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 March 31, 2008
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 [ ]
|
|
Smaller
reporting company
[ ]
|
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 – 16,121,540 shares as of May 8, 2008.
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
|
|
|
|
|
|
4-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
2.
|
|
19-32
|
Item
3.
|
|
33
|
Item
4.
|
|
33
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
34
|
Item
1A.
|
|
34
|
Item
2.
|
|
34
|
Item
3.
|
|
34
|
Item
4.
|
|
34
|
Item
5.
|
|
34
|
Item
6.
|
|
34
|
|
|
|
|
|
35
|
|
|
|
City
Holding Company and Subsidiaries
(in
thousands)
|
|
March
31
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Note
A)
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
65,705 |
|
|
$ |
64,726 |
|
Interest-bearing
deposits in depository institutions
|
|
|
11,252 |
|
|
|
9,792 |
|
Cash
and Cash Equivalents
|
|
|
76,957 |
|
|
|
74,518 |
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale, at fair value
|
|
|
464,215 |
|
|
|
382,098 |
|
Investment
securities held-to-maturity, at amortized cost (approximate fair value at
March 31, 2008 and December 31, 2007 - $32,063 and
$35,198)
|
|
|
33,748 |
|
|
|
34,918 |
|
Total
Investment Securities
|
|
|
497,963 |
|
|
|
417,016 |
|
|
|
|
|
|
|
|
|
|
Gross
loans
|
|
|
1,704,800 |
|
|
|
1,767,021 |
|
Allowance
for loan losses
|
|
|
(18,567 |
) |
|
|
(17,581 |
) |
Net
Loans
|
|
|
1,686,233 |
|
|
|
1,749,440 |
|
|
|
|
|
|
|
|
|
|
Bank
owned life insurance
|
|
|
68,143 |
|
|
|
64,467 |
|
Premises
and equipment
|
|
|
54,144 |
|
|
|
54,635 |
|
Accrued
interest receivable
|
|
|
10,562 |
|
|
|
11,254 |
|
Net
deferred tax asset
|
|
|
16,019 |
|
|
|
20,633 |
|
Intangible
assets
|
|
|
58,065 |
|
|
|
58,238 |
|
Other
assets
|
|
|
56,842 |
|
|
|
32,566 |
|
Total
Assets
|
|
$ |
2,524,928 |
|
|
$ |
2,482,767 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$ |
310,646 |
|
|
$ |
314,231 |
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
420,328 |
|
|
|
397,510 |
|
Savings
deposits
|
|
|
362,041 |
|
|
|
350,607 |
|
Time
deposits
|
|
|
925,630 |
|
|
|
927,733 |
|
Total
Deposits
|
|
|
2,018,645 |
|
|
|
1,990,081 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
139,378 |
|
|
|
161,916 |
|
Long-term
debt
|
|
|
21,425 |
|
|
|
4,973 |
|
Other
liabilities
|
|
|
40,639 |
|
|
|
31,803 |
|
Total Liabilities
|
|
|
2,220,087 |
|
|
|
2,188,773 |
|
|
|
|
|
|
|
|
|
|
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 at March 31, 2008 and December 31, 2007, less 2,383,242
and
2,292,357 shares in treasury,
respectively
|
|
|
46,249 |
|
|
|
46,249 |
|
Capital
surplus
|
|
|
103,276 |
|
|
|
103,390 |
|
Retained
earnings
|
|
|
231,948 |
|
|
|
224,386 |
|
Cost
of common stock in treasury
|
|
|
(83,912 |
) |
|
|
(80,664 |
) |
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
|
(35 |
) |
|
|
(1,783 |
) |
Unrealized
gain on derivative instruments
|
|
|
9,289 |
|
|
|
4,390 |
|
Underfunded
pension liability
|
|
|
(1,974 |
) |
|
|
(1,974 |
) |
Total
Accumulated Other Comprehensive Income
|
|
|
7,280 |
|
|
|
633 |
|
Total
Shareholders’ Equity
|
|
|
304,841 |
|
|
|
293,994 |
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
2,524,928 |
|
|
$ |
2,482,767 |
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands, except earnings per share data)
|
|
Three
Months Ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
30,992 |
|
|
$ |
31,464 |
|
Interest
on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,064 |
|
|
|
6,933 |
|
Tax-exempt
|
|
|
399 |
|
|
|
427 |
|
Interest
on deposits in depository institutions
|
|
|
65 |
|
|
|
117 |
|
Interest
on federal funds sold
|
|
|
- |
|
|
|
257 |
|
Total
Interest Income
|
|
|
37,520 |
|
|
|
39,198 |
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
12,015 |
|
|
|
12,712 |
|
Interest
on short-term borrowings
|
|
|
1,145 |
|
|
|
1,513 |
|
Interest
on long-term debt
|
|
|
441 |
|
|
|
531 |
|
Total
Interest Expense
|
|
|
13,601 |
|
|
|
14,756 |
|
Net
Interest Income
|
|
|
23,919 |
|
|
|
24,442 |
|
Provision
for loan losses
|
|
|
1,883 |
|
|
|
900 |
|
Net
Interest Income After Provision for Loan Losses
|
|
|
22,036 |
|
|
|
23,542 |
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
Investment
securities gains
|
|
|
2 |
|
|
|
- |
|
Service
charges
|
|
|
11,274 |
|
|
|
10,063 |
|
Insurance
commissions
|
|
|
1,038 |
|
|
|
1,012 |
|
Trust
and investment management fee income
|
|
|
632 |
|
|
|
568 |
|
Bank
owned life insurance
|
|
|
676 |
|
|
|
696 |
|
Gain
on sale of retail credit card portfolio and merchant
agreements
|
|
|
- |
|
|
|
1,500 |
|
VISA
IPO Gain
|
|
|
3,289 |
|
|
|
- |
|
Other
income
|
|
|
407 |
|
|
|
532 |
|
Total
Non-interest Income
|
|
|
17,318 |
|
|
|
14,371 |
|
|
|
|
|
|
|
|
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
9,363 |
|
|
|
9,057 |
|
Occupancy
and equipment
|
|
|
1,597 |
|
|
|
1,637 |
|
Depreciation
|
|
|
1,133 |
|
|
|
1,070 |
|
Professional
fees
|
|
|
367 |
|
|
|
403 |
|
Postage,
delivery, and statement mailings
|
|
|
654 |
|
|
|
777 |
|
Advertising
|
|
|
617 |
|
|
|
852 |
|
Telecommunications
|
|
|
418 |
|
|
|
455 |
|
Bankcard
expenses
|
|
|
621 |
|
|
|
518 |
|
Insurance
and regulatory
|
|
|
338 |
|
|
|
385 |
|
Office
supplies
|
|
|
457 |
|
|
|
455 |
|
Repossessed
asset losses (gains), net of expenses
|
|
|
32 |
|
|
|
(14 |
) |
Loss
on early extinguishment of debt
|
|
|
1,208 |
|
|
|
- |
|
Other
expenses
|
|
|
3,094 |
|
|
|
2,021 |
|
Total
Non-interest Expense
|
|
|
19,899 |
|
|
|
17,616 |
|
Income
Before Income Taxes
|
|
|
19,455 |
|
|
|
20,297 |
|
Income
tax expense
|
|
|
6,417 |
|
|
|
7,066 |
|
Net
Income
|
|
|
13,038 |
|
|
|
13,231 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.81 |
|
|
$ |
0.76 |
|
Diluted
earnings per common share
|
|
$ |
0.80 |
|
|
$ |
0.76 |
|
Dividends
declared per common share
|
|
$ |
0.34 |
|
|
$ |
0.31 |
|
Average
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,147 |
|
|
|
17,369 |
|
Diluted
|
|
|
16,205 |
|
|
|
17,424 |
|
See notes to consolidated financial
statements.
City
Holding Company and Subsidiaries
Nine
Months Ended March 31, 2008 and 2007
(in
thousands)
|
|
Common
Stock
|
|
|
Capital
Surplus
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$ |
46,249 |
|
|
$ |
104,043 |
|
|
$ |
194,213 |
|
|
$ |
(33,669 |
) |
|
$ |
(5,529 |
) |
|
$ |
305,307 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adopting FIN 48
|
|
|
|
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
(125 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
13,231 |
|
|
|
|
|
|
|
|
|
|
|
13,231 |
|
Other
comprehensive gain, net of deferred income taxes of $563:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities of $1,205, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723 |
|
|
|
723 |
|
Net
unrealized gain on interest rate floors of $203, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
122 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,076 |
|
Cash
dividends declared ($0.31 per share)
|
|
|
|
|
|
|
|
|
|
|
(5,342 |
) |
|
|
|
|
|
|
|
|
|
|
(5,342 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(536 |
) |
|
|
|
|
|
|
800 |
|
|
|
|
|
|
|
264 |
|
Exercise
of 5,300 stock options
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
82 |
|
Purchase
of 274,300 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,908 |
) |
|
|
|
|
|
|
(10,908 |
) |
Balances
at March 31, 2007
|
|
$ |
46,249 |
|
|
$ |
103,373 |
|
|
$ |
201,977 |
|
|
$ |
(43,561 |
) |
|
$ |
(4,684 |
) |
|
$ |
303,354 |
|
|
|
Common
Stock
|
|
|
Capital
Surplus
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Total
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
$ |
46,249 |
|
|
$ |
103,390 |
|
|
$ |
224,386 |
|
|
$ |
(80,664 |
) |
|
$ |
633 |
|
|
$ |
293,994 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
13,038 |
|
|
|
|
|
|
|
|
|
|
|
13,038 |
|
Other
comprehensive gain, net of deferred income taxes of
$4,431:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities of $2,911, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,748 |
|
|
|
1,748 |
|
Net
unrealized gain on interest rate floors of $8,165, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,899 |
|
|
|
4,899 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,685 |
|
Cash
dividends declared ($0.34 per share)
|
|
|
|
|
|
|
|
|
|
|
(5,476 |
) |
|
|
|
|
|
|
|
|
|
|
(5,476 |
) |
Issuance
of stock awards, net
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
273 |
|
Exercise
of 5,700 stock options
|
|
|
|
|
|
|
(115 |
) |
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
76 |
|
Excess
tax benefit on stock-based compensation
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Purchase
of 104,960 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,717 |
) |
|
|
|
|
|
|
(3,717 |
) |
Balances
at March 31, 2008
|
|
$ |
46,249 |
|
|
$ |
103,276 |
|
|
$ |
231,948 |
|
|
$ |
(83,912 |
) |
|
$ |
7,280 |
|
|
$ |
304,841 |
|
See
notes to consolidated financial statements.
City
Holding Company and Subsidiaries
(in
thousands)
|
|
Three
Months Ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,038 |
|
|
$ |
13,231 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
and accretion
|
|
|
(439 |
) |
|
|
(428 |
) |
Provision
for loan losses
|
|
|
1,600 |
|
|
|
900 |
|
Depreciation
of premises and equipment
|
|
|
1,133 |
|
|
|
1,071 |
|
Deferred
income tax expense (benefit)
|
|
|
183 |
|
|
|
(462 |
) |
Net
periodic employee benefit cost
|
|
|
12 |
|
|
|
59 |
|
Gain
on sale of credit card merchant agreements
|
|
|
- |
|
|
|
(1,500 |
) |
Loss
on early extinguishment of debt
|
|
|
1,208 |
|
|
|
- |
|
Loss
on disposal of premises and equipment
|
|
|
111 |
|
|
|
- |
|
Realized
investment securities (gains)
|
|
|
(2 |
) |
|
|
- |
|
Proceeds
from bank-owned life insurance
|
|
|
- |
|
|
|
204 |
|
Increase
in value of bank-owned life insurance
|
|
|
(676 |
) |
|
|
(696 |
) |
Decrease
(increase) in accrued interest receivable
|
|
|
692 |
|
|
|
(34 |
) |
Increase
in other assets
|
|
|
(19,159 |
) |
|
|
(1,344 |
) |
Increase
in other liabilities
|
|
|
8,797 |
|
|
|
5,497 |
|
Net
Cash Provided by Operating Activities
|
|
|
6,498 |
|
|
|
16,498 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities held-to-maturity
|
|
|
1,145 |
|
|
|
1,058 |
|
Proceeds
from sale of money market and mutual fund securities
available-for-sale
|
|
|
314,400 |
|
|
|
261,385 |
|
Purchases
of money market and mutual fund securities
available-for-sale
|
|
|
(372,304 |
) |
|
|
(357,702 |
) |
Proceeds
from sales of securities available-for-sale
|
|
|
2,065 |
|
|
|
989 |
|
Proceeds
from maturities and calls of securities available-for-sale
|
|
|
15,122 |
|
|
|
29,694 |
|
Purchases
of securities available-for-sale
|
|
|
(38,664 |
) |
|
|
(1,198 |
) |
Net
decrease (increase) in loans
|
|
|
62,648 |
|
|
|
(13,787 |
) |
Sales
of premises and equipment
|
|
|
340 |
|
|
|
- |
|
Purchases
of premises and equipment
|
|
|
(1,093 |
) |
|
|
(1,572 |
) |
Proceeds
from sale of credit card merchant agreements
|
|
|
- |
|
|
|
1,650 |
|
Investment
in bank-owned life insurance
|
|
|
(3,000 |
) |
|
|
- |
|
Redemption
of VISA stock
|
|
|
2,334 |
|
|
|
- |
|
Net
Cash Used in Investing Activities
|
|
|
(17,007 |
) |
|
|
(79,483 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in noninterest-bearing deposits
|
|
|
(3,585 |
) |
|
|
17,294 |
|
Net
increase in interest-bearing deposits
|
|
|
32,149 |
|
|
|
36,640 |
|
Net
(decrease) in short-term borrowings
|
|
|
(5,702 |
) |
|
|
(6,542 |
) |
Proceeds
from long-term debt
|
|
|
16,495 |
|
|
|
- |
|
Repayment
of long-term debt
|
|
|
(29 |
) |
|
|
(79 |
) |
Redemption
of trust preferred securities
|
|
|
(17,569 |
) |
|
|
- |
|
Purchases
of treasury stock
|
|
|
(3,717 |
) |
|
|
(10,908 |
) |
Issuance
of stock awards
|
|
|
(154 |
) |
|
|
- |
|
Exercise
of stock options
|
|
|
76 |
|
|
|
82 |
|
Excess
tax benefits from stock-based compensation arrangements
|
|
|
6 |
|
|
|
- |
|
Dividends
paid
|
|
|
(5,022 |
) |
|
|
(4,898 |
) |
Net
Cash Provided by Financing Activities
|
|
|
12,948 |
|
|
|
31,589 |
|
Increase
(Decrease) in Cash and Cash Equivalents
|
|
|
2,439 |
|
|
|
(31,396 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
74,518 |
|
|
|
110,448 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
76,957 |
|
|
$ |
79,052 |
|
See notes to consolidated financial
statements.
March
31, 2008
Note
A – Basis of Presentation
The
accompanying consolidated financial statements, which are unaudited, include all
of the accounts of City Holding Company (“the Parent Company”) and its
wholly-owned subsidiaries (collectively, “the Company”). All material
intercompany transactions have been eliminated. The consolidated financial
statements include all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for each of the periods presented. Such adjustments are of a normal
recurring nature. The results of operations for the three months ended March 31,
2008 are not necessarily indicative of the results of operations that can be
expected for the year ending December 31, 2008. 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, 2007 has been derived from audited
financial statements included in the Company’s 2007 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 2007 Annual Report of the Company.
Note
B –Previously Securitized Loans
Between
1997 and 1999, the Company completed six securitization transactions involving
approximately $760 million in 125% of fixed rate, junior-lien underlying
mortgages. The Company retained a financial interest in each of the
securitizations until 2004. Principal amounts owed to investors were
evidenced by securities (“Notes”). During 2003 and 2004, the Company
exercised its early redemption options on each of those
securitizations. Once the Notes were redeemed, the Company became the
beneficial owner of the mortgage loans and recorded the loans as assets of the
Company within the loan portfolio. The table below summarizes
information regarding delinquencies, net credit recoveries, and outstanding
collateral balances of previously securitized loans for the dates
presented:
|
|
As
of and for the Three
Months
Ended
|
|
|
As
of and for the Year Ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
Previously
Securitized Loans:
|
|
|
|
|
|
|
|
|
|
Total
principal amount of loans outstanding
|
|
$ |
22,532 |
|
|
$ |
30,880 |
|
|
$ |
24,062 |
|
Discount
|
|
|
(16,507 |
) |
|
|
(18,136 |
) |
|
|
(17,170 |
) |
Net
book value
|
|
$ |
6,025 |
|
|
$ |
12,744 |
|
|
$ |
6,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount of loans between 30 and 89 days past due
|
|
$ |
819 |
|
|
$ |
596 |
|
|
$ |
1,099 |
|
Principal
amount of loans 90 days and above past due
|
|
|
78 |
|
|
|
- |
|
|
|
76 |
|
Net
credit recoveries during the period
|
|
|
228 |
|
|
|
1,108 |
|
|
|
2,938 |
|
The
Company accounts for the difference between the carrying value and the total
expected cash flows from these loans as an adjustment of the yield earned on the
loans over their remaining lives. The discount is accreted to income over
the period during which payments are probable of collection and are reasonably
estimable. Additionally, the collectibility of previously securitized loans is
evaluated over the remaining lives of the loans. An impairment charge on
previously securitized loans would be provided through the Company’s provision
for loan losses if the discounted present value of estimated future cash flows
declines below the recorded value of previously securitized loans. No
such impairment charges were recorded for the three months ended March 31, 2008
and 2007, or for the year ending December 31, 2007.
As of
March 31, 2008, the Company reported a book value of previously securitized
loans of $6.0 million whereas the actual contractual outstanding balance of
previously securitized loans at March 31, 2008 was $22.5 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 March 31, 2008 and 2007, the Company recognized $1.6 million
and $1.8 million, respectively, of interest income from its previously
securitized loans.
Note
C –Derivative Instruments
The
Company utilizes interest rate floors to mitigate exposure to interest rate
risk. As of March 31, 2008, the Company has entered into eight interest
rate floor contracts with a total notional amount of $600 million, seven of
which (total notional amount of $500 million) are designated as cash flow
hedges. The objective of these interest rate floors is to protect the
overall cash flows from the Company’s portfolio of $500 million of variable-rate
loans outstanding from the risk of a decrease in those cash flows.
The
notional amounts and estimated fair values of interest rate floor derivative
positions outstanding at period end are presented in the following table. The
estimated fair values of the interest rate floors on variable-rate loans are
based on quoted market prices.
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
(in
thousands)
|
|
Notional
Value
|
|
|
Estimated
Fair Value
|
|
|
Notional
Value
|
|
|
Estimated
Fair Value
|
|
Interest
rate floors on variable-rate loans
|
|
$ |
500,000 |
|
|
$ |
19,289 |
|
|
$ |
500,000 |
|
|
$ |
11,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average strike rates for interest rate floors outstanding at
March 31, 2008 range from 6.00% to 8.00%.
|
|
Interest rate contracts involve the risk of dealing with counterparties and
their ability to meet contractual terms. These counterparties must have an
investment grade credit rating and be approved by the Company’s Asset and
Liability Committee.
For cash
flow hedges, the effective portion of the gain or loss on the derivative hedging
instrument is reported in other comprehensive income, while the ineffective
portion (indicated by the excess of the cumulative change in the fair value of
the derivative over that which is necessary to offset the cumulative change in
expected future cash flows on the hedge transaction) is recorded in current
earnings as other income or other expense. The Company recognized the
increase in market value of $4.9 million, net of taxes, in Other Comprehensive
Income for the three months ended March 31, 2008 on these derivative
instruments.
Note
D – Short-term borrowings
The
components of short-term borrowings are summarized below:
(
in thousands)
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Security
repurchase agreements
|
|
$ |
124,378 |
|
|
$ |
119,554 |
|
Short-term
advances
|
|
|
15,000 |
|
|
|
25,526 |
|
Junior
subordinated debentures owed to City Holding Capital Trust
|
|
|
- |
|
|
|
16,836 |
|
Total
short-term borrowings
|
|
$ |
139,378 |
|
|
$ |
161,916 |
|
The junior subordinated debentures owed
to City Holding Capital Trust were fully redeemed during the first quarter of
2008 and as a result, the Company incurred a loss of $1.2
million. Securities sold under agreement to repurchase were sold to
corporate and government customers as an alternative to available deposit
products. The underlying securities included in repurchase agreements remain
under the Company’s control during the effective period of the
agreements.
Note
E – Long-Term Debt
The components of long-term debt are
summarized below:
(dollars
in thousands)
|
Maturity
|
|
March
31, 2008
|
|
|
Weighted
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
FHLB
Advances
|
2009
|
|
$ |
2,320 |
|
|
|
5.92 |
% |
FHLB
Advances
|
2010
|
|
|
2,000 |
|
|
|
6.30 |
% |
FHLB
Advances
|
2011
|
|
|
610 |
|
|
|
4.46 |
% |
Junior
subordinated debentures owed to City Holding Capital Trust
III
|
2038
(a)
|
|
|
16,495 |
|
|
|
6.18 |
% |
Total
long-term debt
|
|
|
$ |
21,425 |
|
|
|
|
|
(a) Junior Subordinated
Debentures owed to City Holding Capital Trust III are redeemable prior to
maturity at the option of the Company (i) in whole at any time or in part from
time-to-time, at declining redemption prices ranging from 103.525% to 100.00% on
June 15, 2013, 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 III
(“Capital Trust III”), under the laws of Delaware. Capital Trust III
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 three months ended
March 31:
|
|
2008
|
|
|
2007
|
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
305,909 |
|
|
$ |
32.05 |
|
|
|
271,709 |
|
|
$ |
30.51 |
|
Granted
|
|
|
11,500 |
|
|
|
40.88 |
|
|
|
47,500 |
|
|
|
39.34 |
|
Exercised
|
|
|
(5,700 |
) |
|
|
13.30 |
|
|
|
(5,300 |
) |
|
|
15.53 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
(3,000 |
) |
|
|
34.45 |
|
Outstanding
at March 31
|
|
|
311,709 |
|
|
$ |
32.68 |
|
|
|
310,909 |
|
|
$ |
32.08 |
|
Additional information regarding stock
options outstanding and exercisable at March 31, 2008, 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 |
|
|
|
11,100 |
|
|
$ |
13.30 |
|
|
|
46 |
|
|
$ |
295 |
|
|
|
11,100 |
|
|
$ |
13.30 |
|
|
|
46 |
|
|
$ |
295 |
|
$ |
28.00
- $33.90 |
|
|
|
199,359 |
|
|
|
30.81 |
|
|
|
72 |
|
|
|
1,812 |
|
|
|
158,984 |
|
|
|
30.59 |
|
|
|
70 |
|
|
|
1,481 |
|
$ |
35.36
- $40.88 |
|
|
|
101,250 |
|
|
|
38.48 |
|
|
|
103 |
|
|
|
155 |
|
|
|
41,500 |
|
|
|
36.88 |
|
|
|
93 |
|
|
|
125 |
|
|
|
|
|
|
311,709 |
|
|
|
|
|
|
|
|
|
|
$ |
2,262 |
|
|
|
211,584 |
|
|
|
|
|
|
|
|
|
|
$ |
1,901 |
|
Proceeds
from stock option exercises totaled $0.1 million for both the three months
ended March 31, 2008 and March 31, 2007. Shares issued in connection with stock
option exercises are issued from available treasury shares. If no treasury
shares are available, new shares are issued from available authorized shares.
During the three months ended March 31, 2008 and March 31, 2007 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 during both of the three months ended
March 31, 2008 and March 31, 2007.
Stock-based compensation expense
totaled $0.1 million for both the three months ended March 31, 2008 and
March 31, 2007. Unrecognized stock-based compensation expense related
to stock options totaled $0.6 million at March 31, 2008. At such date,
the weighted-average period over which this unrecognized expense was expected to
be recognized was 1.8 years.
The fair
value of the options is estimated at the date of grant using a Black-Scholes
option-pricing model. The following weighted average
assumptions were used to estimate the fair value of options granted during the
three months ended March 31:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.14 |
% |
|
|
4.38 |
% |
Expected
dividend yield
|
|
|
3.33 |
% |
|
|
3.15 |
% |
Volatility
factor
|
|
|
52.89 |
% |
|
|
39.06 |
% |
Expected
life of option
|
|
8.0
years
|
|
|
5.8
years
|
|
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
$1.0 million at March 31, 2008. At March 31, 2008, this unrecognized
expense is expected to be recognized over 3.5 years based on the weighted
average-life of the restricted shares.
A summary of the Company’s restricted
shares activity and related information is presented below for the three months
ended March 31:
|
|
2008
|
|
|
2007
|
|
|
|
Options
|
|
|
Average
Market Price at Grant
|
|
|
Options
|
|
|
Average
Market Price at Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
31,818 |
|
|
|
|
|
|
15,600 |
|
|
|
|
Granted
|
|
|
2,775 |
|
|
$ |
40.88 |
|
|
|
15,500 |
|
|
$ |
39.51 |
|
Forfeited/Vested
|
|
|
- |
|
|
|
|
|
|
|
(666 |
) |
|
|
|
|
Outstanding
at March 31
|
|
|
34,593 |
|
|
|
|
|
|
|
30,434 |
|
|
|
|
|
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 $0.2 million for the three month periods
ended March 31, 2008 and March 31, 2007.
The Company also maintains a defined
benefit pension plan (“the Defined Benefit Plan”) that covers approximately 300
current and former employees. The Defined Benefit Plan was frozen in 1999
subsequent to the Company’s acquisition of the plan sponsor. The Defined Benefit
Plan maintains an October 31 year-end for purposes of computing its benefit
obligations. The Company made contributions of $0.2 million to the Defined
Benefit Plan during the three months ended March 31, 2007, while no such
contribution was made during the three months ended March 31, 2008.
The
following table presents the components of the net periodic pension cost of the
Defined Benefit Plan:
|
|
Three
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Components
of net periodic cost:
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
166 |
|
|
$ |
164 |
|
Expected
return on plan assets
|
|
|
(217 |
) |
|
|
(185 |
) |
Net
amortization and deferral
|
|
|
63 |
|
|
|
80 |
|
Net
Periodic Pension Cost
|
|
$ |
12 |
|
|
$ |
59 |
|
Note
G – Commitments and Contingencies
The Company is a party to certain
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. The Company
has entered into agreements with its customers to extend credit or provide a
conditional commitment to provide payment on drafts presented in accordance with
the terms of the underlying credit documents. The Company also provides
overdraft protection to certain demand deposit customers that represent an
unfunded commitment. Overdraft protection commitments, which are
included with other commitments below, are uncollateralized and are paid at the
Company’s discretion. Conditional commitments generally include
standby and commercial letters of credit. Standby letters of credit represent an
obligation of the Company to a designated third party contingent upon the
failure of a customer of the Company to perform under the terms of the
underlying contract between the customer and the third party. Commercial letters
of credit are issued specifically to facilitate trade or commerce. Under the
terms of a commercial letter of credit, drafts will be drawn when the underlying
transaction is consummated, as intended, between the customer and a third party.
The funded portion of these financial instruments is reflected in the Company’s
balance sheet, while the unfunded portion of these commitments is not reflected
in the balance sheet. The table below presents a summary of the
contractual obligations of the Company resulting from significant
commitments:
(
in thousands)
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
|
|
Home
equity lines
|
|
$ |
133,038 |
|
|
$ |
135,255 |
|
Commercial
real estate
|
|
|
36,849 |
|
|
|
47,529 |
|
Other
commitments
|
|
|
158,562 |
|
|
|
163,332 |
|
Standby
letters of credit
|
|
|
16,402 |
|
|
|
16,243 |
|
Commercial
letters of credit
|
|
|
280 |
|
|
|
215 |
|
Loan
commitments and standby and commercial letters of credit have credit risks
essentially the same as that involved in extending loans to customers and are
subject to the Company’s standard credit policies. Collateral is obtained based
on management’s credit assessment of the customer. Management does not
anticipate any material losses as a result of these commitments.
Note
H – Total Comprehensive Income
The
following table sets forth the computation of total comprehensive
income:
|
|
Three
months ended March 31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Net
income
|
|
$ |
13,038 |
|
|
$ |
13,231 |
|
|
|
|
|
|
|
|
|
|
Unrealized
security gains arising during the period
|
|
|
2,911 |
|
|
|
1,205 |
|
Reclassification
adjustment for gains included in income
|
|
|
2 |
|
|
|
- |
|
|
|
|
2,913 |
|
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on interest rate floors
|
|
|
8,165 |
|
|
|
203 |
|
Other
comprehensive income before income taxes
|
|
|
24,116 |
|
|
|
14,639 |
|
Tax
effect
|
|
|
(4,431 |
) |
|
|
(563 |
) |
Total
comprehensive income
|
|
$ |
19,685 |
|
|
$ |
14,076 |
|
Note
I – Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended March 31,
|
|
(in
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,038 |
|
|
$ |
13,231 |
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
16,147 |
|
|
|
17,369 |
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
58 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
Shares
for diluted earnings per share
|
|
|
16,205 |
|
|
|
17,424 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.81 |
|
|
$ |
0.76 |
|
Diluted
earnings per share
|
|
$ |
0.80 |
|
|
$ |
0.76 |
|
Options
to purchase 59,000 and 41,750 shares of common stock at exercise prices between
$39.34 and $40.88 and at $36.90 per share were outstanding during the first
quarter of 2008 and the first quarter of 2007, 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 –Fair Value Measurements
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standard
No. 157, (“SFAS No. 157”), “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value under
accounting principles generally accepted in the United States, and enhances
disclosures about fair value measurements. In accordance with
Financial Accounting Standards Board Staff Position No. 157-2, “Effective Date
of FASB Statement No. 157,” the Company will delay application of SFAS No. 157
for non-financial assets and non-financial liabilities until January 1,
2009.
SFAS No.
157 defines fair value as the exchange price that would be received to sell an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy
established by SFAS No. 157 is as follows:
Level 1: Quoted prices
(unadjusted) or identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other
observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, and other
inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant
unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
The
Company used the following methods and significant assumptions to estimate fair
value for assets and liabilities recorded at fair value.
Securities Available for
Sale. Securities available for sale are reported at fair value
utilizing Level 1 and Level 2 inputs. The fair value of securities
available for sale is determined by obtaining quoted prices on nationally
recognized securities exchanges or matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted
securities.
Derivatives. Derivatives are
reported at fair value utilizing Level 2 inputs. The Company obtains dealer
quotations to value its interest rate floors and customer interest rate
swaps.
Previously Securitized
Loans. Previously securitized loans are reported at fair value
utilizing Level 3 inputs. The Company utilizes an internal valuation
model that calculates the present value of estimated future cash
flows. The internal valuation model incorporates assumptions such as
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 determines the yield at
which the resulting discount would be accreted into income.
Impaired
Loans. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS No. 114). The
fair value of impaired loans is estimated using one of several methods,
including collateral value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investments
in such loans. At March 31, 2008, substantially all of the total impaired loans
were evaluated based on the fair value of the collateral. In accordance with
SFAS No. 157, impaired loans where an allowance is established based on the fair
value of collateral require classification in the fair value hierarchy. When the
fair value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan as nonrecurring Level 2.
When an appraised value is not available or management determines the fair value
of the collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring
Level 3.
The
following table presents assets and liabilities measured at fair value on a
recurring basis.
(in
thousands)
March
31, 2008
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities Available for Sale
|
|
$ |
456,671 |
|
|
$ |
63,508 |
|
|
$ |
393,163 |
|
|
$ |
- |
|
Derivatives
(Interest Rate Floors)
|
|
|
19,289 |
|
|
|
- |
|
|
|
19,289 |
|
|
|
- |
|
Previously
Securitized Loans
|
|
|
6,025 |
|
|
|
- |
|
|
|
- |
|
|
|
6,025 |
|
The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis for Level 3
assets for the quarter ended March 31, 2008.
(in
thousands)
|
|
Previously
Securitized Loans
|
|
|
|
|
|
Beginning
balance, January 1, 2008
|
|
$ |
6,892 |
|
Principal Receipts and
Recoveries (net)
|
|
|
(867 |
) |
Ending
Balance, March 31, 2008
|
|
$ |
6,025 |
|
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with accounting principles generally
accepted in the United States. These include assets that are measured
at the lower of cost or market that were recognized at fair value below cost at
the end of the period. At March 31, 2008, the Company has $16.4
million of impaired loans that are measured at fair value on a nonrecurring
basis. These assets are considered to be measured at Level 2 in the
fair value measurement hierarchy.
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 159,
(“SFAS No. 159”) "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115."
SFAS No. 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. The Company has not elected to account for any of its
assets at fair value and therefore adoption of SFAS No. 159 on January 1,
2008 did not effect its financial statements.
Note K–
Recent Accounting Pronouncements
In
December 2007, the FASB issued Statement No. 141 (revised 2007) (“SFAS No.
141R”), “Business Combinations.” SFAS No. 141R will significantly
change how the acquisition method will be applied to business
combinations. SFAS No. 141R requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under SFAS No. 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value. SFAS No.
141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities assumed, as
was previously the case under SFAS No. 141. Under SFAS No. 141R, the
requirements of SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies are to
be recognized at fair value, unless it is a non-contractual contingency that is
not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of SFAS No. 5, “Accounting for
Contingencies.” Reversals of deferred income tax valuation allowances and income
tax contingencies will be recognized in earnings subsequent to the measurement
period. The allowance for loan losses of an acquiree will not be
permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R)
will require new and modified disclosures surrounding subsequent changes to
acquisition-related contingencies, contingent consideration, noncontrolling
interests, acquisition-related transaction costs, fair values and cash flows not
expected to be collected for acquired loans, and an enhanced
goodwill rollforward. The Company will be required to
prospectively apply SFAS No. 141(R) to all business combinations completed
on or after January 1, 2009. Early adoption is not
permitted. The Company is currently evaluating SFAS No. 141 (R) and
has not determined the impact it will have on our financial
statements.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS No. 160”), “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51.” SFAS No. 160 clarifies that a noncontrolling interest in a
subsidiary, which is sometimes referred to as minority interest will be
recharacterized as a “noncontrolling interests” and should be reported as a
component of equity. Among other requirements, SFAS No. 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. SFAS No. 160 is effective for the Company on January
1, 2009 and is not expected to have a significant impact on the Company’s
financial statements.
In March
2008, the FASB issued SFAS No. 161, (“SFAS No. 161”),"Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133." SFAS No. 161 applies to all derivative instruments and related
hedged items accounted for under SFAS No. 133. SFAS No. 161
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No.
133 to provide greater transparency about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedge
items are accounted for under SFAS No. 133 and its related interpretations,
and (iii) how derivative instruments and related hedged items affect an
entity's financial position, results of operations and
cash flows. To meet those objectives, SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for the Company on January 1,
2009 and is not expected to have a significant impact on the Company's financial
statements.
Critical
Accounting Policies
The
accounting policies of the Company conform with U.S. generally accepted
accounting principles and require management to make estimates and develop
assumptions that affect the amounts reported in the financial statements and
related footnotes. These estimates and assumptions are based on information
available to management as of the date of the financial statements. Actual
results could differ 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 2007 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 2007 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 23
- 26 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.
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”) effective January 1, 2007. 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. The Company includes interest and penalties related
to income tax liabilities in income tax expense. The amount of unrecognized
tax benefits could change over the next twelve months as a result of income tax
examinations that are scheduled to occur. However, management cannot
currently estimate the range of possible change.
The
Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for the years ended December 31, 2004 through
2007. The Company and its subsidiaries state income tax returns are open to
audit under the statute of limitations for the years ended December 31,
2004 through 2007.
Note B,
beginning on page 8 of this Quarterly Report on Form 10-Q, and pages 26 and 27
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
Three
Months Ended March 31, 2008 vs. 2007
The
Company reported consolidated net income of $13.0 million, or $0.80 per diluted
common share, for the three months ended March 31, 2008, compared to $13.2
million, or $0.76 per diluted common share for the first three months of 2007.
Return on average assets (“ROA”) was 2.09% and return on average equity (“ROE”)
was 17.4% for the first three months of 2008, compared to 2.10% and 17.1%,
respectively, for the first three months of 2007.
The
Company’s net interest income for the first three months of 2008 decreased $0.6
million compared to the first three months of 2007 (see Net Interest Income). The
Company recorded a provision for loan losses of $1.9 million for the first three
months of 2008 while $0.9 million was recorded for the first three months of
2007 (see Allowance and
Provision for Loan Losses). As further discussed under the
caption Non-Interest Income and Expense, non-interest income increased $2.9
million from the three months ended March 31, 2007, to the three months ended
March 31, 2008. During the first three months of 2008, the Company
recognized a gain of $3.3 million in connection with Visa’s successful initial
public offering (“IPO”). During the first three months of 2007, the
Company recognized a gain of $1.5 million from the sale of its existing merchant
processing agreements (see Non-Interest
Income). Non-interest expenses increased $2.3 million from the
three months ended March 31, 2007 as the Company incurred a loss of $1.2 million
as a result of fully redeeming $16.0 million of 9.15% Trust Preferred Securities
that had been issued in 1998 and increased charitable contributions by $0.5
million (see Non-Interest
Expense).
Net
Interest Income
Three
Months Ended March 31, 2008 vs. 2007
The
Company’s tax equivalent net interest income decreased $0.6 million, or 2.2%,
from $24.7 million during the first quarter of 2007 to $24.1 million during the
first quarter of 2008. This decrease is primarily attributable to two
factors. First, the Company experienced a decrease of $0.2 million in
interest income from previously securitized loans in the first quarter of 2008
as compared to the first quarter of 2007 as the average balance of these loans
decreased 55.3%. The decrease in average balances was partially
mitigated by an increase in the yield on these loans from 49.5% for the first
quarter of 2007 and 93.2% for the fourth quarter of 2007 to 98.8% for the first
quarter of 2008 (see Previously Securitized Loans). The remaining
decrease in net interest income of $0.4 million occurred as interest income from
loans (excluding Previously Securitized loans) and investments decreased more
quickly than the interest expense on deposits and other interest-bearing
liabilities. The Company’s net interest margin was 4.40% in the first
quarter of 2008 as compared to 4.41% in the first quarter of
2007. Excluding the previously securitized loans, the Company’s net
interest margin decreased 3 basis points from 4.18% during the first quarter of
2007 to 4.15% for the first quarter of 2008.
Table
One
Average
Balance Sheets and Net Interest Income
(in
thousands)
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
portfolio (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
601,600 |
|
|
$ |
9,886 |
|
|
|
6.61 |
% |
|
$ |
594,504 |
|
|
$ |
8,854 |
|
|
|
6.04 |
% |
Home
equity
|
|
|
343,658 |
|
|
|
5,912 |
|
|
|
6.92 |
|
|
|
322,647 |
|
|
|
6,242 |
|
|
|
7.85 |
|
Commercial
financial and agriculture
|
|
|
700,155 |
|
|
|
12,235 |
|
|
|
7.03 |
|
|
|
667,073 |
|
|
|
12,689 |
|
|
|
7.71 |
|
Loans
to depository institutions
|
|
|
4,670 |
|
|
|
35 |
|
|
|
3.01 |
|
|
|
49,444 |
|
|
|
654 |
|
|
|
5.36 |
|
Installment
loans to individuals
|
|
|
47,629 |
|
|
|
1,346 |
|
|
|
11.37 |
|
|
|
42,903 |
|
|
|
1,269 |
|
|
|
12.00 |
|
Previously
securitized loans
|
|
|
6,421 |
|
|
|
1,578 |
|
|
|
98.84 |
|
|
|
14,375 |
|
|
|
1,756 |
|
|
|
49.54 |
|
Total
loans
|
|
|
1,704,133 |
|
|
|
30,992 |
|
|
|
7.31 |
|
|
|
1,690,946 |
|
|
|
31,464 |
|
|
|
7.55 |
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
455,663 |
|
|
|
6,064 |
|
|
|
5.35 |
|
|
|
505,585 |
|
|
|
6,933 |
|
|
|
5.56 |
|
Tax-exempt
(2)
|
|
|
37,723 |
|
|
|
614 |
|
|
|
6.55 |
|
|
|
40,413 |
|
|
|
658 |
|
|
|
6.60 |
|
Total
securities
|
|
|
493,386 |
|
|
|
6,678 |
|
|
|
5.44 |
|
|
|
545,998 |
|
|
|
7,591 |
|
|
|
5.64 |
|
Deposits
in depository institutions
|
|
|
8,697 |
|
|
|
65 |
|
|
|
3.01 |
|
|
|
13,033 |
|
|
|
117 |
|
|
|
3.64 |
|
Federal
funds sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,533 |
|
|
|
257 |
|
|
|
5.32 |
|
Total
interest-earning assets
|
|
|
2,206,216 |
|
|
|
37,735 |
|
|
|
6.88 |
|
|
|
2,269,510 |
|
|
|
39,429 |
|
|
|
7.05 |
|
Cash
and due from banks
|
|
|
65,442 |
|
|
|
|
|
|
|
|
|
|
|
50,129 |
|
|
|
|
|
|
|
|
|
Bank
premises and equipment
|
|
|
54,709 |
|
|
|
|
|
|
|
|
|
|
|
44,968 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
186,273 |
|
|
|
|
|
|
|
|
|
|
|
169,046 |
|
|
|
|
|
|
|
|
|
Less:
allowance for loan losses
|
|
|
(17,837 |
) |
|
|
|
|
|
|
|
|
|
|
(15,636 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,494,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,518,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
409,745 |
|
|
$ |
712 |
|
|
|
0.70 |
% |
|
$ |
430,201 |
|
|
$ |
1,332 |
|
|
|
1.26 |
% |
Savings
deposits
|
|
|
360,587 |
|
|
|
1,104 |
|
|
|
1.23 |
|
|
|
330,023 |
|
|
|
1,307 |
|
|
|
1.61 |
|
Time
deposits
|
|
|
933,502 |
|
|
|
10,199 |
|
|
|
4.39 |
|
|
|
921,937 |
|
|
|
10,073 |
|
|
|
4.43 |
|
Short-term
borrowings
|
|
|
127,793 |
|
|
|
1,145 |
|
|
|
3.60 |
|
|
|
146,455 |
|
|
|
1,513 |
|
|
|
4.19 |
|
Long-term
debt
|
|
|
22,505 |
|
|
|
441 |
|
|
|
7.88 |
|
|
|
32,434 |
|
|
|
531 |
|
|
|
6.65 |
|
Total
interest-bearing liabilities
|
|
|
1,854,132 |
|
|
|
13,601 |
|
|
|
2.95 |
|
|
|
1,861,050 |
|
|
|
14,756 |
|
|
|
3.22 |
|
Noninterest-bearing
demand deposits
|
|
|
311,885 |
|
|
|
|
|
|
|
|
|
|
|
316,716 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
28,770 |
|
|
|
|
|
|
|
|
|
|
|
31,234 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
300,016 |
|
|
|
|
|
|
|
|
|
|
|
309,017 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,494,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,518,017 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
24,134 |
|
|
|
|
|
|
|
|
|
|
$ |
24,673 |
|
|
|
|
|
Net
yield on earning assets
|
|
|
|
|
|
|
|
|
|
|
4.40 |
% |
|
|
|
|
|
|
|
|
|
|
4.41 |
% |
(1)
|
For
purposes of this table, non-accruing loans have been included in average
balances and loan fees, which are immaterial, have been included in
interest income.
|
(2)
|
Computed
on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35%.
|
Table
Two
Rate
Volume Analysis of Changes in Interest Income and Interest Expense
(in
thousands)
|
|
Three
months ended March 31,
|
|
|
|
2008
vs. 2007
|
|
|
|
Increase
(Decrease)
|
|
|
|
Due
to Change In:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loan
portfolio
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
107 |
|
|
$ |
925 |
|
|
$ |
1,032 |
|
Home
equity
|
|
|
410 |
|
|
|
(740 |
) |
|
|
(330 |
) |
Commercial,
financial, and agriculture
|
|
|
635 |
|
|
|
(1,089 |
) |
|
|
(454 |
) |
Loans
to depository institutions
|
|
|
(597 |
) |
|
|
(22 |
) |
|
|
(619 |
) |
Installment
loans to individuals
|
|
|
141 |
|
|
|
(64 |
) |
|
|
77 |
|
Previously
securitized loans
|
|
|
(980 |
) |
|
|
802 |
|
|
|
(178 |
) |
Total
loans
|
|
|
(284 |
) |
|
|
(188 |
) |
|
|
(472 |
) |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(698 |
) |
|
|
(171 |
) |
|
|
(869 |
) |
Tax-exempt
(1)
|
|
|
(35 |
) |
|
|
(9 |
) |
|
|
(44 |
) |
Total
securities
|
|
|
(733 |
) |
|
|
(180 |
) |
|
|
(913 |
) |
Deposits
in depository institutions
|
|
|
(39 |
) |
|
|
(13 |
) |
|
|
(52 |
) |
Federal
funds sold
|
|
|
(258 |
) |
|
|
1 |
|
|
|
(257 |
) |
Total
interest-earning assets
|
|
$ |
(1,314 |
) |
|
$ |
(380 |
) |
|
$ |
(1,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$ |
(64 |
) |
|
$ |
(556 |
) |
|
$ |
(620 |
) |
Savings
deposits
|
|
|
122 |
|
|
|
(325 |
) |
|
|
(203 |
) |
Time
deposits
|
|
|
127 |
|
|
|
(1 |
) |
|
|
125 |
|
Short-term
borrowings
|
|
|
(194 |
) |
|
|
(174 |
) |
|
|
(367 |
) |
Long-term
debt
|
|
|
(164 |
) |
|
|
74 |
|
|
|
(91 |
) |
Total
interest-bearing liabilities
|
|
$ |
( 173 |
) |
|
$ |
(982 |
) |
|
$ |
(1,155 |
) |
Net
Interest Income
|
|
$ |
(1,141 |
) |
|
$ |
602 |
|
|
$ |
(539 |
) |
(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 $1.9 million in the first three
months of 2008 and $0.9 million in the first three months of
2007. The provision for loan losses recorded during the first quarter
of 2008 reflects the difficulties of certain commercial borrowers of the Company
during the quarter, the downgrade of their related credits, and management’s
assessment of the impact of these difficulties on the ultimate collectability of
the loans. Changes in the amount of the provision and related
allowance are based on the Company’s detailed methodology and are directionally
consistent with growth and changes in the composition and quality of the
Company’s loan portfolio. The Company believes its methodology for
determining its ALLL adequately provides for probable losses inherent in the
loan portfolio at March 31, 2008.
The
Company had net charge-offs of $0.9 million for the first quarter of 2008, with
depository accounts representing $0.3 million (or approximately 32.3%) 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 commercial and residential loans were
$0.4 and $0.2 million, respectively, for the first
quarter. Charge-offs for commercial loans were primarily related to a
specific credit that had been appropriately considered in establishing the
allowance for loans losses in prior periods.
The
Company’s ratio of non-performing assets to total loans and other real estate
owned increased slightly from 1.20% at December 31, 2007 to 1.21% at March 31,
2008. Based on our analysis, the Company believes that the reserves
allocated to the substandard and nonperforming loans after considering the value
of the collateral securing such loans are adequate to cover losses that may
result from these loans. The Company’s ratio of non-performing assets
to total loans and other real estate owned is 26 basis points lower than 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 1.47% for the most recently reported quarter
ended December 31, 2007.
The
allowance allocated to the commercial loan portfolio (see Table Five) increased
$0.6 million, or 5.8%, from $11.1 million at December 31, 2007 to $11.7 million
at March 31, 2008. 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) increased $0.4 million, or
12.0% from $3.6 million at December 31, 2007 to $4.0 million at March
31, 2008. This increase was primarily due to difficulties experienced
by a specific residential real estate loan customer during the three months
ended March 31, 2008.
The allowance allocated to the consumer
loan portfolio (see Table Five) remained consistent at $0.3 million at December
31, 2007 and March 31, 2008.
The allowance allocated to overdraft
deposit accounts (see Table Five) remained stable at $2.5 million for December
31, 2007 and March 31, 2008.
As
previously discussed, the carrying value of the previously securitized loans
incorporates an assumption for expected cash flows to be received over the life
of these loans. To the extent that the present value of expected cash flows is
less than the carrying value of these loans, the Company would provide for such
losses through the provision for loan losses.
Based on
the Company’s analysis of the adequacy of the allowance for loan losses and in
consideration of the known factors utilized in computing the allowance,
management believes that the allowance for loan losses as of March 31, 2008, 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.
Table
Three
|
|
|
|
|
|
|
Analysis
of the Allowance for Loan Losses
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
Year
ended December 31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
17,581 |
|
|
$ |
15,405 |
|
|
$ |
15,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
(406 |
) |
|
|
(35 |
) |
|
|
(514 |
) |
Real
estate-mortgage
|
|
|
(274 |
) |
|
|
(111 |
) |
|
|
(1,006 |
) |
Installment
loans to individuals
|
|
|
(75 |
) |
|
|
(84 |
) |
|
|
(343 |
) |
Overdraft
deposit accounts
|
|
|
(984 |
) |
|
|
(860 |
) |
|
|
(3,789 |
) |
Total
charge-offs
|
|
|
(1,739 |
) |
|
|
(1,090 |
) |
|
|
(5,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
|
13 |
|
|
|
148 |
|
|
|
231 |
|
Real
estate-mortgage
|
|
|
27 |
|
|
|
15 |
|
|
|
87 |
|
Installment
loans to individuals
|
|
|
108 |
|
|
|
132 |
|
|
|
416 |
|
Overdraft
deposit accounts
|
|
|
694 |
|
|
|
573 |
|
|
|
1,744 |
|
Total
recoveries
|
|
|
842 |
|
|
|
868 |
|
|
|
2,478 |
|
Net
charge-offs
|
|
|
(897 |
) |
|
|
(222 |
) |
|
|
(3,174 |
) |
Provision
for loan losses
|
|
|
1,883 |
|
|
|
900 |
|
|
|
5,350 |
|
Balance
at end of period
|
|
$ |
18,567 |
|
|
$ |
16,083 |
|
|
$ |
17,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percent of Average Total Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (annualized)
|
|
|
(0.21 |
)% |
|
|
(0.05 |
)% |
|
|
(0.18 |
)% |
Provision
for loan losses (annualized)
|
|
|
0.44 |
% |
|
|
0.21 |
% |
|
|
0.31 |
% |
As
a Percent of Non-Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
113.55 |
% |
|
|
235.75 |
% |
|
|
104.49 |
% |
1)
|
The
above table reflects reclassifications from the information furnished in a
Form 8-K filing made on April 25, 2008. The Company has
reclassified $283,000 of losses previously netted against Service Charges
income to the Provision for Loan Losses. Such reclassification
increased the Provision for Loan Losses by $283,000 and increased Service
Charges income by $283,000 and did not affect net income or the Allowance
for Loan Losses at March 31,
2008.
|
Table
Four
|
|
|
|
|
|
|
Non-Performing
Assets
|
|
|
|
|
|
|
|
|
As
of March 31,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$ |
15,840 |
|
|
$ |
6,714 |
|
|
$ |
16,437 |
|
Accruing
loans past due 90 days or more
|
|
|
257 |
|
|
|
108 |
|
|
|
314 |
|
Previously
securitized loans past due 90 days or more
|
|
|
255 |
|
|
|
- |
|
|
|
76 |
|
Total
non-performing loans
|
|
|
16,352 |
|
|
|
6,822 |
|
|
|
16,827 |
|
Other
real estate, excluding property associated withpreviously securitized
loans
|
|
|
4,192 |
|
|
|
290 |
|
|
|
4,163 |
|
Other
real estate associated with previouslysecuritized loans
|
|
|
148 |
|
|
|
252 |
|
|
|
- |
|
Total other real estate
owned
|
|
|
4,340 |
|
|
|
542 |
|
|
|
4,163 |
|
Total non-performing
assets
|
|
$ |
20,692 |
|
|
$ |
7,364 |
|
|
$ |
20,990 |
|
Table
Five
|
|
|
|
|
|
|
Allocation
of the Allowance For Loan Losses
|
|
|
|
|
|
|
As
of March 31,
|
|
|
As
of
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$ |
11,682 |
|
|
$ |
9,395 |
|
|
$ |
11,097 |
|
Real
estate-mortgage
|
|
|
4,038 |
|
|
|
3,937 |
|
|
|
3,605 |
|
Installment
loans to individuals
|
|
|
298 |
|
|
|
583 |
|
|
|
347 |
|
Overdraft
deposit accounts
|
|
|
2,549 |
|
|
|
2,168 |
|
|
|
2,532 |
|
Allowance
for Loan Losses
|
|
$ |
18,567 |
|
|
$ |
16,083 |
|
|
$ |
17,581 |
|
Previously
Securitized Loans
As of March 31, 2008, the Company
reported a carrying value of previously securitized loans of $6.0 million, while
the actual outstanding contractual balance of these loans was $22.5 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 three months ended March 31, 2008 and for the year ended December 31, 2007,
the Company has experienced net recoveries on these loans primarily due to
increased collection efforts. Subsequent to our assumption of the
servicing of these loans during 2005, the Company has averaged net recoveries,
but does not believe that the trend of net recoveries can be sustained
indefinitely.
During
the first three months of 2008 and 2007, the Company recognized $1.6 million and
$1.8 million, respectively, of interest income on its previously securitized
loans. Cash receipts for the three months ended March 31, 2008 and
2007 are summarized in the following table:
|
|
Three
months ended March 31,
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
Principal
receipts
|
|
$ |
3,038 |
|
|
$ |
3,542 |
|
Interest
income receipts
|
|
|
899 |
|
|
|
1,109 |
|
Total
cash receipts
|
|
$ |
3,937 |
|
|
$ |
4,651 |
|
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, 2008
|
$5
million
|
December
31, 2009
|
4
million
|
December
31, 2010
|
3
million
|
December
31, 2011
|
2
million
|
Non-Interest
Income and Non-Interest Expense
Three
Months Ended March 31, 2008 vs. 2007
Non-Interest
Income: During the first quarter
of 2008, the Company recognized a $3.3 million gain in connection with Visa’s
successful initial public offering (“IPO”) completed in March
2008. The Company received approximately $2.3 million on the partial
redemption of its equity interest in Visa. The Company’s remaining
Class B shares will be converted to Class A shares on the third anniversary of
Visa’s IPO or upon Visa’s settlement of certain litigation matters, whichever is
later. The unconverted Class B shares are not reflected in the
Company’s balance sheet at March 31, 2008 as the Company has no historical basis
in these shares. Visa also escrowed a portion of the proceeds from
the IPO to satisfy approximately $1.0 million of liabilities that represented
the Company’s proportionate share of legal judgments and settlements related to
Visa litigation with American Express and Discover Financial
Services
Exclusive
of investment gains, the gain from the Visa IPO, and the gain from the sale of
the Company’s merchant credit card portfolio in the first quarter of 2007,
non-interest income increased $1.1 million to $14.0 million in the first quarter
of 2008 as compared to $12.9 million in the first quarter of
2007. The largest source of non-interest income is service charges
from depository accounts, which increased $1.2 million, or 12.0%, from $10.1
million during the first quarter of 2007 to $11.2 million during the first
quarter of 2008.
.Non-Interest
Expense: During the first quarter
of 2008, the Company fully redeemed $16.0 million of 9.15% trust preferred
securities that had been issued in 1998. As a result of this
redemption, the Company incurred charges of $1.2 million to fully amortize
issuance costs incurred in 1998 and for the early redemption
premium. Excluding the loss on the early redemption of the trust
preferred securities, non-interest expenses increased $1.1 million from $17.6
million in the first quarter of 2007 to $18.7 million in the first quarter of
2008. Salaries and employee benefits increased $0.3 million, or 3.4%,
from the first quarter of 2007 due in part to additional staffing for new retail
locations. Other expenses also include increased charitable
contributions of approximately $0.5 million.
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 100 basis points
in interest rates from the current rate would result in both a 1.25% Fed Funds
rate and long-term interest rates of approximately 1.00%. 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 200 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 100 basis points from current
rates.
The
Company has entered into interest rate floors with a total notional value of
$600 million at March 31, 2008, with maturities between May 2008 and June 2011
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 page 9 for
further discussion of the use and accounting for such derivative
instruments.
The
following table summarizes the sensitivity of the Company’s net income to
various interest rate scenarios. The results of the sensitivity analyses
presented below differ from the results used internally by ALCO in that, in the
analyses below, interest rates are assumed to have an immediate and sustained
parallel shock. The Company recognizes that rates are volatile, but rarely move
with immediate and parallel effects. Internally, the Company considers a variety
of interest rate scenarios that are deemed to be possible while considering the
level of risk it is willing to assume in “worst-case” scenarios such as shown by
the following:
Immediate
Basis
Point Change
in
Interest Rates
|
|
|
Implied
Federal Funds Rate Associated with Change in Interest
Rates
|
|
|
Estimated
Increase
(Decrease)
in
Net
Income Over 12 Months
|
|
|
Estimated
Increase
(Decrease)
in
Economic
Value of
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
|
5.25 |
% |
|
|
- |
% |
|
|
+10.1 |
% |
|
+200 |
|
|
|
4.25 |
|
|
|
(0.5 |
) |
|
|
+7.1 |
|
|
+100 |
|
|
|
3.25 |
|
|
|
(0.8 |
) |
|
|
+3.1 |
|
|
-100 |
|
|
|
1.25 |
|
|
|
(0.1 |
) |
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
|
6.50 |
% |
|
|
+6.2 |
% |
|
|
+14.4 |
% |
|
+200 |
|
|
|
5.50 |
|
|
|
+3.4 |
|
|
|
+10.2 |
|
|
+100 |
|
|
|
4.50 |
|
|
|
+0.9 |
|
|
|
+6.1 |
|
|
-100 |
|
|
|
2.50 |
|
|
|
+0.5 |
|
|
|
+2.8 |
|
|
-200 |
|
|
|
1.50 |
|
|
|
+1.0 |
|
|
|
+3.2 |
|
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 2008 and
beyond. The results above do not necessarily imply that the Company
will experience decreases 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.
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 2006 and 2007, City National received
regulatory approval to pay $146.4 million of cash dividends to the Parent
Company, while generating net profits of $104.8 million. Therefore,
City National will be required to obtain regulatory approval prior to declaring
any cash dividends to the Parent Company during 2008. 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 $1.0 million
on the junior subordinated debentures held by City Holding Capital Trust III.
Additionally, the Parent Company anticipates continuing the payment of
dividends, which are expected to approximate $21.9 million on an annualized
basis over the next 12 months based on common shareholders of record at March
31, 2008. However, interest payments on the debentures can be
deferred for up to five years under certain circumstances and dividends to
shareholders can, if necessary, be suspended. In addition to these
anticipated cash needs, the Parent Company has operating expenses and other
contractual obligations, which are estimated to require $0.4 million of
additional cash over the next 12 months. As of March 31, 2008, the Parent
Company reported a cash balance of $0.8 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 2008 other than the repayment of its $16.5 million
obligation under the debentures held by City Holding Capital Trust III. However,
this obligation does not mature until June 2038, or earlier at the option of the
Parent Company. It is expected that the Parent Company will be able to obtain
the necessary
cash, either through dividends obtained from City National or the issuance of
other debt, to fully repay the debentures at their
maturity.
City
National manages its liquidity position in an effort to effectively and
economically satisfy the funding needs of its customers and to accommodate the
scheduled repayment of borrowings. Funds are available to City National from a
number of sources, including depository relationships, sales and maturities
within the investment securities portfolio, and borrowings from the FHLB and
other financial institutions. As of March 31, 2008, 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 March 31, 2008, City National has the capacity to
borrow an additional $167.4 million from the FHLB and other financial
institutions under existing borrowing facilities. City National maintains a
contingency funding plan, incorporating these borrowing facilities, to address
liquidity needs in the event of an institution-specific or systematic financial
industry crisis. Also, City National maintains a significant percentage (93.2%,
or $464.2 million at March 31, 2008) 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 66.8% as of March 31, 2008 and deposit
balances fund 79.9% 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 $498.0 million at
March 31, 2008, and that greatly exceeded the Company’s non-deposit sources of
borrowing which totaled $201.4 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
$6.5 million of cash from operating activities during the first three months of
2008, primarily from interest income received on loans and investments, net of
interest expense paid on deposits and borrowings. The Company used
$17.0 million of cash in investing activities during the first three months of
2008 primarily for the purchase of money market and mutual fund securities and
to fund additional loans, net of proceeds from these securities and from
maturities and calls of securities available-for-sale. The Company
generated $13.0 million of cash from financing activities during the first three
months of 2008, primarily from increases in deposit accounts of $28.5 million
and the proceeds of long term debt of $16.5 million. These increases
were partially offset by the redemption of trust preferred stock of $17.6
million, cash dividends paid to the Company’s common stockholders of $5.5
million, and the purchase of treasury stock of $3.7 million.
Capital
Resources
During the first three months of 2008,
Shareholders’ Equity increased $10.8 million, or 3.7%, from $294.0 million at
December 31, 2007 to $304.8 million at March 31, 2008. This increase
was primarily due to reported net income of
$13.0 million, unrealized gains on interest rate floors of $4.9 million, and
unrealized gains on available for sale securities of $1.7
million. These increases were partially offset by dividends declared
during the year of $5.5 million and common stock purchases of $3.7
million.
During August 2007, the Board of
Directors authorized the Company to buy back up to 1,000,000 shares of its
common shares (approximately 6% 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. 104,960 shares were repurchased during the first
three months of 2008 and there can be no assurance that the Company will
continue to reacquire its common shares or to what extent the repurchase program
will be successful. As of March 31, 2008, the Company may repurchase
an additional 437,528 shares from time to time depending on market conditions
under the authorization.
Regulatory guidelines require the
Company to maintain a minimum total capital to risk-adjusted assets ratio of
8.0%, with at least one-half of capital consisting of tangible common
stockholders’ equity and a minimum Tier I leverage ratio of 4.0%. Similarly,
City National is also required to maintain minimum capital levels as set forth
by various regulatory agencies. Under capital adequacy guidelines, City National
is required to maintain minimum total capital, Tier I capital, and leverage
ratios of 8.0%, 4.0%, and 4.0%, respectively. To be classified as “well
capitalized,” City National must maintain total capital, Tier I capital, and
leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
The
Company’s regulatory capital ratios remained strong for both City Holding and
City National as illustrated in the following table:
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
Well-
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
Minimum
|
|
|
Capitalized
|
|
|
2008
|
|
|
2007
|
|
City
Holding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
15.0 |
% |
|
|
15.1 |
% |
Tier
I Risk-based
|
|
|
4.0 |
|
|
|
6.0 |
|
|
|
14.0 |
|
|
|
14.1 |
|
Tier
I Leverage
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
10.5 |
|
|
|
10.3 |
|
City
National:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
13.5 |
% |
|
|
13.5 |
% |
Tier
I Risk-based
|
|
|
4.0 |
|
|
|
6.0 |
|
|
|
12.4 |
|
|
|
12.5 |
|
Tier
I Leverage
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
9.2 |
|
|
|
9.1 |
|
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. During the quarter ended March 31, 2008, the Company
converted from Jack Henry’s Banker II core system to Jack Henry’s SilverLake
core system. The core system is used to process and accumulate data
that is ultimately used for financial reporting. The Company believes
that this core system conversion represented a material change to the Company’s
internal control over financial reporting. There were other changes
in the Company’s internal control over financial reporting during the quarter
ended March 31, 2008 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Item
1.
|
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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.
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Item
1A.
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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,
2007.
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Item
2.
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The
following table sets forth information regarding the Company’s common
stock repurchases transacted during the quarter:
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Period
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Total
Number
of
Shares Purchased
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Average
Price
Paid
per
Share
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Total
Number
of
Shares Purchased
as
Part of Publicly
Announced
Plans
or
Programs
(a)
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Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
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January
1 – January 31, 2008
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30,150
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$
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32.51
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30,150
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512,338
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February
1 – February 29, 2008
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-
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$
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-
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-
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512,338
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March
1 – March 31, 2008
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74,810
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$
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36.51
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74,810
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437,528
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(a) In August 2007, 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.
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Item
3.
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None.
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Item
4.
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None.
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Item
5.
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None.
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Item
6.
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(a)
Exhibits
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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
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(Registrant)
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/s/
Charles R. Hageboeck
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Charles
R. Hageboeck
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President
and Chief Executive Officer
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(Principal
Executive Officer)
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/s/
David L. Bumgarner
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David
L. Bumgarner
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Senior
Vice President and Chief Financial Officer
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(Principal
Financial Officer)
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Date: May
8, 2008
-35-