
for the first six months of 2007, compared to 2.12% and 18.1%, respectively,
for
the first six months of 2006.
The
Company’s net interest income for the first six months of 2007 decreased $3.0
million compared to the first six months of 2006 (see Net Interest
Income). The Company recorded a provision for loan losses of $2.5 million
for the first six months of 2007 while $1.7 million was recorded for the first
six months of 2006 (see Allowance and Provision for Loan
Losses). As further discussed under the caption Non-Interest
Income and Expense, non-interest income increased $2.2 million from the six
months ended June 30, 2006, to the six months ended June 30,
2007. During the first six months of 2007, the Company recognized a
gain of $1.5 million from the sale of its existing merchant processing
agreements.
Three
Months Ended June 30, 2007 vs. 2006
The
Company reported consolidated net
income of $12.3 million, or $0.72 per diluted common share, for the three months
ended June 30, 2007, compared to $13.8 million, or $0.77 per diluted common
share, for the second quarter of 2006. Return on average assets
(“ROA”) was 1.94% and return on average equity (“ROE”) was 16.1% for the second
quarter of 2007, compared to 2.17% and 18.8% respectively, for the second
quarter of 2006.
The
Company’s net interest income for
the second quarter of 2007 decreased $1.6 million compared to the second quarter
of 2006 (see Net Interest Income). The Company recorded a
provision for loan losses of $1.6 million for the second quarter of 2007 while
$0.7 was recorded for the second quarter or 2006 (see Allowance and
Provision for Loan Losses). As further discussed under the
caption Non-Interest Income and Expense, non-interest income increased $0.2
million from the quarter ended June 30, 2006, to the quarter ended June 30,
2007. This increase was primarily due to an increase of $0.5 million,
or 4.8%, in service charge revenues. Non-interest expenses remained
flat at $17.5 million.
Net
Interest Income
Six
Months Ended June 30, 2007 vs. 2006
The
Company’s tax equivalent net interest income decreased $3.0 million, or
5.8%, from the first six months of 2006 to the first six months 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 six months of 2006, interest income increased $2.2 million while
interest expenses paid on interest bearing liabilities increased $5.3 million
due to rate increases.
Interest
income on earning assets increased by $2.2 million, driven primarily by an
increase in interest income on loans of $3.4 million despite a decrease of
$1.6
million in interest income from previously securitized loans from the first
six
months 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 50.9% from $26.0 million for the six months ended June 30, 2006,
to $12.8 million for the six months ended June 30, 2007. However,
this reduction in average outstanding balances was partially mitigated as the
yield on these loans rose from an average of 40.4% for the first six months
of
2006 to 57.0% for the first six months of 2007 (see Previously Securitized
Loans
section for further discussion). 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 $1.0 million in interest
income from the first six months of 2006. Interest income on all
other loans (commercial, loans to depository institutions, residential, home
equity, and consumer) increased by $5.9 million as the average yield on these
loans increased by 28 basis points and the average balance on outstanding loans
increased by $104.7 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 $5.3 million due primarily to a 60 basis point increase
in the rates paid on interest bearing deposits from the first six months of
2006. In addition, increases in average outstanding deposit balances
of $86.8 million, or 5.4%, increased interest expense by $1.4
million. The increase in rates and balances was primarily associated
with time deposits that experienced an increase of 78 basis points while
outstanding time deposit balances grew $74.2 million as compared to the first
six months of 2006.
The
net
interest margin was 4.36% for the six months ended June 30, 2007 as compared
to
4.64% for the six months ended June 30, 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 16 basis points from 4.27% during the
first six months of 2006 to 4.11% for the first six months of
2007. This compression is due to increased rates paid on interest
bearing liabilities, primarily time deposits.
Three
Months Ended June 30, 2007 vs. 2006
The
Company’s tax equivalent net interest income decreased $1.6 million, or
6.1%, from the second quarter of 2006 to the second 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 second quarter of 2006, interest income increased $0.5 million while
interest expenses paid on interest bearing liabilities increased $2.1 million
due to rate increases.
Interest
income on earning assets increased by $0.5 million, driven primarily by an
increase in interest income on loans of $1.5 million, despite a decrease of
$0.7
million in interest income from previously securitized loans from the second
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 53.4% from $24.0 million for the quarter ended June 30, 2006,
to
$11.2 million for the quarter ended June 30, 2007. However, this
reduction in average outstanding balances was partially mitigated as the yield
on these loans rose from an average of 41.9% for the second quarter of 2006
to
66.4% for the second quarter of 2007 (see Previously Securitized Loans section
for further discussion). The yield for the first quarter of 2007 was
49.5%. 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 second
quarter of 2006. Interest income on all other loans (commercial,
loans to depository institutions, residential, home equity, and consumer)
increased by $2.6 million as the average yield on these loans increased by
18
basis points and the average balance on outstanding loans increased by $106.5
million (excluding previously securitized loans and credit card
loans).
These
increases were partially offset by an increase in interest expense on interest
bearing liabilities of $2.5 million due primarily to a 44 basis point increase
in the rates paid on interest bearing deposits from the second quarter of
2006. In addition, increases in average outstanding deposit balances
of $73 million, or 4.5%, increased interest expense by $0.6
million. The increase in rates and balances was primarily associated
with time deposits that experienced an increase of 66 basis points while
outstanding time deposit balances grew $57 million as compared to the second
quarter of 2006.
The
net
interest margin was 4.32% for the quarter ended June 30, 2007 as compared to
4.58% for the quarter ended June 30, 2006. The decline in the net
interest margin can partially 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 18 basis points from 4.23% during the
second quarter of 2006 to 4.05% for the second quarter of 2007. This
compression is due to an increase in the rates paid on total interest bearing
liabilities, and reflects an increase in the cost of time
deposits.
Table
One
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
595,381
|
|
|
$ |
17,872
|
|
|
|
6.05 |
% |
|
$ |
594,954
|
|
|
$ |
16,864
|
|
|
|
5.72 |
% |
Home
equity
|
|
|
324,820
|
|
|
|
12,544
|
|
|
|
7.79
|
|
|
|
305,787
|
|
|
|
11,556
|
|
|
|
7.62
|
|
Commercial
financial and agriculture
|
|
|
668,888
|
|
|
|
25,343
|
|
|
|
7.64
|
|
|
|
643,420
|
|
|
|
23,385
|
|
|
|
7.33
|
|
Loans
to depository institutions
|
|
|
54,586
|
|
|
|
1,452
|
|
|
|
5.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Installment
loans to individuals
|
|
|
44,564
|
|
|
|
2,588
|
|
|
|
11.71
|
|
|
|
52,691
|
|
|
|
2,993
|
|
|
|
11.45
|
|
Previously
securitized loans
|
|
|
12,784
|
|
|
|
3,612
|
|
|
|
56.98
|
|
|
|
26,037
|
|
|
|
5,217
|
|
|
|
40.41
|
|
Total
loans
|
|
|
1,701,023
|
|
|
|
63,411
|
|
|
|
7.52
|
|
|
|
1,622,889
|
|
|
|
60,015
|
|
|
|
7.46
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
502,707
|
|
|
|
13,686
|
|
|
|
5.49
|
|
|
|
576,640
|
|
|
|
14,748
|
|
|
|
5.16
|
|
Tax-exempt
(2)
|
|
|
40,286
|
|
|
|
1,315
|
|
|
|
6.58
|
|
|
|
43,843
|
|
|
|
1,418
|
|
|
|
6.52
|
|
Total
securities
|
|
|
542,993
|
|
|
|
15,001
|
|
|
|
5.57
|
|
|
|
620,483
|
|
|
|
16,166
|
|
|
|
5.25
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,218
|
|
|
|
200
|
|
|
|
12.53
|
|
Deposits
in depository institutions
|
|
|
11,623
|
|
|
|
230
|
|
|
|
3.99
|
|
|
|
24,490
|
|
|
|
566
|
|
|
|
4.66
|
|
Federal
funds sold
|
|
|
20,812
|
|
|
|
547
|
|
|
|
5.30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
interest-earning assets
|
|
|
2,276,451
|
|
|
|
79,189
|
|
|
|
7.01
|
|
|
|
2,271,080
|
|
|
|
76,947
|
|
|
|
6.83
|
|
Cash
and due from banks
|
|
|
50,424
|
|
|
|
|
|
|
|
|
|
|
|
51,726
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
46,142
|
|
|
|
|
|
|
|
|
|
|
|
42,575
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
169,455
|
|
|
|
|
|
|
|
|
|
|
|
169,162
|
|
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(15,887 |
) |
|
|
|
|
|
|
|
|
|
|
(16,881 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,526,585
|
|
|
|
|
|
|
|
|
|
|
$ |
2,517,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
429,483
|
|
|
$ |
2,641
|
|
|
|
1.24 |
% |
|
$ |
441,474
|
|
|
$ |
2,588
|
|
|
|
1.18 |
% |
Savings
deposits
|
|
|
337,153
|
|
|
|
2,736
|
|
|
|
1.64
|
|
|
|
312,542
|
|
|
|
1,658
|
|
|
|
1.07
|
|
Time
deposits
|
|
|
922,460
|
|
|
|
20,412
|
|
|
|
4.46
|
|
|
|
848,306
|
|
|
|
15,474
|
|
|
|
3.68
|
|
Short-term
borrowings
|
|
|
154,328
|
|
|
|
3,207
|
|
|
|
4.19
|
|
|
|
156,431
|
|
|
|
2,452
|
|
|
|
3.16
|
|
Long-term
debt
|
|
|
27,145
|
|
|
|
957
|
|
|
|
7.11
|
|
|
|
93,773
|
|
|
|
2,499
|
|
|
|
5.37
|
|
Total
interest-bearing liabilities
|
|
|
1,870,569
|
|
|
|
29,953
|
|
|
|
3.23
|
|
|
|
1,852,526
|
|
|
|
24,671
|
|
|
|
2.69
|
|
Noninterest-bearing
demand deposits
|
|
|
317,382
|
|
|
|
|
|
|
|
|
|
|
|
342,298
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
30,678
|
|
|
|
|
|
|
|
|
|
|
|
28,544
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
307,956
|
|
|
|
|
|
|
|
|
|
|
|
294,294
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,526,585
|
|
|
|
|
|
|
|
|
|
|
$ |
2,517,662
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
49,236
|
|
|
|
|
|
|
|
|
|
|
$ |
52,276
|
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
|
|
4.36 |
% |
|
|
|
|
|
|
|
|
|
|
4.64 |
% |
(1)
|
For
purposes of this table, non-accruing loans have been included in
average
balances and loan fees, which are immaterial, have been included
in
interest income.
|
(2)
|
Computed
on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35%.
|
Table
Two
Rate
Volume Analysis of Changes in Interest Income and Interest
Expense
(in
thousands)
|
|
Six
months ended June 30,
|
|
|
|
2007
vs. 2006
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
12
|
|
|
$ |
995
|
|
|
$ |
1,007
|
|
Home
equity
|
|
|
719
|
|
|
|
269
|
|
|
|
988
|
|
Commercial,
financial, and agriculture
|
|
|
926
|
|
|
|
1,032
|
|
|
|
1,958
|
|
Loans
to depository institutions
|
|
|
1,452
|
|
|
|
-
|
|
|
|
1,452
|
|
Installment
loans to individuals
|
|
|
(462 |
) |
|
|
57
|
|
|
|
(405 |
) |
Previously
securitized loans
|
|
|
(2,655 |
) |
|
|
1,050
|
|
|
|
(1,605 |
) |
Total
loans
|
|
|
(8 |
) |
|
|
3,403
|
|
|
|
3,395
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(1,891 |
) |
|
|
829
|
|
|
|
(1,062 |
) |
Tax-exempt
(1)
|
|
|
(115 |
) |
|
|
12
|
|
|
|
(103 |
) |
Total
securities
|
|
|
(2,006 |
) |
|
|
841
|
|
|
|
(1,165 |
) |
Loans
held for sale
|
|
|
(200 |
) |
|
|
-
|
|
|
|
(200 |
) |
Deposits
in depository institutions
|
|
|
(297 |
) |
|
|
(39 |
) |
|
|
(336 |
) |
Federal
funds sold
|
|
|
-
|
|
|
|
547
|
|
|
|
547
|
|
Total
interest-earning assets
|
|
$ |
(2,511 |
) |
|
$ |
4,752
|
|
|
$ |
2,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
(70 |
) |
|
$ |
123
|
|
|
$ |
53
|
|
Savings
deposits
|
|
|
131
|
|
|
|
947
|
|
|
|
1,078
|
|
Time
deposits
|
|
|
1,353
|
|
|
|
3,585
|
|
|
|
4,938
|
|
Short-term
borrowings
|
|
|
(33 |
) |
|
|
787
|
|
|
|
754
|
|
Long-term
debt
|
|
|
(1,776 |
) |
|
|
234
|
|
|
|
(1,542 |
) |
Total
interest-bearing liabilities
|
|
$ |
(395 |
) |
|
$ |
5,676
|
|
|
$ |
5,281
|
|
Net
Interest Income
|
|
$ |
(2,116 |
) |
|
$ |
(924 |
) |
|
$ |
(3,040 |
) |
(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 June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
596,246
|
|
|
$ |
9,017
|
|
|
|
6.07 |
% |
|
$ |
596,758
|
|
|
$ |
8,484
|
|
|
|
5.70 |
% |
Home
equity
|
|
|
326,970
|
|
|
|
6,302
|
|
|
|
7.73
|
|
|
|
309,270
|
|
|
|
5,962
|
|
|
|
7.73
|
|
Commercial
financial and agriculture
|
|
|
670,687
|
|
|
|
12,655
|
|
|
|
7.57
|
|
|
|
651,501
|
|
|
|
12,092
|
|
|
|
7.44
|
|
Loans
to depository institutions
|
|
|
59,670
|
|
|
|
798
|
|
|
|
5.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Installment
loans to individuals
|
|
|
46,206
|
|
|
|
1,319
|
|
|
|
11.45
|
|
|
|
48,880
|
|
|
|
1,400
|
|
|
|
11.49
|
|
Previously
securitized loans
|
|
|
11,210
|
|
|
|
1,856
|
|
|
|
66.41
|
|
|
|
24,045
|
|
|
|
2,513
|
|
|
|
41.92
|
|
Total
loans
|
|
|
1,710,989
|
|
|
|
31,947
|
|
|
|
7.49
|
|
|
|
1,630,454
|
|
|
|
30,451
|
|
|
|
7.49
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
499,861
|
|
|
|
6,752
|
|
|
|
5.42
|
|
|
|
579,058
|
|
|
|
7,489
|
|
|
|
5.19
|
|
Tax-exempt
(4)
|
|
|
40,160
|
|
|
|
658
|
|
|
|
6.57
|
|
|
|
43,388
|
|
|
|
700
|
|
|
|
6.47
|
|
Total
securities
|
|
|
540,021
|
|
|
|
7,410
|
|
|
|
5.50
|
|
|
|
622,446
|
|
|
|
8,189
|
|
|
|
5.28
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,400
|
|
|
|
200
|
|
|
|
12.53
|
|
Deposits
in depository institutions
|
|
|
10,227
|
|
|
|
113
|
|
|
|
4.43
|
|
|
|
33,986
|
|
|
|
416
|
|
|
|
4.91
|
|
Federal
funds sold
|
|
|
22,077
|
|
|
|
291
|
|
|
|
5.29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
interest-earning assets
|
|
|
2,283,314
|
|
|
|
39,761
|
|
|
|
6.98
|
|
|
|
2,293,286
|
|
|
|
39,256
|
|
|
|
6.87
|
|
Cash
and due from banks
|
|
|
50,715
|
|
|
|
|
|
|
|
|
|
|
|
50,217
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
47,304
|
|
|
|
|
|
|
|
|
|
|
|
42,621
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
169,860
|
|
|
|
|
|
|
|
|
|
|
|
170,273
|
|
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(16,135 |
) |
|
|
|
|
|
|
|
|
|
|
(16,911 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,535,058
|
|
|
|
|
|
|
|
|
|
|
$ |
2,539,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
428,772
|
|
|
$ |
1,310
|
|
|
|
1.23 |
% |
|
$ |
438,851
|
|
|
$ |
1,329
|
|
|
|
1.21 |
% |
Savings
deposits
|
|
|
344,204
|
|
|
|
1,429
|
|
|
|
1.67
|
|
|
|
318,702
|
|
|
|
926
|
|
|
|
1.17
|
|
Time
deposits
|
|
|
922,978
|
|
|
|
10,338
|
|
|
|
4.49
|
|
|
|
865,554
|
|
|
|
8,265
|
|
|
|
3.83
|
|
Short-term
borrowings
|
|
|
162,115
|
|
|
|
1,694
|
|
|
|
4.19
|
|
|
|
161,082
|
|
|
|
1,326
|
|
|
|
3.30
|
|
Long-term
debt
|
|
|
21,915
|
|
|
|
425
|
|
|
|
7.78
|
|
|
|
92,267
|
|
|
|
1,239
|
|
|
|
5.39
|
|
Total
interest-bearing liabilities
|
|
|
1,879,984
|
|
|
|
15,196
|
|
|
|
3.24
|
|
|
|
1,876,456
|
|
|
|
13,085
|
|
|
|
2.80
|
|
Noninterest-bearing
demand deposits
|
|
|
318,041
|
|
|
|
|
|
|
|
|
|
|
|
342,115
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
30,109
|
|
|
|
|
|
|
|
|
|
|
|
28,526
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
306,924
|
|
|
|
|
|
|
|
|
|
|
|
292,389
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,535,058
|
|
|
|
|
|
|
|
|
|
|
$ |
2,539,486
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
24,565
|
|
|
|
|
|
|
|
|
|
|
$ |
26,171
|
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
4.58 |
% |
(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 June 30,
|
|
|
|
2007
vs. 2006
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
(7 |
) |
|
$ |
540
|
|
|
$ |
533
|
|
Home
equity
|
|
|
341
|
|
|
|
(1 |
) |
|
|
340
|
|
Commercial,
financial, and agriculture
|
|
|
356
|
|
|
|
206
|
|
|
|
562
|
|
Loans
to depository institutions
|
|
|
798
|
|
|
|
-
|
|
|
|
798
|
|
Installment
loans to individuals
|
|
|
(77 |
) |
|
|
(4 |
) |
|
|
(81 |
) |
Previously
securitized loans
|
|
|
(1,341 |
) |
|
|
684
|
|
|
|
(657 |
) |
Total
loans
|
|
|
70
|
|
|
|
1,425
|
|
|
|
1,495
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(1,024 |
) |
|
|
287
|
|
|
|
(737 |
) |
Tax-exempt
(1)
|
|
|
(52 |
) |
|
|
10
|
|
|
|
(42 |
) |
Total
securities
|
|
|
(1,076 |
) |
|
|
297
|
|
|
|
(779 |
) |
Loans
held for sale
|
|
|
(200 |
) |
|
|
-
|
|
|
|
(200 |
) |
Deposits
in depository institutions
|
|
|
(291 |
) |
|
|
(11 |
) |
|
|
(302 |
) |
Federal
funds sold
|
|
|
-
|
|
|
|
291
|
|
|
|
291
|
|
Total
interest-earning assets
|
|
$ |
(1,497 |
) |
|
$ |
2,002
|
|
|
$ |
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
(31 |
) |
|
$ |
12
|
|
|
$ |
(19 |
) |
Savings
deposits
|
|
|
74
|
|
|
|
429
|
|
|
|
503
|
|
Time
deposits
|
|
|
548
|
|
|
|
1,525
|
|
|
|
2,073
|
|
Short-term
borrowings
|
|
|
9
|
|
|
|
358
|
|
|
|
367
|
|
Long-term
debt
|
|
|
(945 |
) |
|
|
131
|
|
|
|
(814 |
) |
Total
interest-bearing liabilities
|
|
$ |
(345 |
) |
|
$ |
2,455
|
|
|
$ |
2,110
|
|
Net
Interest Income
|
|
$ |
(1,152 |
) |
|
$ |
(453 |
) |
|
$ |
(1,605 |
) |
(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 $2.5 million in the first six
months of 2007 and $1.7 million in the first six months of 2006. The
Company’s 2007 provision reflects the difficulties encountered by one of the
Company’s borrowers (which has been engaged in residential construction of
several properties) and the downgrade of five related credits. While
the downgrade of this credit relationship unfavorably impacted the provision
and
resulted in an increase in nonaccrual loans of $5.0 million, total past due
loans have declined 15.3% from $9.9 million at December 31, 2006 to $8.3 million
at June 30, 2007. Changes in the amount of the provision and related
allowance are based on the Company’s detailed methodology and are directionally
consistent with changes in credit quality and growth and changes in the
composition and quality of the Company’s loan portfolio.
The
Company had net charge-offs of $1.3 million for the first six months of 2007,
with depository accounts representing $0.9 million (or approximately 68.0%)
of
this total. While charge-offs on depository accounts are appropriately taken
against the ALLL, the revenue associated with 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 residential loans were $0.5
million, while commercial and installment loans experienced no net charge-offs
for the six months ended June 30, 2007. The Company has experienced
annualized net charge-offs related to loans (excluding overdrafts) of 0.05%
for
2007 year to date compared with 0.11% for 2006 and 0.22% for
2005. The trend in net charge-offs is attributable to declines in
balances of loans originated prior to 2002 (including loans acquired as part
of
the Classic Bancshares acquisition). At June 30, 2007, balances of
loans written subsequent to 2002 comprise approximately 75% of total loan
balances.
The
Company’s ratio of non-performing assets to total loans and other real estate
owned increased from 0.44% at March 31, 2007 to 0.71% at June 30, 2007 as a
result of the downgrade of the credit relationship discussed
earlier. Our ratio of non-performing assets to total loans continues
to compare favorably to that of our peer group (bank holding companies with
total assets between $1 and $5 billion), which reported average non-performing
assets as a percentage of loans and other real estate owned of 0.80% for the
most recently reported quarter ended March 31, 2007. The composition
of the Company’s loan portfolio, which is weighted more heavily toward
residential mortgage loans and less towards non-real estate secured commercial
loans than that of our peers, has allowed us to maintain a lower allowance
in
comparison to peers. In addition, the sale of the Company’s credit
card portfolio resulted in a reduction of the allowance of $1.4 million during
2006. As a result, the Company’s ALLL as a percentage of loans
outstanding is 0.96% at June 30, 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 and
allowance 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
$1.8 million, or 21.0%, from $8.3 million at December 31, 2006 to $10.1 million
at June 30, 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) remained consistent at $4.0
million at December 31, 2006 and June 30, 2007.
The
allowance allocated to the consumer
loan portfolio (see Table Five) decreased $0.4 million, or 49.6%, from $0.8
million at December 31, 2006 to $0.4 million at June 30, 2007. This
decrease was attributable to changes in loss experience during the six months
ended June 30, 2007.
The
allowance allocated to overdraft
deposit accounts (see Table Five) declined $0.2 million, or 6.3%, from $2.3
million at December 31, 2006 to $2.1 million at June 30, 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 June 30, 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 June 30, 2007.
Table
Five
|
|
|
|
|
|
|
Analysis
of the Allowance for Loan Losses
|
|
|
|
|
|
|
Six
months ended June 30,
|
|
|
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 |
) |
|
|
(1,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
(155 |
) |
|
|
(228 |
) |
|
|
(1,279 |
) |
Real
estate-mortgage
|
|
|
(563 |
) |
|
|
(528 |
) |
|
|
(935 |
) |
Installment
loans to individuals
|
|
|
(144 |
) |
|
|
(607 |
) |
|
|
(898 |
) |
Overdraft
deposit accounts
|
|
|
(1,816 |
) |
|
|
(1,913 |
) |
|
|
(3,823 |
) |
Total
charge-offs
|
|
|
(2,678 |
) |
|
|
(3,276 |
) |
|
|
(6,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
189
|
|
|
|
65
|
|
|
|
210
|
|
Real
estate-mortgage
|
|
|
30
|
|
|
|
161
|
|
|
|
575
|
|
Installment
loans to individuals
|
|
|
230
|
|
|
|
349
|
|
|
|
598
|
|
Overdraft
deposit accounts
|
|
|
940
|
|
|
|
872
|
|
|
|
1,734
|
|
Total
recoveries
|
|
|
1,389
|
|
|
|
1,447
|
|
|
|
3,117
|
|
Net
charge-offs
|
|
|
(1,289 |
) |
|
|
(1,829 |
) |
|
|
(3,818 |
) |
Provision
for loan losses
|
|
|
2,500
|
|
|
|
1,675
|
|
|
|
3,801
|
|
Balance
at end of period
|
|
$ |
16,616
|
|
|
$ |
15,268
|
|
|
$ |
15,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percent of Average Total Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)
|
|
|
(0.15 |
)% |
|
|
(0.22 |
)% |
|
|
(0.23 |
)% |
Provision
for loan losses (annualized)
|
|
|
0.29 |
% |
|
|
0.21 |
% |
|
|
0.23 |
% |
As
a Percent of Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
145.11 |
% |
|
|
408.02 |
% |
|
|
384.93 |
% |
Table
Six
|
|
|
|
|
|
|
Non-Performing
Assets
|
|
|
|
|
|
|
|
|
As
of June 30,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$ |
11,194
|
|
|
$ |
3,046
|
|
|
$ |
3,319
|
|
Accruing
loans past due 90 days or more
|
|
|
212
|
|
|
|
573
|
|
|
|
635
|
|
Previously
securitized loans past due 90 days or more
|
|
|
45
|
|
|
|
123
|
|
|
|
48
|
|
Total
non-performing loans
|
|
|
11,451
|
|
|
|
3,742
|
|
|
|
4,002
|
|
Other
real estate, excluding property associated with previously securitized
loans
|
|
|
624
|
|
|
|
294
|
|
|
|
161
|
|
Other
real estate associated with previously securitized loans
|
|
|
231
|
|
|
|
92
|
|
|
|
20
|
|
Total
other real estate
owned
|
|
|
855
|
|
|
|
386
|
|
|
|
181
|
|
Total
non-performing
assets
|
|
$ |
12,306
|
|
|
$ |
4,128
|
|
|
$ |
4,183
|
|
Table
Seven
|
|
|
|
|
|
|
Allocation
of the Allowance For Loan Losses
|
|
|
|
|
|
|
As
of June 30,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$ |
10,082
|
|
|
$ |
7,533
|
|
|
$ |
8,330
|
|
Real
estate-mortgage
|
|
|
3,982
|
|
|
|
4,084
|
|
|
|
3,981
|
|
Installment
loans to individuals
|
|
|
404
|
|
|
|
1,182
|
|
|
|
801
|
|
Overdraft
deposit accounts
|
|
|
2,148
|
|
|
|
2,469
|
|
|
|
2,293
|
|
Allowance
for Loan Losses
|
|
$ |
16,616
|
|
|
$ |
15,268
|
|
|
$ |
15,405
|
|
Previously
Securitized Loans
As
of June 30, 2007, the Company
reported a carrying value of previously securitized loans of $10.3 million,
while the actual outstanding contractual balance of these loans was $28.4
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. 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.
During
the six months ended June 30, 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 the trend of net recoveries can be
sustained indefinitely.
During
the first six months of 2007 and 2006, the Company recognized $3.6 million
and
$5.2 million, respectively, of interest income on its previously securitized
loans. Cash receipts for the three and six months ended June 30, 2007
and 2006 are summarized in the following table:
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Principal
receipts
|
|
$ |
3,313
|
|
|
$ |
3,474
|
|
|
$ |
6,856
|
|
|
$ |
7,804
|
|
Interest
income receipts
|
|
|
979
|
|
|
|
1,440
|
|
|
|
2,088
|
|
|
|
3,003
|
|
Total
cash receipts
|
|
$ |
4,292
|
|
|
$ |
4,914
|
|
|
$ |
8,944
|
|
|
$ |
10,807
|
|
Based
on
current cash flow projections, the Company believes that the carrying value
of
previously securitized loans will approximate:
As
of:
|
Estimated
Balance:
|
|
|
December
31, 2007
|
$9
million
|
December
31, 2008
|
6
million
|
December
31, 2009
|
5
million
|
December
31, 2010
|
4
million
|
Non-Interest
Income and Non-Interest Expense
Six
Months Ended June 30, 2007 vs. 2006
Non-Interest
Income: Net of the gain from the sale of the
Company’s merchant credit card agreements and investment gains, non-interest
income increased $0.6 million to $26.5 million in the first six months of 2007
as compared to $25.9 million in the first six months of 2006. The
largest source of non-interest income is from service charges on depository
accounts, which increased $0.7 million, or 3.5%, from $20.8 million during
the
first six months of 2006 to $21.5 million during the first six months of
2007. Insurance commission revenues increased $0.7 million, or 62.5%,
due in part to additional staffing to provide worker’s compensation insurance to
West Virginia businesses. Partially off-setting these increases was a
decrease in other income of $0.8 million due to lower credit card fee income
as
a result of 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 remained flat
at $35.1 million in the first six months of 2006 and 2007. Salaries
and employee benefits increased $0.6 million, or 3.3%, from the first six months
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 essentially offset by a $0.5 million
decrease in other expenses due to the sales of the retail and merchant card
portfolios.
Three
Months Ended June 30, 2007 vs. 2006
Non-Interest
Income: Net of investment securities gains,
non-interest income increased $0.2 million, or 1.3%, to $13.6 million in the
second quarter of 2007 as compared to $13.4 million in the second quarter of
2006. The largest source of non-interest income is service charges
from depository accounts, which increased $0.5 million, or 4.8%, from $10.9
million during the second quarter of 2006 to $11.4 million during the second
quarter of 2007. Insurance commission revenues increased $0.3 million, or 59.7%,
due to additional staffing to provide worker’s compensation insurance to West
Virginia businesses and to bolster the Company’s team of insurance agents
focused on selling directly to retail customers. Partially
off-setting these increases was a decrease in other income of $0.5 million
due
to lower credit card fee income as a result of the sale of the retail credit
card portfolio during the third quarter of 2006 and the sale of the merchant
credit card processing agreements during the first quarter of 2007.
Non-Interest
Expense: Non-interest expenses remained flat
at $17.5 million for both the second quarter of 2006 and the second quarter
of
2007. Salaries and employee benefits increased $0.2 million, or 1.7%,
from the second quarter of 2006 due to additional staffing while bankcard
expenses increased $0.1 million, or 30.3%, due to increased usage by
customers. These increases were essentially offset by decreases in
other expenses of $0.2 million, or 8.9%, due to the sales of the retail and
merchant credit card portfolios and a decrease of $0.2 million, or 32.6%, in
professional fees that was attributable to lower legal and consulting
expenses.
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 June 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
|
|
8.25 |
% |
|
|
+5.6 |
% |
|
|
+1.5 |
% |
|
+200
|
|
|
|
7.25
|
|
|
|
+3.7
|
|
|
|
+1.5
|
|
|
+100
|
|
|
|
6.25
|
|
|
|
+1.6
|
|
|
|
+0.8
|
|
|
-100
|
|
|
|
4.25
|
|
|
|
(2.1 |
) |
|
|
(3.0 |
) |
|
-200
|
|
|
|
3.25
|
|
|
|
(4.2 |
) |
|
|
(6.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
estimates 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 $21.0 million on an annualized
basis over the next 12 months based on common shareholders of record at June
30,
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 $0.6 million of additional cash
over
the next 12 months. As of June 30, 2007, the Parent Company reported a cash
balance of $33.7 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 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 June 30,
2007, City National’s assets are significantly funded by deposits and capital.
Additionally, 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 June 30, 2007, City
National has the capacity to borrow an additional $122.2 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. Also, City National maintains a
significant percentage (91.6%, or $453.7 million at June 30, 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 67.9% as of June 30, 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 $495.4 million at
June
30, 2007, and that greatly exceeded the Company’s non-deposit sources of
borrowing which totaled $217.3 million. Further, the Company’s
deposit mix has a very high proportion of transaction and savings accounts
that
fund 43.3% of the Company’s total assets.
As
illustrated in the Consolidated Statements of Cash Flows, the Company generated
$23.3 million of cash from operating activities during the first six months
of
2007, primarily from interest income received on loans and investments, net
of
interest expense paid on deposits and borrowings. The Company used
$36.6 million of cash in investing activities during the first six months 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 used $2.5 million of cash in
financing activities during the first six months of 2007, primarily for the
purchase of treasury stock of $22.7 million and cash dividends paid to the
Company’s common stockholders of $10.2 million, which were partially offset by
an increase of $28.5 million in non-interest and interest bearing
deposits.
Capital
Resources
During
the first six months of 2007,
Shareholders’ Equity decreased $10.5 million, or 3.4%, from $305.3 million at
December 31, 2006 to $294.8 million at June 30, 2007. This decrease
was primarily due to common stock purchases of $22.7 million and dividends
declared during the year of $10.6 million which were partially offset by
reported net income of $25.6.
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. 580,200 shares were repurchased during the first
six months 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 June 30, 2007, the Company may repurchase an
additional 385,800 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-
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
Minimum
|
|
|
Capitalized
|
|
|
2007
|
|
|
2006
|
|
City
Holding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
16.1 |
% |
|
|
16.2 |
% |
Tier
I Risk-based
|
|
|
4.0
|
|
|
|
6.0
|
|
|
|
15.2
|
|
|
|
15.3
|
|
Tier
I Leverage
|
|
|
4.0
|
|
|
|
5.0
|
|
|
|
10.5
|
|
|
|
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
|
|
|
|
8.7
|
|
|
|
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 June 30, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Item
1.
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1 – April 30, 2007
|
|
|
68,000
|
|
|
$ |
39.56
|
|
|
|
68,000
|
|
|
|
623,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
1 – May 31, 2007
|
|
|
111,200
|
|
|
$ |
38.54
|
|
|
|
111,200
|
|
|
|
512,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
1 – June 30, 2007
|
|
|
126,700
|
|
|
$ |
38.10
|
|
|
|
126,700
|
|
|
|
385,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
The
Company held its Annual Meeting of Shareholders on April 25, 2007
at which
time shareholders were asked to consider the following two proposals,
which were more fully described in the Company’s definitive proxy
statement on Schedule 14A filed with the Securities and Exchange
Commission on March 23, 2007:
|
|
|
|
|
|
1.
To elect one Class I director to serve for a term of two years and
five
Class II directors to serve for a term of three years.
|
|
|
2.
To ratify the Board of Directors’ appointment of Ernst & Young LLP as
independent registered public accounting firm for City Holding Company
for
2007.
|
|
|
|
|
|
The
vote tabulation was as follows:
|
|
|
|
|
|
1.
Election of one Class I director and five Class II directors to the
Board
of Directors:
|
|
|
|
|
|
Director
Nominee
|
Votes
For
|
Votes
Withheld
|
|
|
|
|
|
|
|
John
R. Elliot
|
14,264,147
|
177,649
|
|
|
Oshel
B. Craigo
|
9,605,496
|
4,836,300
|
|
|
William
H. File III
|
14,227,831
|
213,965
|
|
|
Tracy
W. Hylton II
|
14,157,160
|
248,636
|
|
|
C.
Dallas Kayser
|
14,193,196
|
248,600
|
|
|
Sharon
H. Rowe
|
14,226,810
|
214,986
|
|
|
|
|
|
There
were no broker non-votes in the election of directors.
|
|
|
|
|
|
2.
Ratification of the Board of Directors’ appointment of Ernst & Young
LLP as independent registered public accounting firm for City Holding
Company for 2007:
|
|
|
|
|
|
Votes
For
|
Against
|
Abstentions
|
|
|
|
|
|
|
|
14,260,168
|
132,147
|
49,481
|
|
|
|
|
|
There
were no broker non-votes in the ratification of independent registered
public accounting firm.
|
|
|
|
|
Item
5.
|
|
None.
|
Item
6.
|
|
|
|
(a)
Exhibits:
|
|
|
31(a)
|
|
|
|
31(b)
|
|
|
|
32(a)
|
|
|
|
32(a)
|
|
|
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:
August 7, 2007
-37-